Stantec Inc.
TSX : STN
NYSE : SXC

Stantec Inc.

November 02, 2006 09:20 ET

Stantec Announces Net Income Increase of 27.9% in Third Quarter 2006

EDMONTON, ALBERTA--(CCNMatthews - Nov. 2, 2006) - Stantec Inc. (TSX:STN); (NYSE:SXC)

- In the third quarter of 2006 gross revenue increased 43.9% to C$210.2 million compared to C$146.1 million for the same period in 2005. Net revenue increased 44.6% to C$182.0 million compared to C$125.9 million and net income was up 27.9% to C$16.5 million from C$12.8 million. Diluted earnings per share were up 12.5% to C$0.36 in the third quarter 2006 compared to C$0.32 in 2005. Earnings per share reflect an additional 5.9 million average number of shares outstanding compared to the third quarter of 2005.

- Year-to-date 2006 gross revenue increased 38.2% to C$604.3 million compared to C$437.4 million over the first nine months of 2005. Net revenue increased 41.5% to $527.3 million compared to C$372.7 million while net income increased 36.5% to C$44.6 million. Diluted earnings per share were up 16.9% to C$0.97 compared to C$0.83 for the same period in 2005.

"We're pleased to announce continued strong performance in 2006," says Tony Franceschini, Stantec President & CEO. "In the third quarter we continued to execute our integration plan of our newest acquisitions completed over the past year and adding expertise in selected practice areas through strategic employee hires."

Several projects awarded in the third quarter reflect the Company's growing reputation in sustainable design. For example, in Vancouver, British Columbia, Stantec is leading the mechanical, electrical, and civil engineering design services for the Legacy project, a 570-bed acute care hospital and research facility located near downtown Vancouver. Scheduled for completion in 2016, the facility will be designed to provide an environment that will reduce hospital-acquired infections, decrease patient stay times, and improve staff retention along with achieving Leadership in Energy and Environmental Design (LEED®) platinum-level certification. The Company was also awarded an assignment to participate in the development of Kapyong Barracks, a new community in Winnipeg, Manitoba, that is slated to achieve certification in LEED® for Neighborhood Development, the first national standard for sustainable neighborhood design, complete with LEED®-certified buildings. Stantec's Buildings and Urban Land teams will be responsible for the master planning of 160 acres (65 hectares) of the site-a vacant, brownfield property in the city's center-and for the architectural and interior design of the Presentation Centre for the development. In Whistler, British Columbia, Stantec has been chosen to design the upgrade of the Whistler Wastewater Treatment Plant from secondary treatment to advanced treatment that uses biological nutrient technology. The upgraded, 14-megalitre-per-day (3.7-million-US-gallon-per-day) plant will service the increased flows from the Olympic venues and future growth in the Whistler area.

"The sharing of resources and expertise throughout North America and the teamwork our employees use across Stantec offices allows us to deliver solutions to our clients in a unique and sustainable way that provides a competitive advantage," says Franceschini. "The hard work of our employees across the Company is helping to ensure we will collectively meet our goal of becoming a top 10 global design firm."

The third quarter Conference Call, to be held today at 4:00 PM EST (2:00 PM MST), will be broadcast live and archived on Stantec's web site at stantec.com in the Investor Relations section.

Stantec, founded in 1954, provides professional design and consulting services in planning, engineering, architecture, surveying, and project management. We support public and private sector clients in a diverse range of markets, at every stage, from initial concept and financial feasibility to project completion and beyond. Our services are offered through more than 6,000 employees operating out of over 80 locations in North America and the Caribbean. Stantec trades on the Toronto Stock Exchange under the symbol STN and on the New York Stock Exchange under the symbol SXC.

Cautionary note regarding forward-looking statements

This press release contains "forward-looking statements". Some of these statements may involve risks and uncertainties and other factors that may be beyond the control of Stantec and cause actual results to be materially different from those contained in such forward-looking statements. Additional information concerning factors that could cause actual results to materially differ from those in the forward-looking statements is contained in Stantec's filings with the Canadian provincial securities commissions and the United States Securities and Exchange Commission.



Stantec Inc.

Consolidated Balance Sheets
September 30 December 31
(Columnar figures stated in 2006 2005
thousands of Canadian dollars) (Unaudited) $ $
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ASSETS (note 4)
Current
Cash and cash equivalents 2,707 28,143
Restricted cash 2,818 21,312
Accounts receivable, net of allowance for doubtful
accounts of $11,456 in 2006 ($16,053 - 2005) 169,053 137,928
Costs and estimated earnings in excess of billings 47,926 66,172
Prepaid expenses 7,432 5,420
Future income tax assets 8,590 14,827
Other assets (note 3) 9,645 6,569
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Total current assets 248,171 280,371
Property and equipment 63,471 58,519
Goodwill 243,328 242,674
Intangible assets 23,420 27,304
Future income tax assets 9,711 6,814
Other assets (note 3) 15,223 13,097
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Total assets 603,324 628,779
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LIABILITIES AND SHAREHOLDERS' EQUITY
Current
Bank indebtedness 2,904 -
Accounts payable and accrued liabilities 88,108 106,757
Billings in excess of costs and estimated earnings 27,682 24,251
Income taxes payable 4,669 4,441
Current portion of long-term debt (note 4) 2,242 4,813
Future income tax liabilities 13,384 17,552
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Total current liabilities 138,989 157,814
Long-term debt (note 4) 34,674 81,886
Other liabilities (note 5) 29,050 24,764
Future income tax liabilities 17,307 16,262
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Total liabilities 220,020 280,726
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Shareholders' equity
Share capital (note 6) 212,351 210,604
Contributed surplus (note 6) 5,086 5,522
Cumulative translation account (35,908) (25,575)
Deferred stock compensation (344) (833)
Retained earnings 202,119 158,335
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Total shareholders' equity 383,304 348,053
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Total liabilities and shareholders' equity 603,324 628,779
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See accompanying notes


Consolidated Statements of Income and Retained Earnings


(Columnar figures stated For the For the three
in thousands of Canadian quarter ended quarters ended
dollars, except share and September 30 September 30
per share amounts) 2006 2005 2006 2005
(Unaudited) $ $ $ $
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INCOME
Gross revenue 210,147 146,066 604,258 437,374
Less subconsultant and
other direct expenses 28,161 20,196 76,979 64,714
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Net revenue 181,986 125,870 527,279 372,660
Direct payroll costs 78,375 54,470 229,410 163,861
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Gross margin 103,611 71,400 297,869 208,799
Administrative and marketing
expenses (note 9) 72,927 48,407 213,751 149,119
Depreciation of property
and equipment 4,250 3,078 11,354 8,762
Amortization of intangible
assets 1,599 423 4,833 849
Net interest expense (note 4) 432 219 1,814 549
Share of (income) loss from
associated companies (48) 6 (212) (102)
Foreign exchange (gains)
losses 99 (373) (20) (319)
Other income (147) (105) (1,308) (266)
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Income before income taxes 24,499 19,745 67,657 50,207
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Income taxes
Current 9,583 5,747 25,204 14,644
Future (1,498) 1,165 (2,098) 2,929
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Total income taxes 8,085 6,912 23,106 17,573
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Net income for the period 16,414 12,833 44,551 32,634
Retained earnings, beginning
of the period 186,472 137,514 158,335 117,874
Shares repurchased (note 6) (767) - (767) (161)
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Retained earnings, end of
the period 202,119 150,347 202,119 150,347
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Weighted average number of
shares outstanding
- basic (note 6) 45,115,818 39,003,510 45,048,970 38,231,130
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Weighted average number
of shares outstanding
- diluted (note 6) 46,011,515 40,092,232 45,960,117 39,235,210
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Shares outstanding, end
of the period (note 6) 45,076,781 44,608,860 45,076,781 44,608,860
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Earnings per share (note 6)
Basic 0.36 0.33 0.99 0.85
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Diluted 0.36 0.32 0.97 0.83
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See accompanying notes.


Consolidated Statements of Cash Flows

For the For the three
(Columnar figures stated quarter ended quarters ended
in thousands of Canadian September 30 September 30
dollars) 2006 2005 2006 2005
(Unaudited) $ $ $ $
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CASH FLOWS FROM (USED IN)
OPERATING ACTIVITIES
Cash receipts from clients 212,472 153,510 611,224 453,632
Cash paid to suppliers (66,967) (52,873) (188,078) (147,135)
Cash paid to employees (115,884) (74,982) (358,618) (251,059)
Dividends from equity
investments 300 100 450 350
Interest received 1,222 1,940 4,777 4,656
Interest paid (1,988) (1,614) (6,192) (4,392)
Income taxes paid (10,802) (5,873) (28,211) (24,715)
Income taxes recovered 1,969 780 3,136 2,184
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Cash flows from operating
activities (note 10) 20,322 20,988 38,488 33,521
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CASH FLOWS FROM (USED IN)
INVESTING ACTIVITIES
Business acquisitions, net
of cash acquired - (86,710) (12,079) (87,402)
Restricted cash used for
acquisitions 1,285 - 17,991 -
Increase in investments held
for self-insured liabilities (1,120) (2,382) (3,173) (5,758)
Proceeds on disposition of
investments 2 - 7 513
Collection of notes receivable
from disposition of
Technology and Design Build
segments - 156 - 406
Purchase of property and
equipment (3,743) (2,540) (14,562) (10,645)
Proceeds on disposition of
property and equipment 48 93 60 223
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Cash flows used in investing
activities (3,528) (91,383) (11,756) (102,663)
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CASH FLOWS FROM (USED IN)
FINANCING ACTIVITIES
Repayment of long-term debt (26,334) (20,941) (62,504) (28,942)
Proceeds from long-term
borrowings - 95,929 9,142 95,929
Repayment of acquired bank
indebtedness (note 2) - - (1,787) -
Net change in bank
indebtedness financing 2,904 - 2,904 -
Repurchase of shares for
cancellation (note 6) (1,016) - (1,016) (195)
Share issue costs (note 6) - (1,431) - (1,431)
Proceeds from issue of share
capital (note 6) 40 275 1,489 810
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Cash flows from (used in)
financing activities (24,406) 73,832 (51,772) 66,171
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Foreign exchange loss on
cash held in foreign
currency (369) (494) (396) (292)
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Net increase (decrease) in
cash and cash equivalents (7,981) 2,943 (25,436) (3,263)
Cash and cash equivalents,
beginning of the period 10,688 31,684 28,143 37,890
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Cash and cash equivalents, end
of the period 2,707 34,627 2,707 34,627
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See accompanying notes.


Notes to the Unaudited Interim Consolidated Financial Statements

1. General Accounting Policies

These unaudited interim consolidated financial statements have been prepared in accordance with Canadian generally accepted accounting principles on a basis consistent with those used in the preparation of the Company's December 31,2005,annual consolidated financial statements.Because the disclosures included in these interim consolidated financial statements do not conform in all respects to the requirements of generally accepted accounting principles for annual financial statements,these interim consolidated financial statements should be read in conjunction with the December 31,2005,annual consolidated financial statements.In management's opinion,these interim consolidated financial statements include all the adjustments necessary to present fairly such interim consolidated financial statements.The consolidated statements of income and retained earnings and cash flows for interim periods are not necessarily indicative of results on an annual basis due to short-term variations as well as the timing of acquisitions,if any,during interim periods.

2. Business Acquisitions

Acquisitions are accounted for under the purchase method of accounting,and the results of operations since the respective dates of acquisition are included in the consolidated statements of income.From time to time,as a result of the timing of acquisitions in relation to the Company's reporting schedule,certain of the purchase price allocations may not be finalized at the initial time of reporting.Purchase price allocations are completed after the vendors'final financial statements and income tax returns have been prepared and accepted by the Company. Such preliminary purchase price allocations are based on management's best estimates of the fair value of the acquired assets and liabilities.Upon finalization,adjustments to the initial estimates may be required,and these adjustments may be material.The purchase prices of acquisitions are generally subject to price adjustment clauses included in the purchase agreements.Such purchase price adjustments generally result in an increase or reduction to the promissory note consideration recorded at acquisition to reflect either more or less non-cash working capital realized than was originally expected.These purchase price adjustments,therefore,have no net effect on the original purchase price allocations.In the case of some acquisitions,additional consideration may be payable based on future performance parameters.As at September 30,2006,the Company does not anticipate any additional consideration to be payable in the future based on future performance parameters.

Acquisitions in 2006

On March 6,2006,the Company acquired the shares and business of Carinci Burt Rogers Engineering, Inc. for cash consideration and promissory notes.This acquisition has supplemented the Company's buildings engineering capabilities and presence in the Greater Toronto Area.

On April 14,2006,the Company acquired the shares and business of Dufresne-Henry,Inc.for cash consideration and promissory notes. Along with complementing the Company's New York operations, the acquisition has expanded its services into four new states in New England and created an initial platform for growth in Florida. Dufresne-Henry,Inc.'s staff offer professional services in engineering,planning,environmental sciences,and landscape architecture.

On May 12,2006,the Company acquired the shares and business of ACEx Technologies,Inc.for cash consideration and promissory notes.This acquisition has complemented the Company 's services in the areas of transit,rail and power communications,and control systems engineering and added new locations in Oakland, California,and Irving,Texas.

During the first three quarters of 2006,the Company adjusted the purchase price on the Dunlop Architects Inc. (2004),CPV Group Architects & Engineers Ltd.(2005),and Keen Engineering Co.Ltd.(2005)acquisitions pursuant to price adjustment clauses included in the purchase agreements.

During the first three quarters of 2006,the purchase price allocations for the CPV Group Architects & Engineers Ltd.,The Keith Companies,Inc.,and the Keen Engineering Co.Ltd.acquisitions were finalized.The purchase price allocations for the Carinci Burt Rogers Engineering,Inc.,Dufresne-Henry,Inc.,and ACEx Technologies,Inc. acquisitions have not yet been finalized.The Company expects to finalize the purchase price allocations for the Carinci Burt Rogers Engineering, Inc.acquisition during the fourth quarter of 2006 and for the Dufresne-Henry,Inc.and ACEx Technologies,Inc.acquisitions during the first quarter of 2007.

Acquisitions in 2005

During 2005,the Company acquired the shares and business of CPV Group Architects & Engineers Ltd.and of The Keith Companies,Inc.The acquisition of CPV Group Architects & Engineers Ltd. has strengthened the Company's architecture and interior design presence in Canada, and the acquisition of The Keith Companies Inc.has supplemented its urban land development services group along with increasing its multidiscipline engineering and consulting services by adding employees and offices throughout the western and midwestern United States.

During the first three quarters of 2005,the Company paid additional contingent consideration in connection with the Cosburn Patterson Mather Limited (2002)acquisition and adjusted the purchase price on the Ecological Services Group Inc.(2003),The Sear-Brown Group,Inc.(2004),the GBR Architects Limited (2004),and the Dunlop Architects Inc.(2004) acquisitions pursuant to price adjustment clauses included in the purchase agreements.

Aggregate consideration paid

Details of the aggregate consideration given and of the fair values of net assets acquired or adjusted for in the first three quarters of each year are as follows:



2006 2005
(In thousands of Canadian dollars) $ $
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Cash consideration 13,221 109,262
Share consideration (note 6) - 125,540
Promissory notes 4,224 1,830
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Purchase price 17,445 236,632
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Assets and liabilities acquired at fair values
Cash acquired 1,142 21,860
Restricted cash acquired - 30,882
Bank indebtedness assumed (1,787) -
Non-cash working capital 10,363 14,517
Property and equipment 3,079 5,291
Goodwill 8,091 158,230
Other long-term assets - 586
Intangible assets
Client relationships 1,161 9,443
Contract backlog 475 4,262
Other 102 -
Other long-term liabilities (2,039) (367)
Long-term debt (595) -
Future income tax liabilities (2,547) (9,255)
Deferred stock compensation - 1,183
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Net assets acquired 17,445 236,632
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All of the goodwill is non-deductible for income tax purposes. As a result
of the acquisitions completed in 2006, the Company assumed commitments for
operating leases of approximately $1.2 million annually.


3. Other Assets

September 30 December 31
2006 2005
(In thousands of Canadian dollars) $ $
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Investments held for self-insured liabilities 21,338 16,857
Investments in associated companies 1,270 1,545
Investments - other 706 710
Other 1,554 554
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24,868 19,666
Less current portion of investments held for
self-insured liabilities 9,645 6,569
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15,223 13,097
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4. Long-Term Debt

September 30 December 31
2006 2005
(In thousands of Canadian dollars) $ $
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Non-interest-bearing note payable 131 122
Other notes payable 6,932 5,643
Bank loan 29,677 79,035
Mortgages payable - 1,706
Other 176 193
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36,916 86,699
Less current portion 2,242 4,813
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34,674 81,886
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During the quarter, the Company extended its $160 million revolving line of credit facility by one year until August 31, 2009. This facility is available for acquisitions, working capital needs, capital expenditures, and general corporate purposes. Depending on the form under which the credit facility is accessed, rates of interest will vary among Canadian prime, US base rate, or LIBOR rate or bankers acceptance rates plus 65 or 85 basis points. At September 30, 2006, $11,177,000 of the bank loan was payable in US funds (US$10,000,000). Loans may be repaid under the credit facility from time to time at the option of the Company. The credit facility agreement contains restrictive covenants, including, but not limited to, debt to earnings ratio and earnings to debt service ratio. The Company was in compliance with all the covenants under this agreement as at September 30, 2006. All the assets of the Company are held as collateral under a general security agreement for the bank loan.

The interest incurred on long-term debt in Q3 06 was $512,000 (Q3 05 - $413,000), with a year-to-date expense of $2,309,000 (2005 - $1,131,000).



5. Other Liabilities

September 30 December 31
2006 2005
(In thousands of Canadian dollars) $ $
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Provision for self-insured liabilities 12,895 11,346
Deferred gain on sale leaseback 6,296 6,624
Lease inducements 9,869 7,997
Liabilities on lease exit activities 3,058 2,251
Other 1,022 1,021
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33,140 29,239
Less current portion included in accounts
payable and accrued liabilities 4,090 4,475
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29,050 24,764
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Provision for self-insured liabilities

September 30 December 31
2006 2005
(In thousands of Canadian dollars) $ $
---------------------------------------------------------------------------

Provision, beginning of the period 11,346 5,236
Addition to provision 3,254 8,244
Payment for claims settlement (1,705) (2,134)
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Provision, end of the period 12,895 11,346
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Liabilities on lease exit activities

September 30 December 31
2006 2005
(In thousands of Canadian dollars) $ $
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Liability, beginning of the period 2,251 2,817
Current year provision:
Established for existing operations 22 609
Resulting from acquisitions 2,039 276
Amounts paid and charged against the liability:
Impacting administrative and marketing expenses (1,227) (1,103)
Impacting the purchase price allocation - (325)
Impact of foreign exchange (27) (23)
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Liability, end of the period 3,058 2,251
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A reduction of $351,000 in liabilities on lease exit activities impacted
administrative and marketing expenses in Q3 06.

6. Share Capital
Contributed
Capital Stock Surplus
-----------------------------------------------------
2006 2005 2006 2005
-----------------------------------------------------
(In thousands of Shares Shares
Canadian dollars) # $ # $ $ $
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Balance, beginning
of the year 44,626,262 210,604 37,742,170 87,656 5,522 2,544
Share options
exercised for cash 437,806 1,249 129,668 440
Stock-based
compensation expense 186 254
Shares repurchased
under normal
course issuer bid - - (5,800) (15) - (1)
Reclassification of
fair value of stock
options previously
expensed 136 57 (136) (57)
Shares issued on
vesting of
restricted shares 6,278 81 - - (499) -
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Balance, as at
March 31 45,070,346 212,070 37,866,038 88,138 5,073 2,740
Share options
exercised for cash 40,604 200 40,334 95
Stock-based
compensation expense 180 251
Shares repurchased
under normal
course issuer bid - - (7,800) (18) - -
Reclassification of
fair value of stock
options previously
expensed 42 3 (42) (3)
Shares issued on
vesting of
restricted shares 9,716 163 - - (280) -
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Balance, as at
June 30 45,120,666 212,475 37,898,572 88,218 4,931 2,988
Share options
exercised for cash 3,666 40 52,736 275
Stock-based
compensation expense 286 249
Shares repurchased
under normal
course issuer bid (51,600) (243) - - (6) -
Reclassification of
fair value of stock
options previously
expensed 8 56 (8) (56)
Shares issued on
acquisition - - 6,657,552 123,365
Restricted shares
issued on
acquisition - 2,175
Shares issued on
vesting of
restricted shares 4,049 71 - - (117) -
Share issue costs - (1,421)
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Balance, as at
September 30 45,076,781 212,351 44,608,860 210,493 5,086 5,356
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During Q3 06, 51,600 common shares were repurchased for cancellation pursuant to an ongoing normal course issuer bid at a cost of $1,016,000. Of this amount, $243,000 and $6,000 reduced the share capital and contributed surplus accounts, respectively, with $767,000 being charged to retained earnings. During Q3 05, the Company did not repurchase any common shares for cancellation pursuant to the normal course issuer bid.

During the first three quarters of 2006, 51,600 common shares (2005 - 13,600) were repurchased for cancellation pursuant to an ongoing normal course issuer bid at a cost of $1,016,000 (2005 - $195,000). Of this amount, $243,000 and $6,000 (2005 - $33,000 and $1,000) reduced the share capital and contributed surplus accounts, respectively, with $767,000 (2005 - $161,000) being charged to retained earnings.

During Q3 06, the Company recognized a stock-based compensation expense of $455,000 (Q3 05 - $476,000) in administrative and marketing expenses. Of the amount expensed, $286,000 related to the fair value of options granted (Q3 05 - $249,000); $56,000 related to deferred share unit compensation (Q3 05 - $180,000); and $113,000 (Q3 05 - $47,000) related to the restricted shares issued on The Keith Companies, Inc. acquisition.

During the first three quarters of 2006, the Company recognized a stock-based compensation expense of $1,380,000 (2005 - $1,159,000) in administrative and marketing expenses. Of the amount expensed, $652,000 related to the fair value of options granted (2005 - $754,000); $264,000 related to deferred share unit compensation (2005 - $358,000); and $464,000 related to the restricted shares issued on The Keith Companies, Inc. acquisition (2005 - $47,000). The fair value of options granted was reflected through contributed surplus; the deferred share unit compensation was reflected through accrued liabilities; and the restricted shares were reflected through deferred stock compensation. Upon the exercise of share options for which a stock-based compensation expense has been recognized, the cash paid together with the related portion of contributed surplus is credited to share capital. Upon the vesting of restricted shares for which a stock-based compensation expense has been recognized, the related portion of contributed surplus is credited to share capital.

On May 4, 2006, the shareholders of the Company approved the subdivision of its issued common shares on a two-for-one basis, effective for registered common shares at the close of business on May 19, 2006. All references to common shares, per share amounts, and stock-based compensation plans in these consolidated financial statements have been restated to reflect the stock split on a retroactive basis.

Share options

On May 4, 2006, the shareholders of the Company approved an amendment to its employee share option plan, which had the effect of increasing the number of common shares reserved for issuance to 4,514,126 (on a postsplit basis), of which 2,638,668 were available for issue at September 30, 2006.

During Q3 06, the Board of Directors granted 471,000 options to officers and employees of the Company. These options were granted at an exercise price ranging between $20.37 and $20.42 per share. The options vest evenly over a three-year period and have a contractual life of seven years.



Weighted Average
Shares Exercise Price
# $
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Share options, beginning of the year 1,876,528 13.88
Granted 471,000 20.40
Exercised (482,076) 3.09
Cancelled (32,664) 11.27
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Share options, end of the period 1,832,788 11.34
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At September 30, 2006, 974,237 share options were exercisable at a weighted
average price of $6.67.

The weighted average assumptions used in the Black-Scholes options pricing
model for the options granted at market during the
quarter were as follows:

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Risk-free interest rate (%) 4.05
Expected hold period to exercise (years) 6.0
Volatility in the price of the Company's shares (%) 29.4
Weighted average fair value per option ($) 7.59
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7. Segmented Information

The Company provides comprehensive professional services in the area of infrastructure and facilities throughout North America and internationally. The Company considers the basis on which it is organized, including geographic areas and service offerings, in identifying its reportable segments. Operating segments of the Company are defined as components of the Company for which separate financial information is available that is evaluated regularly by the chief operating decision maker in allocating resources and assessing performance. The chief operating decision maker is the Chief Executive Officer of the Company, and the Company's operating segments are based on its regional geographic areas.

All of the operations of the Company are included in one reportable segment as Consulting Services, which provides services throughout North America and internationally.



Geographic information
Property and Equipment,
Goodwill, Intangible Assets
--------------------------------------
September 30, 2006 December 31, 2005
(In thousands of Canadian dollars) $ $
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Canada 106,562 104,463
United States 223,209 223,593
International 448 441
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330,219 328,497
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Geographic information
Gross Revenue
--------------------------------------
For the For the three
quarter ended quarters ended
September 30 September 30
2006 2005 2006 2005
(In thousands of Canadian dollars) $ $ $ $
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Canada 117,571 94,051 340,584 277,373
United States 91,297 51,189 260,582 157,293
International 1,279 826 3,092 2,708
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210,147 146,066 604,258 437,374
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Gross revenue is attributed to countries based on the location of the work
performed.

Practice area information

Gross Revenue
--------------------------------------
For the For the three
quarter ended quarters ended
September 30 September 30
2006 2005 2006 2005
(In thousands of Canadian dollars) $ $ $ $
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Consulting Services
Buildings 46,217 32,826 137,250 104,886
Environment 38,516 23,503 106,856 73,091
Industrial & Project Management 24,805 16,237 67,239 49,801
Transportation 29,053 22,269 81,072 67,041
Urban Land 71,556 51,231 211,841 142,555
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210,147 146,066 604,258 437,374
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8. Employee Future Benefits

The Company contributes to group retirement savings plans and an employee share purchase plan based on the amount of employee contributions made subject to maximum limits per employee. The Company accounts for such defined contributions as an expense in the period in which the contributions are made. The expense recorded in Q3 06 was $3,125,000 (Q3 05 - $1,966,000), with a year-to-date expense of $9,091,000 (2005 - $6,037,000).

9. Investment Tax Credits

Investment tax credits arising from expenditures that qualify as scientific research and experimental development efforts pursuant to existing tax legislation are recorded as a reduction of the applicable administrative and marketing expenses when there is reasonable assurance of their ultimate realization. During Q3 06, no investment tax credits were recorded (2005 - $828,000). Year to date, $500,000 (2005 - $828,000) in investment tax credits were recorded as a reduction of administrative and marketing expenses.

10. Cash Flows From Operating Activities



Cash flows from operating activities determined by the indirect method are
as follows:

For the For the three
quarter ended quarters ended
September 30 September 30
2006 2005 2006 2005
(In thousands of Canadian dollars) $ $ $ $
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Net income for the period 16,414 12,833 44,551 32,634
Add (deduct) items not affecting
cash:
Depreciation of property and
equipment 4,250 3,078 11,354 8,762
Amortization of intangible assets 1,599 423 4,833 849
Future income tax (1,498) 1,165 (2,098) 2,929
Loss (gain) on dispositions of
investments and property and
equipment (432) 31 (902) 369
Stock-based compensation expense 455 476 1,380 1,159
Provision for self-insured liability 2,001 824 3,254 4,273
Other non-cash items (471) 234 84 489
Share of (income) loss from
associated companies (48) 6 (212) (102)
Dividends from equity investments 300 100 450 350
---------------------------------------------------------------------------
22,570 19,170 62,694 51,712
---------------------------------------------------------------------------

Change in non-cash working capital
accounts:
Accounts receivable (9,029) 8,501 (20,529) 6,948
Costs and estimated earnings in
excess of billings 6,585 (1,789) 15,098 (2,713)
Prepaid expenses (1,362) (822) (1,228) (74)
Accounts payable and accrued
liabilities 253 (5,453) (21,420) (13,475)
Billings in excess of costs and
estimated earnings 1,052 791 3,839 (914)
Income taxes payable/recoverable 253 590 34 (7,963)
---------------------------------------------------------------------------
(2,248) 1,818 (24,206) (18,191)
---------------------------------------------------------------------------

Cash flows from operating activities 20,322 20,988 38,488 33,521
---------------------------------------------------------------------------
---------------------------------------------------------------------------


11. Comparative Figures

Certain comparative figures have been reclassified to conform to the presentation adopted for the current period.

MANAGEMENT'S DISCUSSION AND ANALYSIS

October 27, 2006

This Management's Discussion and Analysis of Stantec Inc.'s operations and cash flows for the quarter ended September 30, 2006, should be read in conjunction with our Company's unaudited interim consolidated financial statements and related notes for the quarter ended September 30, 2006, the Management's Discussion and Analysis and audited consolidated financial statements and related notes included in our 2005 Annual Report, and the Report to Shareholders contained in our 2006 Third Quarter Report. Unless otherwise indicated, all amounts shown below are in Canadian dollars. We continue to use the same accounting policies and methods as those used in 2005. Additional information regarding our Company, including our Annual Information Form, is available on SEDAR at www.sedar.com. Such additional information is not incorporated by reference herein and should not be deemed to be made part of this Management's Discussion and Analysis.

During the second quarter of 2006, our shareholders approved the subdivision of our common shares on a two-for-one basis. All references to common shares, per share amounts, and stock-based compensation plans in this Management's Discussion and Analysis have been restated to reflect the stock split on a retroactive basis.

CAUTION REGARDING FORWARD-LOOKING STATEMENTS

Our public communications often include written or verbal forward-looking statements. Forward-looking statements are disclosures regarding possible events, conditions, or results of operations that are based on assumptions about future economic conditions or courses of action and include future-oriented financial information.

Statements of this type are contained in this report, including the discussion of our goal in the Visions, Core Business, and Strategy section and of our annual targets and expectations for our practice areas in the Results and Outlook sections, and may be contained in filings with security regulators or in other communications. Forward-looking statements may involve, but are not limited to, comments with respect to our objectives for 2006 and beyond, our strategies or future actions, our targets, our expectations for our financial condition or share price, or the results of or outlook for our operations or for the Canadian or US economies.

By their nature, forward-looking statements require us to make assumptions and are subject to inherent risks and uncertainties. There is a significant risk that predictions and other forward-looking statements will not prove to be accurate. We caution readers of this report to not place undue reliance on our forward-looking statements since a number of factors could cause actual future results, conditions, actions, or events to differ materially from the targets, expectations, estimates, or intentions expressed in these forward-looking statements.

Future outcomes relating to forward-looking statements may be influenced by many factors, including, but not limited to, global capital market activities; fluctuations in interest rates or currency values; our ability to execute our strategic plans or to complete or integrate acquisitions; critical accounting estimates; the effects of war or terrorist activities; the effects of disease or illness on local, national, or international economies; the effects of disruptions to public infrastructure such as transportation or communications; disruptions in power or water supply; industry or worldwide economic or political conditions; regulatory or statutory developments; the effects of competition in the geographic or business areas in which we operate; the actions of management; or technological changes.

We caution that the foregoing list is not exhaustive of all possible factors and that other factors could adversely affect our results. The Risk Factors section in our 2005 Annual Report provides additional information concerning key factors that could cause actual results to differ materially from those projected in our forward-looking statements. Investors and the public should carefully consider these factors, other uncertainties, and potential events as well as the inherent uncertainty of forward-looking statements when relying on these statements to make decisions with respect to our Company. The forward-looking statements contained herein represent our expectations as of October 27, 2006, and, accordingly, are subject to change after such date. Except as may be required by law, we do not undertake to update any forward-looking statement, whether written or verbal, that may be made from time to time.

VISION, CORE BUSINESS, AND STRATEGY

Our Company provides professional consulting services in the fields of planning, engineering, architecture, interior design, landscape architecture, surveying and geomatics, environmental sciences, project management, and project economics for infrastructure and facilities projects. Through multidiscipline service delivery, we support clients throughout the project life cycle-from the initial conceptual planning to project completion and beyond. Our goal is to become a top 10 global design and consulting services firm with $1 billion in annual revenue by the year 2008 while providing quality services that have a positive impact on our world. Our vision, core business, and strategy and the key performance drivers and capabilities required to meet our goals have not changed in Q3 06 from the description included in our 2005 Annual Report.

RESULTS

Overall Performance

Highlights for Q3 06

By executing our business strategy, we generated strong results for the quarter ended September 30, 2006. The following table summarizes key financial data for the third quarter of 2006 and for the first three quarters of 2006 and 2005:



---------------------------------------------------------------------------
Quarter ended Sep 30
---------------------------------------------------------------------------
(In millions of Canadian dollars, 2006 2005 Change Change
except per share amounts) $ %
---------------------------------------------------------------------------
Gross revenue 210.2 146.1 64.1 43.9%
Net revenue 182.0 125.9 56.1 44.6%
Net income 16.5 12.8 3.7 27.9%
Earnings per share - basic (note) 0.36 0.33 0.03 9.1%
Earnings per share - diluted (note) 0.36 0.32 0.04 12.5%
Cash flows from operating activities 20.3 21.0 (0.7) n/a
Cash flows used in investing (3.6) (91.4) 87.8 n/a
activities
Cash flows from (used in) financing (24.4) 73.8 98.2 n/a
activities
---------------------------------------------------------------------------


---------------------------------------------------------------------------
Three quarters ended Sep 30
---------------------------------------------------------------------------
(In millions of Canadian dollars, 2006 2005 Change Change
except per share amounts) $ %
---------------------------------------------------------------------------
Gross revenue 604.3 437.4 166.9 38.2%
Net revenue 527.3 372.7 154.6 41.5%
Net income 44.6 32.6 12.0 36.5%
Earnings per share - basic (note) 0.99 0.85 0.14 16.5%
Earnings per share - diluted (note) 0.97 0.83 0.14 16.9%
Cash flows from operating activities 38.5 33.5 5.0 n/a
Cash flows used in investing (11.8) (102.7) 90.9 n/a
activities
Cash flows from (used in) financing (51.8) 66.2 (118.0) n/a
activities
---------------------------------------------------------------------------

note: Earnings per share have been restated to reflect the two-for-one
stock split that occurred during Q2 06.

In our 2005 Management's Discussion and Analysis, we established various
ranges of expected performance for fiscal 2006. Below is an indication of
our progress year to date toward our annual targets:

---------------------------------------------------------------------------
Measure 2006 Expected Range Performance to Q3 06
---------------------------------------------------------------------------
Debt to equity ratio (note 1) At or below 0.5 to 1 0.10(3)
Return on equity (note 2) At or above 14% 14.6%(3)
Net income as % of net revenue At or above 5% 8.4%(3)
Gross margin as % of net revenue Between 54 and 56% 56.5%(2)
Administrative and marketing
expenses as % of net revenue Between 40 and 42% 40.5%(3)
Effective income tax rate Between 32 and 34% 34.2%(4)
---------------------------------------------------------------------------

note 1: Debt to equity ratio is calculated as the sum of (1) long-term
debt, including current portion, plus bank indebtedness, minus cash divided
by (2) shareholders' equity.
note 2: Return on equity is calculated as net income for the year divided
by averageshareholders' equity over each of the last four quarters.

(2) Exceeding target
(3) Meeting target
(4) Not yet meeting target


Year to date, we are meeting or exceeding our expected performance levels except for our targeted effective income tax rate as further explained in the Results of Operations section below.

The following highlights our major strategic activities in the third quarter ended September 30, 2006, as we continued to progress toward our goals:

- We extended our $160 million revolving credit facility agreement by one year until August 31, 2009. This facility is available for acquisitions, working capital needs, capital expenditures, and general corporate purposes.

- Under our Company's share option plan and as part of our incentive program, our Board of Directors granted 471,000 stock options to various officers and employees in the Company. These options vest equally over a three-year period and have a contractual life of seven years from the grant date.

- During the quarter, we conducted our annual goodwill impairment review. The review concluded that there was no impairment of goodwill.

Our financial condition continues to remain strong as shareholders' equity increased by $35.3 million year to date mainly due to year-to-date net income of $44.6 million, offset by a $10.3 million change in our cumulative translation account. The cumulative translation account represents an unrealized exchange loss on our investment in our self-sustaining US subsidiaries when translated into Canadian dollars. This amount increased year to date due to the strengthening Canadian dollar. Our total liabilities and total assets decreased by $60.7 million and $25.5 million, respectively, from December 31, 2005, due primarily to the reduction of our revolving credit facility by $49.4 million paid using existing cash and cash equivalents on hand at December 31, 2005, as well as cash generated from operations in 2006. The decline in total assets was also due to a $18.5 million decrease in restricted cash, which was used to fund acquisitions in 2006, the repayment of acquired debt, and the payment of promissory notes for acquisitions completed in prior years. The declines in cash and cash equivalents and restricted cash were offset by a net increase of $12.9 million in accounts receivable and in costs and estimated earnings in excess of billings due to the continued growth of our Company.

Results of Operations

Our Company operates in one reportable segment-Consulting Services. We provide knowledge-based solutions for infrastructure and facilities projects through value-added professional services principally under fee-for-service agreements with clients.

The following table summarizes our key operating results on a percentage of net revenue basis and the percentage increase in the dollar amount of these results compared to the same periods last year:



Quarter ended Sep 30
------------------------------------
% of %
Net Revenue Increase(1)
2006 2005 2006 vs. 2005
---------------------------------------------------------------------------
Gross revenue 115.5% 116.0% 43.9%
Net revenue 100.0% 100.0% 44.6%
Direct payroll costs 43.1% 43.3% 43.9%
Gross margin 56.9% 56.7% 45.1%
Administrative and marketing expenses 40.1% 38.4% 50.7%
Depreciation of property and equipment 2.3% 2.5% 38.1%
Amortization of intangible assets 0.8% 0.3% 278.0%
Net interest expense 0.2% 0.2% 97.3%
Share of (income) loss from associated 0.0% 0.0% n/m
companies
Foreign exchange (gains) losses 0.1% (0.3%) (126.5%)
Other income (0.1%) (0.1%) 40.0%
Income before income taxes 13.5% 15.7% 24.1%
Income taxes 4.5% 5.5% 17.0%
Net income for the period 9.0% 10.2% 27.9%
---------------------------------------------------------------------------


Three quarters ended Sep 30
------------------------------------
% of %
Net Revenue Increase(1)
2006 2005 2006 vs. 2005
---------------------------------------------------------------------------
Gross revenue 114.6% 117.4% 38.2%
Net revenue 100.0% 100.0% 41.5%
Direct payroll costs 43.5% 44.0% 40.0%
Gross margin 56.5% 56.0% 42.7%
Administrative and marketing expenses 40.5% 40.0% 43.3%
Depreciation of property and equipment 2.2% 2.3% 29.6%
Amortization of intangible assets 0.9% 0.2% 469.3%
Net interest expense 0.3% 0.2% 230.4%
Share of (income) loss from associated 0.0% 0.0% 107.8%
companies
Foreign exchange (gains) losses 0.0% (0.1%) (93.7%)
Other income (0.2%) (0.1%) 391.7%
Income before income taxes 12.8% 13.5% 34.8%
Income taxes 4.4% 4.7% 31.5%
Net income for the period 8.4% 8.8% 36.5%
---------------------------------------------------------------------------

(1) % increase calculated based on the dollar change from the comparable
period.
n/m: not meaningful


The following discussion outlines certain factors affecting the results of our operations for the third quarter of 2006 and for the first three quarters of 2006 and should be read in conjunction with our unaudited consolidated financial statements for the quarter ended September 30, 2006.

Gross and Net Revenue

In the course of providing professional services, we incur certain direct costs for subconsultants, equipment, and other expenditures that are recoverable from our clients. The revenue associated with these direct costs is included in our gross revenue. Since such direct costs and their associated revenue can vary significantly from contract to contract, changes in our gross revenue may not be indicative of our revenue trends. Accordingly, we also report net revenue, which is gross revenue less subconsultant and other direct expenses, and analyze our results in relation to net revenue rather than gross revenue.

The following table summarizes the impact of acquisitions, internal growth, and foreign exchange on our gross and net revenue for the third quarter of 2006 and for the first three quarters of 2006 compared to the same periods in 2005.



Gross Revenue Quarter ended Three quarters
Sep 30 ended Sep 30
---------------------------------------------------------------------------
(In millions of Canadian dollars) 2006 vs. 2005 2006 vs. 2005
---------------------------------------------------------------------------
Increase (decrease) due to:
Acquisition growth 51.3 153.4
Net internal growth 16.3 25.3
Impact of foreign exchange rates
on revenue earned by foreign
subsidiaries (3.5) (11.8)
------------------------------

Total increase in gross revenue 64.1 166.9
------------------------------
------------------------------


Net Revenue Quarter ended Three quarters
Sep 30 ended Sep 30
---------------------------------------------------------------------------
(In millions of Canadian dollars) 2006 vs. 2005 2006 vs. 2005
---------------------------------------------------------------------------
Increase (decrease) due to:
Acquisition growth 46.4 138.8
Net internal growth 12.7 25.9
Impact of foreign exchange rates
on revenue earned by foreign
subsidiaries (3.0) (10.1)
------------------------------
Total increase in net revenue 56.1 154.6
------------------------------
------------------------------


The net increase in gross revenue was $64.1 million for Q3 06 over Q3 05 due to growth of $51.3 million from acquisitions and of $16.3 million from internal growth, offset by an impact of foreign exchange rates on revenue earned by foreign subsidiaries of $3.5 million. The large increase in gross and net revenue from acquisitions in the quarter-over-quarter comparison was due to the revenue earned in Q3 06 attributed to the CPV Group Architects & Engineers Ltd. (CPV), The Keith Companies, Inc. (Keith), and the Keen Engineering Co. Ltd. (Keen) acquisitions, which occurred during the third and fourth quarters of 2005, and to the Carinci Burt Rogers Engineering, Inc., Dufresne-Henry, Inc., and ACEx Technologies, Inc. acquisitions, which were completed in the first half of 2006.

The following table summarizes the strong growth in gross revenue by practice area for the third quarter of 2006 and for the first three quarters of 2006 compared to the same periods in 2005:



(In millions of Quarter Three quarters
Canadian dollars) ended Sep 30 ended Sep 30
---------------------------------------------------------------------------
Practice Area Gross Revenue 2006 2005 Change 2006 2005 Change
---------------------------------------------------------------------------

Buildings 46.3 32.8 13.5 137.3 104.9 32.4
Environment 38.6 23.5 15.1 106.9 73.1 33.8
Industrial & Project
Management 24.7 16.2 8.5 67.2 49.7 17.5
Transportation 29.1 22.3 6.8 81.1 67.1 14.0
Urban Land 71.5 51.3 20.2 211.8 142.6 69.2
----------------------------------------------
Total 210.2 146.1 64.1 604.3 437.4 166.9
----------------------------------------------
----------------------------------------------


As indicated above, our gross revenue was impacted by acquisitions, net internal growth, and foreign exchange rates on revenue earned by our foreign subsidiaries. The impact of these factors on gross revenue earned by practice area is summarized below:



(In millions of Canadian dollars) Quarter ended Sep 30
---------------------------------------------------------------------------
Practice Area Gross Revenue Total Change Due Change Due to Net
Change to Internal Growth
Acquisitions and Foreign
Exchange
---------------------------------------------------------------------------
Buildings 13.5 12.5 1.0
Environment 15.1 11.2 3.9
Industrial & Project Management 8.5 3.0 5.5
Transportation 6.8 4.4 2.4
Urban Land 20.2 20.2 0.0
-----------------------------------------
Total 64.1 51.3 12.8
-----------------------------------------
-----------------------------------------


(In millions of Canadian dollars) Three quarters ended Sep 30
---------------------------------------------------------------------------
Practice Area Gross Revenue Total Change Due Change Due to Net
Change to Internal Growth
Acquisitions and Foreign
Exchange
-----------------------------------------
Buildings 32.4 36.9 (4.5)
Environment 33.8 28.1 5.7
Industrial & Project Management 17.5 8.6 8.9
Transportation 14.0 7.4 6.6
Urban Land 69.2 72.4 (3.2)
-----------------------------------------
Total 166.9 153.4 13.5
-----------------------------------------
-----------------------------------------


The following lists the acquisitions completed in 2005 and in the first three quarters of 2006 that impacted specific practice areas:

- Buildings: Dufresne-Henry, Inc. (May 2006); Carinci Burt Rogers Engineering, Inc. (March 2006); Keen Engineering Co. Ltd. (October 2005); The Keith Companies, Inc. (September 2005); and CPV Group Architects & Engineers Ltd. (August 2005).

- Environment: Dufresne-Henry, Inc. (May 2006) and The Keith Companies, Inc. (September 2005).

- Industrial & Project Management: The Keith Companies, Inc. (September 2005) and Dufresne-Henry, Inc. (May 2006).

- Transportation: ACEx Technologies, Inc. (May 2006) and Dufresne-Henry, Inc. (May 2006).

- Urban Land: The Keith Companies, Inc. (September 2005) and Dufresne-Henry, Inc. (May 2006).

All of our practice areas generate a portion of their gross revenue in the United States. The value of the Canadian dollar averaged US$0.89 in Q3 06 compared to US$0.83 in Q3 05, representing an appreciation of 7.2%. Year to date, the value of the Canadian dollar averaged US$0.88 compared to US$0.82 in 2005. This strengthening of the Canadian dollar had a negative effect on the 2006 revenue reported for the quarter and year-to-date compared to the same periods in 2005.

Gross revenue for the Buildings practice area grew by 41.2% in Q3 06 compared to Q3 05 and by 30.9% year to date in 2006 compared to 2005. Of the $32.4 million increase year to date, $25.1 million was due to revenue earned from the buildings practice acquired from the Keen acquisition, and $6.4 million was due to revenue earned from the buildings practice acquired from the CPV acquisition. In Q3 06 our Architecture group continued to secure larger projects and to experience higher project volumes. In particular, the Buildings practice area continued to be very active in western Canada, resulting in a strong backlog. For example, during the quarter this practice area secured a multimillion-dollar contract to provide mechanical, electrical, and civil engineering services for the development of an acute care hospital facility-the Legacy project-in Vancouver, British Columbia. To assist in meeting increased demand, the Buildings practice area has made use of work-sharing initiatives across the Company.

Gross revenue for the Environment practice area increased by 64.3% in Q3 06 compared to Q3 05 and by 46.2% year to date in 2006 compared to 2005. In 2005 the Environment practice area focused on improving the operational effectiveness of underperforming operations. During the last half of 2004, certain of our operations in the Environment practice area were curtailed through staff reductions, resulting in a decrease in the level of revenue generated in 2005. This strategic realignment enhanced the Environment practice area's ability to improve its year-to-date gross revenue and gross margin (58.1% in 2006 versus 56.3% in 2005). Year to date, $20.9 million of gross revenue was generated from the environment practice acquired from the Keith acquisition, and $7.2 million of gross revenue was generated from the environment practice acquired from the Dufresne-Henry, Inc. acquisition. The Environment practice area has remained strong because of larger projects and higher labor utilization rates. For example, during Q3 06 the practice area secured a contract to design the Whistler advanced wastewater treatment plant near the site of the 2010 Winter Olympics in British Columbia.

Gross revenue for the Industrial & Project Management practice area grew by 52.5% in Q3 06 compared to Q3 05 and by 35.2% year to date in 2006 compared to 2005. Of the $17.5 million increase year to date, $8.1 million was due to revenue earned from the industrial and project management practice acquired from the Keith acquisition. The increase in internal growth was primarily due to securing projects in the oil sands sector in western Canada. The Industrial & Project Management practice area has been positioning itself to capture the support facilities and infrastructure segment related to the energy and resources sector and projects in the power telecommunications sector. For example, the practice area is in the process of completing a multimillion-dollar contract to provide services for the Fort Hills Oil Sands project in northern Alberta. Due to competition for qualified staff, especially in western Canada, this practice area is also exploring new strategies for attracting additional labor resources.

Gross revenue for the Transportation practice area increased by 30.5% in Q3 06 compared to Q3 05 and by 20.9% year to date in 2006 compared to 2005. Of the $14.0 million increase year to date, $6.1 million was due to revenue earned from the transportation portion of the Dufresne-Henry, Inc. acquisition. Opportunities in the United States are increasing due to the implementation of the new six-year, US$286.4 billion Safe, Accountable, Flexible, Efficient Transportation Equity Act: A Legacy for Users signed on August 10, 2005. This legislation has increased the funds available for transportation projects, which is starting to translate into contracts for our Company, increasing our backlog in the United States. A portion of this increase is from the New York State Thruway Authority for contracts such as the Interstate 90 Buffalo project. The outlook for our Transportation practice area in Canada remains strong.

Gross revenue for the Urban Land practice area grew by 39.4% in Q3 06 compared to Q3 05 and by 48.5% year to date in 2006 compared to 2005. Of the $69.2 million increase year to date, $70.3 million was due to revenue earned from the urban land practice acquired from the Keith acquisition, and $2.1 million was due to revenue earned from the urban land practice acquired from the Dufresne-Henry, Inc. acquisition. These acquisitions have increased our presence in the urban land market in the United States. Our urban land services are offered primarily in Alberta, southern Ontario, California, Arizona, Nevada, Utah, and Colorado. Most of these regions are stable or experiencing moderate declines in housing starts. Due to our strong market position in these regions, we expect our performance to remain strong for the remainder of 2006.

Gross Margin

For a definition of gross margin, refer to the Definition of Non-GAAP Measures section in our 2005 Annual Report. Gross margin as a percentage of net revenue was 56.9% in Q3 06 compared to 56.7% in Q3 05. Our year-to-date gross margin was 56.5% for 2006 compared to 56.0% for 2005. Overall, our year-to-date gross margin exceeds the anticipated range of 54 to 56% set out in our 2005 Annual Report. Improved markets with corresponding increases in fee schedules have contributed to these enhanced margins year to date.

The following table summarizes our gross margin percentages by practice area for the third quarter of 2006 and 2005 and on a year-to-date basis for 2006 and 2005:




Quarter Three quarters
ended Sep 30 ended Sep 30
---------------------------------------------------------------------------
Practice Area Gross Margin 2006 2005 2006 2005
---------------------------------------------------------------------------
Buildings 57.9% 58.9% 56.0% 56.1%
Environment 58.6% 56.7% 58.1% 56.3%
Industrial & Project Management 49.9% 50.3% 50.4% 49.9%
Transportation 55.0% 55.1% 55.8% 55.7%
Urban Land 58.4% 58.1% 58.1% 58.0%
---------------------------------------------------------------------------


Our gross margin percentages were relatively stable, with a modest increase of 1.9% for the quarter and of 1.8% year to date in the Environment practice area. Because of the nature of our business model, which is based on diversifying our operations across geographic regions, practice areas, and all phases of the infrastructure and facilities project life cycle, there will continue to be fluctuations in the margins reported from quarter to quarter depending on the mix of projects in progress during any quarter.

Administrative and Marketing Expenses

Administrative and marketing expenses as a percentage of net revenue were 40.1% for Q3 06 compared to 38.4% for Q3 05. Year-to-date administrative and marketing expenses as a percentage of net revenue were 40.5% for 2006 compared to 40.0% for 2005 and were within our expected range of 40 to 42% for fiscal 2006. Quarter over quarter, the increase in these expenses was due to higher professional liability claims costs accrued in Q3 06 than in Q3 05. Administrative and marketing expenses may also fluctuate from quarter to quarter as a result of the amount of non-billable staff time allocated to administration and marketing, which is influenced by the ratio of work carried out on proposals and other non-billable administrative and marketing activities during the period.

Depreciation of Property and Equipment

Depreciation of property and equipment as a percentage of net revenue decreased to 2.3% in Q3 06 from 2.5% in Q3 05 and to 2.2% from 2.3% on a year-to-date basis. Quarter over quarter, our depreciation expense dollars have remained relatively constant, resulting in a reduction as a percentage of an increasing net revenue base.

Amortization of Intangible Assets

The timing of completed acquisitions, the size of acquisitions, and the type of intangible assets acquired impact the amount of amortization of intangible assets in a period. Client relationships and other intangible assets are amortized over estimated useful lives ranging from 10 to 15 years, whereas contract backlog is amortized over an estimated useful life of generally less than one and a half years. As a result, the impact of amortization of contract backlog can be significant in the two to six quarters following an acquisition. The table below summarizes the amortization of identifiable intangible assets for the third quarter of 2006 and 2005 and on a year-to-date basis for 2006 and 2005:



Quarter Three quarters
(in thousands of Canadian dollars) ended Sep 30 ended Sep 30
---------------------------------------------------------------------------
2006 2005 2006 2005
---------------------------------------------------------------------------
Amortization of client relationships 609 180 1,809 466
Amortization of backlog 930 195 2,848 245
Other 60 48 176 138
-----------------------------------
Total amortization of intangible
assets 1,599 423 4,833 849
-----------------------------------
-----------------------------------


An increase of $1.2 million in Q3 06 and of $4.0 million year to date compared to the same periods last year was mainly due to the intangible assets acquired from the Keith acquisition on September 15, 2005, and from the Keen acquisition in the fourth quarter of 2005. Of the $4.8 million amortized year to date, $3.0 million related to backlog and client relationships acquired in the Keith acquisition. Of Keith's total contract backlog, we identified $4.0 million as an intangible asset upon acquisition. Of this $4.0 million, $1.2 million remains to be amortized over the next five months.

Net Interest Expense

The increase of $213,000 in net interest expense in Q3 06 compared to Q3 05 and of $1,265,000 on a year-to-date basis compared to 2005 was a result of our long-term debt position throughout the first two quarters of 2006 being higher than in the same period in 2005. During Q3 05, we accessed our revolving credit facility to finance the Keith acquisition, and in the last two quarters, we began repaying the credit facility using cash generated from operations in 2006 and existing cash and cash equivalents. Depending on the form under which the credit facility is accessed and certain financial covenant calculations, rates of interest may vary among Canadian prime, US base rate, or LIBOR or bankers acceptance rates plus 65 or 85 basis points. Our average interest rate increased 1.02% to 5.36% at September 30, 2006, compared to 4.34% at December 31, 2005. We estimate that, based on our balance at September 30, 2006, a 1% change in interest rates would impact our annual earnings per share by less than $0.01.

Foreign Exchange Gains (Losses)

During Q3 06, we recorded a foreign exchange loss of $99,000 compared to a $373,000 gain in Q3 05. On a year-to-date basis, we recorded a foreign exchange gain of $20,000 in 2006 compared to a $319,000 gain in 2005. The foreign exchange gains and losses reported arose on the translation of the foreign-currency-denominated assets and liabilities held in our Canadian companies and in our non-US-based foreign subsidiaries. We minimize our exposure to foreign exchange fluctuations by matching US-dollar assets with US-dollar liabilities and, when appropriate, by entering into forward contracts to buy or sell US dollars in exchange for Canadian dollars. In Q4 05 we borrowed US dollars to complete the Keith acquisition. We did not enter into any forward contracts in the first three quarters of 2006. The exchange rate in effect at the end of Q3 06 was US$0.89 compared to US$0.86 at the end of 2005.

Income Taxes

Our effective income tax rate for the first three quarters of 2006 was 34.2% compared to 35.0% for the year ended December 31, 2005. During the year, the Quebec government enacted Bill 15, legislation that retroactively eliminated the benefit of certain financing trust arrangements. As a result of this legislative change, we recorded an additional $1.0 million of income tax expense in Q2 06 related to 2005. We continue to adjust our income tax rate quarterly, based on changes in statutory rates in the jurisdictions in which we operate as well as on our estimated earnings in each of these jurisdictions. We expect that our effective tax rate by the end of the year will be in the range of 32 to 34%.

SUMMARY OF QUARTERLY RESULTS

The following table sets forth selected data derived from our consolidated financial statements for each of the eight most recently completed quarters. This information should be read in conjunction with the applicable interim unaudited and annual audited consolidated financial statements and related notes thereto.



Quarterly Unaudited Financial Information

(In millions of Canadian dollars, except per share amounts)
---------------------------------------------------------------------------
Dec 31, 2005 Mar 31, 2006 Jun 30, 2006 Sep 30, 2006
---------------------------------------------------------------------------
Gross revenue 180.6 185.3 208.8 210.2
Net revenue 151.9 163.1 182.2 182.0
Net income 8.0 11.4 16.7 16.5
EPS - basic 0.18 0.25 0.37 0.36
EPS - diluted 0.17 0.25 0.36 0.36

---------------------------------------------------------------------------
Dec 31, 2004 Mar 31, 2005 Jun 30, 2005 Sep 30, 2005
---------------------------------------------------------------------------
Gross revenue 127.0 141.1 150.2 146.1
Net revenue 107.1 119.1 127.7 125.9
Net income 9.6 6.7 13.1 12.8
EPS - basic 0.26 0.18 0.34 0.33
EPS - diluted 0.25 0.17 0.34 0.32
---------------------------------------------------------------------------
The quarterly earnings per share on a basic and diluted basis are not
additive and may not equal the annual earnings per share reported. This is
due to the effect of shares issued or repurchased during the year on the
weighted average number of shares. Diluted earnings per share on a
quarterly and annual basis are also affected by the change in the market
price of our shares, since we do not include in dilution options whose
exercise price is not in the money.
---------------------------------------------------------------------------

The following table summarizes the impact of acquisitions, internal growth,
and foreign exchange on our gross revenue for the following quarterly
comparisons:

(In millions of Canadian Q3 06 vs. Q2 06 vs. Q1 06 vs. Q4 05 vs.
dollars) Q3 05 Q2 05 Q1 05 Q4 04
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Increase (decrease) in gross
revenue due to:
Acquisition growth 51.3 55.3 46.8 40.8
Net internal growth 16.3 8.5 0.5 14.4
Impact of foreign exchange
rates on revenue earned by
foreign subsidiaries (3.5) (5.2) (3.1) (1.6)
------------------------------------------
Total increase in gross revenue 64.1 58.6 44.2 53.6
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During Q4 05, our gross revenue grew $53.6 million, or 42.2%, compared to Q4 04. Approximately $40.8 million of this increase resulted from acquisitions completed in 2003, 2004, and 2005. Net income decreased by $1.6 million during Q4 05 compared to the same period in 2004 partially due to the $1.0 million in additional professional liability claims expense based on an independent actuarial report completed in Q4 05. Net income was also affected by an increase of $1.8 million in the amortization of intangible assets over Q4 04 arising on the three acquisitions completed in 2005. The weighted average number of shares in the Company outstanding during Q4 05 was 44,615,200 (including the 6,657,552 shares issued as part of the Keith acquisition) compared to 37,064,170 shares outstanding during Q4 04. The combined impact of these items reduced our reported earnings per share by $0.16. As well, costs were incurred during the integration of the acquired entities in Q4 05, since we added approximately 1,000 staff to our Company from the Keith and Keen acquisitions.

During Q1 06, our gross revenue grew $44.2 million, or 31.3%, compared to Q1 05. Approximately $46.8 million of this increase was a result of the CPV, Keith, and Keen acquisitions, which occurred in the last half of 2005. With the integration of project work for over 1,000 employees into our operations from these acquisitions, net income increased by $4.7 million in Q1 06, and earnings per share increased by $0.07 compared to the same period in 2005.

During Q2 06, our gross revenue grew by $58.6 million, or 39.1%, compared to Q2 05. Approximately $55.3 million of this increase was a result of the three acquisitions completed in the last half of 2005 and of the Carinci Burt Rogers Engineering, Inc., Dufresne-Henry, Inc., and ACEx Technologies, Inc. acquisitions completed in the first half of 2006. Net income increased by $3.6 million in Q2 06 compared to the same period in 2005, and earnings per share increased by $0.03 compared to the same period last year. Net income and earnings per share would have increased $7.6 million and $0.10, respectively, had it not been for a $4.0 million positive adjustment made in Q2 05 related to management's revised estimate of provision for doubtful accounts receivable. That revised estimate was based on improved information on historical loss experience that became available to us through the use of our enterprise management system.

LIQUIDITY AND CAPITAL RESOURCES

The following table represents summarized working capital information as at September 30, 2006, compared to December 31, 2005:



(In millions of Canadian dollars,
except ratios) Sep 30, 2006 Dec 31, 2005 % Change
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Current assets 248.2 280.4 (11.5%)
Current liabilities (139.0) (157.8) (11.9%)
Working capital 109.2 122.6 (10.9%)
Current ratio 1.79 1.78 n/a
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note: Working capital is calculated by subtracting current liabilities from
current assets. Current ratio is calculated by dividing current
assets by current liabilities.


Our cash flows from (used in) operating, investing, and financing activities for the third quarter and year-to-date for 2006 and 2005, as reflected in the Consolidated Statements of Cash Flows, are summarized in the following table:




Quarter Three quarters
(In millions of Canadian dollars) ended Sep 30 ended Sep 30
---------------------------------------------------------------------------
$ $
2006 2005 Change 2006 2005 Change
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Cash flows from operating
activities 20.3 21.0 (0.7) 38.5 33.5 5.0
Cash flows used in investing
activities (3.6) (91.4) 87.8 (11.8) (102.7) 90.9
Cash flows from (used in)
financing activities (24.4) 73.8 98.2 (51.8) 66.2 (118.0)
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Our liquidity needs can be met through a variety of sources, including cash generated from operations, borrowings from our $160 million credit facility, and the issuance of common shares. We also have access to restricted cash, which can be used to finance future acquisitions, future capital expenditures, the repayment of debt acquired in acquisitions, and the payment of promissory notes for completed acquisitions. Our primary use of funds is for paying operational expenses, completing acquisitions, and sustaining capital spending on property and equipment. We continue to manage according to the management guidelines established in our 2005 Annual Report of maintaining a debt to equity ratio of less than 0.5 to 1.

Working Capital

Our working capital (current assets less current liabilities) at the end of Q3 06 was $109.2 million compared to $122.6 million at December 31, 2005. During this period, current assets decreased by $32.2 million, and current liabilities decreased by $18.8 million. The decrease in current assets from December 31, 2005, was primarily due to a decline of $25.4 million in our cash and cash equivalents. As well, current assets decreased due to a decline of $18.5 million in restricted cash, which was used to fund acquisitions in 2006, the repayment of acquired debt, and the payment of promissory notes for acquisitions completed in prior years. Accounts payable and accrued liabilities decreased from December 31, 2005, primarily due to the timing of payments to suppliers and employees. The decrease in working capital during the first three quarters of 2006 was offset by a $10.4 million addition of non-cash working capital from acquisitions completed during the year and from the finalization of purchase price allocations and the payment of additional contingent consideration in connection with acquisitions completed in prior years.

Cash Flows From Operating Activities

Our cash flows from operating activities decreased by $0.7 million in Q3 06 compared to the same period in 2005 and increased by $5.0 million year to date compared to the first three quarters of 2005. The decline quarter over quarter was due to an increase of $4.9 million in income taxes paid. The year-to-date increase was mainly due to an increase of $9.0 million in cash receipts from clients less cash paid to suppliers and employees when comparing 2006 to 2005. Our cash flows for the quarter and year-to-date were also positively affected by an increase in revenue generated by the acquisitions that were integrated in the latter half of 2005 and in the first three quarters of 2006.

Cash Flows Used in Investing Activities

Our cash flows used in investing activities decreased by $87.8 million in Q3 06 compared to the same period in 2005 and by $90.9 million year to date compared to the first three quarters of 2005. Year to date, we used $12.1 million for the acquisition of Carinci Burt Rogers Engineering, Inc., Dufresne-Henry, Inc., and ACEx Technologies, Inc. versus $87.4 million for acquisition activity in 2005, of which $86.7 million was used for the CPV and Keith acquisitions. The use of cash and cash equivalents for acquisitions in 2006 is offset by a drawdown of restricted cash that we acquired in connection with the Keith acquisition to be used for future acquisition purposes.

As a professional services organization, we are not capital intensive. Expenditures are made primarily for property and equipment, including such items as computer equipment and business information systems software, furniture, leasehold improvements, and other office and field equipment. Our capital expenditures increased to $3.7 million in Q3 06 from $2.5 million in Q3 05 and to $14.6 million year to date compared to $10.6 million in 2005. Our Q3 06 expenditures were within the expected range for 2006 to support ongoing operational activity and growth. During Q3 06, our capital expenditures were financed by cash flows from operations.

Cash Flows Used in Financing Activities

Our cash flows used in financing activities rose by $98.2 million in Q3 06 compared to the same period in 2005 and by $118.0 million year to date compared to the first three quarters of 2005. In Q3 06 we repaid $26.3 million of our revolving credit facility versus borrowing $95.9 million in Q3 05 for acquisition purposes, in particular the Keith acquisition. The positive cash flows generated from operations during the quarter provided the cash flow to reduce our credit facility balance. At September 30, 2006, we had $127.4 million available under our $160 million credit facility for future activities.

Shareholders' Equity

Share options exercised during the first three quarters of 2006 generated cash of $1,489,000 compared to $810,000 for the same period in 2005. During the first three quarters of 2006, we repurchased 51,600 (2005 - 13,600) shares for cancellation pursuant to an ongoing normal course issuer bid at a cost of $1,016,000 compared to $195,000 in 2005.

OTHER

Outstanding Share Data

As at September 30, 2006, there were 45,076,781 common shares and 1,832,788 share options outstanding. During the period of September 30, 2006, to October 27, 2006, no shares were repurchased under our normal course issuer bid; no shares were issued on the vesting of restricted shares; no new share options were issued; and 7,002 share options were exercised. As at October 27, 2006, there were 45,083,783 common shares and 1,825,786 share purchase options outstanding.

Contractual Obligations

As part of our continuing operations, we enter into long-term contractual arrangements from time to time due mainly to our long-term debt and operating lease commitments. During the first three quarters ended September 30, 2006, the only material change made to the contractual obligations reported in our 2005 Annual Report was the assumption of approximately $1.2 million annually in operating lease obligations in connection with the acquisition of Carinci Burt Rogers Engineering, Inc., Dufresne-Henry, Inc., and ACEx Technologies, Inc. As well, we repaid $49.4 million on our revolving credit facility during the first three quarters of 2006.

Off-Balance Sheet Arrangements

As at September 30, 2006, our only significant off-balance sheet financial arrangements related to letters of credit in the amount of $1.0 million (December 31, 2005-$1.1 million) that expire at various dates before September 2007. These letters of credit were issued in the normal course of operations, including the guarantee of certain office rental obligations.

Market Risk

We are exposed to various market factors that can affect our performance with respect to currency and interest rates. For the first three quarters of 2006, there has been no significant change in our market risks from those described in our 2005 Annual Report.

Related Party Transactions

As was the case in 2005 (as described in our 2005 Annual Report), no related party transactions were made during the first three quarters of 2006.

OUTLOOK

The outlook for the remainder of 2006 continues to be positive since we operate in a highly diverse infrastructure and facilities market in North America. Results may fluctuate from quarter to quarter depending on variables such as project mix, economic factors, and integration activities from acquisitions. For the first three quarters of 2006, there have been no significant changes in our industry environment or market opportunities, and our expectations remain consistent with those described in the Outlook section of the Management's Discussion and Analysis included in our 2005 Annual Report except for a moderate slowdown in housing starts in some of the regions in which we operate, including Arizona, Nevada, Utah, Colorado, and California. Due to our strong market position in these regions, we expect our performance to remain strong for the remainder of 2006.

CRITICAL ACCOUNTING ESTIMATES, DEVELOPMENTS, AND MEASURES

For the first three quarters ended September 30, 2006, there has been no significant change in our critical accounting estimates, accounting developments, or description of accounting measures from those described in our 2005 Annual Report.

RISK FACTORS

For the first three quarters ended September 30, 2006, there has been no significant change in our risk factors from those described in our 2005 Annual Report.

Contact Information

  • Stantec Inc.
    Jay Averill
    Media Relations
    (780) 917-7441
    or
    Stantec Inc.
    Simon Stelfox
    Investor Relations
    (780) 917-7288
    Website: www.stantec.com