Stantec Inc.
TSX : STN
NYSE : SXC

Stantec Inc.

August 03, 2006 09:21 ET

Stantec Announces Strong Results for the Second Quarter

EDMONTON, ALBERTA--(CCNMatthews - Aug. 3, 2006) - STANTEC INC. (TSX:STN) (NYSE:SXC):

- Gross revenue increased 39.1% to C$208.8 million compared to C$150.2 million in the second quarter of 2005. Net revenue increased 42.7% to C$182.2 million from C$127.7 million, while net income was up 28.0% to C$16.7 million compared to C$13.1 million. Diluted earnings per share were C$0.36 in the second quarter of 2006 compared to C$0.34 the same period last year, representing an increase of 5.9%. In the second quarter of 2005 Stantec changed its method of estimating doubtful accounts receivable. This resulted in a $4.0 million ($0.07 per share) positive adjustment to income in the second quarter last year. Excluding the effect of this 2005 adjustment, the increase in net income for the second quarter of 2006 would have been 59.8%, while diluted earnings per share would have increased 33.3% quarter-to-quarter.

- Year-to-date 2006 gross revenue increased 35.3% to C$394.1 million compared to C$291.3 million in the same period of 2005, while net revenue increased 39.9% to C$345.3 million from C$246.8 million. Net income increased 42.1% to C$28.1 million from C$19.8 million. Diluted EPS were up 19.6% to $0.61 from $0.51. Excluding the positive effect of the $4.0 million adjustment to our earnings made in the second quarter of 2005, the increase in net income year to date would have been 63.6% compared to the same period in 2005, while diluted earnings per share would have increased 38.6% year to date.

- During the second quarter, Stantec completed a 2-for-1 share split, announced the renewal of its Normal Course Issuer Bid, and was included on the S&P/TSX Composite Index, the premier indicator of market activity for the Toronto Stock Exchange.

- Stantec announced the acquisition of Dufresne-Henry in April, adding about 270 employees to the US East region, primarily in New England. Stantec also acquired Oakland, California based ACEx Technologies, a 25-person firm specializing in transit, rail, and power communications, and control systems engineering.

"We are pleased to report strong results in a second quarter where most of our regions and practice areas performed well," says Tony Franceschini, Stantec President & CEO. "Overall, we had strong performance in our Canadian and US West operations and we saw improvement in the US East. This performance reflects, in part, the successful integration of our 2005 acquisitions as well as the addition of Dufresne-Henry at the beginning of this quarter."

Stantec's second quarter project activity in the Transportation area illustrates the positive impact of the signing of the Safe, Accountable, Flexible, Efficient Transportation Equity Act: A Legacy for Users, which has increased US federal funding for transportation projects. The Company was awarded several new contracts including one with the New York State Department of Transportation where Stantec is part of a team designing the upgrading of 4 miles (6.44 kilometres) of U.S. Route 15 from a two-lane roadway to a full, limited-access freeway in Steuben County, New York. The Infrastructure Management & Pavement Engineering team secured an assignment to provide a pavement management software system for the City of Albuquerque, New Mexico, along with conducting a pavement performance survey using Stantec's RT-3000 Road Tester. Stantec's pavement performance expertise will also be used to assist the public works department of Jefferson Parish, Louisiana, in its analysis of the impact of Hurricane Katrina on local infrastructure. The Company will be responsible for providing an inventory of the pavement performance and drainage conditions of the parish's entire street network.

"Our employees are truly working as one team to offer infinite solutions and to successfully integrate new acquisitions. Staff who have joined us, including those from recent acquisitions, are enjoying success by making use of the additional resources available to them as a result of being a part of Stantec," says Franceschini. "It is because of all their efforts that Stantec has been able to produce consistently strong quarterly and annual results."

The second quarter Conference Call, to be held today at 4:00 PM EDT (2:00 PM MDT), 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.



Consolidated Balance Sheets

June 30 December 31
(Columnar figures in thousands of Canadian 2006 2005
dollars) (Unaudited) $ $
------------------------------------------------------------------------
------------------------------------------------------------------------

ASSETS (note 4)
Current
Cash and cash equivalents 10,688 28,143
Restricted cash 4,083 21,312
Accounts receivable, net of allowance for
doubtful accounts of $13,267 in 2006
($16,053 - 2005) 161,088 137,928
Costs and estimated earnings in excess
of billings 54,944 66,172
Prepaid expenses 5,389 5,420
Future income tax assets 8,916 14,827
Other assets (note 3) 8,662 6,569
------------------------------------------------------------------------

Total current assets 253,770 280,371
Property and equipment 64,131 58,519
Goodwill 241,800 242,674
Intangible assets 25,246 27,304
Future income tax assets 9,404 6,814
Other assets (note 3) 13,806 13,097
------------------------------------------------------------------------

Total assets 608,157 628,779
------------------------------------------------------------------------
------------------------------------------------------------------------

LIABILITIES AND SHAREHOLDERS' EQUITY
Current
Accounts payable and accrued liabilities 89,022 106,757
Billings in excess of costs and estimated
earnings 26,300 24,251
Income taxes payable 4,373 4,441
Current portion of long-term debt (note 4) 3,114 4,813
Future income tax liabilities 14,708 17,552
------------------------------------------------------------------------

Total current liabilities 137,517 157,814
Long-term debt (note 4) 59,547 81,886
Other liabilities (note 5) 26,086 24,764
Future income tax liabilities 18,059 16,262
------------------------------------------------------------------------

Total liabilities 241,209 280,726
------------------------------------------------------------------------

Shareholders' equity
Share capital (note 6) 212,475 210,604
Contributed surplus (note 6) 4,931 5,522
Cumulative translation account (36,474) (25,575)
Deferred stock compensation (456) (833)
Retained earnings 186,472 158,335
------------------------------------------------------------------------

Total shareholders' equity 366,948 348,053
------------------------------------------------------------------------

Total liabilities and shareholders' equity 608,157 628,779
------------------------------------------------------------------------
------------------------------------------------------------------------
See accompanying notes


Consolidated Statements of Income and Retained Earnings

(Columnar figures in
thousands of For the quarter For the two quarters
Canadian dollars, ended June 30 ended June 30
except share and per 2006 2005 2006 2005
share amounts) (Unaudited) $ $ $ $
------------------------------------------------------------------------

INCOME
Gross revenue 208,841 150,164 394,111 291,308
Less subconsultant
and other direct
expenses 26,686 22,507 48,818 44,518
------------------------------------------------------------------------

Net revenue 182,155 127,657 345,293 246,790
Direct payroll costs 78,826 54,952 151,035 109,391
------------------------------------------------------------------------

Gross margin 103,329 72,705 194,258 137,399
Administrative and
marketing expenses
(note 9) 72,447 49,450 140,824 100,712
Depreciation of
property and
equipment 3,633 2,920 7,104 5,684
Amortization of
intangible assets 1,706 188 3,234 426
Net interest expense
(note 4) 655 180 1,382 330
Share of income from
associated companies (126) (40) (164) (108)
Foreign exchange
(gains) losses (71) (7) (119) 54
Other income (1,032) (86) (1,161) (161)
------------------------------------------------------------------------

Income before income
taxes 26,117 20,100 43,158 30,462
------------------------------------------------------------------------

Income taxes
Current 8,123 5,069 15,621 8,897
Future 1,274 1,965 (600) 1,764
------------------------------------------------------------------------

Total income taxes 9,397 7,034 15,021 10,661
------------------------------------------------------------------------

Net income for the
period 16,720 13,066 28,137 19,801
Retained earnings,
beginning of the
period 169,752 124,542 158,335 117,874
Shares repurchased
(note 6) - (94) - (161)
------------------------------------------------------------------------

Retained earnings,
end of the period 186,472 137,514 186,472 137,514
------------------------------------------------------------------------
------------------------------------------------------------------------

Weighted average
number of shares
outstanding - basic
(note 6) 45,081,646 37,883,954 45,020,210 37,873,076
------------------------------------------------------------------------

Weighted average
number of shares
outstanding -
diluted (note 6) 46,005,960 38,912,666 45,937,272 38,869,688
------------------------------------------------------------------------

Shares outstanding,
end of the period
(note 6) 45,120,666 37,898,572 45,120,666 37,898,572
------------------------------------------------------------------------

Earnings per share
(note 6)
Basic 0.37 0.34 0.63 0.52
------------------------------------------------------------------------

Diluted 0.36 0.34 0.61 0.51
------------------------------------------------------------------------
See accompanying notes


Consolidated Statements of Cash Flows


For the quarter For the two quarters
(Columnar figures in ended June 30 ended June 30
thousands of Canadian 2006 2005 2006 2005
dollars) (Unaudited) $ $ $ $
------------------------------------------------------------------------

CASH FLOWS FROM (USED IN)
OPERATING ACTIVITIES
Cash receipts from clients 214,589 148,988 398,752 300,122
Cash paid to suppliers (53,025) (40,999) (121,111) (94,262)
Cash paid to employees (114,767) (83,953) (242,734) (176,077)
Dividends from equity
investments - - 150 250
Interest received 1,984 1,452 3,555 2,716
Interest paid (2,138) (1,457) (4,204) (2,778)
Income taxes paid (5,592) (5,349) (17,409) (18,842)
Income taxes recovered 1,077 1,386 1,167 1,404
------------------------------------------------------------------------

Cash flows from operating
activities (note 10) 42,128 20,068 18,166 12,533
------------------------------------------------------------------------

CASH FLOWS FROM (USED IN)
INVESTING ACTIVITIES
Business acquisitions, net
of cash acquired (9,911) 8 (12,079) (692)
Restricted cash used for
acquisitions 14,506 - 16,706 -
Increase in investments
held for self-insured
liabilities (1,171) (1,650) (2,053) (3,376)
Proceeds on disposition of
investments 3 81 5 513
Collection of notes
receivable from
disposition of
Technology and Design
Build segments - 250 - 250
Purchase of property and
equipment (5,173) (3,954) (10,819) (8,105)
Proceeds on disposition of
property and
equipment 1 128 12 130
------------------------------------------------------------------------

Cash flows used in
investing activities (1,745) (5,137) (8,228) (11,280)
------------------------------------------------------------------------

CASH FLOWS FROM (USED IN)
FINANCING ACTIVITIES
Repayment of long-term
debt (33,915) (2,119) (36,170) (8,001)
Repayment of acquired bank
indebtedness (note 2) (1,787) - (1,787) -
Proceeds from long-term
borrowings - - 9,142 -
Repurchase of shares for
cancellation (note 6) - (112) - (195)
Proceeds from issue of
share capital (note 6) 200 95 1,449 535
------------------------------------------------------------------------

Cash flows used in
financing activities (35,502) (2,136) (27,366) (7,661)
------------------------------------------------------------------------

Foreign exchange loss
(gain) on cash held in
foreign currency 66 39 (27) 202
------------------------------------------------------------------------

Net increase (decrease) in
cash and cash equivalents 4,947 12,834 (17,455) (6,206)
Cash and cash equivalents,
beginning of the period 5,741 18,850 28,143 37,890
------------------------------------------------------------------------

Cash and cash equivalents,
end of the period 10,688 31,684 10,688 31,684
------------------------------------------------------------------------
------------------------------------------------------------------------
See accompanying notes


STANTEC INC.

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 annual December 31, 2005, 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 June 30, 2006, the Company does not anticipate any additional consideration to be payable in the future based on future performance parameters.

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 supplements 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, this acquisition expands its services into four new states in New England and creates 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 complements the Company's services in transit, rail and power communications, and control systems engineering and adds new locations in Oakland, California, and Irving, Texas.

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

During the first two quarters of 2006, the purchase price allocations for the CPV Group Architects & Engineers Co. Ltd. and The Keith Companies, Inc. acquisitions were finalized. The purchase price allocations for the Keen Engineering Co. Ltd., 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 Keen Engineering Co. Ltd. acquisition during the third quarter of 2006, 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.

During the first two 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), GBR Architects Limited (2004), and 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 two quarters of each year are as follows:



2006 2005
(In thousands of Canadian dollars) $ $
------------------------------------------------------------------------

Cash consideration 13,221 700
Promissory notes, due 2007 through 2009 4,118 421
------------------------------------------------------------------------

Purchase price 17,339 1,121
------------------------------------------------------------------------
------------------------------------------------------------------------


Assets and liabilities acquired at fair values
Cash acquired 1,142 8
Bank indebtedness assumed (1,787) -
Non-cash working capital 9,832 591
Property and equipment 3,173 (9)
Goodwill 6,790 586
Intangible assets
Client relationships 1,400 -
Contract backlog 475 -
Other 151 -
Long-term debt (595) -
Future income tax liabilities (3,242) (55)
------------------------------------------------------------------------

Net assets acquired 17,339 1,121
------------------------------------------------------------------------
------------------------------------------------------------------------


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

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

Investments held for self-insured liabilities 19,707 16,857
Investments in associated companies 1,522 1,545
Investments - other 708 710
Other 531 554
------------------------------------------------------------------------

22,468 19,666
Less current portion of investments held for
self-insured liabilities 8,662 6,569
------------------------------------------------------------------------

13,806 13,097
------------------------------------------------------------------------
------------------------------------------------------------------------


4. Long-Term Debt

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

Non-interest-bearing note payable 128 122
Other notes payable 8,516 5,643
Bank loan 53,382 79,035
Mortgages payable 362 1,706
Other 273 193
------------------------------------------------------------------------

62,661 86,699
Less current portion 3,114 4,813
------------------------------------------------------------------------

59,547 81,886
------------------------------------------------------------------------
------------------------------------------------------------------------


The Company has a revolving credit facility in the amount of $160 million due on August 31, 2008. Subsequent to the quarter-end, this facility was extended by one year until August 31, 2009. The 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 between Canadian prime, US base rate, or LIBOR rate or bankers acceptance rates plus 65 or 85 basis points. At June 30, 2006, $22,882,000 of the bank loan was payable in US funds (US$20,500,000). 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 June 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 Q2 06 was $795,000 (Q2 05 - $364,000), with a year-to-date expense of $1,797,000 (2005 - $718,000).



5. Other Liabilities

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

Provision for self-insured liabilities 12,181 11,346
Deferred gain on sale leaseback 6,405 6,624
Lease inducements 10,077 7,997
Liabilities on lease exit activities 1,338 2,251
Other - 1,021
------------------------------------------------------------------------

30,001 29,239
Less current portion included in accounts payable
and accrued liabilities 3,915 4,475
------------------------------------------------------------------------

26,086 24,764
------------------------------------------------------------------------
------------------------------------------------------------------------


Provision for self-insured liabilities

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

Provision, beginning of the period 11,346 5,236
Addition to provision 1,253 8,244
Payment for claims settlement (418) (2,134)
------------------------------------------------------------------------

Provision, end of the period 12,181 11,346
------------------------------------------------------------------------
------------------------------------------------------------------------


A midyear actuarial review was performed, resulting in a $994,000
reduction of the provision for self-insured liabilities in the second
quarter.

Liabilities on lease exit activities

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

Liability, beginning of the period 2,251 2,817
Current year provision:
Established for existing operations - 609
Resulting from acquisitions - 276
Amounts paid and charged against the liability:
Impacting administrative and marketing expenses (876) (1,103)
Impacting the purchase price allocation - (325)
Impact of foreign exchange (37) (23)
------------------------------------------------------------------------

Liability, end of the period 1,338 2,251
------------------------------------------------------------------------
------------------------------------------------------------------------


A reduction of $421,000 in liabilities on lease exit activities impacted
administrative and marketing expenses in Q2 06.

6. Share Capital

Contributed
Capital Stock Surplus
-------------------------------------- -------------

2006 2005 2006 2005
------------------ ------------------- ------ ------

(In thousands of Shares Shares
Canadian dollars) # $ # $ $ $
------------------------------------------------------------------------

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) -
------------------------------------------------------------------------

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) -
------------------------------------------------------------------------

Balance, as at
June 30 45,120,666 212,475 37,898,572 88,218 4,931 2,988
------------------------------------------------------------------------
------------------------------------------------------------------------


During Q2 06, the Company did not repurchase any common shares for cancellation pursuant to an ongoing normal course issuer bid. In Q2 05, 7,800 common shares were repurchased at a cost of $112,000. Of this amount, $18,000 and $0 reduced the share capital and contributed surplus accounts, respectively, with $94,000 being charged to retained earnings.

During the first two quarters of 2006, the Company did not repurchase any common shares for cancellation pursuant to an ongoing normal course issuer bid. During the first two quarters of 2005, 13,600 common shares were repurchased for cancellation at a cost of $195,000. Of this amount, $33,000 and $1,000 reduced the share capital and contributed surplus accounts, respectively, with $161,000 being charged to retained earnings.

During Q2 06, the Company renewed its normal course issuer bid with the Toronto Stock Exchange, which enables the Company to purchase up to 2,258,754 common shares during the period June 1, 2006, to May 31, 2007.

During Q2 06, the Company recognized a stock-based compensation expense of $377,000 (Q2 05 - $334,000) in administrative and marketing expenses. Of the amount expensed, $180,000 related to the fair value of options granted (Q2
05 - $251,000); $67,000 related to deferred share unit compensation (Q2 05 - $83,000); and $130,000 related to the restricted shares issued on The Keith Companies, Inc. acquisition.

During the first two quarters of 2006, the Company recognized a stock-based compensation expense of $925,000 (2005 -$683,000) in administrative and marketing expenses. Of the amount expensed, $366,000 related to the fair value of options granted (2005 - $505,000); $208,000 related to deferred share unit compensation (2005 - $178,000); and $351,000 related to the restricted shares issued on The Keith Companies, Inc. acquisition. 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. The shareholders of the Company also approved an amendment to its employee stock 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 3,104,334 were available for issue at June 30, 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.

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

Canada 107,509 104,463
United States 223,216 223,593
International 452 441
------------------------------------------------------------------------

331,177 328,497
------------------------------------------------------------------------
------------------------------------------------------------------------


Geographic information

Gross Revenue
------------------------------------

For the For the two
quarter ended quarters ended
June 30 June 30
2006 2005 2006 2005
(In thousands of Canadian dollars) $ $ $ $
------------------------------------------------------------------------

Canada 117,650 96,406 223,013 183,322
United States 90,156 52,948 169,285 106,104
International 1,035 810 1,813 1,882
------------------------------------------------------------------------

208,841 150,164 394,111 291,308
------------------------------------------------------------------------
------------------------------------------------------------------------


Gross revenue is attributed to countries based on the location of the
work performed.

Practice area information
Gross Revenue
------------------------------------

For the For the two
quarter ended quarters ended
June 30 June 30
2006 2005 2006 2005
(In thousands of Canadian dollars) $ $ $ $
------------------------------------------------------------------------

Consulting Services
Buildings 45,764 36,855 91,033 72,060
Environment 36,942 24,901 68,340 49,588
Industrial & Project Management 22,851 17,677 42,434 33,564
Transportation 28,433 22,883 52,019 44,772
Urban Land 74,851 47,848 140,285 91,324
------------------------------------------------------------------------

208,841 150,164 394,111 291,308
------------------------------------------------------------------------
------------------------------------------------------------------------


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 Q2 06 was $2,653,000 (Q2 05 - $2,067,000), with a year-to-date expense of $5,966,000 (2005 - $4,071,000).

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 Q2 06, investment tax credits of $500,000 were recorded as a reduction of administrative and marketing expenses. No investment tax credits were recorded in the first two quarters of 2005.



10. Cash Flows From Operating Activities

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

For the For the two
quarter ended quarters ended
June 30 June 30
2006 2005 2006 2005
(in thousands of Canadian dollars) $ $ $ $
------------------------------------------------------------------------

Net income for the period 16,720 13,066 28,137 19,801
Add (deduct) items not affecting
cash:
Depreciation of property
and equipment 3,633 2,920 7,104 5,684
Amortization of intangible assets 1,706 188 3,234 426
Future income tax 1,274 1,965 (600) 1,764
Loss (gain) on dispositions of
investments and property
and equipment (793) 439 (470) 338
Stock-based compensation expense 377 334 925 683
Provision for self-insured
liability (994) 1,429 1,253 3,449
Other non-cash items 1,732 78 555 255
Share of income from associated
companies (126) (40) (164) (108)
Dividends from equity investments - - 150 250
------------------------------------------------------------------------

23,529 20,379 40,124 32,542
------------------------------------------------------------------------

Change in non-cash working capital
accounts:
Accounts receivable 9,488 (9,655) (11,500) (1,553)
Costs and estimated earnings in
excess of billings (10,262) 2,150 8,513 (924)
Prepaid expenses (733) 35 134 748
Accounts payable and accrued
liabilities 14,714 8,307 (21,673) (8,022)
Billings in excess of costs and
estimated earnings 968 (2,248) 2,787 (1,705)
Income taxes payable/recoverable 4,424 1,100 (219) (8,553)
------------------------------------------------------------------------

18,599 (311) (21,958) (20,009)
------------------------------------------------------------------------

Cash flows from operating activities 42,128 20,068 18,166 12,533
------------------------------------------------------------------------
------------------------------------------------------------------------


11. Comparative Figures

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

MANAGEMENT'S DISCUSSION AND ANALYSIS

This Management's Discussion and Analysis of Stantec Inc.'s operations and cash flows for the quarter ended June 30, 2006, should be read in conjunction with our Company's unaudited interim consolidated financial statements and related notes for the quarter ended June 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 Second 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 and 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 and currency values; our ability to execute our strategic plans and to complete and 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 and worldwide economic and political conditions; regulatory and statutory developments; the effects of competition in the geographic and 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. 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

We provide professional consulting services in 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 Q2 06 from the description included in our 2005 Annual Report.

RESULTS

Overall Performance

Highlights for Q2 06

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



------------------------------------------------------------------------
Quarter ended June 30 Two quarters ended June 30
------------------------------------------------------------------------
(In
millions of
Canadian
dollars,
except per
share Change Change Change Change
amounts) 2006 2005 $ % 2006 2005 $ %
------------------------------------------------------------------------
Gross
revenue 208.8 150.2 58.6 39.1% 394.1 291.3 102.8 35.3%
------------------------------------------------------------------------
Net revenue 182.2 127.7 54.5 42.7% 345.3 246.8 98.5 39.9%
------------------------------------------------------------------------
Net income 16.7 13.1 3.6 28.0% 28.1 19.8 8.3 42.1%
------------------------------------------------------------------------
Earnings
per share
- basic
(note) 0.37 0.34 0.03 8.8% 0.63 0.52 0.11 21.2%
------------------------------------------------------------------------
Earnings
per share
- diluted
(note) 0.36 0.34 0.02 5.9% 0.61 0.51 0.10 19.6%
------------------------------------------------------------------------
Cash flows
from
operating
activities 42.1 20.1 22.0 n/a 18.2 12.5 5.7 n/a
------------------------------------------------------------------------
Cash flows
used in
investing
activities (1.7) (5.1) 3.4 n/a (8.2)(11.3) 3.1 n/a
------------------------------------------------------------------------
Cash flows
used in
financing
activities (35.5) (2.1) (33.4) n/a (27.4) (7.7) (19.7) n/a
------------------------------------------------------------------------
note: Earnings per share have been restated to reflect the two-for-one
stock split that occurred during the quarter.


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:



------------------------------------------------------------------------
Performance
Measure 2006 Expected Range to Q2 06
------------------------------------------------------------------------
Debt to equity ratio (note 1) At or below 0.5 to 1 0.14 (b)
------------------------------------------------------------------------
Return on equity (note 2) At or above 14% 14.6%(b)
------------------------------------------------------------------------
Net income as % of net revenue At or above 5% 8.1%(b)
------------------------------------------------------------------------
Gross margin as % of net revenue Between 54 and 56% 56.3%(a)
------------------------------------------------------------------------
Administrative and marketing
expenses as % of net revenue Between 40 and 42% 40.8%(b)
------------------------------------------------------------------------
Effective income tax rate Between 32 and 34% 34.8%(c)
------------------------------------------------------------------------
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 average shareholders' equity over each of the last
four quarters.
(a) Exceeding target
(b) Meeting target
(c) Not yet meeting target


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

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

- Diluted earnings per share increased 5.9% to $0.36 in Q2 06 from $0.34 in Q2 05. This increase would have been 33.3% had it not been for a $4.0 million positive adjustment in last year's second quarter related to management's revised estimate of provision for doubtful accounts receivable. This revised estimate was based on improved information on historical loss experience that became available to us through the use of our enterprise management system. Throughout this Management's Discussion and Analysis, quarterly and year-to-date comparisons of administrative and marketing expenses and net income between 2005 and 2006 are affected by this adjustment. The adjustment had a $0.07 positive effect on our 2005 second quarter and 2005 year-to-date earnings per share.

- On April 14, 2006, we acquired the shares and business of Dufresne-Henry, Inc., adding over 270 employees and 12 office locations to our Company. The acquisition of this multidiscipline design firm complements our New York operations, expands our services into four new states in New England, and establishes an initial presence in Florida. Dufresne-Henry, Inc.'s staff offer a full range of professional services in engineering, planning, environmental sciences, and landscape architecture.

- On May 4, 2006, our shareholders approved the subdivision of our issued common shares on a two-for-one basis, effective for registered common shares at the close of business on May 19, 2006.

- On May 4, 2006, our shareholders approved an amendment to our employee stock option plan, effectively increasing the maximum number of common shares reserved for issuance to 4,514,126 on a postsplit basis, of which 3,104,334 were available for issue at June 30, 2006.

- On May 12, 2006, we acquired the shares and business of the communications systems engineering firm ACEx Technologies, Inc., adding over 25 staff and new locations in Oakland, California, and Irving, Texas. This acquisition complements our services in transit, rail and power communications, and control systems engineering.

- During the second quarter, we renewed our Normal Course Issuer Bid with the Toronto Stock Exchange (TSX), which allows us to repurchase up to 2,258,754 of our common shares during the period June 1, 2006, to May 31, 2007, representing 5% of our shares outstanding at the time of our renewal. We are of the opinion that, at times, the market price of our common shares does not fully reflect the value of our business or future business prospects and that, at such times, the purchase of our shares represents an attractive, appropriate, and desirable use of available funds.

- During the second quarter, Stantec was added to the S&P/TSX Composite Index.

- Subsequent to the quarter-end, we extended our $160 million revolving credit facility agreement by one year until August 31, 2009.

Our financial condition continues to remain strong as shareholders' equity increased by $18.9 million year to date mainly due to year-to-date net income of $28.1 million, offset by a $10.9 million change in our cumulative translation account. The cumulative translation account represents an unrealized exchange loss on our investment in our US subsidiaries when translated to Canadian dollars each reporting period. This account increased from 2005 due to the strengthening Canadian dollar. Our total liabilities decreased by $39.5 million from December 31, 2005, due primarily to the reduction of our revolving credit facility by $25.7 year to date as a result of positive cash flows from operations in Q2 06. As well, total liabilities decreased due to the timing of annual employee bonus payments made in Q1 06. Our total assets decreased by $20.6 million mainly due to a decline of $17.5 million in cash and cash equivalents used to reduce the liabilities noted above. In addition, total assets decreased due to a decline of $17.2 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. The decline in total assets was offset by a net increase of $11.9 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 Two quarters ended
June 30 June 30
------------------------------------------
% of % % of %
Net Increase Net Increase
Revenue (1) Revenue (1)
------------------------------------------
2006 2006
vs. vs.
2006 2005 2005 2006 2005 2005
------------------------------------------------------------------------
Gross revenue 114.7% 117.6% 39.1% 114.1% 118.0% 35.3%
------------------------------------------------------------------------
Net revenue 100.0% 100.0% 42.7% 100.0% 100.0% 39.9%
------------------------------------------------------------------------
Direct payroll costs 43.3% 43.0% 43.4% 43.7% 44.3% 38.1%
------------------------------------------------------------------------
Gross margin 56.7% 57.0% 42.1% 56.3% 55.7% 41.4%
------------------------------------------------------------------------
Administrative and marketing
expenses 39.7% 38.7% 46.5% 40.8% 40.8% 39.8%
------------------------------------------------------------------------
Depreciation of property and
equipment 2.0% 2.3% 24.4% 2.1% 2.3% 25.0%
------------------------------------------------------------------------
Amortization of intangible
assets 0.9% 0.2% 807.4% 0.8% 0.2% 659.2%
------------------------------------------------------------------------
Net interest expense 0.4% 0.1% 263.9% 0.4% 0.1% 318.8%
------------------------------------------------------------------------
Share of (income) loss from
associated companies 0.0% 0.0% n/m 0.0% 0.0% n/m
------------------------------------------------------------------------
Foreign exchange (gains)
losses 0.0% 0.0% n/m 0.0% 0.0% n/m
------------------------------------------------------------------------
Other income 0.6% 0.0% n/m 0.3% 0.0% n/m
------------------------------------------------------------------------
Income before income taxes 14.3% 15.7% 29.9% 12.5% 12.3% 41.7%
------------------------------------------------------------------------
Income taxes 5.1% 5.5% 33.6% 4.4% 4.3% 40.9%
------------------------------------------------------------------------
Net income for the period 9.2% 10.2% 28.0% 8.1% 8.0% 42.1%
------------------------------------------------------------------------
(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 second quarter of 2006 and for the first two quarters of 2006 and should be read in conjunction with our unaudited consolidated financial statements for the quarter ended June 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 directly 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 second quarter of 2006 and for the first two quarters of 2006 compared to the same periods in 2005.



------------------------------------------------------------------------
Gross Revenue Quarter Two quarters
ended ended
June 30 June 30
------------------------------------------------------------------------
(In millions of Canadian dollars) 2006 vs. 2005 2006 vs. 2005
------------------------------------------------------------------------
Increase (decrease) due to:
------------------------------------------------------------------------
Acquisition growth 55.3 102.1
------------------------------------------------------------------------
Net internal growth 8.5 9.0
------------------------------------------------------------------------
Impact of foreign exchange rates on
revenue earned by foreign subsidiaries (5.2) (8.3)
------------------------------------------------------------------------
------------------------------------------------------------------------
Total increase in gross revenue 58.6 102.8
------------------------------------------------------------------------
------------------------------------------------------------------------


------------------------------------------------------------------------
Net Revenue Quarter Two quarters
ended ended
June 30 June 30
------------------------------------------------------------------------
(In millions of Canadian dollars) 2006 vs. 2005 2006 vs. 2005
------------------------------------------------------------------------
Increase (decrease) due to:
------------------------------------------------------------------------
Acquisition growth 49.8 92.4
------------------------------------------------------------------------
Net internal growth 9.2 13.2
------------------------------------------------------------------------
Impact of foreign exchange rates on
revenue earned by foreign subsidiaries (4.5) (7.1)
------------------------------------------------------------------------
------------------------------------------------------------------------
Total increase in net revenue 54.5 98.5
------------------------------------------------------------------------
------------------------------------------------------------------------


The net increase in gross revenue was $58.6 million for Q2 06 over Q2 05 due to growth of $55.3 million from acquisitions and of $8.5 million from internal growth, offset by an impact of foreign exchange rates on revenue earned by foreign subsidiaries of $5.2 million. The large increase in gross and net revenue from acquisitions in the quarter-over-quarter comparison was due to the revenue earned in Q2 06 attributed to the CPV Group Architects & Engineers Ltd. (CPV), the Keen Engineering Co. Ltd. (Keen), and The Keith Companies, Inc. (Keith) acquisitions, which occurred in the second half 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 second quarter of 2006 and for the first two quarters of 2006 compared to the same periods in 2005:



-----------------------------------------------------------------------
(In millions of Canadian dollars) Quarter ended Two quarters ended
June 30 June 30
-----------------------------------------------------------------------
Practice Area Gross Revenue 2006 2005 Change 2006 2005 Change
-----------------------------------------------------------------------
Buildings 45.7 36.9 8.8 91.0 72.1 18.9
-----------------------------------------------------------------------
Environment 36.9 24.9 12.0 68.3 49.6 18.7
-----------------------------------------------------------------------
Industrial & Project Management 22.9 17.7 5.2 42.5 33.5 9.0
-----------------------------------------------------------------------
Transportation 28.4 22.9 5.5 52.0 44.8 7.2
-----------------------------------------------------------------------
Urban Land 74.9 47.8 27.1 140.3 91.3 49.0
-----------------------------------------------------------------------
-----------------------------------------------------------------------
Total 208.8 150.2 58.6 394.1 291.3 102.8
-----------------------------------------------------------------------


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 June 30 Two quarters ended June 30
------------------------------------------------------------------------
Practice Area Change Change
Gross Revenue Due Due
to Net to Net
Internal Internal
Growth Growth
Change and Change and
Total Due to Foreign Total Due to Foreign
Change Acquisitions Exchange Change Acquisitions Exchange
------------------------------------------------------------------------
Buildings 8.8 12.1 (3.3) 18.9 24.4 (5.5)
------------------------------------------------------------------------
Environment 12.0 10.1 1.9 18.7 16.9 1.8
------------------------------------------------------------------------
Industrial &
Project
Management 5.2 2.9 2.3 9.0 5.6 3.4
------------------------------------------------------------------------
Transportation 5.5 3.0 2.5 7.2 3.0 4.2
------------------------------------------------------------------------
Urban Land 27.1 27.2 (0.1) 49.0 52.2 (3.2)
------------------------------------------------------------------------
------------------------------------------------------------------------
Total 58.6 55.3 3.3 102.8 102.1 0.7
------------------------------------------------------------------------
------------------------------------------------------------------------


The following lists the acquisitions completed in 2005 and in the first two 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 Q2 06 compared to US$0.80 in Q2 05, representing an appreciation of 11.3%. Year to date, the value of the Canadian dollar averaged US$0.88 compared to US$0.81 in 2005. This strengthening of the Canadian dollar had a negative effect on the 2006 revenue reported in the quarter and year-to-date compared to the same periods in 2005.

Gross revenue for the Buildings practice area grew by 23.8% in Q2 06 compared to Q2 05 and by 26.2% year to date in 2006 compared to 2005. Of the $18.9 million increase year to date, $16.2 million was due to revenue earned from the Keen acquisition, and $5.1 million was due to revenue earned from the CPV acquisition. In Q2 06 our Architecture group continued to secure larger projects and to experience higher project volumes. In particular, the Buildings practice area is very active in western Canada, resulting in a strong backlog. To assist in meeting this increased demand, the Buildings practice area is making use of work-sharing initiatives across the Company.

Gross revenue for the Environment practice area increased by 48.2% in Q2 06 compared to Q2 05 and by 37.7% 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 gross revenue and gross margin in Q2 06 (57.7% in Q2 06 versus 56.2% in Q2 05). Year to date, $13.8 million of gross revenue was generated from the Keith acquisition, and $3.1 million was generated from the Dufresne-Henry, Inc. acquisition. The Environment practice area remains strong, particularly Environmental Infrastructure, because of larger projects and higher labor utilization rates.

Gross revenue for the Industrial & Project Management practice area grew by 29.4% in Q2 06 compared to Q2 05 and by 26.9% year to date in 2006 compared to the same period in 2005. Of the $9.0 million increase year to date, $5.4 million was due to revenue earned 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 is positioning itself to capture the support facilities and infrastructure segment related to the energy and resources sector; however, competition for labor in regions such as western Canada may impact this growth potential.

Gross revenue for the Transportation practice area increased by 24.0% in Q2 06 compared to Q2 05 and by 16.1% year to date in 2006 compared to 2005. 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. For example, in Q2 06 we renewed a five-year, $11 million contract with the U.S. Department of Transportation to conduct long-term pavement performance studies. In addition, the outlook for our Transportation practice area in Canada remains optimistic.

Gross revenue for the Urban Land practice area grew by 56.7% in Q2 06 compared to Q2 05 and by 53.7% year to date in 2006 compared to 2005. Of the $49.0 million increase year to date, $51.5 million was due to revenue earned from the Keith acquisition. This acquisition has increased our Company's profile in the western United States. Currently, some of the markets in which Urban Land operates are experiencing a moderate slowdown in activity. However, since we are generally a top-three service provider in this practice area in these regions, we expect our performance to remain strong during the remainder of the year.

Gross Margin

For a definition of gross margin, refer to the Definition of Non-GAAP Measures included in our 2005 Annual Report. Gross margin as a percentage of net revenue was 56.7% in Q2 06 compared to 57.0% in Q2 05. The year-to-date gross margin was 56.3% for 2006 compared to 55.7% for 2005. Overall, our year-to-date gross margin exceeds the anticipated range of 54 to 56% set out in our 2005 Annual Report. The information available from our enterprise management system has contributed to improved project management and enhanced gross margin year to date.

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



------------------------------------------------------------------------
Quarter Two quarters
ended ended
June 30 June 30
------------------------------------------------------------------------
Practice Area Gross Margin 2006 2005 2006 2005
------------------------------------------------------------------------
Buildings 54.9% 56.8% 55.0% 54.8%
------------------------------------------------------------------------
Environment 57.7% 56.2% 57.8% 56.2%
------------------------------------------------------------------------
Industrial & Project Management 50.4% 52.0% 50.6% 49.8%
------------------------------------------------------------------------
Transportation 56.3% 57.8% 56.2% 55.9%
------------------------------------------------------------------------
Urban Land 59.2% 58.8% 57.9% 57.9%
------------------------------------------------------------------------


Gross margin percentages decreased in all practice areas except Environment and Urban Land in Q2 06 compared to Q2 05 but, on a year-to-date basis, exceeded 2005 levels in all practice areas. 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 39.7% for Q2 06 compared to 38.7% for Q2 05. Year-to-date administrative and marketing expenses as a percentage of net revenue were 40.8% for both 2006 and 2005 and were within our expected range of 40 to 42% for fiscal 2006. Administrative expenses were reduced in 2005 by a $4.0 million adjustment resulting from management's revised estimate of provision for doubtful accounts receivable. This revised estimate was based on improved information on historical loss experience that became available to us through the use of our enterprise management system. Excluding the effect of this adjustment, administrative and marketing expenses as a percentage of net revenue would have been 41.9% for Q2 05 and 42.4% for the first six months of 2005. This compares to 39.7% for Q2 06 and 40.8% for the first six months of 2006. The decrease is due, in part, to the outcome of a midyear actuarial review, which resulted in lower professional liability claims costs in Q2 06 compared to the 2005 level.

Depreciation of Property and Equipment

Depreciation of property and equipment as a percentage of net revenue decreased to 2.0% in Q2 06 from 2.3% in Q2 05 and to 2.1% 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 second quarter of 2006 and 2005 and on a year-to-date basis for 2006 and 2005:



------------------------------------------------------------------------
Quarter Two quarters
ended ended
(in thousands of Canadian dollars) June 30 June30
------------------------------------------------------------------------
2006 2005 2006 2005
------------------------------------------------------------------------
Amortization of client relationships 614 144 1,200 286
------------------------------------------------------------------------
Amortization of backlog 1,029 0 1,918 50
------------------------------------------------------------------------
Other 63 44 116 90
------------------------------------------------------------------------
------------------------------------------------------------------------
Total amortization of intangible assets 1,706 188 3,234 426
------------------------------------------------------------------------


An increase of $1.5 million in Q2 06 and of $2.8 million year to date compared to the same periods last year was mainly due to the intangible assets acquired in the last half of 2005 from the CPV, Keith, and Keen acquisitions. Of the $3.2 million amortized year to date, $2.0 million related to backlog and client relationships acquired in the Keith acquisition in September 2005. We identified $4.0 million of contract backlog as an intangible asset upon the acquisition of Keith. Of this amount, $1.8 million remains to be amortized over the next eight months.

Net Interest Expense

The increase of $475,000 in net interest expense in Q2 06 compared to Q2 05 and of $1,052,000 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. As at June 30, 2006, $53.4 million was outstanding on our credit facility versus $21.4 million outstanding as at June 30, 2005. In addition, depending on the form under which the credit facility is accessed and certain financial covenant calculations, rates of interest may vary between 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 June 30, 2006, compared to 4.34% at December 31, 2005. We estimate that, based on our balance at June 30, 2006, a 1% change in interest rate would impact our annual earnings per share by approximately $0.01.

Foreign Exchange Gains (Losses)

During Q2 06, we recorded a foreign exchange gain of $71,000 compared to a $7,000 gain in Q2 05. On a year-to-date basis, we recorded a foreign exchange gain of $119,000 compared to a $54,000 loss in 2005. The foreign exchange gains and losses reported arose on the translation of the foreign-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 two quarters of 2006. The exchange rate in effect at the end of Q2 06 was US$0.90 compared to US$0.86 at the end of 2005.

Income Taxes

Our effective income tax rate for the first two quarters of 2006 was 34.8% compared to 35.0% for the year ended December 31, 2005. During Q2 06, 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 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 for each of the next two quarters 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)
------------------------------------------------------------------------
Sep 30, 2005 Dec 31, 2005 Mar 31, 2006 Jun 30, 2006
------------------------------------------------------------------------
Gross revenue 146.1 180.6 185.3 208.8
------------------------------------------------------------------------
Net revenue 125.9 151.9 163.1 182.2
------------------------------------------------------------------------
Net income 12.8 8.0 11.4 16.7
------------------------------------------------------------------------
EPS - basic 0.33 0.18 0.25 0.37
------------------------------------------------------------------------
EPS - diluted 0.32 0.17 0.25 0.36
------------------------------------------------------------------------
------------------------------------------------------------------------


------------------------------------------------------------------------
Sep 30, 2004 Dec 31, 2004 Mar 31, 2005 Jun 30, 2005
------------------------------------------------------------------------
Gross revenue 139.8 127.0 141.1 150.2
------------------------------------------------------------------------
Net revenue 119.8 107.1 119.1 127.7
------------------------------------------------------------------------
Net income 8.5 9.6 6.7 13.1
------------------------------------------------------------------------
EPS - basic 0.23 0.26 0.18 0.34
------------------------------------------------------------------------
EPS - diluted 0.22 0.25 0.17 0.34
------------------------------------------------------------------------
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 Q2 06 vs. Q1 06 vs. Q4 05 vs. Q3 05 vs.
dollars) Q2 05 Q1 05 Q4 04 Q3 04
------------------------------------------------------------------------
Increase (decrease) in gross
revenue due to:
------------------------------------------------------------------------
Acquisition growth 55.3 46.8 40.8 9.9
------------------------------------------------------------------------
Net internal growth 8.5 0.5 14.4 0.8
------------------------------------------------------------------------
Impact of foreign exchange
rates on revenue
earned by foreign
subsidiaries (5.2) (3.1) (1.6) (4.4)
------------------------------------------------------------------------
------------------------------------------------------------------------
Total increase in gross
revenue 58.6 44.2 53.6 6.3
------------------------------------------------------------------------
------------------------------------------------------------------------


During Q3 05, our gross revenue grew $6.3 million compared to Q3 04 partly due to growth of $9.9 million from acquisitions, offset by an impact of foreign exchange rates on revenue earned by foreign subsidiaries. The growth in gross margin from 52.1% in Q3 04 to 56.7% in Q3 05 was partially due to the implementation of a fixed rate disbursement process as a means of simplifying the recovery of administrative disbursements related to billable projects. In addition, the information available from our new enterprise management system contributed to improved project management, which in turn enhanced our gross margins. The combined impact of the above factors contributed to the $0.10 increase in earnings per share for Q3 05 compared to Q3 04.

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 during Q4 05 decreased by $1.6 million 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 and included the 6,657,552 shares issued as part of the Keith acquisition compared to the 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.

LIQUIDITY AND CAPITAL RESOURCES

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



------------------------------------------------------------------------
(In millions of Canadian dollars,
except ratios) Jun 30, 2006 Dec 31, 2005 % Change
------------------------------------------------------------------------
Current assets 253.8 280.4 (9.5%)
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Current liabilities (137.5) (157.8) (12.9%)
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Working capital 116.3 122.6 (5.1%)
------------------------------------------------------------------------
Current ratio 1.85 1.78 n/a
------------------------------------------------------------------------
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 second quarter and year-to-date for 2006 and 2005, as reflected in the Consolidated Statements of Cash Flows, are summarized in the following table:



------------------------------------------------------------------------
(In millions of Canadian Quarter ended Two quarters ended
dollars) June 30 June 30
------------------------------------------------------------------------
2006 2005 $ Change 2006 2005 $ Change
------------------------------------------------------------------------
Cash flows from
operating
activities 42.1 20.1 22.0 18.2 12.5 5.7
------------------------------------------------------------------------
Cash flows used in
investing
activities (1.7) (5.1) 3.4 (8.2) (11.3) 3.1
------------------------------------------------------------------------
Cash flows used in
financing
activities (35.5) (2.1) (33.4) (27.4) (7.7) (19.7)
------------------------------------------------------------------------


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 operational expenses, 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 Q2 06 was $116.3 million compared to $122.6 million at December 31, 2005. During this period, current assets decreased by $26.6 million, and current liabilities decreased by $20.3 million. The decrease in current assets from December 31, 2005, was due to a decline of $17.5 million in our cash and cash equivalents. As well, current assets decreased due to a decline of $17.2 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, partially due to the payment of annual employee bonuses. A $9.8 million addition of non-cash working capital from the acquisition of Carinci Burt Rogers Engineering Inc., Dufresne-Henry, Inc., and ACEx Technologies, Inc. offset the decrease in working capital during the first two quarters of 2006.

Cash Flows From Operating Activities

Our cash flows from operating activities increased by $22.0 million in Q2 06 compared to the same period in 2005 and by $5.7 million year to date compared to the first two quarters of 2005. These increases were mainly due to an increase of cash receipts from clients less cash paid to suppliers and employees of $22.8 million quarter over quarter and of $5.1 million year to date 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 half of 2006.

Cash Flows Used in Investing Activities

Our cash flows used in investing activities decreased by $3.4 million in Q2 06 compared to the same period in 2005 and by $3.1 million year to date compared to the first two 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 $0.7 million for acquisition activity in 2005. The use of cash for acquisitions in 2006 is offset by a drawdown of restricted cash that we assumed 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 $5.2 million in Q2 06 from $4.0 million in Q2 05 and from $10.8 million year to date compared to $8.1 million in 2005. Our Q2 06 expenditures were within the expected range for 2006 to support ongoing operational activity and growth. During Q2 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 $33.4 million in Q2 06 compared to the same period in 2005 and by $19.7 million year to date compared to the first two quarters of 2005. In Q2 06 we repaid $33.9 million of our revolving credit facility versus repaying $2.1 million in Q2 05. The increase in cash flows from operations during the quarter, as discussed above, provided the cash flow to reduce our credit facility balance. During Q2 05, we repaid our long-term debt, since there was a reduction in our investment in accounts receivable and in costs and estimated earnings in excess of billings. As staff became more familiar with and efficient in the use of our enterprise management system, improved project management, invoicing, and collection procedures enabled us to reduce our net investment in these accounts in Q2 05. At June 30, 2006, we had $106.6 million available under our $160 million credit facility for future activities.

Shareholders' Equity

Share options exercised during the first two quarters of 2006 generated cash of $1.4 million compared to $535,000 for the same period in 2005.

OTHER

Outstanding Share Data

As at June 30, 2006, there were 45,120,666 common shares and 1,370,788 share options outstanding. During the period of June 30, 2006, to July 28, 2006, 15,000 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 2,666 share options were exercised. As at July 28, 2006, there were 45,108,332 common shares 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 two quarters ended June 30, 2006, the only material changes to the contractual obligations reported in our 2005 Annual Report were 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 $25.7 million on our revolving credit facility during the first two quarters of 2006.

Off-Balance Sheet Arrangements

As at June 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 April 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. 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 two 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. 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.

CRITICAL ACCOUNTING ESTIMATES, DEVELOPMENTS, AND MEASURES

For the first two quarters ended June 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 two quarters ended June 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