EX-99.1 2 ex99_1.htm STANTEC INC. FIRST QUARTER REPORT TO SHAREHOLDERS Stantec announces first quarter results
 

One Team. Infinite Solutions.
 
 

Stantec Inc.
2007 FIRST QUARTER REPORT
THREE MONTHS ENDED MARCH 31, 2007, AND 2006
 
Table of Contents
 
 

Management’s Discussion and Analysis
 

 
Stantec, founded in 1954, provides professional design and consulting services in planning, engineering, architecture, surveying, economics, and project management. Continually striving to balance economic, environmental, and social responsibilities, we are recognized as a world-class leader and innovator in the delivery of sustainable solutions. We support public and private sector clients in a diverse range of markets in the infrastructure and facilities sector at every stage, from initial concept and financial feasibility to project completion and beyond.

In simple terms, the world of Stantec is the water we drink, the roadways we travel, the buildings we visit, the industries in which we work, and the neighborhoods we call home.

Our services are offered through over 6,500 employees operating out of more than 100 locations in North America. Stantec trades on the TSX under the symbol STN and on the NYSE under the symbol SXC.
 
Stantec is One Team providing Infinite Solutions

First Quarter 2007 Financial Highlights

•               
Gross revenue for the first quarter of 2007 increased 16.7% to $216.3 million, compared to $185.3 million for the first quarter of 2006. Net revenue increased 17.9% to $192.3 million, compared to $163.1 million for the first quarter of 2006.
•               
Net income for the first quarter of 2007 increased 35.1% to $15.4 million, compared to $11.4 million for the first quarter of 2006.
•               
Diluted earnings per share for the first quarter of 2007 were 32.0% higher at $0.33, versus $0.25 for the first quarter of 2006.

I am very pleased to report continuing strong performance for our Company for the first quarter of 2007. Net income for the quarter was $15.4 million, and diluted earnings per share were $0.33, representing increases of 35.1% and 32.0%, respectively, compared to the first quarter of 2006.

Contributing to the increase in net income were three factors—decreased amortization of intangible assets, lower net interest expense, and a higher gross margin percentage compared to the same period in 2006—which together positively impacted our bottom line. Our gross margin percentage was higher than anticipated because of the mix and type of projects we completed during the quarter. Over the remainder of the year, we expect both our amortization of intangible assets and our net interest expense to increase as a result of the acquisition of Vollmer Associates LLP early in the second quarter, and we expect our gross margin percentage to be between 55 and 57%.

During the first quarter, we secured a diverse range of new projects, which demonstrates the strength of our business model as well as the continuing evolution of our practice areas. In particular, new project activity in the public sector was strong for our Transportation and Environment groups. For example, we obtained an assignment with the New York State Department of Transportation to design the reconstruction of 10 miles (16 kilometres) of Interstate 87 north of Albany, New York. The four-year project will involve pavement analysis and advanced traffic modeling of this busy six-lane urban interstate, as well as capacity studies of six service interchanges and a system junction with Interstate 90. In Houston, Texas, we were awarded a sole-source contract to complete system operating plans for extensions to the light rail transit system. We were also granted a three-year on-call assignment with the North Carolina Department of Transportation Rail Division to provide general railroad engineering services, highway/railroad crossing evaluations, and railroad planning studies throughout North Carolina and a two-year on-call contract with the Ontario Ministry of Transportation to provide engineering services for bridge projects in Ontario’s central region.

In the environment service sector, we were chosen to conduct a study that will assist the City of Toronto and neighboring municipalities in protecting drinking water drawn from Lake Ontario. Encompassing the 20 water treatment plants that service the Greater Toronto Area, the study will include an issues evaluation, threats inventory, and water quality risk assessment. During the first quarter, we also obtained a two-year contract to provide a variety of environmental assessment services throughout the province of Saskatchewan for SaskPower. Our work will include environmental impact assessments and screenings, field investigations, and the development of environmental codes of practice, among other responsibilities. And we procured an assignment to design an expansion of the Tussahaw Water Treatment Plant in Henry County, Georgia, doubling its treatment capacity from 13 million US gallons (49.2 megalitres) to 26 million US gallons (98.4 megalitres) per day.

Over the past few months, we have also secured significant new assignments with clients in the buildings service sector. For example, we have been selected, in association with another firm, to serve as the architects for the new Peace Country Regional Health Centre to be located in Grande Prairie, Alberta. We planning and schematic design of a 16.2 -hectare (40-acre) greenfield site for a new 300-bed acute care hospital as well as the master planning of the conversion of the existing Queen Elizabeth Hospital into a community ambulatory care center. In addition, we are also providing integrated architecture and mechanical engineering services in designing the new University Centre at the University of British Columbia Okanagan campus in Kelowna, British Columbia. Targeted to achieve Gold certification from the Leadership in Energy and Environmental Design (LEED) Green Building Rating SystemTM, the building will feature the use of geothermal energy, natural ventilation, heat recycling, and other green technologies.
 
i
Other notable projects include an assignment to provide civil engineering, planning, and mapping services for the development of McAllister Ranch, a new 2,000-acre (809.4 hectare) residential community in Bakersfield, California. When fully built, the community will include more than 6,000 residential lots, 340 acres (138 hectares) of commercial development, 14 miles (22.5 kilometres) of arterial roadways, an 18-hole golf course, lakes, parks, and schools. We have also been chosen as one of six firms to complete various projects across Canada over the next five years for the Department of National Defence. These projects will require integrated services, coordinated by our Manufacturing/Industrial team, from many of our practice areas.

Immediately following the end of the first quarter, we completed the acquisition of Vollmer Associates LLP, a 600-person firm headquartered in New York City that focuses on providing engineering, architecture, planning, landscape architecture, and survey services for the transportation sector. Along with adding 20 offices to our operations in the northeastern United States, the integration of the Vollmer staff will significantly enhance our transportation practice in North America.

In closing, the first quarter of 2007 once again showcased—both through our results and through our project activity—the continuing strength of our business model. With such strength, we are confident that we can continue to execute our focused growth plan.


Tony Franceschini, P.Eng.
President & CEO
May 3, 2007 
 
ii
 
(Unaudited)
 
 
 
 
March 31
 
December 31
  
   
2007
  
2006
  
(In thousands of Canadian dollars)
   $  
$
  
               
ASSETS (note 4)
              
Current
              
Cash and cash equivalents
    
42,778
    
28,363
  
Restricted cash
    
749
    
1,545
  
Accounts receivable, net of allowance for doubtful accounts of
              
$8,659 in 2007 ($7,379 - 2006)
    
164,046
    
168,474
  
Costs and estimated earnings in excess of billings
    
47,972
    
39,924
  
Income taxes recoverable
    
3,217
    
-
  
Prepaid expenses
    
5,041
    
6,591
  
Future income tax assets
    
9,295
    
9,711
  
Other assets (note 3)
    
11,452
    
8,228
  
               
Total current assets
    
284,550
    
262,836
  
Property and equipment
    
66,228
    
65,009
  
Goodwill
    
250,797
    
251,491
  
Intangible assets
    
20,208
    
22,819
  
Future income tax assets
    
10,497
    
9,984
  
Other assets (note 3)
    
20,778
    
18,338
  
               
Total assets
    
653,058
    
630,477
  
               
               
LIABILITIES AND SHAREHOLDERS' EQUITY
              
Current
              
Bank indebtedness
    
4,613
    
-
  
Accounts payable and accrued liabilities
    
76,863
    
107,132
  
Billings in excess of costs and estimated earnings
    
31,898
    
28,721
  
Income taxes payable
    
-
    
3,432
  
Current portion of long-term debt (note 4)
    
4,589
    
4,181
  
Future income tax liabilities
    
12,836
    
12,236
  
               
Total current liabilities
    
130,799
    
155,702
  
Long-term debt (note 4)
    
45,079
    
12,046
  
Other liabilities (note 5)
    
35,236
    
33,561
  
Future income tax liabilities
    
16,370
    
18,273
  
               
Total liabilities
    
227,484
    
219,582
  
               
Shareholders' equity
              
Share capital
    
214,267
    
212,781
  
Contributed surplus
    
5,139
    
5,458
  
Deferred stock compensation
    
(181
)
  
(250
)
Retained earnings
    
233,178
    
217,750
  
Accumulated other comprehensive income (note 8)
    
(26,829
)
  
(24,844
)
               
Total shareholders' equity
    
425,574
    
410,895
  
               
Total liabilities and shareholders' equity
    
653,058
    
630,477
  
 
See accompanying notes
              
 
STANTEC INC. (UNAUDITED)
F-1
 
 
   
For the quarter ended
  
   
March 31
  
   
2007
  
2006
  
(In thousands of Canadian dollars, except per share amounts)
    $  
$
  
               
INCOME
              
Gross revenue
    
216,311
    
185,270
  
Less subconsultant and other direct expenses
    
23,964
    
22,132
  
               
Net revenue
    
192,347
    
163,138
  
Direct payroll costs
    
83,007
    
72,209
  
               
Gross margin
    
109,340
    
90,929
  
Administrative and marketing expenses (note 7)
    
81,675
    
68,377
  
Depreciation of property and equipment
    
4,088
    
3,471
  
Amortization of intangible assets
    
939
    
1,528
  
Net interest (income) expense (note 4)
    
(107
)
  
727
  
Share of income from associated companies
    
(69
)
  
(38
)
Foreign exchange gains
    
(178
)
  
(48
)
Other income (note 3)
    
(278
)
  
(129
)
               
Income before income taxes
    
23,270
    
17,041
  
               
Income taxes
              
Current
    
7,467
    
7,498
  
Future
    
375
    
(1,874
)
               
Total income taxes
    
7,842
    
5,624
  
               
Net income for the period
    
15,428
    
11,417
  
               
Weighted average number of shares outstanding - basic
    
45,481,764
    
44,946,790
  
               
Weighted average number of shares outstanding - diluted
    
46,125,051
    
45,917,882
  
               
Shares outstanding, end of the period
    
45,534,408
    
45,070,346
  
               
Earnings per share (note 7)
              
Basic
    
0.34
    
0.25
  
               
Diluted
    
0.33
    
0.25
  
 
See accompanying notes
              
STANTEC INC. (UNAUDITED)
F-2
(Unaudited)

                     
Accumulated
      
 
Shares
  
Share
  
Contributed
  
Deferred
      
Other
      
 
Outstanding
  
Capital
  
Surplus
  
Stock
  
Retained
  
Comprehensive
      
 
(note 7)
  
(note 7)
  
(note 7)
  
Compensation
  
Earnings
  
Income (AOCI)
  
Total
  
(In thousands of Canadian dollars, except
                           
shares outstanding)
#
    $  
$
    $  
$
    $  
$
  
                                           
Balance, December 31, 2006
  
45,201,785
    
212,781
    
5,458
    
(250
)
  
217,750
    
(24,844
)
  
410,895
  
                                           
Change in accounting policy (note 1)
                                
481
    
481
  
                                           
Balance, January 1, 2007, as
                                          
adjusted
  
45,201,785
    
212,781
    
5,458
    
(250
)
  
217,750
    
(24,363
)
  
411,376
  
                                           
Comprehensive income:
                                          
                                           
Net income
                          
15,428
          
15,428
  
Currency translation adjustments
                                
(2,679
)
  
(2,679
)
Unrealized gains on financial assets
                                
215
    
215
  
Realized gains transferred to net
                                          
income
                                
(2
)
  
(2
)
Total comprehensive income
                          
15,428
    
(2,466
)
  
12,962
  
                                           
Share options exercised for cash
  
317,062
    
1,098
                            
1,098
  
Stock-based compensation expense
              
359
    
69
                
428
  
Reclassification of fair value of stock
                                          
options previously expensed
        
197
    
(197
)
                    
-
  
Shares issued on vesting of restricted
                                          
shares
  
15,561
    
191
    
(481
)
                    
(290
)
                                           
Balance, March 31, 2007
  
45,534,408
    
214,267
    
5,139
    
(181
)
  
233,178
    
(26,829
)
  
425,574
  
                                 
Retained earnings and AOCI 
                                  206,349       
 
 
 
  
Shares
    
Share
    
Contributed
    
Deferred
                    
 
  
Outstanding
    
Capital
    
Surplus
    
Stock
    
Retained
              
 
  
(note 7)
    
(note 7
)
  
(note 7
)
  
Compensation
    
Earnings
    
AOCI
    
Total
  
 
  
#
    
$
  
 
$
    
$
  
 
$
    
$
  
 
$
  
                                           
Balance, December 31, 2005
 44,626,262
    
210,604
    
5,522
    
(833
)
  
158,335
    
(25,575
)
  
348,053
  
Comprehensive income:
                                          
                                           
Net income
                          
11,417
          
11,417
  
Currency translation adjustments
                                
1,032
    
1,032
  
Total comprehensive income
                          
11,417
    
1,032
    
12,449
  
                                           
Share options exercised for cash
  
437,806
    
1,249
                            
1,249
  
Stock-based compensation expense
              
186
    
220
                
406
  
Reclassification of fair value of stock
                                          
options previously expensed
        
136
    
(136
)
                    
-
  
Shares issued on vesting of restricted
                                          
shares
  
6,278
    
81
    
(499
)
                    
(418
)
                                           
Balance, March 31, 2006
 45,070,346
    
212,070
    
5,073
    
(613
)
  
169,752
    
(24,543
)
  
361,739
  
                                 
Retained earnings and AOCI 
                                  145,209        
 
See accompanying notes
                                          

STANTEC INC. (UNAUDITED)
F-3
(Unaudited)
   
For the quarter ended
  
   
 March 31
  
   
2007
  
2006
  
(In thousands of Canadian dollars)
    $  
$
  
               
CASH FLOWS FROM (USED IN) OPERATING ACTIVITIES
              
Cash receipts from clients
    
210,699
    
184,163
  
Cash paid to suppliers
    
(65,627
)
  
(68,086
)
Cash paid to employees
    
(148,414
)
  
(127,967
)
Dividends from equity investments
    
250
    
150
  
Interest received
    
1,353
    
1,571
  
Interest paid
    
(773
)
  
(2,066
)
Income taxes paid
    
(13,683
)
  
(11,817
)
Income taxes recovered
    
458
    
90
  
               
Cash flows used in operating activities (note 11)
    
(15,737
)
  
(23,962
)
               
CASH FLOWS FROM (USED IN) INVESTING ACTIVITIES
              
Business acquisitions, including cash acquired (note 2)
    
(95
)
  
(2,168
)
Restricted cash used for acquisitions
    
319
    
2,200
  
Increase in investments held for self-insured liabilities
    
(2,576
)
  
(882
)
Proceeds on disposition of investments
    
5
    
2
  
Purchase of property and equipment
    
(6,076
)
  
(5,646
)
Proceeds on disposition of property and equipment
    
17
    
11
  
               
Cash flows used in investing activities
    
(8,406
)
  
(6,483
)
               
CASH FLOWS FROM (USED IN) FINANCING ACTIVITIES
              
Repayment of long-term debt
    
(8,522
)
  
(2,255
)
Proceeds from long-term borrowings
    
41,695
    
9,142
  
Net change in bank indebtedness financing
    
4,613
    
-
  
Proceeds from issue of share capital
    
1,098
    
1,249
  
               
Cash flows from financing activities
    
38,884
    
8,136
  
               
Foreign exchange loss on cash held in foreign currency
    
(326
)
  
(93
)
               
Net increase (decrease) in cash and cash equivalents
    
14,415
    
(22,402
)
Cash and cash equivalents, beginning of the period
    
28,363
    
28,143
  
               
Cash and cash equivalents, end of the period
    
42,778
    
5,741
  
 
See accompanying notes
              
STANTEC INC. (UNAUDITED)
F-4

1. General Accounting Policies

These unaudited interim consolidated financial statements have been prepared in accordance with Canadian generally accepted accounting principles (GAAP) on a basis consistent with those used in the preparation of the Company's December 31, 2006, annual consolidated financial statements except as described below. Because the disclosures included in these interim consolidated financial statements do not conform in all respects to the requirements of GAAP for annual financial statements, these interim consolidated financial statements should be read in conjunction with the December 31, 2006, 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, shareholders' equity and comprehensive income, 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.

Change in accounting policies

Financial instruments, equity, and comprehensive income. Effective January 1, 2007, the Company adopted the Canadian Institute of Chartered Accountants (CICA) handbook Section 3855, “Financial Instruments—Recognition and Measurement”; Section 1530, “Comprehensive Income”; and Section 3251, “Equity.” These pronouncements further align Canadian GAAP with US GAAP and International Financial Reporting Standards (IFRS) and require the following:

•     
Financial assets are classified as either loans or receivables, held to maturity, held for trading, or available for sale. Held-to-maturity classification is restricted to fixed maturity instruments that the Company intends and is able to hold to maturity, and these instruments are accounted for at amortized cost. Held-for-trading instruments are recorded at fair value, with realized and unrealized gains and losses reported in net income. The remaining financial assets are classified as available for sale. These assets are recorded at fair value, with accumulated unrealized gains and losses reported in a new category of the consolidated balance sheets under shareholders’ equity called “Accumulated Other Comprehensive Income” until the financial asset is disposed, at which time the realized gains or losses are recognized in net income. Changes in fair value from reporting period to reporting period are recorded in "Other Comprehensive Income."
 
•     
Financial liabilities are classified as either held for trading or other. Held-for-trading instruments are recorded at fair value, with realized and unrealized gains and losses reported in net income. Other instruments are accounted for at amortized cost, with related gains and losses reported in net income.
 
•     
Derivatives are classified as held for trading unless designated as hedging instruments. All derivatives are recorded at fair value on the consolidated balance sheets (note 6).

As a result of adopting these standards, the Company classified its financial instruments as follows:

•     
Cash and cash equivalents and restricted cash are classified as financial assets held for trading.
 
•     
Accounts receivable net of allowance for doubtful accounts are classified as receivables.
 
•     
Investments held for self-insured liabilities are classified as financial assets available for sale.
 
 •     
Bank indebtedness, accounts payable and accrued liabilities, and long-term debt are classified as other financial liabilities.

 
NOTES TO THE UNAUDITED INTERIM CONSOLIDATED FINANCIAL STATEMENTS
STANTEC INC. (UNAUDITED)
F-5
In accordance with the provisions of these new standards, accumulated other comprehensive income is included on the Company's consolidated balance sheets as a separate component of shareholders’ equity. Accumulated other comprehensive income includes, on a net of tax basis, net unrealized gains and losses on available-for-sale financial assets and unrealized foreign currency translation gains and losses on self-sustaining foreign operations. On January 1, 2007, in accordance with transitional provisions, unrealized foreign currency translation losses on self-sustaining foreign operations were reclassified from the cumulative translation account to accumulated other comprehensive income.

The impact of recording investments held for self-insured liabilities at fair value on January 1, 2007, in accordance with transitional provisions was to increase other assets by approximately $493,000, increase opening accumulated other comprehensive income by approximately $481,000 (after-tax), and increase future income tax liabilities by $12,000. Accumulated other comprehensive income decreased by the $24.8 million balance previously reported in the cumulative translation account. These transition adjustments did not affect net income or basic or diluted earnings per share. Prior period consolidated financial statements have not been restated.

The fair value of a financial instrument on initial recognition is normally the transaction price, which is the value of the consideration given or received. Transaction costs on financial instruments are expensed when incurred. Purchases and sales of financial assets are accounted for at trade dates. Subsequent to initial recognition, the fair values of financial instruments are based on the bid prices in quoted active markets for financial assets and the ask prices for financial liabilities. The fair values of cash and cash equivalents, accounts receivable, and accounts payable and accrued liabilities approximate their carrying amounts because of the short-term maturity of these instruments.

Accounting Changes. Effective January 1, 2007, the Company adopted the new CICA handbook Section 1506, “Accounting Changes.” This section establishes criteria for changing accounting policies, together with the accounting treatment and disclosure of changes in accounting policies, changes in accounting estimates, and the correction of errors. It includes the disclosure, on an interim and annual basis, of a description and the impact on the Company's financial results of any new primary source of GAAP that has been issued but is not yet effective. This new section did not have an effect on the Company's financial position or on the results of its operations.

Recent accounting pronouncements

Financial Instruments—Disclosure and Presentation. In November 2006, the CICA issued the new handbook Section 3862, “Financial Instruments—Disclosures,” and Section 3863, “Financial Instruments—Presentation,” effective for fiscal years beginning on or after October 1, 2007. These pronouncements further aligned Canadian GAAP with US GAAP and IFRS. Early adoption of these recommendations is permitted. Section 3862 requires companies to provide disclosures in their financial statements that enable users to evaluate a) the significance of financial instruments for their financial position and performance and b) the nature and extent of risks arising from financial instruments to which they are exposed during the period and at the balance sheet date and how they manage those risks. Section 3863 establishes standards for the presentation of financial instruments. It addresses the classification of financial instruments between liabilities and equity; the classification of related interest, dividends, and losses and gains; and the circumstances in which financial assets and financial liabilities are offset. These new standards are not expected to have a material effect on the Company’s financial position or on the results of its operations.

Capital Disclosures. In November 2006, the CICA released the new handbook Section 1535, “Capital,” effective for fiscal years beginning on or after October 1, 2007. This section establishes standards for disclosing information about a company’s capital and how it is managed in order that a user of the company’s financial statements may evaluate its objectives, policies, and processes for managing capital. This new standard is not expected to have a material effect on the Company’s financial position or on the results of its operations.

International Financial Reporting Standards. The CICA plans to converge Canadian GAAP for public companies with IFRS over a transition period that is expected to end in 2011. The impact of this transition to IFRS on the Company’s consolidated financial statements has not been determined.

NOTES TO THE UNAUDITED INTERIM CONSOLIDATED FINANCIAL STATEMENTS
STANTEC INC. (UNAUDITED)
F-6
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 values 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 March 31, 2007, there is no contingent consideration that may be payable in 2007 or future years (March 31, 2006 -$9,000). Additional consideration is recorded as additional goodwill in the period in which the contingency is resolved.

Acquisitions in Q1 07

On March 9, 2007, the Company acquired the net assets and business of Nicolson Tamaki Architects Inc. for cash consideration and promissory notes. This acquisition supplements the Company's architecture services in British Columbia, Canada.

During the first quarter of 2007, the Company adjusted the purchase price on the Keen Engineering Co. Ltd., Carinci Burt Rogers Engineering, Inc., Dufresne-Henry, Inc., and ACEx Technologies, Inc. acquisitions pursuant to purchase price adjustment clauses included in the purchase agreements.

During the first quarter of 2007, the purchase price allocations for the Dufresne-Henry, Inc. and ACEx Technologies, Inc. acquisitions were finalized.

Acquisitions in Q1 06

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 supplemented the Company’s buildings engineering capabilities and presence in the Greater Toronto Area.

During the first quarter 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.

 
NOTES TO THE UNAUDITED INTERIM CONSOLIDATED FINANCIAL STATEMENTS
STANTEC INC. (UNAUDITED)
F-7
Aggregate consideration paid

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

 
2007
  
2006
  
(In thousands of Canadian dollars)
  $  
$
  
             
Cash consideration
  
95
    
2,200
  
Promissory notes
  
198
    
3,273
  
             
Purchase price
  
293
    
5,473
  
             
             
Assets and liabilities acquired at fair values
            
Cash acquired
  
-
    
32
  
Non-cash working capital
  
(195
)
  
3,794
  
Property and equipment
  
(36
)
  
36
  
Investments
  
3
    
-
  
Goodwill
  
1,094
    
1,626
  
Intangible assets
            
Client relationships
  
(1,012
)
  
265
  
Contract backlog
  
(334
)
  
113
  
Other
  
(152
)
  
-
  
Long-term debt
  
-
    
(44
)
Future income tax liabilities
  
925
    
(349
)
             
Net assets acquired
  
293
    
5,473
  

Goodwill of $169,000 is deductible for income tax purposes.

At the time of acquisition, management estimates the exit costs of consolidating or closing offices occupied by the acquired entity. These costs are accrued in other long-term liabilities as part of the purchase price allocation (note 5).

3
.
Other Assets
    
 
 
March 31
  
December 31
  
 
2007
  
2006
  
(In thousands of Canadian dollars)
  $  
$
  
             
Investments held for self-insured liabilities
  
26,270
    
22,720
  
Investments in associated companies
  
1,167
    
1,347
  
Investments - other
  
796
    
823
  
Other
  
3,997
    
1,676
  
   
32,230
    
26,566
  
Less current portion of investments held for self-insured liabilities
  
11,452
    
8,228
  
   
20,778
    
18,338
  

Investments held for self-insured liabilities consist of government and corporate bonds and equity securities. These investments are classified as available for sale and are stated at fair value. The bonds bear interest at rates ranging from 3.39 to 7.00% per annum. Interest, dividends, and realized gains and losses on these investments are recorded in other income. The term to maturity of the bond portfolio ranges from within one to nine years.

 
NOTES TO THE UNAUDITED INTERIM CONSOLIDATED FINANCIAL STATEMENTS
STANTEC INC. (UNAUDITED)
 F-8

4
.
Long-Term Debt
    
 
 
March 31
  
December 31
  
 
2007
  
2006
  
(In thousands of Canadian dollars)
  $  
$
  
             
Non-interest-bearing note payable
  
137
    
134
  
Other notes payable
  
7,965
    
7,935
  
Bank loan
  
41,566
    
8,158
  
   
49,668
    
16,227
  
Less current portion
  
4,589
    
4,181
  
   
45,079
    
12,046
  
 
The Company has a revolving credit facility in the amount of $160 million that expires on 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 between Canadian prime, US base rate, or LIBOR rate or bankers acceptance rates plus 65 or 85 basis points. As at March 31, 2007, $41,566,000 (March 31, 2006 - $44,968,000) of the bank loan was payable in US funds (US$36,000,000) (March 31, 2006 - US$38,500,000). Loans may be repaid under the credit facility from time to time at the option of the Company. The average interest rate applicable at March 31, 2007, was 5.98% (March 31, 2006 - 4.94%). 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 and throughout the quarter ended March 31, 2007. 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 Q1 07 was $133,000 (Q1 06 - $1,002,000).
 
5
.
Other Liabilities
    
 
 
March 31
  
December 31
  
 
2007
  
2006
  
     
$$
  
         
Provision for self-insured liabilities
  
16,501
    
16,041
  
Deferred gain on sale leaseback
  
6,078
    
6,187
  
Lease inducement benefits
  
10,050
    
10,499
  
Liabilities on lease exit activities
  
2,799
    
2,833
  
Other
  
4,394
    
2,333
  
             
   
39,822
    
37,893
  
Less current portion included in accrued liabilities
  
4,586
    
4,332
  
             
   
35,236
    
33,561
  
 
 
NOTES TO THE UNAUDITED INTERIM CONSOLIDATED FINANCIAL STATEMENTS
STANTEC INC. (UNAUDITED)
F-9

Provision for self-insured liabilities
        
 
March 31
  
December 31
  
 
2007
  
2006
  
(In thousands of Canadian dollars)
  $  
$
  
             
Provision, beginning of the period
  
16,041
    
11,346
  
Current year provision
  
1,584
    
6,329
  
Payment for claims settlement
  
(995
)
  
(2,087
)
Impact of foreign exchange
  
(129
)
  
453
  
             
Provision, end of the period
  
16,501
    
16,041
  
 
Liabilities on lease exit activities
            
 
  
March 31
    
December 31
  
   
2007
    
2006
  
(In thousands of Canadian dollars)
  
$
  
 
$
  
             
Liability, beginning of the period
  
2,833
    
2,251
  
Current year provision:
            
Established for existing operations
  
439
    
96
  
Resulting from acquisitions
  
-
    
2,146
  
Payment or reductions:
            
Impacting administrative and marketing expenses
  
(469
)
  
(1,649
)
Impact of foreign exchange
  
(4
)
  
(11
)
             
Liability, end of the period
  
2,799
    
2,833
  
 
6
.
Financial Instruments—Forward Contracts
        

As at March 31, 2007, the Company had entered into foreign currency forward contract arrangements that provided for the sale of US$8.0 million at rates ranging from 1.1561 to 1.1725 per US dollar maturing over the next three months. These derivative financial instruments were entered into to mitigate foreign currency fluctuation risk on net operating assets denominated in US dollars. The fair value of these contracts using market rates as at March 31, 2007, is $104,000. During the period, unrealized gains of $104,000 relating to derivative financial instruments were recorded in net income as foreign exchange gains. No forward contracts were outstanding at March 31, 2006.

 7.   Share Capital

During Q1 07 and Q1 06, the Company did not repurchase any common shares for cancellation pursuant to the normal course issuer bid.
 
During Q1 07, the Company recognized a stock-based compensation expense of $917,000 (Q1 06 - $631,000) in administrative and marketing expenses. Of the amount expensed, $359,000 related to the fair value of options granted (Q1 06 - $186,000); $489,000 related to deferred share unit compensation (Q1 06 - $225,000); and $69,000 (Q1 06 -$220,000) 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.
 
 
NOTES TO THE UNAUDITED INTERIM CONSOLIDATED FINANCIAL STATEMENTS
STANTEC INC. (UNAUDITED)
F-10
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
 For the Quarter Ended March 31
       
 
 2007
  
 2006
     
Weighted
      
Weighted
 
Share
  
Average Exercise
  
Share
  
Average Exercise
 
Options
  
 Price
  
Options
  
Price
               
 
#
  
$
  
#
  
$
Share options, beginning of the period
1,702,784
  
11.92
  
1,876,528
  
6.94
Exercised
(317,062
)
3.46
  
(437,806
)
2.85
Forfeited
(8,664
)
17.91
  
-
  
-
Share options, end of the period
1,377,058
  
13.83
  
1,438,722
  
8.19

At March 31, 2007, 765,056 (March 31, 2006 - 1,008,052) share options were exercisable at a weighted average price of $10.09 (March 31, 2006 - $6.55) .

8
.
Accumulated Other Comprehensive Income
              
 
     
Unrealized
          
 
Cumulative
  
Gains on
  
Realized Gains
      
 
Translation
  
Financial
  
Transferred to
      
 
Adjustments
  
Assets
  
Net Income
  
Total
  
(In thousands of Canadian dollars)
$
  
$
  
$
  
$
  
                 
Balance, December 31, 2006
(24,844
)
-
  
-
  
(24,844
)
Change in accounting policy (note 1)
-
  
481
  
-
  
481
  
                 
Current period activity
(2,679
)
221
  
(2
)
(2,460
)
Income tax effect
-
  
(6
)
-
  
(6
)
                 
Balance, March 31, 2007
(27,523
)
696
  
(2
)
(26,829
)
 
9
.
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 makers are the Chief Executive Officer and the Chief Operating Officer of the Company, and the Company's operating segments are based on its regional geographic areas.
 
 
NOTES TO THE UNAUDITED INTERIM CONSOLIDATED FINANCIAL STATEMENTS
STANTEC INC. (UNAUDITED)
F-11
The Company has three operating segments that are aggregated in one reportable segment as Consulting Services, which provides services throughout North America and internationally.

Geographic information
  
Property and Equipment,
  
   
Goodwill, Intangible Assets
  
           
   
March 31, 2007
  
December 31, 2006
  
(In thousands of Canadian dollars)
    $  
$
  
               
Canada
    
108,204
    
106,497
  
United States
    
228,596
    
232,387
  
International
    
433
    
435
  
     
337,233
    
339,319
  
 
Geographic information
  
Gross Revenue
  
       
   
For the quarter ended
  
   
 March 31
  
   
2007
  
2006
  
(In thousands of Canadian dollars)
    $  
$
  
               
Canada
    
120,853
    
105,363
  
United States
    
93,261
    
79,129
  
International
    
2,197
    
778
  
     
216,311
    
185,270
  
Gross revenue is attributed to countries based on the location of the work performed.
      
 
Practice area information
  
Gross Revenue
  
       
   
For the quarter ended
  
   
 March 31
  
   
2007
  
2006
  
(In thousands of Canadian dollars)
    $  
$
  
               
Consulting Services
              
Buildings
    
49,016
    
45,269
  
Environment
    
43,121
    
31,398
  
Industrial & Project Management
    
29,099
    
19,583
  
Transportation
    
27,845
    
23,586
  
Urban Land
    
67,230
    
65,434
  
     
216,311
    
185,270
  

 
NOTES TO THE UNAUDITED INTERIM CONSOLIDATED FINANCIAL STATEMENTS
STANTEC INC. (UNAUDITED)
F-12
10. 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 Q1 07 was $3,633,000 (Q1 06 - $3,313,000).

11. Cash Flows From Operating Activities
        
Cash flows from operating activities determined by the indirect method are as follows:
  
 
 
For the quarter ended
 
 
 March 31
  
 
2007
  
2006
  
(In thousands of Canadian dollars)
  $  
$
  
             
CASH FLOWS FROM (USED IN) OPERATING ACTIVITIES
            
Net income for the period
  
15,428
    
11,417
  
Add (deduct) items not affecting cash:
            
Depreciation of property and equipment
  
4,088
    
3,471
  
Amortization of intangible assets
  
939
    
1,528
  
Future income tax
  
375
    
(1,874
)
(Gain) loss on dispositions of investments and property and equipment
  
(233
)
  
323
  
Stock-based compensation expense
  
917
    
631
  
Provision for self-insured liability
  
1,584
    
2,247
  
Other non-cash items
  
(402
)
  
(1,177
)
Share of income from equity investments
  
(69
)
  
(38
)
Dividends from equity investments
  
250
    
150
  
   
22,877
    
16,678
  
             
Change in non-cash working capital accounts:
            
Accounts receivable
  
2,237
    
(20,988
)
Costs and estimated earnings in excess of billings
  
(8,686
)
  
18,775
  
Prepaid expenses
  
1,546
    
867
  
Accounts payable and accrued liabilities
  
(31,153
)
  
(36,470
)
Billings in excess of costs and estimated earnings
  
3,208
    
1,819
  
Income taxes payable/recoverable
  
(5,766
)
  
(4,643
)
             
 
  
(38,614
)
  
(40,640
)
             
Cash flows used in operating activities
  
(15,737
)
  
(23,962
)

12. Subsequent Events

On April 2, 2007, the Company acquired the business of Vollmer Associates LLP for cash consideration of US$31.0 million and promissory notes of US$10.0 million. This acquisition complements the Company's New York operations and strengthens its services in planning, transportation, architecture, and landscape architecture.

13. Comparative Figures

Certain comparative figures have been reclassified to conform to the presentation adopted for the current year.
 
 
NOTES TO THE UNAUDITED INTERIM CONSOLIDATED FINANCIAL
STATEMENTS STANTEC INC. (UNAUDITED)
F-13


April 27, 2007
This Management’s Discussion and Analysis of Stantec Inc.’s operations and cash flows for the quarter ended March 31, 2007, should be read in conjunction with our Company’s unaudited interim consolidated financial statements and related notes for the quarter ended March 31, 2007, the Management’s Discussion and Analysis and audited consolidated financial statements and related notes included in our 2006 Annual Report, and the Report to Shareholders contained in our 2007 First 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 2006 except for the adoption of the Canadian Institute of Chartered Accountants (CICA) handbook Section 3855, “Financial Instruments—Recognition and Measurement”; Section 1530, “Comprehensive Income”; and Section 3251, “Equity.” A description of these new standards and their impact on our financial position or results of operations is detailed in note 1 of our unaudited interim consolidated financial statements for the quarter ended March 31, 2007, and in the Critical Accounting Estimates, Developments, and Measures section below. Additional information regarding our Company, including our Annual Information Form, is available on SEDAR at www.sedar.com. Such additional information is not incorporated by reference herein and should not be deemed to be made part of this Management’s Discussion and Analysis.

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

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

Statements of this type are contained in this report, including the discussion of our goal in the Visions, Core Business, and Strategy section and of our annual targets and expectations for our practice areas in the Results and Outlook sections, and may be contained in filings with security regulators or in other communications. Forward-looking statements may involve, but are not limited to, comments with respect to our objectives for 2007 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.
 

MANAGEMENT’S DISCUSSION AND ANALYSIS
STANTEC INC. (UNAUDITED)
M-1
Future outcomes relating to forward-looking statements may be influenced by many factors, including, but not limited to, global capital market activities; fluctuations in interest rates or currency values; our ability to execute our strategic plans or to complete or integrate acquisitions; critical accounting estimates; the effects of war or terrorist activities; the effects of disease or illness on local, national, or international economies; the effects of disruptions to public infrastructure such as transportation or communications; disruptions in power or water supply; industry or worldwide economic or political conditions; regulatory or statutory developments; the effects of competition in the geographic or business areas in which we operate; the actions of management; or technological changes.

We caution that the foregoing list is not exhaustive of all possible factors and that other factors could adversely affect our results. The Risk Factors section in our 2006 Annual Report provides additional information concerning key factors that could cause actual results to differ materially from those projected in our forward-looking statements. Investors and the public should carefully consider these factors, other uncertainties, and potential events as well as the inherent uncertainty of forward-looking statements when relying on these statements to make decisions with respect to our Company. The forward-looking statements contained herein represent our expectations as of April 27, 2007, and, accordingly, are subject to change after such date. Except as may be required by law, we do not undertake to update any forward-looking statement, whether written or verbal, that may be made from time to time.

Our Company provides 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 in 2008 while providing professional services that have a positive, sustainable 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 Q1 07 from the description included in our 2006 Annual Report.

Overall Performance

Highlights for Q1 07

By executing our business strategy, we generated strong results for the quarter ended March 31, 2007. Our gross revenue, net income, and earnings per share increased in Q1 07 compared to Q1 06 as follows:

 
(In millions of Canadian dollars, except per share amounts)
 
Q1 07
 
Q1 06
 
$ Change
 
% Change
         
Gross revenue
216.3
185.3
31.0
16.7%
Net revenue
192.3
163.1
29.2
17.9%
Net income
15.4
11.4
4.0
35.1%
Earnings per share - basic
0.34
0.25
0.09
36.0%
Earnings per share - diluted
0.33
0.25
0.08
32.0%
Cash flows used in operating activities
(15.7)
(24.0)
8.3
n/a
Cash flows used in investing activities
(8.4)
(6.5)
(1.9)
n/a
Cash flows from financing activities
38.9
8.1
30.8
n/a

 
MANAGEMENT’S DISCUSSION AND ANALYSIS
STANTEC INC. (UNAUDITED)
M-2

In our 2006 annual Management’s Discussion and Analysis, we established various ranges of expected performance for fiscal 2007. Below is an indication of our progress toward our annual targets:

Measure
2007 Expected Range
Actual to
Q1 07
Performance
       
Debt to equity ratio (note 1)
At or below 0.5 to 1
0.03
P
Return on equity (note 2)
At or above 14%
16.5%
P
Net income as % of net revenue
At or above 6%
8.0%
P
Gross margin as % of net revenue
Between 55 and 57%
56.8%
P
Administrative and marketing
expenses as % of net revenue
Between 40 and 42%
42.5%
Í
Effective income tax rate
Between 32 and 34%
33.7%
P
note 1: Debt to equity ratio is calculated as long-term debt plus current portion of long-term debt plus bank indebtedness less cash, all divided by shareholders’ equity.
note 2: Return on equity is calculated as net income for the last four quarters divided by average shareholders’ equity over each of the last four quarters.
P Meeting target
Í Not meeting target (see page M-9)

The following highlights the key activities and initiatives that occurred in the first quarter ended March 31, 2007, and subsequent to the quarter-end in the areas of operations, board governance, compliance, and acquisitions:

 
·
Net income increased 35.1% to $15.4 million, and diluted earnings per share increased 32.0% to $0.33 compared to the first quarter of 2006. The increase in net income was mainly due to our amortization of intangible assets and net interest expense being lower than in the same period in 2006 as further explained in the Results of Operations section below. As well, our gross margin was higher than anticipated due to the mix and type of projects completed during the quarter.

 
·
On February 21, 2007, Ivor Ruste joined the Company’s board of directors. Mr. Ruste is currently the vice president of finance for EnCana Corporation headquartered in Calgary. From 1998 to 2006, he was the managing partner of the Edmonton office of KPMG LLP, and just prior to joining EnCana in May 2006, he served as the Alberta regional managing partner and vice chair of the KPMG Canadian board of directors.

 
·
On March 15, 2007, we announced that Mark Jackson had been appointed to the new role of senior vice president and chief operating officer (COO). The COO role was created to oversee the day-to-day management of our operations and practice responsibilities previously held by our chief executive officer (CEO). In our growing organization, this change will allow our CEO to focus more time on acquisitions, investor relations, strategic planning, and overall Company leadership in executing our plan to be a top 10 global design firm. Mark, who previously was the practice area unit leader for our Environment practice area, graduated from the University of Waterloo in 1975 with a bachelor of applied science in civil engineering. He joined Stantec in 1997 with the acquisition of Kitchener, Ontario-based Paragon Engineering.
 
 
MANAGEMENT’S DISCUSSION AND ANALYSIS
STANTEC INC. (UNAUDITED)
M-3
 
·
On March 30, 2007, in accordance with Section 404 of the Sarbanes-Oxley Act, the Company filed its first-year certification relating to internal control over financial reporting. Our CEO and our chief financial officer concluded that, as at December 31, 2006, the Company’s internal control over financial reporting was effective and that there were no material weaknesses.

 
·
Subsequent to the quarter-end, on April 2, 2007, we acquired the business of Vollmer Associates LLP for cash consideration of US$31.0 million and promissory notes of US$10.0 million. This acquisition complements our US East operations, nearly doubling our footprint by adding approximately 600 staff; establishes a major presence in New York City; and strengthens our services in the transportation sector.

Our financial condition continues to remain strong as shareholders’ equity increased by $14.7 million in Q1 07 due mainly to net income of $15.4 million and $1.1 million from share options exercised for cash, offset by a $2.0 million change in our accumulated other comprehensive income. Our accumulated other comprehensive income represents an unrealized foreign exchange loss on our investment in our self-sustaining US subsidiaries when translated into Canadian dollars and unrealized gains and losses on our investment held for self-insured liabilities. For a further description of accumulated other comprehensive income, refer to the Critical Accounting Estimates, Developments, and Measures section below.

Our total liabilities increased by $7.9 million from December 31, 2006. We borrowed US$34 million (C$39.3 million) on our revolving credit facility on March 28, 2007, to enable the purchase of Vollmer Associates LLP and its acquired debt. The cash was paid to the vendors on the completion of the transaction on April 2, 2007. The increase in long-term debt was partially offset by a decrease in accounts payable and accrued liabilities of $30.3 million due primarily to the timing of payments for annual employee bonuses.

Our total assets increased by $22.6 million. Cash and cash equivalents made up $14.4 million of this increase, which resulted from the timing of the borrowing noted above.

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 in Q1 07 compared to the same period last year:
 
 
MANAGEMENT’S DISCUSSION AND ANALYSIS
STANTEC INC. (UNAUDITED)
M-4
 
 
                                    Quarter ended March 31
 
 % of Net Revenue
% Increase*
 
2007
2006
2007 vs. 2006
       
Gross revenue
112.5%
113.6%
16.7%
Net revenue
100.0%
100.0%
17.9%
Direct payroll costs
43.2%
44.3 %
15.0%
Gross margin
56.8%
55.7%
20.2%
Administrative and marketing expenses
42.5%
41.9%
19.4%
Depreciation of property and equipment
2.1%
2.1%
17.1%
Amortization of intangible assets
0.4%
0.9%
(40.0%)
Net interest (income) expense
(0.1%)
0.5%
n/m
Share of income from associated
companies
0.0%
0.0%
n/m
Foreign exchange gains
(0.1%)
0.0%
n/m
Other income
(0.1%)
(0.1%)
200.0%
Income before income taxes
12.1%
10.4%
37.1%
Income taxes
4.1%
3.4%
39.3%
Net income for the period
8.0%
7.0%
35.1%
* % 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 first quarter of 2007 and should be read in conjunction with our unaudited consolidated financial statements for that quarter.

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 first quarter of 2007 compared to the same period in 2006.
 
 
MANAGEMENT’S DISCUSSION AND ANALYSIS
STANTEC INC. (UNAUDITED)
M-5
Gross Revenue
  
 First Quarter
(In millions of Canadian dollars)
  
2007 vs. 2006
     
Increase due to:
    
 
Acquisition growth
12.9
 
Net internal growth
16.8
 
Impact of foreign exchange rates on revenue earned by foreign subsidiaries
1.3
   
Total increase in gross revenue
31.0


Net Revenue
  
First Quarter
(In millions of Canadian dollars)
  
2007 vs. 2006
     
Increase due to:
    
 
Acquisition growth
11.3
 
Net internal growth
16.7
 
Impact of foreign exchange rates on revenue earned by foreign subsidiaries
1.2
   
Total increase in net revenue
29.2

The net increase in gross revenue was $31.0 million for Q1 07 over Q1 06 due to growth of $12.9 million from acquisitions, internal growth of $16.8 million, and a positive impact of foreign exchange rates on revenue earned by foreign subsidiaries of $1.3 million. The increase in acquisition gross and net revenue in the quarter-over-quarter comparison was due to the revenue earned in Q1 07 attributed 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 in the first quarter of 2007 compared to the same period in 2006:

Practice Area Gross Revenue
Quarter ended March 31
(In millions of Canadian dollars)
2007
2006
Change
       
Buildings
49.0
45.3
3.7
Environment
43.1
31.4
11.7
Industrial & Project Management
29.1
19.6
9.5
Transportation
27.9
23.6
4.3
Urban Land
67.2
65.4
1.8
Total
216.3
185.3
31.0
 
 
MANAGEMENT’S DISCUSSION AND ANALYSIS
STANTEC INC. (UNAUDITED)
M-6

As indicated above, our gross revenue was impacted by acquisitions, net internal growth, and the effect of 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:

Practice Area Gross Revenue 
Quarter ended March 31
2007 vs. 2006
(In millions of Canadian dollars)
 
 
Total
Change
 
Change Due
to
Acquisitions
 
Change Due to
Internal
Growth
 
Change Due
to Foreign
Exchange
         
Buildings
3.7
2.4
1.2
0.1
Environment
11.7
4.8
6.6
0.3
Industrial & Project Management
9.5
0.4
9.0
0.1
Transportation
4.3
4.0
0.2
0.1
Urban Land
1.8
1.3
(0.2)
0.7
Total
31.0
12.9
16.8
1.3

The following lists the acquisitions completed in 2006 that impacted specific practice areas:

 
·
Buildings: Dufresne-Henry, Inc. (April 2006) and Carinci Burt Rogers Engineering, Inc. (March 2006)
 
·
Environment: Dufresne-Henry, Inc. (April 2006)
 
·
Industrial & Project Management: Dufresne-Henry, Inc. (April 2006)
 
·
Transportation: ACEx Technologies, Inc. (May 2006) and Dufresne-Henry, Inc. (April 2006)
 
·
Urban Land: Dufresne-Henry, Inc. (April 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$0.85 in Q1 07 compared to US$0.87 in Q1 06, representing a depreciation of 2.3%. This weakening of the Canadian dollar had a positive effect on reported revenue in Q1 07 compared to Q1 06.

Buildings. Gross revenue for the Buildings practice area grew by 8.2% in Q1 07 compared to Q1 06. Of the $3.7 million increase in gross revenue, $1.9 million and $0.5 million were due to revenue earned from the acquisition of Carinci Burt Rogers Engineering, Inc. and Dufresne-Henry, Inc., respectively. In addition, internal growth accounted for $1.2 million of the change in gross revenue from Q1 06 to Q1 07, and foreign exchange positively affected the change in gross revenue by $0.1 million. The Buildings practice area continues to secure larger projects and to experience higher project volumes. In particular, activity in western Canada is especially strong in both the public and private sectors. For example, in Q1 07 the Buildings practice area secured a contract to provide architecture, planning, landscape architecture, and structural, mechanical, electrical, civil, and transportation engineering services for the development of a 16.2-hectare (40-acre) greenfield site for a new 300-bed acute care hospital in Grand Prairie, Alberta. To assist in meeting increased demand for staff, the practice area continues to make use of work-sharing initiatives across the Company in 2007. During Q1 07, we also received various awards, including the Autodesk Revit Building Information Modeling (BIM) Experience Award for the use of the Revit platform for architectural and buildings engineering. We are taking a leading position in adopting BIM because we believe that it is the technology of the future for delivering the type of well-integrated solutions that our clients are demanding.
 
 
MANAGEMENT’S DISCUSSION AND ANALYSIS
STANTEC INC. (UNAUDITED)
M-7
Environment. Gross revenue for the Environment practice area increased by 37.3% in Q1 07 compared to Q1 06. Of the $11.7 million increase in gross revenue, $4.8 million was due to revenue earned from the Dufresne-Henry, Inc. acquisition, $6.6 million was due to internal growth, and $0.3 million was due to foreign exchange. The Environment practice area remains strong due to larger projects and the strong economy in western Canada. We believe that opportunities for this practice area will remain positive due to interest in Canada and the United States in funding water quality and wastewater initiatives, the need to rehabilitate or replace aging infrastructure, continuing population growth in certain US regions, and heightening regulatory activities regarding clean water.

Industrial & Project Management. Gross revenue for the Industrial & Project Management practice area grew by 48.5% in Q1 07 compared to Q1 06. Of the $9.5 million increase in gross revenue, $0.4 million was due to revenue earned from the Dufresne-Henry, Inc. acquisition, $9.0 million was due to internal growth, and $0.1 million was due to foreign exchange. The strong internal growth was primarily due to projects secured as a result of the strong economy in western Canada. During the quarter, the Industrial & Project Management practice area continued to provide services for the development of facilities and infrastructure in support of major projects in British Columbia and Alberta. The strong need for power transmission facilities in North America also resulted in Stantec being awarded projects in this sector in Q1 07. In addition, during the quarter, this practice area led efforts that resulted in the Company’s selection as one of six firms to complete various projects for the Department of National Defence across Canada over the next five years. The practice area continues to position itself to capture more of the support facilities and infrastructure segment of the energy and resources sector, projects in the power transmission and distribution sector, and opportunities that may arise from an expected increase in construction activity related to the focus on renewable energy (i.e., ethanol, biomass, wind, and solar energy) initiatives in North America.

Transportation. Gross revenue for the Transportation practice area increased by 18.2% in Q1 07 compared to Q1 06. Of the $4.3 million increase in gross revenue, $3.3 million and $0.7 million were due to revenue earned from the Dufresne-Henry, Inc. and ACEx Technologies Inc. acquisitions, respectively. In addition, internal growth accounted for $0.2 million of the change in gross revenue from Q1 06 to Q1 07, and foreign exchange positively affected the increase in gross revenue by $0.1 million. The implementation of the six-year, US$286.4 billion Safe, Accountable, Flexible, Efficient Transportation Equity Act: A Legacy for Users signed on August 10, 2005, has increased the funds available for transportation projects, which continues to translate into contracts for our Company. During the quarter, the Transportation practice area secured an assignment to provide system integration analysis and planning services for several light rail transit projects in the southern United States. With the purchase of Vollmer Associates LLP, we expect our presence in the transportation market in the US East to increase. The outlook for our transportation practice in Canada remains optimistic due to the extension of gas tax funding and additional infrastructure programs included in the 2007 federal budget.

Urban Land. Gross revenue for the Urban Land practice area grew by 2.8% in Q1 07 compared to Q1 06. Of the $1.8 million increase in gross revenue, $1.3 million was due to revenue earned from the Dufresne-Henry, Inc. acquisition, and $0.7 million was due to foreign exchange. Revenue earned from non-acquisition activities decreased quarter over quarter by $0.2 million. We offer urban land services primarily in three core regions—Alberta, Ontario, and California—which account for approximately 75% of our business. In addition, we have a more modest urban land presence in Arizona, Nevada, Utah, Colorado, North Carolina, and Florida and a small presence in other Canadian and eastern US markets. In spite of a general decline in housing starts in various parts of the United States, housing starts in our primary markets in Canada are less impacted. Due to our strong position in the three core regions mentioned above, we anticipate that our overall performance in the Urban Land practice area will continue to be stable in 2007.
 
 
MANAGEMENT’S DISCUSSION AND ANALYSIS
STANTEC INC. (UNAUDITED)
M-8

Gross Margin

For a definition of gross margin, refer to the Definition of Non-GAAP Measures included in our 2006 Annual Report. Our gross margin as a percentage of net revenue was 56.8% in Q1 07 compared to 55.7% in Q1 06. The Q1 07 gross margin fell within the anticipated range of 55 to 57% set out in our 2006 Annual Report. Factors that contributed to our improved gross margin in Q1 07 compared to Q1 06 include the following:

 
·
Improved markets for our services with corresponding increases in fee rates.
 
·
Improved project management through enhanced staff training and support systems. This improvement has been achieved through the expansion of our on-line Learning Resource Center during 2006 with updated content and in-house programs and training in project and financial management.
 
·
Fluctuations in the margin reported from quarter to quarter depending on the mix of projects in progress during any quarter. These fluctuations reflect 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.

The following table summarizes our gross margin percentages by practice area for Q1 07 and Q1 06:

   
Quarter ended March 31
  
Practice Area Gross Margin
  
2007
  
2006
  
           
Buildings
    
57.8
%
  
55.0
%
Environment
    
58.3
%
  
57.8
%
Industrial & Project Management
    
50.8
%
  
50.9
%
Transportation
    
55.4
%
  
56.1
%
Urban Land
    
58.2
%
  
56.5
%

Our gross margin percentages increased in all practice areas except Industrial & Project Management and Transportation in Q1 07 compared to Q1 06. These changes are attributable to the same factors mentioned above.

Administrative and Marketing Expenses

Our administrative and marketing expenses as a percentage of net revenue were 42.5% for Q1 07 compared to 41.9% for Q1 06 and were slightly over our expected range of 40 to 42% for fiscal 2007. We still anticipate that these expenses will be within this expected range by year-end. Administrative and marketing expenses may fluctuate from quarter to quarter as a result of the amount of staff time charged to marketing and administrative labor, which is influenced by the mix of projects in progress and being pursued during the period.
 
 
MANAGEMENT’S DISCUSSION AND ANALYSIS
STANTEC INC. (UNAUDITED)
M-9
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 the 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 first quarter of 2007 and 2006:

   
Quarter ended March 31
  
(In thousands of Canadian dollars)
  
2007
  
2006
  
               
Amortization of client relationships
   
528
    
585
  
Amortization of backlog
    
390
    
890
  
Other
    
21
    
53
  
               
Total amortization of intangible assets
    
939
    
1,528
  

The decrease of $589,000 in Q1 07 from the same quarter last year was mainly due to the $359,000 in backlog amortized in Q1 06 relating to the Keen Engineering Co. Ltd. (Keen) and CPV Group Architects & Engineers Ltd. (CPV) acquisitions. The Keen and CPV backlog balances were fully amortized at the end of 2006 and, therefore, did not carry into Q1 07. As well, the decrease in Q1 07 related to a downward adjustment in amortization of $264,000 relating to the Dufresne-Henry, Inc. and ACEx Technologies, Inc. acquisitions. This adjustment was made on the finalization of the purchase price allocation for these acquisitions during the quarter.

Based on the unamortized intangible asset balance remaining at the end of Q1 07, we expect the amortization expense for intangible assets to be in the range of $2.5 to $3.0 million by year-end. This range may be impacted by any new acquisitions completed after Q1 07.

Net Interest (Income) Expense

We recognized net interest income of $107,000 in Q1 07 compared to net interest expense of $727,000 in Q1 06 because our long-term debt position during the first quarter of 2006 was higher on average than in the same period in 2007.

Depending on the form under which our 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 to 5.98% at March 31, 2007, compared to 4.94% at March 31, 2006. We estimate that, based on our balance at March 31, 2007, a 1% change in interest rates would impact our annual earnings per share by less than $0.01.
 
 
MANAGEMENT’S DISCUSSION AND ANALYSIS
STANTEC INC. (UNAUDITED)
M-10
Foreign Exchange Gains (Losses)

During Q1 07, we recorded a foreign exchange gain of $178,000 compared to a $48,000 gain in Q1 06. These foreign exchange gains have arisen 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 2006 we began repaying our US-dollar debt using cash generated from operations, which created the need to enter into forward contracts in the last quarter of 2006 and in Q1 07. As at March 31, 2007, we had entered into foreign currency forward contracts that provided for the sale of US$8.0 million at rates ranging from 1.1561 to 1.1725 per US dollar maturing over the next three months.

Income Taxes

Our effective income tax rate increased to 33.7% for Q1 07 compared to 32.7% for the year ended December 31, 2006. Our estimated income tax rate is adjusted 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. For 2007 we are expecting an increase in the portion of income that we earn in higher tax jurisdictions, resulting in an increase of our effective income tax rates from 2006.

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)
Jun 30, 2006
Sep 30, 2006
Dec 31, 2006
Mar 31, 2007
         
Gross revenue
208.8
210.2
211.8
216.3
Net revenue
182.2
182.0
180.6
192.3
Net income
16.7
16.5
15.6
15.4
EPS - basic
0.37
0.36
0.35
0.34
EPS - diluted
0.36
0.36
0.34
0.33
         
 
Jun 30, 2005
Sep 30, 2005
Dec 31, 2005
Mar 31, 2006
         
Gross revenue
150.2
146.1
180.6
185.3
Net revenue
127.7
125.9
151.9
163.1
Net income
13.1
12.8
8.0
11.4
EPS - basic
0.34
0.33
0.18
0.25
EPS - diluted
0.34
0.32
0.17
0.25
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.

MANAGEMENT’S DISCUSSION AND ANALYSIS
STANTEC INC. (UNAUDITED)
M-11
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 dollars)
Q1 07
vs. Q1 06
Q4 06
vs. Q4 05
Q3 06
vs. Q3 05
Q2 06
vs. Q2 05
         
Increase (decrease) in gross revenue due to:
        
Acquisition growth
12.9
12.0
51.3
55.3
Net internal growth
16.8
21.4
16.3
8.5
Impact of foreign exchange rates on revenue
earned by foreign subsidiaries
1.3
(2.2)
(3.5)
(5.2)
         
Total increase in gross revenue
31.0
31.2
64.1
58.6

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

During Q3 06, our gross revenue grew by $64.1 million, or 43.9%, compared to Q3 05. Approximately $51.3 million of this increase was a result of the three acquisitions completed in the last half of 2005 and of the Carinci Burt Rogers Engineering, Inc., Dufresne-Henry, Inc., and ACEx Technologies Inc. acquisitions completed in the first half of 2006. As we integrated the staff and project work from these acquisitions, net income increased by $3.7 million, or 27.9%, in Q3 06 compared to the same period in 2005, and basic earnings per share increased by $0.03 compared to the same period last year.

During Q4 06, our gross revenue increased by $31.2 million, or 17.3%, to $211.8 million compared to $180.6 million for the same period in 2005. Approximately $12.0 million of this increase resulted from acquisitions completed in 2005 and 2006 and internal growth of $21.4 million, offset by $2.2 million in foreign exchange due to the strengthening of the Canadian dollar during 2005 and 2006. Net income during Q4 06 was strong, increasing by $7.6 million, or 95.7%, from the same period in 2005. Basic earnings per share in Q4 06 increased by $0.17, or 94.4%, compared to the same period in Q4 05. These increases in net income and earnings per share were mainly due to the growth in gross revenue mentioned above as well as a quarterly gross margin of 58.3% compared to 53.5% for the same period last year. Due to 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 our gross margin from period to period depending on the mix of projects during any quarter. In addition, our 2005 gross margin was lower since we integrated approximately 1,000 staff into our Company in Q4 05 from the Keith and Keen acquisitions, who were then required to learn new practices and processes and understand new systems. Such a learning curve results in decreased productivity until the learning is complete.
 
 
MANAGEMENT’S DISCUSSION AND ANALYSIS
STANTEC INC. (UNAUDITED)
M-12
The following table represents summarized working capital information as at March 31, 2007, compared to December 31, 2006:

(In millions of Canadian dollars, except ratios)
  
Mar 31, 2007
  
Dec 31, 2006
  
% Change
  
               
Current assets
    
284.6
    
262.8
    
8.3
%
Current liabilities
    
(130.8
)
  
(155.7
)
  
(16.0
%)
Working capital
    
153.8
    
107.1
    
43.6
%
Ratio of current assets to current liabilities
    
2.18
    
1.69
    
n/a
  
note: Working capital is calculated by subtracting current liabilities from current assets. The current ratio is calculated by dividing current assets by current liabilities.

Our cash flows from (used in) operating, investing, and financing activities for the first quarter of 2007 and 2006, as reflected in the Consolidated Statements of Cash Flows, are summarized in the following table:

   
 Quarter ended March 31
  
(In millions of Canadian dollars)
  
2007
  
2006
  
$ Change
  
                     
Cash flows used in operating activities
    
(15.7
)
  
(24.0
)
  
8.3
  
Cash flows used in investing activities
   
(8.4
)
  
(6.5
)
  
(1.9
)
Cash flows from (used in) financing activities
    
38.9
    
8.1
    
30.8
  

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. Our primary use of funds is for paying operational expenses, completing acquisitions, and sustaining capital spending on property and equipment. We continue to manage according to the management guidelines established in our 2006 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 Q1 07 was $153.8 million compared to $107.1 million at December 31, 2006. Current assets increased by $21.8 million, and current liabilities decreased by $24.9 million during this period. The increase in current assets from December 31, 2006, was due to a $14.4 million increase in cash and cash equivalents as $39.3 million was accessed from our credit facility on March 28, 2007, to fund the Vollmer Associates LLP acquisition and was paid out on April 2, 2007. The decrease in current liabilities was due to the payment of annual employee bonuses during the quarter.

Cash Flows Used in Operating Activities

Our cash flows used in operating activities decreased by $8.3 million in Q1 07 compared to the same period in 2006. The quarter-over-quarter change was mainly due to an increase of $8.5 million in cash receipts from clients less cash paid to suppliers and employees. Our cash flow was positively affected by a decrease in our investment in costs and estimated earnings in excess of billings and in accounts receivable to 91 days in Q1 07 from 102 days in Q1 06 since we have now completed the integration of acquisitions made in the last half of 2005 (i.e., the Keen and Keith acquisitions). The above was offset by a $1.5 million increase in net income taxes paid in Q1 07 versus Q1 06.
 
 
MANAGEMENT’S DISCUSSION AND ANALYSIS
STANTEC INC. (UNAUDITED)
M-13
Cash Flows Used in Investing Activities

Our cash flows used in investing activities increased by $1.9 million in Q1 07 compared to the same period in 2006. In Q1 07 we increased our investments held for self-insured liabilities by $1.7 million compared to Q1 06. As a professional services organization, we are not capital intensive. Funds spent on capital are 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 property and equipment purchases increased to $6.1 million in Q1 07 from $5.6 million in Q1 06. Our Q1 07 purchases were within the expected range for 2007 to support ongoing operational activity and growth. During Q1 07, our purchases of property and equipment were financed by cash flows from operations.

Cash Flows From Financing Activities

Our cash flows from financing activities increased by $30.8 million in Q1 07 compared to the same period in 2006. During Q1 07, we repaid the revolving credit facility that was outstanding at December 31, 2006, and then used $41.6 million of the revolving credit facility in late March 2007, in part to fund the Vollmer Associates LLP acquisition. In Q1 06 we used $9.1 million of our revolving credit facility.
 
Shareholders’ Equity

Share options exercised during the first quarter of 2007 generated cash of $1.1 million compared to $1.2 million during the same period in 2006.

Outstanding Share Data

As at March 31, 2007, there were 45,534,408 common shares and 1,377,058 share options outstanding. During the period of April 1, 2007, to April 27, 2007, no shares were repurchased under our normal course issuer bid; 10,200 share options were exercised; no share options were cancelled; and 2,428 common shares were released from restriction upon the vesting of restricted shares.

Contractual Obligations

As part of our continuing operations, we enter into long-term contractual arrangements from time to time. The following table summarizes the contractual obligations due on our long-term debt, other liabilities, and operating lease commitments as of March 31, 2007:

Contractual Obligations
Payments Due by Period
(In millions of Canadian dollars)
  
 
Total
Less than
1 year
1-3 years
4-5 years
After
5 years
           
Long-term debt
50.8
4.8
45.1
0.0
0.9
Interest on debt
6.3
2.7
3.6
0.0
0.0
Operating lease commitments
205.5
34.5
55.7
42.7
72.6
Other
7.9
1.8
3.7
0.0
2.4
Total Contractual Obligations
270.5
43.8
108.1
42.7
75.9
 
 
MANAGEMENT’S DISCUSSION AND ANALYSIS
STANTEC INC. (UNAUDITED)
M-14
For further information regarding the nature and repayment terms of our long-term debt, refer to note 4 in our unaudited interim consolidated financial statements for the quarter ended March 31, 2007. Our operating lease commitments include obligations under office space rental agreements, and our other liabilities primarily include leasehold inducement benefits and provision for self-insurance.

Off-Balance Sheet Arrangements

In the normal course of business, we enter into letters of credit, including the guarantee of certain office rental obligations. We also provide indemnifications and in very limited circumstances, bonds, which are often standard contractual terms, to counterparties in transactions such as purchase and sale contracts for assets or shares, service agreements, and leasing transactions. During the quarter ended March 31, 2007, there was no material change to our off-balance sheet arrangements as described in our 2006 Annual Report.

Market Risk

We are exposed to various market factors that can affect our performance with respect to currency and interest rates. For the first quarter of 2007, there was no significant change in our market risks from those described in our 2006 Annual Report.

Related Party Transactions

As was the case in 2006 (as described in our 2006 Annual Report), no related party transactions were made during Q1 07.

The outlook for the remainder of 2007 continues to be positive since we operate in a highly diverse infrastructure and facilities market within North America. Results may fluctuate from quarter to quarter depending on variables such as project mix, economic factors, and integration activities from acquisitions. For the first quarter of 2007, 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 2006 Annual Report.

The preparation of our financial statements in accordance with Canadian GAAP requires us to make various estimates and assumptions. However, future events may result in significant differences between estimates and actual results. This Management’s Discussion and Analysis includes reference to and uses measures and terms that are not specifically defined in the CICA Handbook and do not have any standardized meaning prescribed by GAAP. These non-GAAP measures may not be comparable to similar measures presented by other companies. For the quarter ended March 31, 2007, there has been no significant change in our critical accounting estimates or description of accounting measures from those included in our 2006 Annual Report.
 
 
MANAGEMENT’S DISCUSSION AND ANALYSIS
STANTEC INC. (UNAUDITED)
M-15
Accounting changes

For the quarter ended March 31, 2007, there has been no significant change in our accounting developments as described in our 2006 Annual Report except for the adoption of the CICA handbook Section 3855, “Financial Instruments—Recognition and Measurement”; Section 1530, “Comprehensive Income”; and Section 3251, “Equity.” These pronouncements further align Canadian GAAP with US GAAP and International Financial Reporting Standards and require the following:

 
·
Financial assets are classified as either loans or receivables, held to maturity, held for trading, or available for sale. Held-to-maturity classification is restricted to fixed maturity instruments that we intend and are able to hold to maturity, and these investments are accounted for at amortized cost. Held-for-trading instruments are recorded at fair value, with realized and unrealized gains and losses reported in net income. The remaining financial assets are classified as available for sale. These assets are recorded at fair value, with accumulated unrealized gains and losses reported in a new category of the consolidated balance sheets under shareholders’ equity called “Accumulated Other Comprehensive Income” until the financial asset is disposed, at which time the realized gains or losses are recognized in net income. Changes in fair value from reporting period to reporting period are recorded in “Other Comprehensive Income.”

 
·
Financial liabilities are classified as either held for trading or other. Held-for-trading instruments are recorded at fair value, with realized and unrealized gains and losses reported in net income. Other instruments are accounted for at amortized cost, with related gains and losses reported in net income.

 
·
Derivatives are classified as held for trading unless designated as hedging instruments. All derivatives are recorded at fair value on the consolidated balance sheets.

As a result of adopting these standards, we classified our financial instruments as follows:

 
·
Cash and cash equivalents and restricted cash are classified as financial assets held for trading.
 
·
Accounts receivable net of allowance for doubtful accounts are classified as receivables.
 
·
Investments held for self-insured liabilities are classified as financial assets available for sale.
 
·
Bank indebtedness, accounts payable and accrued liabilities, and long-term debt are classified as other financial liabilities.
 
·
Foreign currency exchange contracts are derivatives that are classified as held for trading. Our foreign currency forward contracts are not accounted for as hedges.

In accordance with the provisions of these new standards, accumulated other comprehensive income is included on our consolidated balance sheets as a separate component of shareholders’ equity. Accumulated other comprehensive income includes, on a net of tax basis, net unrealized gains and losses on available-for-sale financial assets and unrealized foreign currency translation gains and losses on self-sustaining foreign operations. On January 1, 2007, in accordance with transitional provisions, unrealized foreign currency translation gains and losses on self-sustaining foreign operations were reclassified from the cumulative translation account to accumulated other comprehensive income.
 
MANAGEMENT’S DISCUSSION AND ANALYSIS
STANTEC INC. (UNAUDITED)
M-16
The impact of recording our investments held for self-insured liabilities at fair value on January 1, 2007, in accordance with transitional provisions was to increase other assets by approximately $493,000, increase opening accumulated other comprehensive income by approximately $481,000 (after-tax), and increase future income tax liabilities by $12,000. Accumulated other comprehensive income also decreased by the $24.8 million balance previously reported in our cumulative translation account. These transition adjustments did not affect net income or basic or diluted earnings per share. Prior period consolidated financial statements have not been restated.

 
There were no changes in our internal control over financial reporting during the quarter ended March 31, 2007, that materially affected, or are reasonably likely to materially affect, internal control over financial reporting.

 
For the quarter ended March 31, 2007, there was no significant change in our risk factors from those described in our 2006 Annual Report.

 
On April 2, 2007, we acquired the business of Vollmer Associates LLP for cash consideration of US$31.0 million and promissory notes of US$10.0 million. This acquisition complements our US East operations, nearly doubling our footprint by adding approximately 600 staff; establishes a major presence in New York City; and strengthens our services in the transportation sector.

 
MANAGEMENT’S DISCUSSION AND ANALYSIS
STANTEC INC. (UNAUDITED)
M-17
 
Shareholder Information
Transfer Agent
Computershare Trust Company of Canada
Calgary, Alberta

Auditors
Ernst & Young LLP
Chartered Accountants
Edmonton, Alberta

Principal Bank
Canadian Imperial Bank of
Commerce

Securities Exchange Listing
Stantec shares are traded
on the Toronto Stock Exchange
under the symbol STN and on
the New York Stock Exchange
under the symbol SXC.

Investor Relations
Stantec Inc.
10160 - 112 Street
Edmonton AB
Canada T5K 2L6
Tel: (780) 917-7000
Fax: (780) 917-7330
ir@stantec.com

10160 - 112 Street
Edmonton AB
Canada
T5K 2L6
ir@stantec.com