DALLAS--(BUSINESS WIRE)--AT&T Inc.* (NYSE:T) reported solid revenue, earnings and free cash flow growth in the third quarter led by gains in Mobility and WarnerMedia. Wireless results in the third quarter included positive postpaid phone net adds, strong prepaid phone gains and growing service revenues. (On a GAAP basis, service revenues declined 3.4%; however, on a comparable basis, service revenues grew 2.3%.)
“I’m pleased with the progress we made on a number of fronts in the third quarter,” said Randall Stephenson, AT&T chairman and CEO. “Our U.S. wireless business is growing and it’s the single biggest contributor to our earnings and cash flow. WarnerMedia was immediately accretive in its first full quarter, contributing 5 cents to EPS, and our free cash flow grew by double digits.
“We’ve accomplished all this while staying focused on managing our debt portfolio. We’re on track to get to the 2.5x debt-to-EBITDA range by year-end 2019. And as we’re nearing completion of our fiber build and making pricing moves on video, we’re laying the foundation for stabilizing our Entertainment Group profitability in 2019. Across the business, I like our momentum and feel confident that we’re on track to deliver on our plans.”
North America wireless:
-
4.3 million total wireless net adds:
- 3.4 million in U.S., driven by connected devices and prepaid
- 907,000 in Mexico
Communications Highlights
-
Mobility:
- Service revenues up 2.3% on a comparable basis
-
550,000 phone net adds in the U.S.
- 69,000 postpaid phone net adds
- 481,000 prepaid phone net adds
- Nearly 750,000 branded smartphones added to base
- Third-quarter postpaid phone churn of 0.93%
-
Entertainment Group:
- 49,000 DIRECTV NOW net adds with 346,000 net losses in traditional video as company focuses on improving profitability and begins beta test of new streaming video device
- More than 10 million customer locations passed with fiber
WarnerMedia Highlights
-
Revenues up with gains in all business units
- Turner and Home Box Office year-over-year subscription revenue growth
- Strong Warner Bros. television licensing revenue growth; box office releases included the hit films Crazy Rich Asians, The Meg and The Nun
- 37 Primetime Emmy Awards; 12 News and Documentary Emmy Awards
Xandr Highlights
- Advertising revenues grew 34%; up 22% excluding the AppNexus acquisition
- AppNexus enhances addressable advertising technology
Consolidated Financial Results2
AT&T's consolidated revenues for the third quarter totaled $45.7 billion versus $39.7 billion in the year-ago quarter, up 15.3%, primarily due to the Time Warner acquisition partially offset by the impact of ASC 606 and the netting of approximately $920 million of USF revenues with operating expenses. Without the accounting change, revenues were $46.6 billion, an increase of 17.5% primarily due to the Time Warner acquisition. Declines in domestic video, legacy wireline services and Vrio were offset by growth in wireless equipment and services, WarnerMedia and Xandr.
Operating expenses were $38.5 billion versus $33.9 billion in the year-ago quarter, primarily due to the Time Warner acquisition partially offset by the netting of USF and other regulatory fee revenues and the deferral of commissions under ASC 606. Excluding those impacts, operating expenses were $39.9 billion, an increase of about $6.1 billion due to the Time Warner acquisition, higher wireless equipment costs and Entertainment Group content cost pressure, partially offset by cost efficiencies.
Versus results from the third quarter of 2017, operating income was $7.3 billion, up 25.2% primarily due to the Time Warner acquisition; and operating income margin was 15.9% versus 14.6%. On a comparative basis, operating income was $6.7 billion and operating income margin was 14.3%. When adjusting for amortization, merger- and integration-related expenses and other items, operating income was $10.0 billion, or $9.4 billion on a comparative basis, versus $7.5 billion in the year-ago quarter, and operating income margin was 21.9%, or 20.3% on a comparative basis, versus 18.8% in the year-ago quarter.
Third-quarter net income attributable to AT&T was $4.7 billion, or $0.65 per diluted share, versus $3.0 billion, or $0.49 per diluted share, in the year-ago quarter. Adjusting for $0.25 of costs for amortization, merger- and integration-related expenses and other items, earnings per diluted share was $0.90 compared to an adjusted $0.74 in the year-ago quarter, a 21.6% increase.
Cash from operating activities was $12.3 billion, and capital expenditures were $5.9 billion. Capital investment included about $560 million in FirstNet capital costs and reflects no FirstNet reimbursements. Free cash flow — cash from operating activities minus capital expenditures — was $6.5 billion for the quarter. The company is successfully managing near-term maturities and refinancing risk and expects to have retired or refinanced about $28 billion of near-to-intermediate term maturities by the end of 2018.
1Adjustments include a non-cash mark-to-market benefit plan gain/loss, merger-related interest expense, merger integration and amortization costs 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 the largest of these items. Accordingly, we cannot provide a reconciliation between forecasted adjusted diluted EPS and reported diluted EPS without unreasonable effort.
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.
*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. © 2018 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
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 | |||||||||||||||||||||
Third Quarter | Nine-Month Period | ||||||||||||||||||||
2018 | 2017 | 2018 | 2017 | ||||||||||||||||||
Net cash provided by operating activities | $ | 12,346 | $ | 10,803 | $ | 31,522 | $ | 28,473 | |||||||||||||
Less: Capital expenditures | (5,873 | ) | (5,251 | ) | (17,099 | ) | (16,474 | ) | |||||||||||||
Free Cash Flow | 6,473 | 5,552 | 14,423 | 11,999 | |||||||||||||||||
Less: Dividends paid | (3,631 | ) | (3,009 | ) | (9,775 | ) | (9,030 | ) | |||||||||||||
Free Cash Flow after Dividends | $ | 2,842 | $ | 2,543 | $ | 4,648 | $ | 2,969 | |||||||||||||
Free Cash Flow Dividend Payout Ratio | 56.1 | % | 54.2 | % | 67.8 | % | 75.3 | % | |||||||||||||
EBITDA
Our calculation of EBITDA, as presented, may differ from similarly titled measures reported by other companies. For AT&T, EBITDA excludes other income (expense) – net, and equity in net income (loss) of affiliates, as these do not reflect the operating results of our subscriber base or operations that are not under our control. Equity in net income (loss) of affiliates represents the proportionate share of the net income (loss) of affiliates in which we exercise significant influence, but do not control. Because we do not control these entities, management excludes these results when evaluating the performance of our primary operations. EBITDA also excludes interest expense and the provision for income taxes. Excluding these items eliminates the expenses associated with our capital and tax structures. Finally, EBITDA excludes depreciation and amortization in order to eliminate the impact of capital investments. EBITDA does not give effect to cash used for debt service requirements and thus does not reflect available funds for distributions, reinvestment or other discretionary uses. EBITDA is not presented as an alternative measure of operating results or cash flows from operations, as determined in accordance with U.S. generally accepted accounting principles (GAAP).
EBITDA service margin is calculated as EBITDA divided by service revenues.
When discussing our segment, business unit and supplemental results, EBITDA excludes equity in net income (loss) of affiliates, and depreciation and amortization from operating contribution.
These measures are used by management as a gauge of our success in acquiring, retaining and servicing subscribers because we believe these measures reflect AT&T's ability to generate and grow subscriber revenues while providing a high level of customer service in a cost-effective manner. Management also uses these measures as a method of comparing operating performance with that of many of its competitors. The financial and operating metrics which affect EBITDA include the key revenue and expense drivers for which management is responsible and upon which we evaluate performance.
We believe EBITDA Service Margin (EBITDA as a percentage of service revenues) to be a more relevant measure than EBITDA Margin (EBITDA as a percentage of total revenue) for our Mobility business unit operating margin. We also use wireless service revenues to calculate margin to facilitate comparison, both internally and externally with our wireless competitors, as they calculate their margins using wireless service revenues as well.
There are material limitations to using these non-GAAP financial measures. EBITDA, EBITDA margin and EBITDA service margin, as we have defined them, may not be comparable to similarly titled measures reported by other companies. Furthermore, these performance measures do not take into account certain significant items, including depreciation and amortization, interest expense, tax expense and equity in net income (loss) of affiliates. 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 | |||||||||||||||||||||
Third Quarter | Nine-Month Period | ||||||||||||||||||||
2018 | 2017 | 2018 | 2017 | ||||||||||||||||||
Net Income | $ | 4,816 | $ | 3,123 | $ | 14,823 | $ | 10,711 | |||||||||||||
Additions: | |||||||||||||||||||||
Income Tax (Benefit) Expense | 1,391 | 1,851 | 4,305 | 5,711 | |||||||||||||||||
Interest Expense | 2,051 | 1,686 | 5,845 | 4,374 | |||||||||||||||||
Equity in Net (Income) Loss of Affiliates | 64 | (11 | ) | 71 | 148 | ||||||||||||||||
Other (Income) Expense - Net | (1,053 | ) | (842 | ) | (5,108 | ) | (2,255 | ) | |||||||||||||
Depreciation and amortization | 8,166 | 6,042 | 20,538 | 18,316 | |||||||||||||||||
EBITDA | 15,435 | 11,849 | 40,474 | 37,005 | |||||||||||||||||
Total Operating Revenues | 45,739 | 39,668 | 122,763 | 118,870 | |||||||||||||||||
Service Revenues | 41,297 | 36,378 | 109,849 | 109,372 | |||||||||||||||||
EBITDA Margin | 33.7 | % | 29.9 | % | 33.0 | % | 31.1 | % | |||||||||||||
EBITDA Service Margin | 37.4 | % | 32.6 | % | 36.8 | % | 33.8 | % | |||||||||||||
Supplemental Historical EBITDA, EBITDA Margin and EBITDA Service Margin | |||||
Dollars in millions | Third Quarter | ||||
2018 | |||||
Net Income |
$ |
4,366 |
|||
Additions: | |||||
Income Tax (Benefit) Expense | 1,245 | ||||
Interest Expense | 2,051 | ||||
Equity in Net (Income) Loss of Affiliates | 64 | ||||
Other (Income) Expense - Net | (1,053 | ) | |||
Depreciation and amortization | 8,166 | ||||
EBITDA | 14,839 | ||||
Total Operating Revenues | 46,607 | ||||
Service Revenues | 42,681 | ||||
EBITDA Margin | 31.8 | % | |||
EBITDA Service Margin | 34.8 | % | |||
Segment and Business Unit EBITDA, EBITDA Margin and EBITDA Service Margin | |||||||||||||||||||||
Dollars in millions | |||||||||||||||||||||
Third Quarter | Nine-Month Period | ||||||||||||||||||||
2018 | 2017 | 2018 | 2017 | ||||||||||||||||||
Communications Segment | |||||||||||||||||||||
Operating Contribution | $ | 8,182 | $ | 8,071 | $ | 24,623 | $ | 24,821 | |||||||||||||
Additions: | |||||||||||||||||||||
Equity in Net (Income) Loss of Affiliates | 1 | - | 3 | - | |||||||||||||||||
Depreciation and amortization | 4,607 | 4,576 | 13,820 | 13,825 | |||||||||||||||||
EBITDA | 12,790 | 12,647 | 38,446 | 38,646 | |||||||||||||||||
Total Operating Revenues | 36,230 | 37,115 | 107,173 | 111,268 | |||||||||||||||||
Operating Income Margin | 22.6 | % | 21.7 | % | 23.0 | % | 22.3 | % | |||||||||||||
EBITDA Margin | 35.3 | % | 34.1 | % | 35.9 | % | 34.7 | % | |||||||||||||
Mobility | |||||||||||||||||||||
Operating Contribution | $ | 5,603 | $ | 5,333 | $ | 16,267 | $ | 15,929 | |||||||||||||
Additions: | |||||||||||||||||||||
Equity in Net (Income) of Affiliates | 1 | - | 1 | - | |||||||||||||||||
Depreciation and amortization | 2,079 | 2,008 | 6,287 | 5,988 | |||||||||||||||||
EBITDA | 7,683 | 7,341 | 22,555 | 21,917 | |||||||||||||||||
Total Operating Revenues | 17,938 | 17,370 | 52,575 | 51,922 | |||||||||||||||||
Service Revenues | 13,989 | 14,475 | 41,074 | 43,414 | |||||||||||||||||
Operating Income Margin | 31.2 | % | 30.7 | % | 30.9 | % | 30.7 | % | |||||||||||||
EBITDA Margin | 42.8 | % | 42.3 | % | 42.9 | % | 42.2 | % | |||||||||||||
EBITDA Service Margin | 54.9 | % | 50.7 | % | 54.9 | % | 50.5 | % | |||||||||||||
Entertainment Group | |||||||||||||||||||||
Operating Contribution | $ | 1,104 | $ | 1,283 | $ | 3,888 | $ | 4,470 | |||||||||||||
Additions: | |||||||||||||||||||||
Equity in Net (Income) Loss of Affiliates | (1 | ) | 1 | 1 | - | ||||||||||||||||
Depreciation and amortization | 1,331 | 1,379 | 3,986 | 4,254 | |||||||||||||||||
EBITDA | 2,434 | 2,663 | 7,875 | 8,724 | |||||||||||||||||
Total Operating Revenues | 11,589 | 12,467 | 34,498 | 37,435 | |||||||||||||||||
Operating Income Margin | 9.5 | % | 10.3 | % | 11.3 | % | 11.9 | % | |||||||||||||
EBITDA Margin | 21.0 | % | 21.4 | % | 22.8 | % | 23.3 | % | |||||||||||||
Business Wireline | |||||||||||||||||||||
Operating Contribution | $ | 1,475 | $ | 1,455 | $ | 4,468 | $ | 4,422 | |||||||||||||
Additions: | |||||||||||||||||||||
Equity in Net (Income) Loss of Affiliates | 1 | (1 | ) | 1 | - | ||||||||||||||||
Depreciation and amortization | 1,197 | 1,189 | 3,547 | 3,583 | |||||||||||||||||
EBITDA | 2,673 | 2,643 | 8,016 | 8,005 | |||||||||||||||||
Total Operating Revenues | 6,703 | 7,278 | 20,100 | 21,911 | |||||||||||||||||
Operating Income Margin | 22.0 | % | 20.0 | % | 22.2 | % | 20.2 | % | |||||||||||||
EBITDA Margin | 39.9 | % | 36.3 | % | 39.9 | % | 36.5 | % | |||||||||||||
Segment and Business Unit EBITDA, EBITDA Margin and EBITDA Service Margin | |||||||||||||||||||||
Dollars in millions | |||||||||||||||||||||
Third Quarter | Nine-Month Period | ||||||||||||||||||||
2018 | 2017 | 2018 | 2017 | ||||||||||||||||||
WarnerMedia Segment | |||||||||||||||||||||
Operating Contribution | $ | 2,528 | $ | 2 | $ | 2,992 | $ | 21 | |||||||||||||
Additions: | |||||||||||||||||||||
Equity in Net (Income) of Affiliates | 39 | 6 | 55 | 23 | |||||||||||||||||
Depreciation and amortization | 134 | 1 | 166 | 3 | |||||||||||||||||
EBITDA | 2,701 | 9 | 3,213 | 47 | |||||||||||||||||
Total Operating Revenues | 8,204 | 107 | 9,709 | 323 | |||||||||||||||||
Operating Income Margin | 31.3 | % | 7.5 | % | 31.4 | % | 13.6 | % | |||||||||||||
EBITDA Margin | 32.9 | % | 8.4 | % | 33.1 | % | 14.6 | % | |||||||||||||
Turner | |||||||||||||||||||||
Operating Contribution | $ | 1,449 | $ | 22 | $ | 1,802 | $ | 79 | |||||||||||||
Additions: | |||||||||||||||||||||
Equity in Net (Income) of Affiliates | (7 | ) | (13 | ) | (39 | ) | (32 | ) | |||||||||||||
Depreciation and amortization | 59 | 1 | 71 | 3 | |||||||||||||||||
EBITDA | 1,501 | 10 | 1,834 | 50 | |||||||||||||||||
Total Operating Revenues | 2,988 | 107 | 3,767 | 323 | |||||||||||||||||
Operating Income Margin | 48.3 | % | 8.4 | % | 46.8 | % | 14.6 | % | |||||||||||||
EBITDA Margin | 50.2 | % | 9.3 | % | 48.7 | % | 15.5 | % | |||||||||||||
Home Box Office | |||||||||||||||||||||
Operating Contribution | $ | 630 | $ | - | $ | 734 | $ | - | |||||||||||||
Additions: | |||||||||||||||||||||
Equity in Net (Income) Loss of Affiliates | (2 | ) | - | (1 | ) | - | |||||||||||||||
Depreciation and amortization | 25 | - | 30 | - | |||||||||||||||||
EBITDA | 653 | - | 763 | - | |||||||||||||||||
Total Operating Revenues | 1,644 | - | 1,925 | - | |||||||||||||||||
Operating Income Margin | 38.2 | % | - | 38.1 | % | - | |||||||||||||||
EBITDA Margin | 39.7 | % | - | 39.6 | % | - | |||||||||||||||
Warner Bros. | |||||||||||||||||||||
Operating Contribution | $ | 553 | $ | - | $ | 642 | $ | - | |||||||||||||
Additions: | |||||||||||||||||||||
Equity in Net (Income) Loss of Affiliates | 23 | - | 24 | - | |||||||||||||||||
Depreciation and amortization | 40 | - | 54 | - | |||||||||||||||||
EBITDA | 616 | - | 720 | - | |||||||||||||||||
Total Operating Revenues | 3,720 | - | 4,227 | - | |||||||||||||||||
Operating Income Margin | 15.5 | % | - | 15.8 | % | - | |||||||||||||||
EBITDA Margin | 16.6 | % | - | 17.0 | % | - | |||||||||||||||
Segment and Business Unit EBITDA, EBITDA Margin and EBITDA Service Margin | |||||||||||||||||||||
Dollars in millions | |||||||||||||||||||||
Third Quarter | Nine-Month Period | ||||||||||||||||||||
2018 | 2017 | 2018 | 2017 | ||||||||||||||||||
Latin America Segment | |||||||||||||||||||||
Operating Contribution | $ | (201 | ) | $ | (125 | ) | $ | (462 | ) | $ | (257 | ) | |||||||||
Additions: | |||||||||||||||||||||
Equity in Net (Income) of Affiliates | (9 | ) | (17 | ) | (24 | ) | (62 | ) | |||||||||||||
Depreciation and amortization | 297 | 304 | 942 | 905 | |||||||||||||||||
EBITDA | 87 | 162 | 456 | 586 | |||||||||||||||||
Total Operating Revenues | 1,833 | 2,099 | 5,809 | 6,054 | |||||||||||||||||
Operating Income Margin | -11.5 | % | -6.8 | % | -8.4 | % | -5.3 | % | |||||||||||||
EBITDA Margin | 4.7 | % | 7.7 | % | 7.8 | % | 9.7 | % | |||||||||||||
Vrio | |||||||||||||||||||||
Operating Contribution | $ | 66 | $ | 99 | $ | 281 | $ | 362 | |||||||||||||
Additions: | |||||||||||||||||||||
Equity in Net (Income) of Affiliates | (9 | ) | (17 | ) | (24 | ) | (62 | ) | |||||||||||||
Depreciation and amortization | 168 | 206 | 559 | 642 | |||||||||||||||||
EBITDA | 225 | 288 | 816 | 942 | |||||||||||||||||
Total Operating Revenues | 1,102 | 1,363 | 3,710 | 4,065 | |||||||||||||||||
Operating Income Margin | 5.2 | % | 6.0 | % | 6.9 | % | 7.4 | % | |||||||||||||
EBITDA Margin | 20.4 | % | 21.1 | % | 22.0 | % | 23.2 | % | |||||||||||||
Mexico | |||||||||||||||||||||
Operating Contribution | $ | (267 | ) | $ | (224 | ) | $ | (743 | ) | $ | (619 | ) | |||||||||
Additions: | |||||||||||||||||||||
Depreciation and amortization | 129 | 98 | 383 | 263 | |||||||||||||||||
EBITDA | (138 | ) | (126 | ) | (360 | ) | (356 | ) | |||||||||||||
Total Operating Revenues | 731 | 736 | 2,099 | 1,989 | |||||||||||||||||
Operating Income Margin | -36.5 | % | -30.4 | % | -35.4 | % | -31.1 | % | |||||||||||||
EBITDA Margin | -18.9 | % | -17.1 | % | -17.2 | % | -17.9 | % | |||||||||||||
Segment EBITDA, EBITDA Margin and EBITDA Service Margin | |||||||||||||||||||||
Dollars in millions | |||||||||||||||||||||
Third Quarter | Nine-Month Period | ||||||||||||||||||||
2018 | 2017 | 2018 | 2017 | ||||||||||||||||||
Xandr | |||||||||||||||||||||
Operating Contribution |
$ |
333 |
$ | 294 | $ | 952 | $ | 873 | |||||||||||||
Additions: | |||||||||||||||||||||
Depreciation and amortization | 3 | - | 4 | 1 | |||||||||||||||||
EBITDA | 336 | 294 | 956 | 874 | |||||||||||||||||
Total Operating Revenues | 445 | 333 | 1,174 | 992 | |||||||||||||||||
Operating Income Margin | 74.8 | % | 88.3 | % | 81.1 | % | 88.0 | % | |||||||||||||
EBITDA Margin | 75.5 | % | 88.3 | % | 81.4 | % | 88.1 | % | |||||||||||||
Adjusting Items
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 | |||||||||||||||||||||
Third Quarter | Nine-Month Period | ||||||||||||||||||||
2018 | 2017 | 2018 | 2017 | ||||||||||||||||||
Operating Revenues | |||||||||||||||||||||
Natural disaster revenue credits | $ | - | $ | 89 | $ | - | $ | 89 | |||||||||||||
Adjustments to Operating Revenues | - | 89 | - | 89 | |||||||||||||||||
Operating Expenses | |||||||||||||||||||||
Time Warner and other merger costs | 361 | 33 | 749 | 152 | |||||||||||||||||
Employee separation costs | 76 | 208 | 260 | 268 | |||||||||||||||||
Natural disaster costs | - | 118 | 104 | 118 | |||||||||||||||||
DIRECTV merger integration costs | - | 67 | - | 317 | |||||||||||||||||
Mexico merger integration costs | - | 34 | - | 153 | |||||||||||||||||
(Gain) loss on transfer of wireless spectrum | - | - | - | (181 | ) | ||||||||||||||||
Foreign currency exchange | - | - | 43 | 98 | |||||||||||||||||
Adjustments to Operations and Support Expenses | 437 | 460 | 1,156 | 925 | |||||||||||||||||
Amortization of intangible assets | 2,329 | 1,136 | 4,669 | 3,508 | |||||||||||||||||
Adjustments to Operating Expenses | 2,766 | 1,596 | 5,825 | 4,433 | |||||||||||||||||
Other | |||||||||||||||||||||
Merger-related interest and fees1 | - | 485 | 1,029 | 752 | |||||||||||||||||
Actuarial (gain) loss | - | - | (2,726 | ) | (259 | ) | |||||||||||||||
(Gain) loss on sale of assets, impairments and other adjustments |
(327 | ) | (81 | ) | (279 | ) | 140 | ||||||||||||||
Adjustments to Income Before Income Taxes | 2,439 | 2,089 | 3,849 | 5,155 | |||||||||||||||||
Tax impact of adjustments | 548 | 716 | 765 | 1,717 | |||||||||||||||||
Tax Related Items | - | (146 | ) | (96 | ) | (146 | ) | ||||||||||||||
Adjustments to Net Income | $ | 1,891 | $ | 1,519 | $ | 3,180 | $ | 3,584 | |||||||||||||
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 | |||||||||||||||||||||
Third Quarter | Nine-Month Period | ||||||||||||||||||||
2018 | 2017 | 2018 | 2017 | ||||||||||||||||||
Operating Income | $ | 7,269 | $ | 5,807 | $ | 19,936 | $ | 18,689 | |||||||||||||
Adjustments to Operating Revenues | - | 89 | - | 89 | |||||||||||||||||
Adjustments to Operating Expenses | 2,766 | 1,596 | 5,825 | 4,433 | |||||||||||||||||
Adjusted Operating Income | 10,035 | 7,492 | 25,761 | 23,211 | |||||||||||||||||
EBITDA | 15,435 | 11,849 | 40,474 | 37,005 | |||||||||||||||||
Adjustments to Operating Revenues | - | 89 | - | 89 | |||||||||||||||||
Adjustments to Operations and Support Expenses | 437 | 460 | 1,156 | 925 | |||||||||||||||||
Adjusted EBITDA | 15,872 | 12,398 | 41,630 | 38,019 | |||||||||||||||||
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 EBITDA1 | 15,872 | 46,173 | |||||||||||||||||||
Total Operating Revenues | 45,739 | 39,668 | 122,763 | 118,870 | |||||||||||||||||
Adjustments to Operating Revenues | - | 89 | - | 89 | |||||||||||||||||
Total Adjusted Operating Revenue | 45,739 | 39,757 | 122,763 | 118,959 | |||||||||||||||||
Service Revenues | 41,297 | 36,378 | 109,849 | 109,372 | |||||||||||||||||
Adjustments to Service Revenues | - | 89 | - | 89 | |||||||||||||||||
Adjusted Service Revenue | 41,297 | 36,467 | 109,849 | 109,461 | |||||||||||||||||
Operating Income Margin | 15.9 | % | 14.6 | % | 16.2 | % | 15.7 | % | |||||||||||||
Adjusted Operating Income Margin | 21.9 | % | 18.8 | % | 21.0 | % | 19.5 | % | |||||||||||||
Adjusted EBITDA Margin | 34.7 | % | 31.2 | % | 33.9 | % | 32.0 | % | |||||||||||||
Adjusted EBITDA Service Margin | 38.4 | % | 34.0 | % | 37.9 | % | 34.7 | % | |||||||||||||
Supplemental Results under Historical Accounting Method | |||||||||||||||||||||
Operating Income | 6,673 | ||||||||||||||||||||
Adjustments to Operating Expenses | 2,766 | ||||||||||||||||||||
Adjusted Supplemental Operating Income | 9,439 | ||||||||||||||||||||
EBITDA | 14,839 | ||||||||||||||||||||
Adjustments to Operations and Support Expenses | 437 | ||||||||||||||||||||
Adjusted Supplemental EBITDA | 15,276 | ||||||||||||||||||||
Supplemental Operating Revenues | 46,607 | ||||||||||||||||||||
Adjusted Supplemental Operating Income Margin | 20.3 | % | |||||||||||||||||||
Adjusted Supplemental EBITDA margin | 32.8 | % |
1 Pro Forma Adjusted EBITDA reflects the combined results of 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 | ||||||||||||||||||||
Third Quarter | Nine-Month Period | |||||||||||||||||||
2018 | 2017 | 2018 | 2017 | |||||||||||||||||
Diluted Earnings Per Share (EPS) | $ | 0.65 | $ | 0.49 | $ | 2.19 | $ | 1.69 | ||||||||||||
Amortization of intangible assets | 0.25 | 0.12 | 0.55 | 0.38 | ||||||||||||||||
Merger integration items1 | 0.04 | 0.06 | 0.22 | 0.14 | ||||||||||||||||
(Gain) loss on sale of assets, impairments and other adjustments2 |
(0.04 |
) |
0.05 | 0.02 | 0.06 | |||||||||||||||
Actuarial (gain) loss3 | - | - | (0.31 | ) | (0.03 | ) | ||||||||||||||
Tax-related items | - | 0.02 | - | 0.02 | ||||||||||||||||
Adjusted EPS | $ | 0.90 | $ | 0.74 | $ | 2.67 | $ | 2.26 | ||||||||||||
Year-over-year growth - Adjusted | 21.6 | % | 18.1 | % | ||||||||||||||||
Weighted Average Common Shares Outstanding with Dilution (000,000) |
7,320 | 6,182 | 6,630 | 6,184 |
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 an actuarial gain of $930 million in the first quarter of
2018 associated with our postretirement plan and a gain of $1,796
million in the second quarter associated with our pension plan. As a
result, adjusted EPS reflects (1) in the first quarter and for the first
nine months, an expected return on plan assets of $77 million (based on
an average expected return on plan assets of 5.75% for our VEBA trusts),
rather than the actual return on plan assets of $31 million loss (VEBA
return of -3.08%) and (2) in the second quarter and for the first nine
months, an expected return on plan assets of $754 million (based on an
average expected return on plan assets of 7.00% for our Pension trusts),
rather than the actual return on plan assets of $186 million loss
(Pension return of -0.56%), both of which are included in the GAAP
measure of income.
Pro Forma 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 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.
Net Debt to Pro Forma Adjusted EBITDA | ||||||||||||||||||||
Dollars in millions | ||||||||||||||||||||
Three Months Ended | ||||||||||||||||||||
Mar. 31, | Jun. 30, | Sep. 30, |
|
YTD 2018 | ||||||||||||||||
2018 | 2018 | 2018 | ||||||||||||||||||
Pro Forma Adjusted EBITDA1 | $ | 15,182 | $ | 15,119 | $ | 15,872 |
$ |
46,173 | ||||||||||||
Add back severance | (51 | ) | (133 | ) | (76 | ) | (260 | ) | ||||||||||||
Net Debt Pro Forma Adjusted EBITDA | 15,131 | 14,986 | 15,796 | 45,913 | ||||||||||||||||
Annualized Pro Forma Adjusted EBITDA | 61,217 | |||||||||||||||||||
End-of-period current debt | 14,905 | |||||||||||||||||||
End-of-period long-term debt | 168,513 | |||||||||||||||||||
Total End-of-Period Debt | 183,418 | |||||||||||||||||||
Less: Cash and Cash Equivalents | 8,657 | |||||||||||||||||||
Net Debt Balance | 174,761 | |||||||||||||||||||
Annualized Net Debt to Pro Forma Adjusted EBITDA Ratio | 2.85 |
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 by AT&T in the third quarter of 2018.
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 | |||||||||||||||||||||||||||||||||||||||
Three Months Ended | |||||||||||||||||||||||||||||||||||||||
September 30, 2018 | September 30, 2017 | ||||||||||||||||||||||||||||||||||||||
Mobility |
Business |
Adjustments1 |
Business |
Mobility |
Business |
Adjustments1 |
Business |
||||||||||||||||||||||||||||||||
Operating Revenues | |||||||||||||||||||||||||||||||||||||||
Wireless service | $ | 13,989 | $ | - | $ | (12,112 | ) | $ | 1,877 | $ | 14,475 | $ | - | $ | (12,452 | ) | $ | 2,023 | |||||||||||||||||||||
Strategic services | - | 3,059 | - | 3,059 | - | 3,018 | - | 3,018 | |||||||||||||||||||||||||||||||
Legacy voice and data services | - | 2,615 | - | 2,615 | - | 3,343 | - | 3,343 | |||||||||||||||||||||||||||||||
Other services and equipment | - | 1,029 | - | 1,029 | - | 917 | - | 917 | |||||||||||||||||||||||||||||||
Wireless equipment | 3,949 | - | (3,359 | ) | 590 | 2,895 | - | (2,555 | ) | 340 | |||||||||||||||||||||||||||||
Total Operating Revenues | 17,938 | 6,703 | (15,471 | ) | 9,170 | 17,370 | 7,278 | (15,007 | ) | 9,641 | |||||||||||||||||||||||||||||
Operations and support | 10,255 | 4,030 | (8,687 | ) | 5,598 | 10,029 | 4,635 | (8,568 | ) | 6,096 | |||||||||||||||||||||||||||||
EBITDA | 7,683 | 2,673 | (6,784 | ) | 3,572 | 7,341 | 2,643 | (6,439 | ) | 3,545 | |||||||||||||||||||||||||||||
Depreciation and amortization | 2,079 | 1,197 | (1,777 | ) | 1,499 | 2,008 | 1,189 | (1,731 | ) | 1,466 | |||||||||||||||||||||||||||||
Total Operating Expenses | 12,334 | 5,227 | (10,464 | ) | 7,097 | 12,037 | 5,824 | (10,299 | ) | 7,562 | |||||||||||||||||||||||||||||
Operating Income | $ | 5,604 | $ | 1,476 | $ | (5,007 | ) | $ | 2,073 | $ | 5,333 | $ | 1,454 | $ | (4,708 | ) | $ | 2,079 | |||||||||||||||||||||
Equity in net Income of Affiliates | (1 | ) | (1 | ) | 1 | (1 | ) | - | 1 | (1 | ) | - | |||||||||||||||||||||||||||
Contribution | 5,603 | 1,475 | (5,006 | ) | 2,072 | 5,333 | 1,455 | (4,709 | ) | 2,079 | |||||||||||||||||||||||||||||
1 Non-business wireless reported in the Communication segment under the Mobility business unit. | |||||||||||||||||||||||||||||||||||||||
Supplemental Operational Measure | |||||||||||||||||||||||||||||||||||||||
Nine Months Ended | |||||||||||||||||||||||||||||||||||||||
September 30, 2018 | September 30, 2017 | ||||||||||||||||||||||||||||||||||||||
Mobility |
Business |
Adjustments1 |
Business |
Mobility |
Business |
Adjustments1 |
Business |
||||||||||||||||||||||||||||||||
Operating Revenues | |||||||||||||||||||||||||||||||||||||||
Wireless service | $ | 41,074 | $ | - | $ | (35,577 | ) | $ | 5,497 | $ | 43,414 | $ | - | $ | (37,384 | ) | $ | 6,030 | |||||||||||||||||||||
Strategic services | - | 9,168 | - | 9,168 | - | 8,880 | - | 8,880 | |||||||||||||||||||||||||||||||
Legacy voice and data services | - | 8,176 | - | 8,176 | - | 10,314 | - | 10,314 | |||||||||||||||||||||||||||||||
Other services and equipment | - | 2,756 | - | 2,756 | - | 2,717 | - | 2,717 | |||||||||||||||||||||||||||||||
Wireless equipment | 11,501 | - | (9,749 | ) | 1,752 | 8,508 | - | (7,520 | ) | 988 | |||||||||||||||||||||||||||||
Total Operating Revenues | 52,575 | 20,100 | (45,326 | ) | 27,349 | 51,922 | 21,911 | (44,904 | ) | 28,929 | |||||||||||||||||||||||||||||
Operating Expenses | |||||||||||||||||||||||||||||||||||||||
Operations and support | 30,020 | 12,084 | (25,296 | ) | 16,808 | 30,005 | 13,906 | (25,764 | ) | 18,147 | |||||||||||||||||||||||||||||
EBITDA | 22,555 | 8,016 | (20,030 | ) | 10,541 | 21,917 | 8,005 | (19,140 | ) | 10,782 | |||||||||||||||||||||||||||||
Depreciation and amortization | 6,287 | 3,547 | (5,390 | ) | 4,444 | 5,988 | 3,583 | (5,162 | ) | 4,409 | |||||||||||||||||||||||||||||
Total Operating Expenses | 36,307 | 15,631 | (30,686 | ) | 21,252 | 35,993 | 17,489 | (30,926 | ) | 22,556 | |||||||||||||||||||||||||||||
Operating Income | $ | 16,268 | $ | 4,469 | $ | (14,640 | ) | $ | 6,097 | $ | 15,929 | $ | 4,422 | $ | (13,978 | ) | $ | 6,373 | |||||||||||||||||||||
Equity in net Income of Affiliates | (1 | ) | (1 | ) | 1 | (1 | ) | - | - | - | - | ||||||||||||||||||||||||||||
Contribution | 16,267 | 4,468 | (14,639 | ) | 6,096 | 15,929 | 4,422 | (13,978 | ) | 6,373 | |||||||||||||||||||||||||||||
1 Non-business wireless reported in the Communication segment under the Mobility business unit. |