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Civitas Solutions Reports Fiscal 2018 Third Quarter Financial Results

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Civitas Solutions, Inc. (NYSE:CIVI) today reported financial results
for the fiscal third quarter ended June 30, 2018.

Third Quarter Fiscal 2018 At A Glance

  • Third quarter net revenue increased 8.6% to $404.5 million
  • Third quarter net income was $9.6 million, compared to $7.4 million in
    the third quarter of fiscal 2017
  • Third quarter Adjusted EBITDA was $51.7 million, an increase of 21.8%
    compared to the third quarter of fiscal 2017
  • Two acquisitions were completed during the third quarter, with total
    annual revenues of $9 million

"I am pleased with our strong third quarter, which was driven by growth
in net revenue and EBITDA across all four service lines," stated Bruce
Nardella, president and chief executive officer. "In recent quarters
management has focused on key initiatives to strengthen our operating
performance, and our results in the third quarter reflect continued
progress on a number of fronts, particularly our G&A cost-containment
project. At the same time, we have been very active in completing
acquisitions, SRS is performing very well under a single management team
and our ARY service line achieved strong organic growth.

"Our direct labor expense was also better than projected, although aided
by structural items that strengthened our performance during the
quarter," Nardella added. "While our strong third quarter performance
has allowed us to increase our Adjusted EBITDA guidance for fiscal year
2018, management's expectations are tempered by a very challenging labor
market that we expect will pressure our organic EBITDA growth in the
coming quarters. We believe, however, in our ability to execute on our
multi-lever growth strategy and create long-term value for our
stockholders."

Third Quarter Fiscal 2018 Financial Results

GAAP Results

Net revenue for the third quarter of fiscal 2018 was $404.5 million, an
increase of $32.2 million, or 8.6%, over net revenue for the same period
of the prior year. Net revenue increased $28.1 million from acquisitions
that closed during and after the third quarter of the prior year and
$4.1 million from organic growth.

Net revenue consisted of:

  • Intellectual and Developmental Disabilities ("I/DD") services net
    revenue of $256.5 million, an increase of 5.3% compared to the third
    quarter of fiscal 2017.
  • Post-Acute Specialty Rehabilitation Services ("SRS") net revenue of
    $90.6 million, an increase of 16.5% compared to the third quarter of
    fiscal 2017.
  • At-risk youth ("ARY") services net revenue of $38.3 million, an
    increase of 8.2% compared to the third quarter of fiscal 2017.
  • Adult Day Health ("ADH") services net revenue of $19.1 million, an
    increase of 22.1% compared to the third quarter of fiscal 2017.

Income from operations for the third quarter of fiscal 2018 was $24.6
million, or 6.1% of net revenue, compared to $20.3 million, or 5.4% of
net revenue, for the third quarter of the prior year. The increase in
our operating margin was primarily due to a decrease in direct labor
costs and general and administrative expenses as a percentage of
revenue. The decrease in direct labor costs was primarily due to the
growth in our SRS service line and a positive adjustment to reflect a
reduction in our estimated annual incentive compensation expense,
partially offset by an increase in overtime costs compared to the three
months ended June 30, 2017. The decrease in general and administrative
expenses was primarily due to cost containment efforts and efficiencies
gained through our project to optimize the Company's cost structure. The
increase in our operating margin was partially offset by increases in
direct occupancy costs and in depreciation and amortization expense as a
percentage of revenue. The increase in direct occupancy costs was
primarily due to higher levels of open occupancy within our waiver group
home programs and an increase in rent expense that was partially driven
by the Mentis acquisition. The increase in depreciation and amortization
expense was due to $1.8 million of accelerated amortization on
intangible assets associated with a program closure and additional
quarterly amortization from intangibles acquired in acquisitions that
closed during and after the three months ended June 30, 2017.

Net income for the third quarter of fiscal 2018 was $9.6 million
compared to net income of $7.4 million for the same period of the prior
year. The increase in net income for the third quarter of fiscal 2018
was primarily due to the increase in our income from operations
described above.

Basic and diluted net income per common share was $0.26 for the third
quarter of fiscal 2018, compared to basic and diluted net income of
$0.20 for the same period of the prior year.

Non-GAAP Results

Adjusted EBITDA for the third quarter of fiscal 2018 was $51.7 million,
or 12.8% of net revenue, compared to Adjusted EBITDA of $42.5 million,
or 11.4% of net revenue, for the third quarter of the prior year. The
increase in our Adjusted EBITDA margin compared to the third quarter of
the prior year was attributable to the factors described above. Adjusted
EBITDA for the third quarter of fiscal 2018 excludes $0.8 million of
exit costs and $1.8 million of accelerated amortization expense related
to program closures described below.

Adjusted net income per diluted common share was $0.58 for the third
quarter of fiscal 2018 compared to $0.43 for the third quarter of the
prior year.

Year-to-Date Fiscal 2018 Financial Results

Net revenue for the nine months ended June 30, 2018 was $1,192.7
million, an increase of $98.6 million, or 9.0%, over net revenue for the
same period of the prior year. Net revenue increased $82.0 million from
acquisitions that closed during and after the nine months ended June 30,
2017 and $16.6 million from organic growth.

Net revenue consisted of:

  • I/DD services net revenue of $764.4 million, an increase of 6.3%
    compared to the nine months ended June 30, 2017.
  • SRS net revenue of $264.4 million, an increase of 15.3% compared to
    the nine months ended June 30, 2017.
  • ARY services net revenue of $110.7 million, an increase of 3.7%
    compared to the nine months ended June 30, 2017.
  • ADH services net revenue of $53.2 million, an increase of 37.0%
    compared to the nine months ended June 30, 2017.

Income from operations for the nine months ended June 30, 2018 was $43.8
million, or 3.7% of net revenue, compared to $52.0 million, or 4.8% of
net revenue, for the same period of the prior year. The decrease in our
operating margin was primarily due to $5.5 million of exit costs and
$6.0 million of accelerated amortization expense on definite-lived
intangible assets associated with 39 program closures, primarily within
our SRS and I/DD service lines. The program closures were the result of
a comprehensive examination of each program's performance across all
service lines that began in the second quarter of fiscal 2018 in
response to margin erosion created by increasing labor and healthcare
costs. In addition to the program closure costs, our operating margin
was negatively impacted by an increase in direct occupancy costs due to
higher levels of open occupancy in our waiver group home programs and an
increase in rent expense that was partially driven by the Mentis
acquisition. Direct labor costs also increased as a percentage of
revenue due to higher amounts of overtime as a result of competitive
labor markets. The decrease in our operating margin was partially offset
by a decrease in general and administrative expense resulting from our
cost containment efforts and efficiencies gained from our project to
optimize the Company's cost structure.

Net income for the nine months ended June 30, 2018 was $16.5 million
compared to $17.0 million for the same period of the prior year. In
addition to the factors impacting income from operations described
above, net income for the nine months ended June 30, 2018 included a
$6.7 million tax benefit that was recorded in connection with revaluing
of the Company's deferred tax liabilities as a result of the lower
corporate tax rate established by the Tax Cuts and Jobs Act (the "Tax
Act") enacted in the first quarter of fiscal 2018.

Basic and diluted net income per common share was $0.44 for the nine
months ended June 30, 2018, compared to basic net income per common
share of $0.46 and diluted net income per common share of $0.45 for the
same period of the prior year.

Non-GAAP Results

Adjusted EBITDA for the nine months ended June 30, 2018 was $130.3
million, or 10.9% of net revenue, compared to Adjusted EBITDA of $119.5
million, or 10.9% of net revenue, for the same period of the prior year.
The change in Adjusted EBITDA compared to the nine months ended June 30,
2017 was due to the factors impacting income from operations described
above, except that Adjusted EBITDA for the nine months ended June 30,
2018 excludes the $5.5 million of exit costs and the $6.0 million of
accelerated amortization expense associated with the program closures
described above.

Adjusted net income per diluted common share was $1.29 for the nine
months ended June 30, 2018 compared to $1.08 for the same period of the
prior year.

Stock Repurchase Program

On February 8, 2018, we announced that our Board of Directors approved a
stock repurchase program under which we are authorized to repurchase up
to $25.0 million of the Company's outstanding common stock from time to
time in the open market, through negotiated transactions or otherwise
(including, without limitation, the use of Rule 10b5-1 plans). The stock
repurchase program will expire on August 12, 2018 or the date on which
the total repurchase amount has been spent, whichever occurs first. We
intend to conduct any open market stock repurchase activities in
compliance with the safe harbor provisions of Rule 10b-18 of the
Exchange Act. During the second and third quarters of fiscal 2018, we
repurchased 1,351,892 shares for $19.7 million under the program, which
we have implemented through a 10b5-1 plan. As of June 30, 2018, we have
remaining authorization to repurchase up to $5.3 million of common stock
under the program.

Fiscal 2018 Outlook and Guidance

The Company is maintaining its fiscal 2018 net revenue guidance range
and updating its fiscal 2018 Adjusted EBITDA guidance range that it
communicated on May 10, 2018 during the release of fiscal second quarter
results.

For fiscal 2018, we are maintaining our net revenue guidance range of
$1.58 billion to $1.61 billion and increasing our Adjusted EBITDA
guidance to a range of $170 million to $173 million. This compares to
our previous Adjusted EBITDA guidance range of $168 million to $171
million.

A reconciliation of the low-end and high-end of our current Adjusted
EBITDA guidance to net income is as follows:

  Fiscal Year Ending September 30, 2018
(In millions) Low-end   High-end
Net income $ 18 $ 20
Provision for (benefit from) income taxes (1 )
Interest expense, net (a) 38 38
Depreciation and amortization 96 96
Stock-based compensation 8 8
Expense reduction project costs 3 3
Exit costs 7 7
Acquisition-related transaction costs 1   1
Adjusted EBITDA $ 170   $ 173
 

Modeling guidelines for the current fiscal year are as follows:

Average basic and diluted shares outstanding for the year: 37 million
Capital
expenditures: 3.3% of net revenue
Annual tax rate: 32% (b)

(a)

  Interest expense, net as presented in the reconciliation of Adjusted
EBITDA guidance to net income does not give effect to any future
borrowings to fund repurchases under the stock repurchase program.

(b)

The modeling guideline for our annual tax rate excludes the impact
of the $6.7 million non-cash benefit recognized during the nine
months ended June 30, 2018. This benefit primarily relates to
remeasuring the Company's deferred tax liabilities at the newly
enacted federal tax rate. Including the $6.7 million benefit the
annual tax rate is estimated to be approximately (3%).
 

Net income as presented in the reconciliation of Adjusted EBITDA
guidance to net income may be further impacted by potential future
non-operating charges that would impact net income without affecting
Adjusted EBITDA.

Conference Call

This afternoon, Tuesday, August 7, 2018, Civitas Solutions management
will host a conference call at 5:00 pm (Eastern Time) to discuss the
fiscal 2018 third quarter operating results.

Conference Call Dial-in #:

Domestic U.S. Toll Free:     877-255-4315
International: 412-317-5467
 

Replay Details (available 1 hour after conclusion of the
conference call through 8/14/18):

Domestic U.S. Toll Free:     877-344-7529
International: 412-317-0088
Canada Toll Free: 855-669-9658
Replay Access Code: 10122296
 

A live webcast of the conference call will be available via the investor
relations section of the Company's website: www.civitas-solutions.com.
Following the call, an archived replay of the webcast will be available
on this website through November 7, 2018.

Non-GAAP Financial Information

This earnings release includes a discussion of Adjusted EBITDA, Adjusted
net income per diluted common share and net debt, which are non-GAAP
financial measures. Adjusted EBITDA is presented because it is an
important measure used by management to assess financial performance,
and management believes it provides a more transparent view of the
Company's underlying operating performance and operating trends. In
addition, the Company believes this measurement is important because
securities analysts, investors and lenders use this measurement to
compare the Company's performance to other companies in our industry.
Adjusted net income per diluted share is presented to exclude
non-recurring costs and other expenses incurred in connection with
acquisitions that are not reflective of the Company's continuing
operating performance. Net debt is presented because it is useful for
lenders, securities analysts and investors in determining the Company's
net debt leverage ratio.

The non-GAAP financial measures are not determined in accordance with
GAAP and should not be considered in isolation or as alternatives to net
income, net income per diluted share or total debt or other financial
statement data presented as indicators of financial performance or
liquidity, each as presented in accordance with GAAP. Adjusted EBITDA
should not be considered as a measure of discretionary cash available to
us to invest in the growth of our business. Similarly, Adjusted net
income per diluted share should not be considered a measure of cash flow
per common share but rather a performance metric that presents our
operating performance taking into account certain of the same
adjustments in Adjusted EBITDA and does so on a per share basis. While
we and other companies in our industry frequently use Adjusted EBITDA
and Adjusted net income per diluted share as measures of operating
performance and the ability to meet debt service requirements, they are
not necessarily comparable to other similarly titled captions of other
companies due to potential inconsistencies in the methods of
calculation. All non-GAAP financial measures should be reviewed in
conjunction with the Company's financial statements filed with the SEC.

For a reconciliation of each non-GAAP financial measure to the most
directly comparable GAAP financial measure, please see "Reconciliation
of Non-GAAP Financial Measures" on pages 9 and 10 of this press release.

Forward-Looking Statements

This press release contains statements about future events and
expectations that constitute forward-looking statements, including our
guidance, outlook and statements about our expectations for future
financial performance. Forward-looking statements are based on our
beliefs, assumptions and expectations of industry trends, our future
financial and operating performance, our growth, and effects of the Tax
Act on the Company, taking into account the information currently
available to us. These statements are not statements of historical fact.
Forward-looking statements involve risks and uncertainties that may
cause our actual results to differ materially from the expectations of
future results we express or imply in any forward-looking statements and
you should not place undue reliance on such statements. Factors that
could contribute to these differences include, but are not limited to:
reductions or changes in Medicaid or other funding; changes in budgetary
priorities by federal, state and local governments; substantial claims,
litigation and governmental proceedings; reductions in reimbursement
rates or changes in policies or payment practices by the Company's
payors; increases in labor costs; matters involving employees that may
expose the Company to potential liability; the Company's substantial
amount of debt; the Company's ability to comply with billing and
collection rules and regulations; changes in economic conditions;
increases in insurance costs; increases in workers compensation-related
liability; the Company's ability to maintain relationships with
government agencies and advocacy groups; negative publicity; the
Company's ability to maintain existing service contracts and licenses;
the Company's ability to implement its growth strategies successfully;
the Company's financial performance; and other factors described in
"Risk Factors" in Civitas' Form 10-K. Words such as "anticipates",
"believes", "continues", "positions", "estimates", "expects", "goal",
"aspiration", "objectives", "intends", "may", "hope", "opportunity",
"plans", "potential", "near-term", "long-term", "projections",
"assumptions", "projects", "guidance", "forecasts", "outlook", "target",
"trends", "should", "could", "would", "will" and similar expressions are
intended to identify such forward-looking statements. We qualify any
forward-looking statements entirely by these cautionary factors. We
assume no obligation to update or revise any forward-looking statements
for any reason, or to update the reasons actual results could differ
materially from those anticipated in these forward-looking statements,
even if new information becomes available in the future. Comparisons of
results for current and any prior periods are not intended to express
any future trends or indications of future performance, unless expressed
as such, and should only be viewed as historical data.

 
Select Financial Highlights
($ in thousands, except share and per share data)
(unaudited)
  Three Months Ended   Nine Months Ended
June 30,   June 30,
2018   2017   2018   2017
Net revenue $ 404,498 $ 372,345 $ 1,192,717   $ 1,094,138
Cost of revenue (exclusive of depreciation expense shown below) 315,934 292,498 948,803 861,992
Operating expenses:
General and administrative 40,269 40,413 128,569 123,992
Depreciation and amortization 23,741   19,161     71,509     56,146  
Total operating expenses 64,010   59,574     200,078     180,138  
Income from operations 24,554 20,273 43,836 52,008
Other income (expense):
Other income (expense), net (83 ) (149 ) (896 ) 762
Interest expense (10,229 ) (8,339 )   (28,815 )   (25,117 )
Income before income taxes 14,242 11,785 14,125 27,653
Provision (benefit) for income taxes 4,657   4,424     (2,366 )   10,634  
Net income $ 9,585   $ 7,361     $ 16,491     $ 17,019  
 
Basic income per common share $ 0.26 $ 0.20 $ 0.44 $ 0.46
Diluted income per common share $ 0.26 $ 0.20 $ 0.44 $ 0.45
 
Weighted average number of common shares outstanding, basic 36,503,170 37,323,458 37,136,375 37,278,760
Weighted average number of common shares outstanding, diluted 36,592,727 37,495,488 37,249,551 37,413,264
 
Additional financial data:
Program rent expense $ 18,067 $ 15,241 $ 57,012 $ 44,321
 
Selected Balance Sheet and Cash Flow Highlights
($ in thousands)
(unaudited)
   
As of
June 30, 2018 September 30, 2017
Cash and cash equivalents $ $ 7,297
Working capital (a) $ 42,310 $ 30,740
Total assets $ 1,121,688 $ 1,049,382
Total debt (b) $ 723,268 $ 637,488
Net debt (c) $ 673,268 $ 580,191
Stockholders' equity $ 168,561 $ 162,917
 
Nine Months Ended June 30,
2018 2017
Cash flows provided by (used in):
Operating activities $ 67,263 $ 70,020
Investing activities (d) $ (131,447 ) $ (82,211 )
Financing activities (e) $ 56,887 $ (12,389 )
Purchases of property and equipment $ (35,645 ) $ (32,981 )
Acquisition of businesses, net of cash acquired (f) $ (97,465 ) $ (51,883 )
 
(a)   Calculated as current assets minus current liabilities.
(b) Total debt includes obligations under capital leases and excludes
deferred financing costs and original issue discount on the term
loan.

(c)

Represents net debt as defined in our senior credit agreement (total
debt, net of cash and cash equivalents and restricted cash). See
Reconciliation of Non-GAAP Financial Measures for a reconciliation
of total debt to net debt.

(d)

Cash used in investing activities during the nine months ended June
30, 2018 includes $74.7 million paid for the acquisition of Mentis
Neuro Rehabilitation, LLC ("Mentis").

(e)

Cash provided by financing activities for the nine months ended June
30, 2018 includes an incremental term loan of $75.0 million, the net
proceeds of which were used for the acquisition of Mentis.

(f)

For the nine months ended June 30, 2017, cash paid for acquisitions
includes a $9.5 million deposit made on an acquisition within our
SRS service line that closed on July 1, 2017.
 
Reconciliation of Non-GAAP Financial Measures
(Amounts in thousands except per share data)
(unaudited)
  Three Months Ended
June 30,
  Nine Months Ended
June 30,
 
Reconciliation of Net Income to Adjusted EBITDA: 2018   2017 2018   2017
Net income $ 9,585 $ 7,361 $ 16,491 $ 17,019
Provision (benefit) for income taxes 4,657 4,424 (2,366 ) 10,634
Interest expense, net 10,144 8,339 28,567 25,112
Depreciation and amortization 23,741 19,161 71,509 56,146
Adjustments:
Stock-based compensation (a) 1,976 2,223 5,792 6,596
Contingent consideration adjustment (b) (181 ) 194
Expense reduction project costs (c) 760 945 2,708 2,694
Exit costs (d) 769 6,591
Acquisition-related transaction costs (e) 103   207     991     1,063  
Adjusted EBITDA $ 51,735   $ 42,479     $ 130,283     $ 119,458  
 
Three Months Ended
June 30,
Nine Months Ended
June 30,
Reconciliation of Net Income per Diluted Share to Adjusted Net
Income per Diluted Share:
 
2018 2017 2018 2017
Net income per diluted share $ 0.26 $ 0.20 $ 0.44 $ 0.45
Adjustments:
Stock-based compensation (a) 0.05 0.06 0.15 0.18
Contingent consideration adjustment (b) 0.01
Expense reduction project costs (c) 0.02 0.03 0.07 0.07
Exit costs(d) 0.02 0.18
Acquisition-related transaction costs (e) 0.01 0.03 0.03
Intangible asset amortization expense(f) 0.35 0.25 1.06 0.73
Impact of non-cash discrete tax benefit (g) 0.01 (0.18 )
Income tax effect of adjustments to net income per diluted common
share (h)
(0.13 ) (0.12 )   (0.46 )   (0.39 )
Adjusted net income per diluted common share $ 0.58   $ 0.43     $ 1.29     $ 1.08  
 
(a)   Represents non-cash stock-based compensation expense.
(b) Represents the fair value adjustment associated with acquisition
related contingent consideration liabilities.
(c) Represents consulting, severance and other costs incurred in
connection with the Company's project to optimize business
operations and reduce company-wide expenses.
(d) For the three months ended June 30, 2018, represents expenses of
$0.4 million for lease termination costs, $0.1 million for severance
costs, and $0.3 million of non-cash losses on the disposition of
fixed assets related to the program closures described above. For
the nine months ended June 30, 2018, represents expenses of $4.8
million for lease termination costs, $0.7 million for severance
costs, and $1.1 million of non-cash losses on the disposition of
fixed assets.

(e)

Represents external transaction costs incurred by the Company for
acquisitions. The Company has not historically excluded these costs
but began excluding them in the first quarter of fiscal 2018. The
Company believes that excluding these costs will provide the Company
and its investors with a more transparent view of the Company's
underlying operating performance because these expenses can vary
significantly from quarter to quarter and the timing is difficult to
predict. Prior period Adjusted EBITDA has been recast to conform to
this presentation.
 
Reconciliation of Non-GAAP Financial Measures (continued)
(Amounts in thousands)
(unaudited)
 

(f)

Represents amortization expense on intangible assets acquired in
business combinations. For the three and nine months ended June
30, 2018, this includes $1.8 million and $6.0 million,
respectively, of accelerated amortization related to
definite-lived intangible assets associated with the program
closures described above.

(g)

Represents the non-cash provision of $0.3 million and benefit of
$6.7 million recorded during the three and nine months ended June
30, 2018, respectively, related to the remeasurement of the
Company's net deferred tax liabilities at the newly enacted
federal tax rate.

(h)

The income tax effect was calculated using a tax rate of
approximately 31% for the three and nine months ended June 30,
2018 and 38% for the three and nine months ended June 30, 2017.
The tax rate for each respective period represents the Company's
estimated effective tax rate for the year as of the third quarter,
excluding the impact of any non-cash discrete tax expenses or
benefits, such as the tax benefit described in footnote (g).

 

A reconciliation of reported debt to net debt is as follows:

 
As of
June 30, 2018   September 30, 2017
Reported Debt(1) $ 718,096 $ 631,465
Original issue discount on term loan, net of accumulated amortization 1,130 901
Deferred financing costs, net of accumulated amortization 4,042 5,122
Total debt $ 723,268 $ 637,488
Cash and cash equivalents 7,297
Restricted cash 50,000 50,000
Net debt $ 673,268 $ 580,191
 

(1) Reported debt includes obligations under capital leases.

About Civitas

Civitas Solutions, Inc. is the leading national provider of home- and
community-based health and human services to must-serve individuals with
intellectual, developmental, physical or behavioral disabilities and
other special needs. Since our founding in 1980, we have evolved from a
single residential program to a diversified national network offering an
array of quality services in 36 states.

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