EX-99.1 2 ex99_1.htm CONSOLIDATED FINANCIAL STATEMENTS CONSOLIDATED FINANCIAL STATEMENTS
 


Third Quarter 2006 Financial Highlights

•  
Gross revenue for the third quarter of 2006 increased 43.9% to $210.2 million compared to $146.1 million for the third quarter of 2005. On a year-to-date basis, gross revenue increased 38.2% to $604.3 million.
 
•  
Net revenue for the third quarter of 2006 increased 44.6% to $182.0 million compared to $125.9 million for the third quarter of 2006, with a year-to-date increase of 41.5% to $527.3 million.
 
•  
Net income for the third quarter of 2006 increased 27.9% to $16.5 million compared to $12.8 million for the third quarter of 2005, with a year-to-date increase of 36.5% to $44.6 million.
 
•  
Diluted earnings per share for the third quarter of 2006 were 12.5% higher at $0.36 versus $0.32 for the third quarter of 2005, with a year-to-date increase of 16.9% to $0.97.
 
Report to Shareholders

I am pleased to report continuing strong performance for our Company for the third quarter of 2006. Net income for the quarter was $16.5 million, and diluted earnings per share were $0.36, representing increases of 27.9% and 12.5%, respectively, compared to the third quarter of 2005. On a year-to-date basis, net income was $44.6 million, and diluted earnings per share were $0.97, representing increases of 36.5% and 16.9% compared to last year.

Our operations in all of our regions and practice areas are contributing to our performance, particularly our operations in Canada and the US West. Our US East operations have improved over the past year, and an independent valuation of the goodwill of these operations conducted during the third quarter concluded that there is no impairment of goodwill.

New projects awarded during the third quarter showcase our capabilities in the engineering and architectural design of sustainable facilities. For example, we were selected to serve as the prime mechanical, electrical, and civil engineering consultants for the Legacy project, a large academic acute care hospital and research center to be located in Vancouver, British Columbia. This world-class facility will be designed to provide a healing environment for patients, a pleasant workplace for staff, and a state-of-the-art learning center for health care practitioners and researchers. The design will incorporate innovative and green building features with the goal of achieving Leadership in Energy and Environmental Design (LEED®) Platinum-level certification. In Quesnel, British Columbia, work began on the upgrading of a complex care facility, for which we are providing integrated architecture and engineering services. This two-year project will include the addition of 59 new beds along with the renovation of 22 existing beds and of the existing adult day care, food services, and laundry services departments. We were also awarded an assignment to participate in the development of Kapyong Barracks, a new community in Winnipeg, Manitoba, that is targeted to achieve certification under LEED® for Neighborhood Development, the first national standard for sustainable neighborhood design, and is also to include LEED®-certified buildings. As part of a design team, our Architecture

group will be responsible for the master planning of 160 acres (64.7 hectares) of the site, a vacant brownfield property. We are also providing all the architecture and interior design services for the development of the Presentation Centre for the community. And in Calgary, Alberta, we were selected to provide site development services at two maintenance yard facility sites—the Sheppard Landfill and The Bearspaw Yard—as well as the architectural and engineering design of several buildings on the sites. Targeted to achieve LEED® Silver certification, the project will also include the development of a district heating system that will scavenge methane gas from the Sheppard Landfill for heat production.
 
 
Our Company continues to be involved in the development of infrastructure complementary to the hosting of the Winter Olympics in British Columbia in 2010. Most recently, we were chosen to design the retrofit of the wastewater treatment plant in Whistler, British Columbia, from secondary treatment to advanced treatment that uses biological nutrient removal technology. The upgraded, 14.7 -megalitre-per-day (3.9 -million-US-gallon-per-day) plant will service increased effluent from the 2010 Olympic venues and from the growing Whistler area. The plant will be designed to meet the sustainability objectives of the community.

Also notable is our Company’s increasing participation in the energy development sector in the province of Alberta. For example, we are serving as the prime consultant in the design of facilities and infrastructure for the Fort Hills Oil Sands project. Our responsibilities include plot plan management, site development, water supply, water and effluent treatment, roads and rail line infrastructure, fuel storage, gas supply, power supply, operations and maintenance buildings, workforce housing, power distribution transmission, and communications. We have also secured a contract to provide the detailed engineering design of a major tank terminal facility for an international pipeline company.

Clearly, the third quarter of 2006 was active for our Company, demonstrating our ability to participate in widely varying projects in diverse service sectors. Through this diversity, our Company continues to grow and evolve.
 
 
 

September 30, 2006
Contents

 
 
STANTEC INC.
 
  
 
  
   
September 30
  
December 31
  
   
2006
  
2005
  
(Columnar figures stated in thousands of Canadian dollars) (Unaudited)
   $  
$
  
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
  
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
  
Total assets
  
603,324
    
628,779
  
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
  
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
  
Total liabilities
  
220,020
    
280,726
  
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
  
Total shareholders' equity
  
383,304
    
348,053
  
Total liabilities and shareholders' equity
  
603,324
    
628,779
  
See accompanying notes
            

STANTEC INC.


   
For the quarter ended
 
For the three quarters ended
  
   
September 30
  
September 30
  
   
2006
  
2005
  
2006
  
2005
  
(Columnar figures stated in thousands of Canadian
                          
dollars, except share and per share amounts)
                          
(Unaudited)
    
$
  
 
$
    
$
  
 
$
  
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
  
Net revenue
    
181,986
    
125,870
    
527,279
    
372,660
  
Direct payroll costs
    
78,375
    
54,470
    
229,410
    
163,861
  
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
)
Income before income taxes
    
24,499
    
19,745
    
67,657
    
50,207
  
Income taxes
                          
Current
    
9,583
    
5,747
    
25,204
    
14,644
  
Future
    
(1,498
)
  
1,165
    
(2,098
)
  
2,929
  
Total income taxes
    
8,085
    
6,912
    
23,106
    
17,573
  
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
)
Retained earnings, end of the period
    
202,119
    
150,347
    
202,119
    
150,347
  
Weighted average number of shares
                          
outstanding - basic (note 6)
    
45,115,818
    
39,003,510
    
45,048,970
    
38,231,130
  
Weighted average number of shares
                          
outstanding - diluted (note 6)
    
46,011,515
    
40,092,232
    
45,960,117
    
39,235,210
  
Shares outstanding, end of the period
                          
(note 6)
    
45,076,781
    
44,608,860
    
45,076,781
    
44,608,860
  
Earnings per share (note 6)
                          
Basic
    
0.36
    
0.33
    
0.99
    
0.85
  
Diluted
    
0.36
    
0.32
    
0.97
    
0.83
  
See accompanying notes
                          

 
 
   
For the quarter ended
 
For the three quarters ended
  
   
September 30
 
September 30
  
   
2006
  
2005
  
2006
  
2005
  
 
                  
(Columnar figures stated in thousands of Canadian dollars)(Unaudited)
    $  
$
    $  
$
  
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
  
Cash flows from operating activities (note 10)
    
20,322
    
20,988
    
38,488
    
33,521
  
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
  
Cash flows used in investing activities
    
(3,528
)
  
(91,383
)
  
(11,756
)
  
(102,663
)
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
  
Cash flows from (used in) financing activities
    
(24,406
)
  
73,832
    
(51,772
)
  
66,171
  
Foreign exchange loss on cash held in foreign
                          
currency
    
(369
)
  
(494
)
  
(396
)
  
(292
)
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
  
Cash and cash equivalents, end of the period
    
2,707
    
34,627
    
2,707
    
34,627
  
See accompanying notes
                          
 
STANTEC INC.


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.
 
STANTEC INC.

Notes to the Unaudited Interim Consolidated Financial Statements

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)
    $  
$
  
Cash consideration
    
13,221
    
109,262
  
Share consideration (note 6)
    
-
    
125,540
  
Promissory notes
    
4,224
    
1,830
  
Purchase price
    
17,445
    
236,632
  
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
  
Net assets acquired
    
17,445
    
236,632
  
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.
 
STANTEC INC.

Notes to the Unaudited Interim Consolidated Financial Statements

3
.
Other Assets
    
 
   
September 30
  
December 31
  
   
2006
  
2005
  
(In thousands of Canadian dollars)
    $  
$
  
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
  
     
24,868
    
19,666
  
Less current portion of investments held for self-insured liabilities
    
9,645
    
6,569
  
     
15,223
    
13,097
  
 
4
.
Long-Term Debt
    
 
   
September 30
  
December 31
  
   
2006
  
2005
  
(In thousands of Canadian dollars)
    $  
$
  
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
  
     
36,916
    
86,699
  
Less current portion
    
2,242
    
4,813
  
     
34,674
    
81,886
  
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).
 
STANTEC INC.

Notes to the Unaudited Interim Consolidated Financial Statements

5
.
Other Liabilities
        
 
   
September 30
  
December 31
  
   
2006
  
2005
  
(In thousands of Canadian dollars)
    $  
$
  
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
  
     
33,140
    
29,239
  
Less current portion included in accounts payable and accrued liabilities
    
4,090
    
4,475
  
     
29,050
    
24,764
  
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
)
Provision, end of the period
    
12,895
    
11,346
  
Liabilities on lease exit activities
              
 
    
September 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
    
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
)
Liability, end of the period
    
3,058
    
2,251
  
A reduction of $351,000 in liabilities on lease exit activities impacted administrative and marketing expenses in Q3 06.
 
STANTEC INC.

Notes to the Unaudited Interim Consolidated Financial Statements

6
.
Share Capital
                        
 
                             
 Contributed 
  
       
 Capital Stock 
          
 Surplus 
  
       
2006
      
2005
    
2006
      
2005
  
     
Shares
          
Shares
                    
(In thousands of 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
  
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
)
            
Balance, as at September 30
    
45,076,781
    
212,351
    
44,608,860
    
210,493
    
5,086
    
5,356
  
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.
 
STANTEC INC.

Notes to the Unaudited Interim Consolidated Financial Statements

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
  
   
#
  
$
  
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
  
Share options, end of the period
    
1,832,788
    
11.34
  
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:

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
  
 
STANTEC INC.

Notes to the Unaudited Interim Consolidated Financial Statements

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) 
  
 $
    $  
Canada
          
106,562
    
104,463
  
United States
          
223,209
    
223,593
  
International
          
448
    
441
  
           
330,219
    
328,497
  
 
 
Geographic information  
 Gross Revenue 
  
   
For the quarter ended
  
For the three quarters ended
  
   
 September 30
  
September 30
  
   
2006
  
2005
  
2006
  
2005
  
(In thousands of Canadian dollars)
   $  
$
    $  
$
  
                           
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
  
     
210,147
    
146,066
    
604,258
    
437,374
  
Gross revenue is attributed to countries based on the location of the work performed.
 
      
Practice area information
    
 Gross Revenue
  
 
For the quarter ended 
For the three quarters ended
 
September 30 
September 30
     
2006
    
2005
    
2006
    
2005
  
(In thousands of Canadian dollars)
      $  
 
$
      $  
 
$
  
                           
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
  
     
210,147
    
146,066
    
604,258
    
437,374
  
 
STANTEC INC.

Notes to the Unaudited Interim Consolidated Financial Statements

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 quarter ended
 
For the three quarters ended
  
   
September 30
 
September 30
  
   
2006
  
2005
  
2006
  
2005
  
(in thousands of Canadian dollars)
  
$
  
$
  
$
  
$
  
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
  
 
STANTEC INC.

Notes to the Unaudited Interim Consolidated Financial Statements

11. Comparative Figures

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

12.