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Civitas Solutions Reports Fiscal 2019 First Quarter Results

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Civitas Solutions, Inc. (NYSE:CIVI) today reported financial results
for the fiscal first quarter ended December 31, 2018.

First Quarter Fiscal 2019 At A Glance

  • First quarter net revenue increased 2.8% to $406.6 million
  • First quarter net income was $6.4 million, compared to $9.4 million in
    the first quarter of fiscal 2018
  • First quarter Adjusted EBITDA was $46.2 million, an increase of 21.4%
    compared to the first quarter of fiscal 2018

First Quarter Fiscal 2019 Financial Results

GAAP Results

Net revenue for the first quarter of fiscal 2019 was $406.6 million, an
increase of $11.2 million, or 2.8%, over net revenue for the same period
of the prior year. Net revenue increased $7.5 million from acquisitions
that closed during and after the first quarter of the prior year and
$3.7 million from organic growth.

Net revenue consisted of:

  • Community Support Services(1) ("CSS") net revenue of $260.5
    million, an increase of 1.8% compared to the first quarter of fiscal
    2018.
  • Specialty Rehabilitation Services ("SRS") net revenue of $89.1
    million, an increase of 3.6% compared to the first quarter of fiscal
    2018.
  • Children & Family Services(1) ("CFS") net revenue of
    $38.0 million, an increase of 6.0% compared to the first quarter of
    fiscal 2018.
  • Adult Day Health ("ADH") services net revenue of $19.0 million, an
    increase of 7.4% compared to the first quarter of fiscal 2018.

Income from operations for the first quarter of fiscal 2019 was $20.9
million, or 5.1% of net revenue, compared to $12.8 million, or 3.2% of
net revenue, for the first quarter of the prior year. The improvement in
our operating margin was driven by decreases in both direct labor costs
and general and administrative expenses as a percentage of revenue. The
decrease in direct labor costs was primarily attributable to changes in
service line revenue mix and margin improvements resulting from the
closure of under-performing programs during the last three quarters of
fiscal 2018. The decrease in general and administrative expenses as a
percentage of revenue was primarily due to our efforts to manage costs
and improve efficiencies and a decrease in expense associated with the
Company's deferred compensation plans.

Net income for the first quarter of fiscal 2019 was $6.4 million
compared to $9.4 million for the same period of the prior year. The
decrease in our net income compared to the first quarter of fiscal 2018
was primarily due to a $6.5 million tax benefit that was recorded during
the first quarter of fiscal 2018 as a result of the newly enacted Tax
Cuts and Jobs Act (the "Tax Act"), partially offset by the increase in
income from operations described above.

Basic and diluted net income per common share was $0.18 for the first
quarter of fiscal 2019, compared to $0.25 for the same period of the
prior year.

Non-GAAP Results

Adjusted EBITDA for the first quarter of fiscal 2019 was $46.2 million,
or 11.4% of net revenue, compared to Adjusted EBITDA of $38.1 million,
or 9.6% of net revenue, for the first quarter of the prior year. The
increase in our Adjusted EBITDA margin compared to the first quarter of
the prior year was attributable to the operating factors described above
except that Adjusted EBITDA for the first quarter of fiscal 2019
includes $1.2 million of losses associated with mark to market
adjustments on our company owned life insurance plans.

The Merger Agreement

On December 18, 2018, Celtic Intermediate Corp., a Delaware corporation
("Parent"), Celtic Tier II Corp., a Delaware corporation ("Merger Sub"),
and Civitas Solutions, Inc. ("Civitas"), entered into an Agreement and
Plan of Merger (the "Merger Agreement"), providing for the merger of
Merger Sub with and into Civitas (the "Merger"), with Civitas surviving
the Merger as a wholly owned subsidiary of Parent, which is owned by
funds advised by Centerbridge Partners, L.P.

If the Merger is completed, each share of Civitas common stock issued
and outstanding immediately prior to the effective time of the Merger
(other than (i) shares of Civitas common stock owned by Civitas
(excluding any shares of Civitas common stock owned by any subsidiary of
Civitas, which will remain outstanding), Parent or Merger Sub and (ii)
shares as to which appraisal rights have been properly demanded and
perfected in accordance with Section 262 of the General Corporation Law
of the State of Delaware) will be automatically canceled and converted
into the right to receive $17.75 in cash, without interest and subject
to any applicable withholding taxes.

The consummation of the Merger is subject to certain customary
conditions, including, but not limited to, (1) receipt of the vote in
favor of the adoption of the Merger Agreement by a the holders of a
majority of the outstanding shares of Civitas common stock entitled to
vote on the Merger Agreement; (2) expiration of waiting periods (and any
extensions thereof), if any, applicable to the consummation of the
Merger under the Hart-Scott-Rodino Antitrust Improvements Act of 1976,
(3) the absence of a material adverse effect and (4) the absence of any
law or order prohibiting, making illegal or enjoining the Merger.

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 7-8 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 and include statements about
industry trends, our future financial and operating performance, our
growth, and effects of the Tax Act on the Company, the proposed merger
with affiliates of funds advised by Centerbridge Partners, L.P., 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; the ability of the parties to satisfy the conditions to the
closing of the proposed Merger; 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.

Additional Information About the Acquisition and Where to Find It

This communication is being made in respect of the proposed transaction
involving Civitas and an affiliate of Centerbridge. A stockholder
meeting will be announced soon to obtain stockholder approval of the
proposed merger. Civitas has filed with the Securities and Exchange
Commission (the "SEC") a preliminary proxy statement in connection with
the proposed merger. The definitive proxy statement will be sent or
given to the stockholders of Civitas and will contain important
information about the proposed transaction and related matters.
INVESTORS OF CIVITAS ARE URGED TO READ THE DEFINITIVE PROXY STATEMENT
AND OTHER RELEVANT MATERIALS CAREFULLY AND IN THEIR ENTIRETY WHEN THEY
BECOME AVAILABLE BECAUSE THEY WILL CONTAIN IMPORTANT INFORMATION ABOUT
CIVITAS, CENTERBRIDGE AND THE PROPOSED MERGER. Investors may obtain a
free copy of these materials (when they are available) and other
documents filed by Civitas with the SEC at the SEC's website at www.sec.gov,
at Civitas' website at www.civitas-solutions.com
or by sending a written request to Civitas at 313 Congress Street,
Boston, MA 02210; Attention: General Counsel and Corporate Secretary.

Participants in the Solicitation

Civitas and its directors, executive officers and certain other members
of management and employees may be deemed to be participants in
soliciting proxies from its stockholders in connection with the proposed
merger. Information regarding Civitas' directors and executive officers
is set forth in Civitas' Amendment No. 1 on Form 10-K/A filed on January
22, 2019. Additional information regarding persons who may be deemed to
be participants in soliciting proxies and any direct or indirect
interests they may have in the proposed merger will be set forth in the
definitive proxy statement for the special meeting of stockholders when
it is filed with the SEC.

(1) As of October 1, 2018, Community Support Services and
Children & Family Services are new names for the operating divisions
formerly referred to as Intellectual and Developmental Disabilities
("I/DD") and At-Risk Youth ("ARY") respectively. There were no changes
to the composition of the operating divisions as a result of these name
changes.

 
Select Financial Highlights
($ in thousands, except share and per share data)
(unaudited)
  Three Months Ended
December 31,
2018   2017
Net revenue $ 406,631 $ 395,418
Cost of revenue (exclusive of depreciation expense shown below) 322,352 316,257
Operating expenses:
General and administrative 41,032 44,534
Depreciation and amortization 22,375   21,797  
Total operating expenses 63,407   66,331  
Income from operations 20,872 12,830
Other income (expense):
Other income (expense), net (1,347 ) 446
Interest expense (10,166 ) (9,009 )
Income before income taxes 9,359 4,267
Provision (benefit) for income taxes 2,972   (5,127 )
Net income $ 6,387   $ 9,394  
 
Basic and diluted income per common share $ 0.18 $ 0.25
 
Weighted average number of common shares outstanding, basic 36,162,345 37,472,018
Weighted average number of common shares outstanding, diluted 36,378,664 37,675,792
 
Additional financial data:
Program rent expense $ 17,552 $ 17,194
 
 
Selected Balance Sheet and Cash Flow Highlights
($ in thousands)
(unaudited)
   
As of
December 31, 2018 September 30, 2018
Cash and cash equivalents $ 6,805 $ 8,168
Working capital (a) $ 55,269 $ 39,786
Total assets $ 1,099,547 $ 1,127,192
Total debt (b) $ 709,733 $ 711,753
Net debt (c) $ 652,928 $ 653,585
Stockholders' equity $ 172,890 $ 166,734
 
Three Months Ended December 31,
2018 2017
Cash flows provided by (used in):
Operating activities $ 15,726 $ 8,830
Investing activities (d) $ (13,460 ) $ (91,380 )
Financing activities (e) $ (3,573 ) $ 76,151
Purchases of property and equipment $ (14,200 ) $ (11,187 )
Acquisition of businesses, net of cash acquired $ $ (81,926 )
 

(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 three months ended December 31, 2017 includes
$74.7 million paid for the acquisition of Mentis.
(e)
Cash provided by financing activities for the three months ended
December 31, 2017 includes an incremental term loan of $75.0 million,
the net proceeds of which were used for the acquisition of Mentis.

 
Reconciliation of Non-GAAP Financial Measures
(Amounts in thousands except per share data)
(unaudited)  

Three Months Ended
December 31,

Reconciliation of Net Income to Adjusted EBITDA: 2018   2017
Net income $ 6,387 $ 9,394
Provision (benefit) for income taxes 2,972 (5,127 )
Interest expense, net 10,166 8,925
Depreciation and amortization 22,375 21,797
Adjustments:
Stock-based compensation (a) 2,068 1,651
Merger costs (b) 1,190
Restructuring costs (c) 198
Acquisition-related transaction costs (d) 840 702
Expense reduction project costs (e)   722  
Adjusted EBITDA $ 46,196   $ 38,064  
 

Three Months Ended
December 31,

Reconciliation of Net Income per Diluted Share to Adjusted Net
Income per Diluted Share:
2018 2017
Net income per diluted share $ 0.18 $ 0.25
Adjustments:
Stock-based compensation (a) 0.06 0.04
Merger costs (b) 0.03
Restructuring costs (c) 0.01
Acquisition-related transaction costs (d) 0.02 0.02
Expense reduction project costs (e) 0.02
Intangible asset amortization expense(f) 0.30 0.29
Impact of non-cash discrete tax benefit (g) 0.01 (0.17 )
Income tax effect of adjustments to net income per diluted common
share (h)
(0.11 ) (0.12 )
Adjusted net income per diluted common share $ 0.50   $ 0.33  
 

(a) Represents non-cash stock-based compensation expense.
(b)
Represents external costs incurred in connection with the definitive
merger agreement with Parent and Merger Sub announced on December 18,
2018.
(c) Represents severance costs associated with
ongoing optimization initiatives.
(d) Represents
external transaction costs incurred by the Company for acquisitions.
(e)
Represents consulting, severance and other costs incurred in connection
with the Company's project to optimize business operations and reduce
company-wide expenses.
(f) Represents amortization
expense on intangible assets acquired in business combinations.
(g)
Represents the non-cash provision of $0.4 million and benefit of $6.5
million recorded during the three months ended December 31, 2018 and
2017, 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
28% and 32% for the three months ended December 31, 2018 and 2017,
respectively. The tax rate for each respective period represents the
Company's estimated effective tax rate for the year as of the first
quarter, excluding the impact of any non-cash discrete tax expenses or
benefits, including the items described in footnote (g).

 

Reconciliation of Non-GAAP Financial Measures (continued)

(Amounts in thousands)

(unaudited)

 

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

 
 
As of
December 31, 2018   September 30, 2018
Reported Debt(1) $ 705,670 $ 707,136
Original issue discount on term loan, net of accumulated amortization 909 1,020
Deferred financing costs, net of accumulated amortization 3,154   3,597
Total debt 709,733 711,753
Cash and cash equivalents 6,805 8,168
Restricted cash 50,000   50,000
Net debt $ 652,928   $ 653,585
 

(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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