CVS Health : Q2 2022 Non-GAAP Reconciliation (opens in new window)

Q2 2022 Earnings

Reconciliation of Non-GAAP Financial Measures to the Most Directly Comparable

GAAP Financial Measures

Q2 2022 ACTUAL RESULTS

CVS Health Corporation (the "Company") uses non-GAAP financial measures to analyze underlying business performance and trends. The Company believes that providing these non-GAAP financial measures enhances the Company's and investors' ability to compare the Company's past financial performance with its current performance. These non-GAAP financial measures are provided as supplemental information to the financial measures the Company discloses that are calculated and presented in accordance with GAAP. Non-GAAP financial measures should not be considered a substitute for, or superior to, financial measures determined or calculated in accordance with GAAP. The Company's definitions of its non-GAAP financial measures may not be comparable to similarly titled measurements reported by other companies.

Non-GAAP financial measures such as consolidated adjusted operating income, adjusted earnings per share (EPS), baseline adjusted earnings per share (Baseline Adjusted EPS) and adjusted income attributable to CVS Health exclude from the relevant GAAP metrics, as applicable: amortization of intangible assets and other items, if any, that neither relate to the ordinary course of the Company's business nor reflect the Company's underlying business performance.

The Company's Non-GAAP adjusted effective income tax rate excludes from the relevant GAAP metric the corresponding tax benefit or expense related to the amortization of intangible assets and other items, if any, that neither relate to the ordinary course of the Company's business nor reflect the Company's underlying business performance and certain discrete tax items.

ADJUSTED EFFECTIVE INCOME TAX RATE

The following are reconciliations of the effective income tax rate to the adjusted effective income tax rate:

CONSOLIDATED

	(Unaudited)		(Unaudited)
	Quarter Ended		Year to Date
	June 30,		June 30,
	2022	2021	2022	2021
Effective income tax rate (GAAP measure)	26.5 %	25.3 %	24.4 %	25.2 %
Impact of non-GAAP adjustments (1)	(1.1)	(0.1)	1.0	(0.1)
Adjusted effective income tax rate	25.4 %	25.2 %	25.4 %	25.1 %

1. Removes the corresponding tax benefit or expense related to the items excluded from adjusted income attributable to CVS Health in the Company's second quarter 2022 earnings press release that neither relate to the ordinary course of the Company's business nor reflect the Company's underlying business performance, such as amortization of intangible assets, gains/losses on divestitures, certain legal settlements, losses on assets held for sale, acquisition-related integration costs and acquisition purchase price adjustments outside of the acquisition accounting measurement period. The nature of each non- GAAP adjustment is evaluated to determine whether a discrete adjustment should be made to the adjusted income tax provision. During the six months ended June 30, 2022, the Company's adjusted income tax provision also excludes the impact of certain discrete tax items concluded in the first quarter of 2022.

Page 1 of 9

August 3, 2022

Q2 2022 Earnings

Reconciliation of Non-GAAP Financial Measures to the Most Directly Comparable

GAAP Financial Measures

CAUTIONARY STATEMENT CONCERNING FORWARD-LOOKING STATEMENTS

The Private Securities Litigation Reform Act of 1995 provides a safe harbor for forward-looking statements made by or on behalf of the Company. The information on pages 3 to 9 of this document is forward-looking. By their nature, all forward-looking statements are not guarantees of future performance or results and are subject to risks and uncertainties that are difficult to predict and/or quantify. Actual results may differ materially from those contemplated by the forward-looking statements due to the risks and uncertainties related to the coronavirus disease 2019 ("COVID-19") pandemic, including the potential emergence of additional variants, vaccine and testing protocols, government testing initiatives, the geographies impacted and the severity and duration of the pandemic, the pandemic's impact on the U.S. and global economies and consumer behavior and health care utilization patterns, and the timing, scope and impact of stimulus legislation and other federal, state and local governmental responses to the pandemic, as well as the risks and uncertainties described in the Company's Securities and Exchange Commission ("SEC") filings, including those set forth in the Risk Factors section and under the heading "Cautionary Statement Concerning Forward-Looking Statements" in the Company's most recently filed Annual Report on Form 10-K for the fiscal year ended December 31, 2021, in its Quarterly Report on Form 10-Q for the quarterly period ended June 30, 2022 and its Current Reports on Form 8-K.

You are cautioned not to place undue reliance on the Company's forward-looking statements. The Company's forward-looking statements are and will be based upon management's then-current views and assumptions regarding future events and operating performance, and are applicable only as of the dates of such statements. The Company does not assume any duty to update or revise forward-looking statements, whether as a result of new information, future events, uncertainties or otherwise.

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August 3, 2022

Q2 2022 Earnings

Reconciliation of Non-GAAP Financial Measures to the Most Directly Comparable

GAAP Financial Measures

FULL-YEAR 2022

ADJUSTED EARNINGS PER SHARE & BASELINE ADJUSTED EARNINGS PER SHARE

GAAP diluted EPS, Adjusted EPS and Baseline Adjusted EPS, respectively, are calculated by dividing net income attributable to CVS Health, adjusted income attributable to CVS Health and baseline adjusted income attributable to CVS Health by the Company's weighted average diluted shares outstanding. The Company defines adjusted income attributable to CVS Health as net income attributable to CVS Health (GAAP measure) excluding the impact of amortization of intangible assets and other items, if any, that neither relate to the ordinary course of the Company's business nor reflect the Company's underlying business performance, such as gains/losses on divestitures, certain legal settlements, losses on assets held for sale, acquisition-related integration costs, store impairments, goodwill impairments, acquisition purchase price adjustments outside of measurement period, losses on early extinguishment of debt and the corresponding tax benefit or expense related to the items excluded from adjusted income attributable to CVS Health, and any other items specifically identified herein. Baseline adjusted income attributable to CVS Health also excludes from net income attributable to CVS Health the impact of items that the Company cannot project for future periods such as realized capital gains and losses and changes in prior years' health care costs estimates, includes an estimate of the annualized impact from the Company's increase to minimum wage and the corresponding tax benefit or expense per share related to the items excluded from or included in baseline Adjusted EPS above.

The following are reconciliations of projected GAAP diluted EPS to projected Adjusted EPS and projected Baseline Adjusted EPS:

				2022E					2021
		Low			High			Actual
		Total		Per		Total		Per		Total		Per
In millions, except per share amounts		Common		Common		Common
Company		Share	Company		Share	Company		Share
Net income attributable to CVS Health (GAAP measure)	$	9,620	$	7.23	$	9,885	$	7.43	$	7,910	$	5.95
Non-GAAP adjustments:
Amortization of intangible assets		1,870		1.41		1,870		1.41		2,259		1.70
Gain on divestiture of subsidiary (1)		(225)		(0.17)		(225)		(0.17)		-		-
Legal settlement (2)		484		0.36		484		0.36		-		-
Loss on assets held for sale (3)		41		0.03		41		0.03		-		-
Acquisition-related integration costs (4)		-		-		-		-		132		0.10
Store impairments (5)		-		-		-		-		1,358		1.02
Goodwill impairment (6)		-		-		-		-		431		0.33
Acquisition purchase price adjustment outside of measurement period (7)		-		-		-		-		(61)		(0.05)
Loss on early extinguishment of debt (8)		-		-		-		-		452		0.34
Tax impact of non-GAAP adjustments (9)		(615)		(0.46)		(615)		(0.46)		(1,316)		(0.99)
Adjusted income attributable to CVS Health	$	11,175	$	8.40	$	11,440	$	8.60	$	11,165	$	8.40
Total baseline adjustments (10)												(0.48)
Baseline adjusted EPS (10)											$	7.92
Weighted average diluted shares outstanding				1,330				1,330				1,329

1. During 2022, the gain on divestiture of subsidiary represents the pre-tax gain on the sale of PayFlex Holdings, Inc. ("PayFlex"), which the Company sold on June 1, 2022, for approximately $775 million.
2. During 2022, the legal settlement relates to the agreement with the State of Florida, entered into in March 2022, to resolve opioid claims dating back more than a decade. Under this agreement, CVS Health Corporation settled all opioid claims against it and its subsidiaries by the State of Florida for $484 million, inclusive of certain legal fees, to be paid over a period of 18 years.
3. During 2022, the loss on assets held for sale relates to the Commercial Business reporting unit within the Health Care Benefits segment. In March 2022, the Company reached an agreement to sell its international health care business domiciled in Thailand ("Thailand business"), which was included in the Commercial Business reporting unit. At that time, a portion of the

Page 3 of 9

August 3, 2022

Q2 2022 Earnings

Reconciliation of Non-GAAP Financial Measures to the Most Directly Comparable

GAAP Financial Measures

Commercial Business goodwill was specifically allocated to the Thailand business. The net assets of the Thailand business were accounted for as assets held for sale at March 31, 2022. The carrying value of the Thailand business was determined to be greater than its fair value and a loss on assets held for sale was recorded during the first quarter of 2022. The sale closed in the second quarter of 2022, and the ultimate loss on the sale was not material.

1. During 2021, acquisition-related integration costs relate to the acquisition of Aetna Inc. ("Aetna").
2. During 2021, the store impairments charge relates to the write-down of operating lease right-of-use assets and property and equipment in connection with the planned closure of approximately 900 retail stores between 2022 and 2024.
3. During 2021, the goodwill impairment charge relates to the LTC reporting unit within the Retail/LTC segment.
4. During 2021, the acquisition purchase price adjustment outside of measurement period relates to a purchase price working capital adjustment for an acquisition completed during the first quarter of 2020. The resolution of this matter occurred subsequent to the acquisition accounting measurement period.
5. During 2021, the loss on early extinguishment of debt relates to the Company's repayment of approximately $2.3 billion of its outstanding senior notes in December 2021 pursuant to its early redemption make-whole provision for such senior notes and the Company's repayment of approximately $2.0 billion of its outstanding senior notes in August 2021 pursuant to its tender offer for such senior notes.
6. Represents the corresponding tax benefit or expense related to the items excluded from Adjusted EPS above. The nature of each non-GAAP adjustment is evaluated to determine whether a discrete adjustment should be made to the adjusted income tax provision. During 2022, the Company's non-GAAP tax provision also excludes the impact of certain discrete tax items concluded in the first quarter of 2022. During 2021, the Company's non-GAAP tax provision also excludes certain tax benefits primarily related to the U.S. Internal Revenue Service ("IRS") approval of a prior year tax refund claim.
7. In order to enhance the Company's and investors' ability to set Adjusted EPS growth expectations for future periods, the Company adjusted its full-year 2021 Adjusted EPS to remove the following items when determining baseline Adjusted EPS: (i) the impact of items that it cannot project for future periods such as realized capital gains and losses and changes in prior years' health care costs estimates, (ii) includes the estimated impact of the full year incremental expense related to the Company's minimum wage increase and (iii) the corresponding tax benefit or expense per share related to the items excluded from or included in baseline Adjusted EPS above. Net realized capital gains and losses arise from various types of transactions, primarily in the course of managing a portfolio of assets that support the payment of insurance liabilities. The Company experiences net realized capital gains or net realized capital losses, however the Company cannot project the amount of such gains or losses. In addition, the Company experiences changes to its prior years' health care cost estimates, however the Company cannot project the amount of such changes in estimates. For comparability, the Company is including the full year projected impact of the labor costs to make it comparable to future periods which will include a full year of increased labor cost. When determining the income tax impact of the baseline Adjusted EPS adjustments, the nature of the total baseline adjustments were evaluated to determine whether a discrete adjustment should be made to the baseline income tax provision.

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August 3, 2022

Q2 2022 Earnings

Reconciliation of Non-GAAP Financial Measures to the Most Directly Comparable

GAAP Financial Measures

ADJUSTED OPERATING INCOME

The Company defines adjusted operating income as operating income (GAAP measure) excluding the impact of amortization of intangible assets and other items, if any, that neither relate to the ordinary course of the Company's business nor reflect the Company's underlying business performance, such as gains/losses on divestitures, certain legal settlements, losses on assets held for sale, acquisition-related integration costs, store impairments, goodwill impairments and acquisition purchase price adjustments outside of measurement period. The Company uses adjusted operating income as its principal measure of segment performance as it enhances the Company's ability to compare past financial performance with current performance and analyze underlying business performance and trends. The consolidated measure is not determined in accordance with GAAP and should not be considered a substitute for, or superior to, the most directly comparable GAAP measure, consolidated operating income. The following are reconciliations of projected operating income to projected adjusted operating income:

FULL-YEAR 2022

CONSOLIDATED

			Year Ending
			December 31,
		2022E			2021
In millions		Low		High		Actual
Operating income (GAAP measure)	$	15,110	$	15,460	$	13,193
Amortization of intangible assets		1,870		1,870		2,259
Gain on divestiture of subsidiary (1)		(225)	(225)		-
Legal settlement (2)		484		484		-
Loss on assets held for sale (3)		41		41		-
Acquisition-related integration costs (4)		-		-		132
Store impairments (5)		-		-		1,358
Goodwill impairment (6)		-		-		431
Acquisition purchase price adjustment outside of measurement period (7)		-		-		(61)
Adjusted operating income	$	17,280	$	17,630	$	17,312

1. During 2022, the gain on divestiture of subsidiary represents the pre-tax gain on the sale of PayFlex, which the Company sold on June 1, 2022, for approximately $775 million.
2. During 2022, the legal settlement relates to the agreement with the State of Florida, entered into in March 2022, to resolve opioid claims dating back more than a decade. Under this agreement, CVS Health Corporation settled all opioid claims against it and its subsidiaries by the State of Florida for $484 million, inclusive of certain legal fees, to be paid over a period of 18 years.
3. During 2022, the loss on assets held for sale relates to the Commercial Business reporting unit within the Health Care Benefits segment. In March 2022, the Company reached an agreement to sell its Thailand business, which was included in the Commercial Business reporting unit. At that time, a portion of the Commercial Business goodwill was specifically allocated to the Thailand business. The net assets of the Thailand business were accounted for as assets held for sale at March 31, 2022. The carrying value of the Thailand business was determined to be greater than its fair value and a loss on assets held for sale was recorded during the first quarter of 2022. The sale closed in the second quarter of 2022, and the ultimate loss on the sale was not material.
4. During 2021, acquisition-related integration costs relate to the Aetna acquisition.
5. During 2021, the store impairments charge relates to the write-down of operating lease right-of-use assets and property and equipment in connection with the planned closure of approximately 900 retail stores between 2022 and 2024.
6. During 2021, the goodwill impairment charge relates to the LTC reporting unit within the Retail/LTC segment.
7. During 2021, the acquisition purchase price adjustment outside of measurement period relates to a purchase price working capital adjustment for an acquisition completed during the first quarter of 2020. The resolution of this matter occurred subsequent to the acquisition accounting measurement period.

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August 3, 2022