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Civitas Solutions Reports Fiscal 2018 Third Quarter Financial Results

August 7, 2018

BOSTON--(BUSINESS WIRE)--Aug 7, 2018--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:

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)

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 #:

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

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.

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