BOSTON--(BUSINESS WIRE)--Civitas Solutions, Inc. (NYSE: CIVI) today reported financial results for the fiscal third quarter ended June 30, 2016.

Third Quarter Fiscal 2016 Highlights

• Third quarter net revenue increased 2.3% to $354.0 million; excluding at-risk youth ("ARY") divested operations, third quarter net revenue increased by 6.5%
• Third quarter net income was $4.8 million, compared to net income of $0.6 million in the third quarter of fiscal 2015
• Third quarter Adjusted EBITDA increased 4.0% to $40.6 million
• Completed two acquisitions during the third quarter, bringing the year-to-date total to ten acquisitions with total annual revenues of $45.2 million

“Our third quarter growth reflects increases in volumes and stable or increasing rates in our two largest service lines, I/DD and SRS,” stated Bruce Nardella, president and chief executive officer. “In addition, our financial results in the quarter are highlighted by the continued accelerated investment in new start initiatives, two additional acquisitions on top of the eight companies acquired in the first half of the year, rapid growth in our new adult day health service line, and solid operating performance in many of our larger markets.

“Relative to our expectations, our performance in the quarter was affected primarily by continued weakness in West Virginia from the redesign of its I/DD waiver program and higher-than-expected health care costs,” Nardella added. “Looking ahead, however, we remain confident in our ability to continue to expand high-quality services in existing and new markets through acquisition opportunities and new start initiatives, drive free cash flow, and create long-term value for our stockholders.”

Third Quarter Fiscal 2016 Financial Results

Net revenue for the third quarter was $354.0 million, an increase of $8.0 million, or 2.3%, over net revenue for the same period of the prior year. The growth in net revenue was negatively impacted by the divestiture of our ARY operations in six states, which resulted in a decrease in net revenue of $13.5 million as compared to the prior year period. Excluding these operations, net revenue increased by $21.5 million or 6.5%, of which $12.1 million was from acquisitions that closed during and after the third quarter ended June 30, 2015, and $9.4 million was from organic growth.

Net revenue consisted of:

• Human Services net revenue of $280.5 million (79.2% of total net revenue), an increase of 0.7% compared to the third quarter of fiscal 2015; excluding ARY divested operations, Human Services net revenue increased by 5.9%; and
• Post-Acute Specialty Rehabilitation Services net revenue of $73.5 million (20.8% of total net revenue), an increase of 8.7% compared to the third quarter of fiscal 2015.

Income from operations for the third quarter was $17.8 million, or 5.0% of net revenue, compared to $11.5 million, or 3.3% of net revenue, for the third quarter of the prior year. The increase in our operating margin was primarily due to the positive impact of divesting lower margin ARY operations during fiscal 2015 and the first half of fiscal 2016 and a decrease in amortization expense due to an $8.2 million intangible impairment charge related to the ARY divestitures recorded during the third quarter of the prior year. These improvements were partially offset by an increase in occupancy costs as a percentage of revenue due to programs with higher levels of open occupancy and an increase in workers' compensation expense during three months ended June 30, 2016.

Net income for the third quarter was $4.8 million compared to net income of $0.6 million for the same period of the prior year. Net income was positively affected by the increase in our income from operations.

Basic and diluted net income per common share from continuing operations was $0.13 for the fiscal third quarter ended June 30, 2016, compared to net income per common share from continuing operations of $0.04 for the same period of the prior year.

Adjusted EBITDA for the third quarter was $40.6 million, or 11.5% of net revenue, compared to Adjusted EBITDA of $39.1 million, or 11.3% for the third quarter ended June 30, 2015. The increase in our Adjusted EBITDA margin for the three months ended June 30, 2016 was primarily due to the divestiture of the ARY operations discussed above. The improvement was partially offset by an increase in occupancy costs as a percentage of revenue due to programs with higher levels of open occupancy, and an increase in workers' compensation expense compared to the same period of the prior year.

Year-to-Date Fiscal 2016 Financial Results

Net revenue for the nine months ended June 30, 2016 was $1,045.4 million, an increase of $29.6 million, or 2.9%, over net revenue for the same period of the prior year. The growth in net revenue was negatively impacted by the divestiture of our ARY operations discussed above, which resulted in a decrease in net revenue of $36.3 million as compared to the prior year period. Excluding these operations, net revenue increased by $66.0 million or 6.8%, of which $30.5 million was from acquisitions that closed during and after the nine months ended June 30, 2015, and $35.5 million was from organic growth.

Net revenue consisted of:

• Human Services net revenue of $831.8 million (79.6% of total net revenue), an increase of 1.4% compared to the nine months ended June 30, 2015; excluding ARY divested operations, Human Services net revenue increased by 6.2%; and
• Post-Acute Specialty Rehabilitation Services net revenue of $213.5 million (20.4% of total net revenue), an increase of 9.1% compared to the nine months ended June 30, 2015.

Income from operations for the nine months ended June 30, 2016 was $46.4 million, or 4.4% of net revenue, compared to $46.0 million, or 4.5% of net revenue, for the same period of the prior year. The decrease in our operating margin during the nine months ended June 30, 2016 was partly due to an increase in direct labor costs resulting from $6.6 million of favorable adjustments to our reserves for health insurance and incentive compensation in the prior year period. In addition, our operating margin during the nine months ended June 30, 2016 was negatively impacted by a $10.5 million stock-based compensation charge related to our former equity plan, exit costs associated with the ARY divestitures, an increase in direct labor costs due to higher amounts of overtime in some markets, an increase in occupancy costs due to programs with higher levels of open occupancy and higher professional and general liability expense. The impact of these items was offset by margin improvements resulting from ARY divested operations, lower workers' compensation expense due to favorable settlement experience on prior period claims and a decrease in amortization expense due to intangible impairment charges of $10.4 million related to the ARY divestitures recorded during the nine months ended June 30, 2015.

Net income for the nine months ended June 30, 2016 was $6.5 million compared to a net loss of $1.2 million for the same period of the prior year. In addition to the items discussed above, net income for the nine months ended June 30, 2016 was positively impacted by lower interest expense and debt extinguishment costs as compared to the prior period resulting from the redemption of senior notes in fiscal 2015. This benefit was partially offset by a loss on the sale of our ARY operations in North Carolina and the tax impact associated with the stock-based compensation charge discussed above. This expense was not deductible for tax purposes.

Basic and diluted net income per common share from continuing operations was $0.18 for the nine months ended June 30, 2016, compared to a net loss per common share from continuing operations of $0.01 for the same period of the prior year.

Adjusted EBITDA for the nine months ended June 30, 2016 was $118.2 million, or 11.3% of net revenue compared to Adjusted EBITDA of $116.6 million, or 11.5% of net revenue, for the same period of the prior year. The decrease in our Adjusted EBITDA margin was partly due to an increase direct labor costs resulting from $6.6 million of favorable adjustments to our health insurance reserves and accruals for incentive compensation in the prior year period. In addition, our Adjusted EBITDA margin was negatively impacted by an increase in direct labor costs due to higher amounts of overtime in some markets, an increase in occupancy costs due to programs with higher levels of open occupancy, and higher professional and general liability expense as compared to the same period of the prior year. The impact of these items was offset by margin improvements resulting from the ARY divested operations and lower workers' compensation expense due to favorable settlement experience on prior period claims.

Fiscal 2016 Outlook and Guidance

The Company is updating its fiscal year 2016 net revenue and Adjusted EBITDA guidance that it communicated on May 10, 2016 during the release of fiscal second quarter results.

For fiscal 2016, we are narrowing our net revenue guidance range to a range of $1,400.0 billion to $1,415.0 billion and lowering our guidance for Adjusted EBITDA to a range of $158.0 million to $161.0 million.

“As a result of recent developments, we expect that our growth in the back half of the year will be lower than we had anticipated due to greater-than-expected impact from both the West Virginia redesign and health care costs,” Nardella stated. “Just as was the case in the third quarter, we expect these two factors will be a headwind on our growth during the fourth quarter. Consequently, we are revising our fiscal year 2016 Adjusted EBITDA guidance to account for their projected impact.”

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 35 states.