Exhibit
99.2
















Index1
                
                COMPANY
      PROFILE2
                
                FINANCIAL
      SUMMARY4
                
                MESSAGE
      TO SHAREHOLDERS6
                
                BOARD
      OF DIRECTORS6
                
                CORPORATE
      OFFICERSMANAGEMENT'S DISCUSSION AND ANALYSISM–1
                
                Management’s
      Discussion and AnalysisM–1
                
                Caution
      Regarding Forward-Looking StatementsM–3
                
                Executive
      SummaryM–4
                
                Core
      Business and StrategyM–7
                
                Key
      Performance Drivers and CapabilitiesM–10
                
                ResultsM–10
                
                Overall
      PerformanceM–12
                
                AcquisitionsM–13
                
                Selected
      Annual InformationM–14
                
                Results
      of OperationsM–27
                
                Fourth
      Quarter Results and Quarterly TrendsM–30
                
                Liquidity
      and Capital ResourcesM–34
                
                OtherM–37
                
                OutlookM–40
                
                Critical
      Accounting Estimates, Developments, and MeasuresM–51
                
                Risk
      FactorsM–62
                
                Controls
      and ProceduresM–63
                
                Corporate
      GovernanceM–64
                
                Subsequent
      EventCONSOLIDATED
      FINANCIAL STATEMENTSF–1
                
                Management
      ReportF–2
                
                Independent
      Auditors’ Report on Financial StatementsF–3
                
                Independent
      Auditors’ Report on Internal Control over Financial
    ReportingF–4
                
                Consolidated
      Balance SheetsF–5
                
                Consolidated
      Statements of IncomeF–6
                
                Consolidated
      Statements of Shareholders’ Equity and Comprehensive
  IncomeF–7
                
                Consolidated
      Statements of Cash FlowsF–8
                
                Notes
      to the Consolidated Financial StatementsIBC
                
                OFFICE
      LOCATIONSIBC
                
                SHAREHOLDER
      INFORMATION
 Stantec
Inc. 2009 Financial Review
 
 
 Company
Profile
 
 Stantec,
founded in 1954, provides professional consulting services in planning,
engineering, architecture,
interior design, landscape architecture, surveying, environmental sciences,
project management,
and project economics for infrastructure and facilities projects. 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, 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 routes wetravel,
the buildings we visit, theindustries
in which we work, and theneighborhoods
we call home.
 Stantec
Inc. 2009 Financial Review
 1
 
 Financial
      Summary(In
      thousands of Canadian dollars,except
      per share amounts and ratios)
                  
                  2009
                  
                  
                  2008
                  
                  
                  2007
                  
                  
                  2006
                  
                  
                  2005Gross
      revenue
                  
                  
                  1,519,865
                  
                  
                  
                  1,351,951
                  
                  
                  
                  954,619
                  
                  
                  
                  816,133
                  
                  
                  
                  618,020Net
      revenue
                  
                  
                  1,242,942
                  
                  
                  
                  1,130,124
                  
                  
                  
                  830,888
                  
                  
                  
                  707,927
                  
                  
                  
                  524,552Income
      before taxes
                  
                  
                  91,666
                  
                  
                  
                  64,499
                  
                  
                  
                  99,114
                  
                  
                  
                  89,424
                  
                  
                  
                  62,500Net
      income
                  
                  
                  55,940
                  
                  
                  
                  29,017
                  
                  
                  
                  69,279
                  
                  
                  
                  60,182
                  
                  
                  
                  40,622Current
      assets
                  
                  
                  409,253
                  
                  
                  
                  480,725
                  
                  
                  
                  323,248
                  
                  
                  
                  264,551
                  
                  
                  
                  280,371Current
      liabilities
                  
                  
                  283,811
                  
                  
                  
                  300,009
                  
                  
                  
                  232,697
                  
                  
                  
                  159,695
                  
                  
                  
                  157,814Property
      and equipment (1)
                  
                  
                  108,256
                  
                  
                  
                  107,768
                  
                  
                  
                  80,776
                  
                  
                  
                  58,351
                  
                  
                  
                  51,281Long-term
      debt
                  
                  
                  198,769
                  
                  
                  
                  215,113
                  
                  
                  
                  74,539
                  
                  
                  
                  12,046
                  
                  
                  
                  81,886Shareholders’
      equity
                  
                  
                  547,394
                  
                  
                  
                  538,975
                  
                  
                  
                  442,698
                  
                  
                  
                  410,895
                  
                  
                  
                  348,053Gross
      revenue backlog (2)
                  
                  
                  948,000
                  
                  
                  
                  1,005,000
                  
                  
                  
                  831,000
                  
                  
                  
                  685,000
                  
                  
                  
                  588,000EBITDA (3)
                  
                  
                  182,412
                  
                  
                  
                  166,429
                  
                  
                  
                  123,448
                  
                  
                  
                  113,052
                  
                  
                  
                  78,002Cash
      and cash equivalents
                  
                  
                  14,690
                  
                  
                  
                  103,979
                  
                  
                  
                  14,175
                  
                  
                  
                  28,363
                  
                  
                  
                  28,143Earnings
      per share – basic
                  
                  
                  1.23
                  
                  
                  
                  0.64
                  
                  
                  
                  1.52
                  
                  
                  
                  1.34
                  
                  
                  
                  1.02Earnings
      per share – diluted
                  
                  
                  1.22
                  
                  
                  
                  0.63
                  
                  
                  
                  1.50
                  
                  
                  
                  1.31
                  
                  
                  
                  0.99Current
      ratio
                  
                  
                  1.44
                  
                  
                  
                  1.60
                  
                  
                  
                  1.39
                  
                  
                  
                  1.66
                  
                  
                  
                  1.78Net
      debt to equity ratio
                  
                  
                  0.40
                  
                  
                  
                  0.26
                  
                  
                  
                  0.19
                  
                  
                  
                  (0.03
                  )
                  
                  
                  0.17Weighted
      average numberof
      shares outstanding
                  
                  
                  45,544,688
                  
                  
                  
                  45,584,612
                  
                  
                  
                  45,577,261
                  
                  
                  
                  45,068,266
                  
                  
                  
                  39,840,234Shares
      outstanding
                  
                  
                  45,716,820
                  
                  
                  
                  45,448,123
                  
                  
                  
                  45,698,143
                  
                  
                  
                  45,201,785
                  
                  
                  
                  44,626,262Shares
      traded
                  
                  
                  40,881,633
                  
                  
                  
                  57,354,858
                  
                  
                  
                  34,463,255
                  
                  
                  
                  24,864,000
                  
                  
                  
                  17,911,000TSX
      (In
      Canadian dollars)High
      (4)
                  
                  
                  30.85
                  
                  
                  
                  40.10
                  
                  
                  
                  39.31
                  
                  
                  
                  25.84
                  
                  
                  
                  20.20Low
      (4)
                  
                  
                  18.56
                  
                  
                  
                  16.35
                  
                  
                  
                  23.70
                  
                  
                  
                  18.50
                  
                  
                  
                  12.25Close
                  
                  
                  30.40
                  
                  
                  
                  30.15
                  
                  
                  
                  38.89
                  
                  
                  
                  25.25
                  
                  
                  
                  19.88NYSE(5)(In USdollars)High
      (4)
                  
                  
                  29.53
                  
                  
                  
                  40.30
                  
                  
                  
                  39.64
                  
                  
                  
                  22.55
                  
                  
                  
                  17.25Low
      (4)
                  
                  
                  14.19
                  
                  
                  
                  12.70
                  
                  
                  
                  20.10
                  
                  
                  
                  16.33
                  
                  
                  
                  14.70Close
                  
                  
                  28.84
                  
                  
                  
                  24.70
                  
                  
                  
                  39.02
                  
                  
                  
                  21.74
                  
                  
                  
                  17.05
 All
references to common shares and per share amounts in this financial summary have
been restated to reflect the two-for-one split approved on May 4,
2006.
 (1)
                  With
      the adoption of Section 3064, “Goodwill and Intangible Assets,” of the
      Canadian Institute of Chartered Accountants Handbook, we retrospectively
      reclassified the net book value of certain software from “Property and
      Equipment” to “Intangible Assets.”
 (2)
                  This
      is unaudited information.
 (3)
                  EBITDA
      is calculated as income before income taxes less net interest expense,
      amortization of intangible assets, and depreciation of property and
      equipment.
 (4)
                  High
      and low prices for the common shares on the Toronto Stock Exchange (TSX)
      and New York Stock Exchange (NYSE) during the 52 weeks ended December 31,
      2009, shown above, were the intraday
  prices.
 (5)
                        Stantec
      began trading on the New York Stock Exchange (NYSE) on August 5,
      2005.
 
 Stantec
Inc. 2009 Financial Review
 2
 
 Graphic
 
  Stantec
Inc. 2009 Financial Review
 3
 Message
      to Shareholders
 
 2009 was
a year when the economy challenged businesses throughout North America. For
private and
public firms, not-for-profit organizations, and government bodies alike, it
impacted all aspects of
business operations. But while being tested by one of the toughest economies in
our 56-year history,
Stantec achieved several important objectives.
 
 Solid performance.Although
our business declined internally as we addressed
decreased opportunities in some
sectors, we achieved overall growth in revenue, income, and earnings
and celebrated our 56th year of uninterrupted profitability. Moreover, we ended
the year with
a strong balance sheet with a sustainable level of debt, which gives us the
flexibility to
continue to grow both organically and through acquisitions.
 
 Effective integration.Even in
a difficult business environment, we had the financial strength to
continue to pursue our growth plan. In 2009, we integrated over 1,700 new
colleagues in 40
offices from our largest acquisition to date. It is a tribute to our staff and
their commitment to our “One
Team” operating philosophy that we were able to achieve our integration goals
quickly and
effectively.
 
 Successful reorganization.In
the midst of economic stress, we successfully reorganized our structure,
including transitioning to a new chief executive officer, chief financial
officer, and chief operating
officer, all of whom were promoted internally. We also welcomed two new members to our
board of directors—David Emerson, a former member of Parliament for Canada, and
Paul Cellucci,
a former US ambassador to Canada, governor of Massachusetts, and lieutenant
governor of
Massachusetts.
 
 Enhanced Client Relationships.In 2009, we made progress on our goal of working with national
and global clients on larger, long-term projects. For example, we obtained a
global, multiyear
preferred supplier contract to provide environmental assessment and remediation
services to
international energy corporation Chevron at sites throughout North America,
South America, the
Asia-Pacific region, the Middle East, and Russia. In the United States, as part
of a consortium of four
firms, we secured a five-year contract to assist the Federal Emergency
Management Agency
with Risk MAP, a massive flood risk mapping and planning program designed to
help
 We
achieved overall growth in revenue, income, and earnings and celebrated our 56th
year of uninterrupted profitability.
  Stantec
Inc. 2009 Financial Review
 4
 
 Our achievements in 2009 were a
testament to the strength of our business
model .
  make
communities safer by providing more accurate flood and risk data to first
responders and community
officials for use in mitigation activites. We were also chosen to lead a
seven-firm team on a
five-year US federal government contract to provide three-dimensional laser
scanning services
to the U.S. General Services Administration, the government body that oversees
the construction
and management of federal buildings throughout the United States. This
nationwide surveying
program will cover 1,400 buildings and help the government manage its building data more
efficiently.
  For our
performance in 2009, and every year, we have our employees to thank. By working together
to manage our operations effectively and deliver high-quality, well-managed
projects to our
clients, they not only execute our business plan but also give us a reputation
for excellence.
  Our
achievements in 2009 were a testament to the strength of our business model,
which enabled us to
adjust our service delivery to changing market demands. As we enter a new
decade, we believe
that we remain well positioned to continue to expand our business to meet our
clients’ needs and
to take advantage of market opportunities in each of our practice areas. Our
services are
essential to helping our clients improve the quality of life in communities
throughout North America
and around the world, and we look forward to continuing to use our global
expertise and local
strength to provide sustainable, integrated solutions.
 
 On behalf
of Stantec, thank you for your confidence in our strategic direction and for
your continued
support.
 Graphic
 
 Stantec
Inc. 2009 Financial Review
 5
 
 Graphic
  Stantec
Inc. 2009 Financial Review
 6
  STANTEC
INC.
 
 
 MANAGEMENT’S
DISCUSSION AND ANALYSIS
 
 and
 
 CONSOLIDATED
FINANCIAL STATEMENTS
 
 For the
Years Ended December 31, 2009, and 2008
  
 MANAGEMENT’S
DISCUSSION AND ANALYSIS
 
 February
25, 2010
 
 This
discussion and analysis of Stantec Inc.’s operations, financial position and
cash flows, dated February 25, 2010, should be read in conjunction with the
Company’s 2009 audited consolidated financial statements and related notes. Our
2009 audited consolidated financial statements are prepared in accordance with
generally accepted accounting principles (GAAP) in Canada, which differ in
certain respects from GAAP in the United States. Note 25 of our audited
consolidated financial statements summarizes the principal differences between
Canadian GAAP and US GAAP that affect our financial statements. Unless otherwise
indicated, all amounts shown below are in Canadian dollars. Additional
information regarding the Company, including our Annual Information Form, is
available on SEDAR at www.sedar.com. Such
additional information is not incorporated by reference and should not be deemed
to be made part of this Management’s Discussion and Analysis.
 
 
 CAUTION
REGARDING FORWARD-LOOKING STATEMENTS
 
 Our
public communications often include written or verbal forward-looking statements
within the meaning of the U.S. Private Securities Litigation Reform Act and
Canadian securities law. Forward-looking statements are disclosures regarding
possible events, conditions, or results of operations that are based on
assumptions about future economic conditions and courses of action and include
future-oriented financial information.
 
 Statements
of this type are contained in this report, including the discussion of our goals
in the Visions, Core Business, and Strategy section and of our annual and
long-term targets and expectations for our practice areas in the Results and
Outlook sections, and may be contained in filings with securities regulators or
in other communications. Forward-looking statements may involve, but are not
limited to, comments with respect to our objectives for 2010 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.
 
 We
provide forward-looking information for our business (i.e., in relation to our
2020 international growth target and our goals for each of our practice areas)
in the Core Business and Strategy section as well as the Results (under the
Overall Performance, Gross and Net Revenue: 2009 versus 2008 and Liquidity and
Capital Resources subheadings) and Outlook sections of this report in order to
describe management expectations and targets by which we measure our success and
to assist our shareholders in understanding our financial position as at and for
the periods ended on the dates presented in this report. Readers are cautioned
that this information may not be appropriate for other purposes.
 
 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, forecasts, conclusions, projections, and other forward-looking
statements will not prove to be accurate. We caution readers of this report not
to place undue reliance on our forward-looking statements since a number of
factors could cause actual future results, conditions, actions, or events to
differ materially from the targets, expectations, estimates, or intentions
expressed in these forward-looking statements.
 
 Future
outcomes relating to forward-looking statements may be influenced by many
factors, including, but not limited to, the following material risks, each of
which is further described in the Risk Factors section of this
report.
  ·
              Economic
      downturns could have a negative impact on our business since our clients
      may curtail investment in infrastructure projects or may experience
      difficulty in paying for services
performed.
  ·
              The
      professional consulting services industry is highly competitive, which
      could have a negative impact on our profit margins and market
      share.
   MANAGEMENT’S
DISCUSSION AND ANALYSIS
 December
31, 2009
 STANTEC
INC.
  M-1
  ·
              The
      nature of our business exposes us to potential liability claims and
      contract disputes, which may reduce our
profits.
  ·
              Our
      backlog is subject to unexpected adjustments and cancellations and is,
      therefore, an uncertain indicator of our future
  earnings.
  ·
              Changing
      markets may offer opportunities to provide services through alternate
      models. Failure to respond to these market demands may result in lost
      revenues.
  ·
              We
      derive significant revenue from contracts with government agencies. Any
      disruption in government funding or in our relationship with those
      agencies could adversely affect our
business.
  ·
              Interruption
      to our systems and network infrastructure could adversely impact our
      ability to operate.
  ·
              We
      bear the risk of cost overruns in a significant number of our contracts.
      We may experience reduced profits or, in some cases, losses under these
      contracts if costs increase above our
estimates.
  ·
              Uncertainties
      associated with an acquisition may cause a loss of
    employees.
  ·
              We
      may be unsuccessful in our goal to increase the size and profitability of
      our operations, which could lead to a reduction in our market share and
      competitiveness as our industry
consolidates.
  ·
              We
      may experience difficulties in integrating an acquired entity’s business
      into our existing operations and so may not realize the anticipated
      benefits of the acquisition.
  ·
              To
      attain our goal of increasing the size and profitability of our
      operations, we may pursue and invest in business opportunities outside
      North America. Unfamiliarity with markets and political environments may
      impair our ability to increase our international
  revenues.
  ·
              Goodwill
      and intangible assets acquired from our acquisitions represent substantial
      portions of our total assets. If our acquired businesses do not perform as
      expected, we may be required to write down the value of our goodwill and
      intangible assets, which could have a material adverse effect on our
      earnings.
  ·
              One
      of our primary competitive advantages is our reputation. If our reputation
      is damaged due to client dissatisfaction, our ability to win additional
      business may be materially damaged.
  ·
              Our
      employees may face environmental, health, and safety risks and hazards in
      the workplace resulting in injury or lost
time.
 
 Assumptions
 In
determining our forward-looking statements, we consider material factors
including assumptions about the performance of the Canadian and US economies in
2010 and its effect on our business. The assumptions we made in determining the
outlook for each of our practice areas, our annual targets, and our outlook for
2010 are listed in the Outlook section of this report.
 
 The
preceding list of factors is not exhaustive. 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
February 25, 2010, 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. In the case of the ranges of expected performance for fiscal 2010, it
is our current practice to evaluate and, where we deem appropriate, provide
updates. However, subject to legal requirements, we may change this practice at
any time at our sole discretion.
 
 
 MANAGEMENT’S
DISCUSSION AND ANALYSIS
 December
31, 2009
 STANTEC
INC.
  M-2
  EXECUTIVE
SUMMARY
 
 Core
Business and Strategy
  ·
              Our
      Company provides professional consulting services in planning,
      engineering, architecture, interior design, landscape architecture,
      surveying and geomatics, project management, environmental sciences, and
      project economics for infrastructure and facilities projects throughout
      North America.
  ·
              Our
      goal is to become and remain a top 10 global design and consulting
      services firm, and our focus is to provide professional services in the
      infrastructure and facilities market principally on a fee-for-service
      basis.
 
 Key
Performance Drivers and Capabilities
  ·
              Our
      performance depends on our ability to attract and retain qualified people;
      align our leadership activities with our financial and strategic goals;
      expand our work with top clients; make the most of market opportunities;
      finance our growth; find, acquire, and integrate firms and/or new
      employees into our operations; and achieve top-three market penetration in
      the geographic areas we serve.
 
 Results
  ·
              Ability to adapt to challenging
      economic conditions.Despite the challenging economic environment
      and competitive landscape, 2009 was a year in which we continued to show
      strength in our operations and financial performance, demonstrating our
      ability to adapt our business model to changing
  markets.
  ·
              Continued profitability.
      In 2009, we achieved a 12.4% increase in gross revenue, a 10.0% increase
      in net revenue, and a 9.6% increase in earnings before
      interest expense, income taxes, depreciation, and
      amortization (EBITDA) compared to 2008. Our net income for
      2009 was $55.9 million compared to $29.0 million in 2008. Diluted earnings
      per share for 2009 were $1.22 compared to $0.63 in
  2008.
  ·
              Growth through
      acquisition. In January 2009, we completed our largest acquisition
      to date with the addition of Jacques Whitford Group Ltd. and Jacques
      Whitford Global Group Limited (Jacques Whitford), which brought over 1,700
      employees and 40 offices to our operations and strengthened our service
      capabilities in geotechnical engineering, air quality evaluation, and
      environmental and geoscientific assessment. In November 2009, we acquired
      Granary Associates, Inc. (Granary) with offices in Philadelphia,
      Pennsylvania, and New York, New York. The addition of this firm
      strengthened our expertise in project management, planning, architecture,
      and interior design, especially in the health care
    industry.
  ·
              Strong balance sheet and
      liquidity.Our balance sheet remains solid, and in 2009, we
      generated strong cash flows from operations, which were used to reduce our
      long-term bank debt levels. At December 31, 2009, $163.4 million (2008 –
      $104.9 million) of our $300 million credit facility was available for
      future acquisitions, working capital needs, capital expenditures, and
      general corporate purposes.
 
 Outlook
  ·
              We
      believe that our overall outlook for 2010 is stable compared to the last
      half of 2009, with moderate growth beginning in the second half of 2010 in
      regions and practice areas where we are a top-tier service provider. The
      outlook for each practice area in 2010 ranges from stable to moderate
      growth for Buildings, Environment, Transportation, and Industrial and flat
      for Urban Land.
 
 Risk
  ·
              Various
      factors could cause our actual results to differ materially from those
      projected in our forward- looking statements and are described in the Risk
      Factors section of this report. Although the difficult economic
      environment of the past year appears to be slowly improving, related
      pressures, such as increased competition, margin compressions, and project
      delays, are not expected to subside immediately. These pressures and
      uncertainties related to economic recovery, volatility in the Canadian/US
      exchange rate, and government funding may impact our outlook for
      2010.
 
 
 MANAGEMENT’S
DISCUSSION AND ANALYSIS
 December
31, 2009
 STANTEC
INC.
  M-3
  CORE
BUSINESS AND STRATEGY
 
 Our
Company provides professional consulting services in planning, engineering,
architecture, interior design, landscape architecture, surveying and geomatics,
project management, environmental sciences, and project economics for
infrastructure and facilities projects. By integrating our expertise in these
areas across North America and the Caribbean, we are able to work as “One Team”
providing our clients with a vast number of project solutions. This integrated
approach also enables us to execute our “Global Expertise. Local Strength.”
operating philosophy. We support the services we deliver through local offices
with the knowledge and skills of our entire organization. Through
multidiscipline service delivery, we also support clients throughout the project
life cycle—from the initial conceptual planning to project completion and
beyond.
 
 Our goal
is to become and remain a top 10 global design and consulting services firm, and
our focus is to provide professional services in the infrastructure and
facilities market principally on a fee-for-service basis while participating in
various models of alternative project delivery. In 2009, we developed a new
10-year strategic plan for achieving our objective. From 2010 to 2020, we intend
to continue to increase the depth and breadth of our services. We are confident
that we can do so because we have built a solid foundation—made up of a robust
business strategy, workforce, organizational structure, and systems—to take us
into the future. We will remain focused on servicing the North American market
while gradually increasing our geographic reach outside North America in markets
that are best suited and receptive to our services as these services evolve and
mature. Currently, international work accounts for 2% of our business. By 2020,
we aim to generate up to 20% of our revenue from our international work, most
likely by expanding to the United Kingdom, Europe, and Australia. We plan to
grow organically by focusing on cross-selling our existing services to our
biggest clients and to new national and global clients. Providing more services
to our large clients will strengthen our integrated, “One Team”
approach.
 
 Our
strategy for achieving our goals is based on mitigating risk by
 
 ·
              Diversifying
      our operations through a focused, three-dimensional business
      model
 ·
              Serving
      many clients on many projects
 ·
              Taking
      on little or no construction risk
 ·
              Positioning
      ourselves among the top-three service providers in our geographic regions
      and practice areas
 ·
              Managing
      our assets and operating
effectively
 
 Our
focused, three-dimensional business model allows us to manage risk while
continuing to increase our revenue and earnings. The model is based
on
 
 ·
              Diversifying
      our operations across several geographic
regions
 ·
              Specializing
      in distinct but complementary practice
areas
 ·
              Providing
      services in all five phases of the infrastructure and facilities project
      life cycle (planning, design, construction, maintenance, and
      decommissioning)
 
 Because
of the diversity of our model, we are generally able to adapt to changes in
market conditions, such as the current economic slowdown, by offsetting
decreased demand for services in one practice area with increased demand for
services in another practice area.
 
 
 MANAGEMENT’S
DISCUSSION AND ANALYSIS
 December
31, 2009
 STANTEC
INC.
  M-4
  
 Through
our “One Team” approach to our business and service delivery, we have one
reportable GAAP segment—Consulting Services—which is an aggregate of our
operating segments. Our operating segments are based on our regional geographic
areas, and our chief operating decision maker (chief executive officer) assesses
our Company’s performance based on financial information available from these
geographic areas. In addition, we have practice areas that provide strategic
direction, mentoring, and technical support to our operations across our
geographic regions.
 
 The
following discussion outlines the three main components of our business
model.
 
 Geographic
Diversification
 Currently,
we operate in four main geographic regions in North America—Canada East, Canada
West, US East, and US West. We also have a small presence in the Caribbean and a
project presence in several international locations. Our goal is to position
ourselves among the top three service providers in each of our regions. Based on
our services mix, this generally means achieving a market penetration of 100
employees or $10 million in revenue per 1 million in population. We realize this
objective in our existing regions primarily by adding services through organic
growth and strategic hiring supplemented by acquisitions. We achieve our target
in new regions principally by acquiring and integrating firms that complement
our organization supplemented by organic growth and strategic
hiring.
 
 Practice
Area Specialization
 Currently,
we provide services in five specialized practice area groupings—Buildings,
Environment, Industrial, Transportation, and Urban Land. Focusing on this
combination of project services helps differentiate us from our competitors,
allowing us to enhance our presence in new geographic regions and markets and to
establish and maintain long-term client relationships. Our strategy for
strengthening this element of our business model is to expand the depth of our
expertise in our current practice areas and to selectively add complementary new
practice areas to our operations.
 
 Buildings. We provide
architectural and engineering design and consulting services through two
specialist practice areas—1) Architecture and 2) Buildings Engineering—to both
private and public sector clients in a wide range of building types and market
sectors across North America and internationally. Our primary focus is the
design of health care, education, sports and recreation, airport, and retail and
commercial buildings from preconception to postcompletion. Our core services
include project and program definition, facilities planning, architectural
design, interior design, and structural, mechanical, electrical, and acoustical
engineering for both new construction and existing buildings. For existing
buildings, we offer expertise in performance engineering, building operating
systems (including analysis of exterior envelope, air quality, lighting, and
energy efficiency), and ongoing tenant improvements. Over the past few years,
our Buildings practice area has also established an industry-wide reputation for
leadership in sustainable and integrated design.
 
 In 2009,
we expanded our Buildings practice area through the addition of Granary, a firm
that provides project management, planning, architecture, and interior design
services to the health care sector through offices in the United States. Going
forward, our focus in 2010 and over the next five years will be to develop a
significant presence for this practice area in the United States through
acquisitions while growing organically in Canada. By 2020, we expect our
Buildings practice to be among the top three design and consulting practices in
North America.
 
 Environment. We provide
solutions for water supply and wastewater disposal for communities and industry,
planning and permitting infrastructure projects, ecosystem restorations, and
soil-structure interaction evaluations through four specialist practice areas:
1) Environmental Infrastructure, 2) Environmental Management, 3) Environmental
Remediation, and 4) Geotechnical Engineering. Our core services in these areas
include water supply, treatment, storage, and distribution; wastewater
collection, pumping, treatment, and disposal; watershed management;
environmental assessment, documentation, and permitting; ecosystem restoration
planning and design; environmental site management and remediation; subsurface
investigation and characterization; and geotechnical engineering.
 
 
 MANAGEMENT’S
DISCUSSION AND ANALYSIS
 December
31, 2009
 STANTEC
INC.
  M-5
  In 2009,
we expanded our Environment practice area through the addition of Jacques
Whitford. This acquisition, our largest to date with 40 offices mainly located
in Canada, enhanced our capabilities in environmental assessment, documentation
and permitting; environmental site management and remediation; and geotechnical
engineering.
 
 In 2010
and over the next five years, we will focus on strengthening our Environment
practice area by continuing to expand its profile and market share throughout
North America, primarily in the water and energy sectors. By 2020, we expect to
be a top-tier firm in the water sector in North America with a significant
indigenous presence in western Europe and the South Asia/Pacific region. In the
energy sector, we aim to be a leading global firm in the environmental review,
permitting, and licensing markets and a top-tier provider of liability
management services to leading energy firms worldwide.
 
 Industrial. We provide
consulting and design services to private, public, and government clients
through five specialist practice areas: 1) Manufacturing, 2) Power, 3)
Resources, 4) Bio/Pharmaceuticals, and 5) Program & Project Management. Our
core offerings include planning, engineering, project management, and oversight
in market sectors such as oil and gas, renewable energy, mining, linear
infrastructure, power transmission and distribution, automotive, forest
products, food and beverage, and general manufacturing. We also provide
specialty services in strategic management and in the management of
multibillion-dollar client programs. Our services span the life cycle of
projects from inception to decommissioning.
 
 In 2009,
our Industrial practice area grew compared to 2008 as a result of the
acquisition of McIntosh Engineering Holdings Corporation (McIntosh), which we
completed in the latter half of 2008. In 2010, we will focus on building the
practice area organically and through acquisitions in strategic sectors in the
United States and Canada. Over the next five years, we expect to complete
several acquisitions that complement our existing practice areas in order to
become a top 10 service provider in Canada and to generate a portion of our
Industrial revenues internationally. Our goal for 2020 is to develop several of
our Industrial practices into top 10 service providers in North America and to
earn up to 20% of our Industrial revenues internationally.
 
 Transportation. We offer
solutions for the safe and efficient movement of people and goods, primarily to
public sector clients, through one practice area focusing on the transportation
sector. Our core services include project management, planning, engineering,
construction administration, and infrastructure management related to the
transportation sector. We prepare transportation master plans for communities;
conduct transportation investment studies; plan and design airport, transit,
rail, and highway facilities; provide administration and support services for
the construction of specific projects; and provide ongoing management planning
for the safe and efficient upkeep of transportation facilities. Our broad range
of expertise is illustrated by our ability to 1) provide specialized services
such as state-of-the-art simulation modeling, 2) evaluate the effectiveness of
alternative transportation demand and supply management techniques, 3) prepare
investment grade revenue studies for funding transportation projects, 4) provide
public consultation and environmental assessment skills to build broad public
support for infrastructure plans, and 5) design and implement integrated
infrastructure/asset management systems for all types of transportation
infrastructure.
 
 In 2009,
the Transportation practice area grew compared to 2008 through strategic hiring
in our existing geographic locations. Our focus for this practice in 2010 is to
grow through acquisitions, particularly in the US Southeast, California, Texas,
Ontario, and British Columbia, and to grow primarily organically in the transit
sector. Over the next five years, we expect this practice area to move from a
top 20 position to a top 10 position in North America. For 2020, our goal is to
have a top five Transit practice, viable Aviation and Bridge practices, and a
well-diversified Roadways practice that is capable of competing for the largest
and most complex projects in most major urban areas across North
America.
 
 
 MANAGEMENT’S
DISCUSSION AND ANALYSIS
 December
31, 2009
 STANTEC
INC.
  M-6
  Urban Land. We provide
planning, landscape architecture, surveying, engineering, and project management
solutions, principally for the land development, real estate, and retail and
commercial industries, through four specialist practice areas: 1) Commercial
Program Development, 2) Planning & Landscape Architecture, 3) Urban Land
Engineering, and 4) Surveys/Geomatics. Our core services include, or relate to,
the development of conceptual and master plans, development approvals and
entitlement, infrastructure design, transportation planning, traffic
engineering, landscape architecture, construction review, and a wide variety of
surveying and geomatics services to support the land development industry and
other practice areas.
 
 In 2009,
we continued to diversify the services we provide for nonresidential development
sectors and to adapt to changes in the North American housing market. Going
forward, we are positioning ourselves to serve a rebounding housing market in
North America in 2010 and beyond. Over the next five and 10 years, we also aim
to be a North American leader in providing geospatial services (geographic
information systems, scanning, survey geodetics, and remote sensing),
multidisciplinary commercial program development services, and integrated
planning and urban design services.
 
 Life
Cycle Solutions
 The third
element of our business model is the provision of professional services in all
five phases of the project life cycle—planning, design, construction,
maintenance, and decommissioning. This inclusive approach enables us to deliver
services during periods of strong new capital project activity (i.e., design and
construction) as well as periods of lower new capital project expenditures
(i.e., maintenance and rehabilitation). Beginning with the planning and design
stages, we provide conceptual and detailed design services, conduct feasibility
studies, and prepare plans and specifications. During the construction phase, we
generally act as the owners’ representative, providing project management,
surveying, and resident engineering services. We focus principally on
fee-for-service work and generally do not act as the contractor or take on
construction risk. Following project completion, during the maintenance phase,
we provide ongoing professional services for maintenance and rehabilitation
projects in areas such as facilities and infrastructure management, facilities
operations, and performance engineering. Finally, in the decommissioning phase,
we provide solutions and recommendations for taking facilities out of active
service.
 
 Going
forward, our strategy is to continue to expand the scope of services we provide
in the initial planning stages and during maintenance, allowing us to establish
longer-term relationships with clients throughout the project life cycle. Our
three-dimensional business model allows us to provide services to many clients
and for many projects, ensuring that we do not rely on a few large projects for
our revenue and that no single client or project accounts for more than 5% of
our business.
 
 
 KEY
PERFORMANCE DRIVERS AND CAPABILITIES
 
 Our
performance depends on our ability to attract and retain qualified people; align
our leadership activities with our financial and strategic goals; work with top
clients; make the most of market opportunities; finance our growth; find,
acquire, and integrate firms and/or new employees into our operations; and
achieve top-three market penetration in the geographic areas we serve. Based on
our success with these drivers, we believe that we are well positioned to
continue to be one of the principal providers of professional design and
consulting services in our geographic regions.
 
 People
 Our most
important performance driver is our people. Employees create the project
solutions we deliver to clients. Consequently, to achieve our goal of becoming
and remaining a top 10 global design firm, we must grow our workforce through a
combination of internal hiring and acquisitions. We measure our success in this
area by total staff numbers. In 2009, our employee numbers increased to
approximately 9,300 from 8,700 in 2008. As at December 31, 2009, our workforce
was made up of about 5,100 professionals, 2,800 technical staff, and 1,400
support personnel.
 
 
 MANAGEMENT’S
DISCUSSION AND ANALYSIS
 December
31, 2009
 STANTEC
INC.
  M-7
  To
attract and retain qualified staff, we offer opportunities to be part of “One
Team” working on challenging multidiscipline projects with some of the most
talented people in our industry. We are continually strengthening and supporting
our people-oriented, “One Team” culture. In 2009, we completed a number of
activities, including updating our Career Development Center to include more
tools and assessment resources. The Career Development Center is the online
source for all our learning, coaching and mentoring, and professional and career
development resources. During the year, we continued to roll out the leadership
development program we launched in 2008 to leaders throughout our regions,
updated and enhanced the content and exams in our project management learning
series, and enhanced our methods for measuring the impact of our training
programs to better determine the return on our investment. We also invested in
our staff by focusing on health and safety initiatives, including education and
training in risk and hazard identification. We will continue to update and
improve our learning, career development, and health and safety programs in
response to our staff’s needs.
 
 To
measure our success in attracting and retaining staff, we use tools such as
employee engagement surveys, ongoing requests for feedback, and exit interviews.
The results of these performance metrics help us develop programs and
initiatives for improving and maintaining staff engagement. We also track
turnover rates for our staff through our business information
system.
 
 Our
diversified portfolio approach to business, operating in different regions and
practice areas, and our “One Team” philosophy, using and sharing the best
available staff resources across the Company, generally enable us to redeploy a
portion of our workforce when faced with changes in local, regional, or national
economies or practice area demand. Although there will always be some areas
where it will be difficult to find appropriate staff during certain periods, as
we increase in size we become better able to address these issues by using staff
from other parts of the Company either through temporary relocation or work
sharing. We are continually improving our ability to work on projects from
multiple locations through standardized practices and systems, project
collaboration, and Web-based technology.
 
 Leadership
 Our
ability to align the activities of our senior managers with our short- and
long-term financial and strategic goals is also an important driver for our
success. To this end, in addition to fixed salaries, we provide, on a
discretionary basis, short- and long-term compensation designed to reward our
senior managers (including our chief financial and chief operating officers,
regional operating unit leaders, and practice area unit leaders) for their
individual and corporate contributions to meeting our objectives. The short-term
compensation is an annual cash bonus. The total amount available in the annual
employee bonus pool is calculated as a percentage of our annual net income,
which we believe directly ties the interests of our bonus-eligible employees,
including our senior managers, to our financial performance. In determining the
awards each year, we balance the managers’ overall contributions to our
profitability Company wide with the performance of their individual business
unit, an approach that, in our view, creates a sense of shared responsibility
for achieving outstanding business results and meeting our clients’ needs. As
long-term compensation, we have an employee share option plan. Key staff may be
given options to purchase shares, which further aligns their interests with
those of our shareholders and encourages them to stay employed with us over the
long term. In making the decision to award options to an individual, our chief
executive officer (CEO) and Corporate Governance and Compensation Committee
consider the individual’s ability to contribute to our long-term success, along
with other factors.
 
 Similarly,
our CEO’s compensation package is governed by the terms of his employment
agreement, includes a base salary; an annual bonus calculated as a percentage of
our pretax, prebonus income; and a prescribed allotment of deferred share units.
We require our CEO, senior vice presidents, chief operating officer (COO), and
chief financial officer (CFO) to own a minimum number of shares, representing a
specific percentage of their base salary, in the Company. We believe that
deferred share units and minimum ownership requirements represent incentives for
our CEO to achieve a minimum growth rate in our share price, thereby aligning
his compensation with the interests of shareholders.
 
 
 MANAGEMENT’S
DISCUSSION AND ANALYSIS
 December
31, 2009
 STANTEC
INC.
  M-8
  Since the
results of our operations are dependent on the abilities and efforts of the
members of our senior management team and other key personnel, our Corporate
Governance and Compensation Committee and senior managers regularly review our
succession planning measures for management. In 2009, we implemented our
succession plan for key members of our leadership team, including the CEO, CFO,
and COO, who all had years of experience with the Company and were promoted
internally.
 
 Clients
 Another
essential performance driver is our ability to attract and retain top clients.
For us, the best clients are those with whom we have long-term relationships and
for whom we provide multiple services and complete large and innovative
projects. Currently, approximately 70% of our business comes through repeat
clients, and our largest 10 clients account for approximately 10% of our
revenue. Our goal is to expand the number of top clients we serve through an
account management program designed to increase organic growth by building on
relationships with existing clients.
 
 Acquisition
Opportunities and Integration
 The North
American market gives us many opportunities to build toward our goal of becoming
and remaining a top 10 global design firm. We believe that such growth is
necessary in order to enhance the depth of our expertise, broaden our services,
increase our shareholder value, provide more opportunities for our employees,
and lever our information technology systems. Our strategy for achieving our
goal is to combine internal growth with the acquisition of firms that believe in
our vision and want to be part of our dynamic Company. In 2009, we completed two
acquisitions, including our largest to date. These additions strengthened our
capabilities in our Buildings and Environment practice areas, increased our
presence in Canada and the eastern United States, and expanded our ability to
support the energy sector. We are confident that we can continue to take
advantage of acquisition opportunities because we operate in an industry sector
that includes more than 100,000 firms, most of which are small. According to
Engineering News-Recordmagazine, the largest 500 engineering and architecture companies
headquartered in the United States—our principal competitors—generate
approximately US$90 billion in annual fees, 20% of which they earn
internationally. Currently, we have approximately a 2% share of this
market.
 
 The
integration of acquired firms begins immediately following the acquisition
closing date and generally takes between six months and two years to complete.
It involves the implementation of our Company-wide information technology and
financial management systems as well as provision of support services from our
corporate and regional offices. This approach allows our new staff to focus on
their primary responsibility of continuing to serve clients with minimal
interruption while taking advantage of our systems and expertise.
 
 Our
acquisition and integration program is managed by a dedicated acquisition team
that supports, or is responsible for, the tasks of identifying and valuing
acquisition candidates, undertaking and coordinating due diligence, negotiating
and closing transactions, and integrating employees and systems following an
acquisition. This team is complemented and enhanced by other operational staff
as appropriate. We measure our success in integrating acquired employees through
a postintegration survey and use the survey results to address specific issues
and improve future integration activities.
 
 Financing
 Our
success also depends on our continuing ability to finance our growth plan.
Adequate financing gives us the flexibility to acquire firms that are
appropriate to our vision and complement our business model. Since we became
publicly traded on the Toronto Stock Exchange (TSX) in 1994, we have increased
our gross revenue at a compound annual rate of 20.8%. To fund such growth, we
require cash generated from both internal and external sources. Historically, we
have completed acquisitions using mostly cash and notes while at opportune times
raising additional equity to replenish our cash reserves, pay down debt, or
strengthen our balance sheet. To date, we have issued additional shares for
these purposes on four occasions—in 1997, 2000, 2002, and 2005. Currently, we
have a revolving credit facility, due on August 31, 2011, that provides us with
a line of credit of $300 million, of which $163.4 million was available as at
December 31, 2009, for future activities.
 
 
 MANAGEMENT’S
DISCUSSION AND ANALYSIS
 December
31, 2009
 STANTEC
INC.
  M-9
  Market
Penetration
 Also key
to our success is achieving a certain level of market penetration in the
geographic areas we serve. Our target is to be among the top three service
providers in each of our geographic regions and practice areas. With this level
of market presence, we are less likely to be affected by downturns in regional
economies. Top-three positioning also gives us increased opportunities to work
for the best clients, obtain the best projects, and attract and retain the best
employees in a region and is important for building or maintaining the critical
mass of staff needed to generate consistent performance and to support regional
company infrastructure.
 
 
 RESULTS
 
 Overall
Performance
 
 Highlights
for 2009
 
 (In
      millions of Canadian dollars,
                except
      per share amounts)
              
              2009
              
              
              2008
              
              
              $
      Change
              
              
              %
      ChangeGross
      revenue
              
              
              1,519.9
              
              
              
              1,352.0
              
              
              
              167.9
              
              
              
              12.4
              %Net
      income
              
              
              55.9
              
              
              
              29.0
              
              
              
              26.9
              
              
              
              92.8
              %Earnings
      per share – basic
              
              
              1.23
              
              
              
              0.64
              
              
              
              0.59
              
              
              
              92.2
              %Earnings
      per share – diluted
              
              
              1.22
              
              
              
              0.63
              
              
              
              0.59
              
              
              
              93.7
              %EBITDA
      (note
      1)
              
              
              182.4
              
              
              
              166.4
              
              
              
              16.0
              
              
              
              9.6
              %Cash
      flows from operating activities
              
              
              100.0
              
              
              
              160.0
              
              
              
              (60.0
              )
              
              
              n/mCash
      flows used in investing activities
              
              
              (103.2
              )
              
              
              (127.7
              )
              
              
              24.5
              
              
              
              n/mCash
      flows from (used in) financing activities
              
              
              (84.1
              )
              
              
              53.8
              
              
              
              (137.9
              )
              
              
              n/m
 n/m
= not meaningful
 note
1: EBITDA is calculated as income before income taxes less net interest expense,
amortization of intangible assets, and depreciation
of property and equipment
 as
further discussed in the Definition of Non-GAAP Measures in the Critical
Accounting Estimates, Developments, and Measures section of this
report.
  
  The
following highlights our major financial achievements and strategic activities
in 2009, as well as other factors that contributed to our financial performance
and overall financial condition:
 
 ·
              Continued profitability and
      growth.In 2009, we achieved a 12.4% increase in gross revenue, a
      10.0% increase in net revenue, and a 9.6% increase in EBITDA (the terms
      net revenue and EBITDA are defined in the Definition of Non-GAAP Measures
      in the Critical Accounting Estimates, Developments, and Measures section
      of this report) compared to 2008.
 
 
 MANAGEMENT’S
DISCUSSION AND ANALYSIS
 December
31, 2009
 STANTEC
INC.
  M-10
  During
the year, we conducted our annual goodwill impairment test. Due to fluctuations
in the market and uncertainties arising from overall economic conditions, we
recorded a $35.0 million impairment to goodwill. This impairment charge
decreased our diluted earnings per share by $0.76. The goodwill charge is
non-cash in nature and does not affect our liquidity, cash flows from operating
activities, or debt covenants and will not impact our future operations.
Excluding the impact of this goodwill impairment, our financial results for the
year reached record levels. Our net income would have been $90.9 million, and
our diluted earnings per share would have been $1.98 for the year.
 
 Including
the impact of the goodwill impairment charge, our net income for 2009 was $55.9
million compared to $29.0 million in 2008 and $69.3 million in 2007. Our diluted
earnings per share for 2009 were $1.22 compared to $0.63 in 2008 and $1.50 in
2007. Our net income increased year over year due to an increase in our gross
margin percentages (the term gross margin is defined in the Definition of
Non-GAAP Measures in the Critical Accounting Estimates, Developments, and
Measures section of this report) from 55.7% to 56.3% and a $3.5 million increase
in income from associated companies mainly due to the Jacques Whitford
acquisition. This increase in net income was offset by a slight increase in our
administrative and marketing expenses as a percentage of net revenue from 41.3%
to 41.8% and a $3.9 million increase in interest expense.
 
 ·
              Ability to adapt to challenging
      economic conditions.Our operating results were strong compared to
      2008, demonstrating our ability to adapt our business model to changing
      market conditions throughout North America. However, continued weakness in
      the residential market contributed to decreased revenue in our Urban Land
      practice area in 2009 compared to 2008. This decrease was offset by an
      increase in revenue in our Environment, Industrial, and Transportation
      practice areas.
 
 Despite
the economic slowdown in North America, we believe that we are well positioned
to maintain our business and take advantage of market opportunities in 2010 for
a number of reasons:
  ·
              The
      diversification of our operations across geographic regions, practice
      areas, and all phases of the infrastructure and facilities project life
      cycle as well as our mixture of private and public sector projects give us
      the flexibility to timely adapt to changing market
    conditions.
  ·
              We
      have a strong leadership team that emphasizes a client-centered culture,
      asset management, and operational effectiveness. We continue to monitor
      our short-term backlog and match staff levels to the work
      available.
  ·
              We
      have a dedicated team of employees who have shown commitment to excellence
      in project design and management, as well as in controlling costs and
      pursuing efficiency in our
operations.
  ·
              We
      have a strong balance sheet and continue to generate sufficient cash flows
      to meet our operating needs and fund future
  growth.
 
 ·
              Growth through acquisitions.Acquisitions completed in 2008 and 2009 contributed $275.7 million
      to the change in our gross revenue from 2008 to 2009. We completed two
      acquisitions in 2009.
 
 ·
              Strong balance sheet.Our balance sheet remains solid. In 2009, we generated sufficient
      cash flows to reduce our long-term bank debt levels. At December 31, 2009,
      $163.4 million (2008 – $104.9 million) of our $300 million credit facility
      was available for future acquisitions, working capital needs, capital
      expenditures, and general corporate
purposes.
 
 
 MANAGEMENT’S
DISCUSSION AND ANALYSIS
 December
31, 2009
 STANTEC
INC.
  M-11
  
 ·
              Leadership succession.During 2009, we seamlessly implemented our succession plan for
      several key leaders. Effective May 14, 2009, Robert (Bob) Gomes succeeded
      Tony Franceschini, who assumed a role on our board of directors, as the
      CEO of our Company. Bob graduated from the University of Alberta with a
      degree in civil engineering and has held various leadership roles in his
      over 20 years with Stantec, including those of vice president of Alberta
      North and senior vice president of the Industrial practice area. At the
      beginning of the year, Dan Lefaivre assumed the role of CFO. A certified
      management accountant, Dan joined Stantec in 1990 and has played an
      integral role in numerous acquisitions, conversion activities, financing
      activities, and the integration of business systems. In addition, during
      2009, Paul Cellucci, David Emerson, and Bob Gomes were elected as new
      directors of our board as one board member retired in the
      year.
 
 Effective
January 1, 2010, Rich Allen, the senior vice president of our US East region,
assumed the role of COO from Mark Jackson, who retired from Stantec at the end
of 2009. Rich has bachelor and master’s degrees in civil engineering and
received his juris doctor from the Franklin Pierce Law Center in 1985. Rich
joined Stantec in 2006 with the acquisition of Dufresne-Henry, Inc., where he
served as president and CEO.
 
 Results
Compared to 2009 Targets
 In our
2008 Management’s Discussion and Analysis, we established various ranges of
expected performance for 2009. The following table presents the results we
achieved in 2009:
 
 Measure
              Expected
      Range
              Results
      Achieved
              Results
      before Goodwill ImpairmentGross
      margin as % of net revenue
              Between
      54 and 56%
              56.3%   P
              56.3%
      PAdministrative
      and marketing expenses as % of net revenue
              Between
      41 and 43.5%
              41.8%   P
              41.8%
      PNet
      income as % of net revenue
              At
      or above 6%
              4.5% Ï
              7.3%
      PEffective
      income tax rate
              Between
      29 and 31%
              39.0%Ï
              28.2%
      PReturn
      on equity (note
      1)
              At
      or above 14%
              10.1% Ï
              14.7%
      PNet
      debt to equity ratio (note
      2)
              At
      or below 0.5 to 1
              0.40   P
              0.35
      P
 note
1: Return on equity is calculated as net income for the year divided by average
shareholders’ equity over each of the last four quarters as further discussed in
the Definition of Non-GAAP Measures in the Critical Accounting Estimates,
Developments, and Measures section of this report.
 note
2: Net debt to equity ratio is calculated as long-term debt plus current portion
of long-term debt less cash and cash held in escrow, all divided by
shareholders’ equity as further discussed in the Definition of Non-GAAP Measures
in the Critical Accounting Estimates, Developments, and Measures section of this
report.
 P Met or
performed better than target
 X
Did not meet target
 
 In 2009,
we met our targets for all items except net income as a percentage of net
revenue, effective income tax rate, and return on equity. Excluding the impact
of the goodwill impairment charge, we met or performed better than all our
targets. The goodwill impairment charge is explained in the Goodwill and
Intangible Assets section below.
 
 Acquisitions
 
 Total
consideration for acquisition activity was $144.8 million in 2009 and
$122.9 million in 2008. In 2009, we completed the following
acquisitions:
  ·
              On
      January 2, 2009, we acquired the shares and businesses of Jacques
      Whitford, which added approximately 1,700 staff to our Company. The
      acquisition of this firm increased our presence in Canada and the eastern
      United States, enhanced our geotechnical engineering capabilities, and
      increased our ability to provide environmental assessments and permitting
      services, especially for the energy
sector.
   MANAGEMENT’S
DISCUSSION AND ANALYSIS
 December
31, 2009
 STANTEC
INC.
  M-12
  ·
              On
      November 6, 2009, we acquired the assets of Granary, which brought
      approximately 100 staff to our Company. The acquisition of this firm added
      considerable depth to our service offerings in the health care sector.
      Granary provides project management, architecture, and interior design
      services.
 
 In Q1 09,
we completed the integration of SII Holdings, Inc. (Secor). Also during the
year, we successfully integrated the systems of Jacques Whitford. We expect to
integrate Granary’s systems by the end of Q1 10.
 
 Selected
Annual Information
 
 We have
demonstrated strong, sustainable financial growth in the last three years as
highlighted in the trending of the annual information below:
 
 (In
      millions of Canadian dollars,
                  except
      per share and share amounts)
                
                2009
                
                
                2008
                
                
                2007Gross
      revenue(note
      1)
                
                
                1,519.9
                
                
                
                1,352.0
                
                
                
                954.6Net
      income (note
      2)
                
                
                55.9
                
                
                
                29.0
                
                
                
                69.3Earnings
      per share – basic (note
      2)
                
                
                1.23
                
                
                
                0.64
                
                
                
                1.52Earnings
      per share – diluted (note
      2)
                
                
                1.22
                
                
                
                0.63
                
                
                
                1.50Cash
      dividends declared per common share
                
                Nil
                
                
                Nil
                
                
                NilTotal
      assets
                
                
                1,123.5
                
                
                
                1,144.9
                
                
                
                813.6Total
      long-term debt
                
                
                234.2
                
                
                
                249.2
                
                
                
                96.1Outstanding
      common shares – as at December 31
                
                
                45,716,820
                
                
                
                45,448,123
                
                
                
                45,698,143Outstanding
      common shares – as at February 25, 2010
                
                
                45,733,820Outstanding
      share options – as at December 31
                
                
                1,752,298
                
                
                
                2,061,828
                
                
                
                1,751,022Outstanding
      share options – as at February 25, 2010
                
                
                1,731,965
 note
1: The term gross revenue is defined in the Definition of Non-GAAP Measures in
the Critical Accounting Estimates, Developments, and Measures section of this
Management’s Discussion and Analysis.
 note2:
Net income, basic earnings per share, and diluted earnings per share would have
been $90.9 million, $2.00, and $1.98, respectively, without the $35 million
goodwill impairment charge in 2009, and $82.0 million, $1.80, and $1.78,
respectively, without the $53 million goodwill impairment charge in
2008.
 
 The two
acquisitions completed in 2009, the five completed in 2008, and the 11 completed
in 2007 contributed to our year-over-year growth in gross revenue, net income,
and basic and diluted earnings per share.
 
 Balance Sheet. Our total
assets decreased by $21.3 million from 2008 to 2009. This decrease was primarily
due to a decrease of $89.3 million in cash and cash equivalents and of $7.4
million in restricted cash. On December 31, 2008, cash and cash equivalents
included cash advanced from our credit facility and held for the Jacques
Whitford acquisition closing. The cash was paid to the vendors on the completion
of the transaction on January 2, 2009. These decreases in cash were partially
offset by a $17.2 million increase in accounts receivable and in costs and
estimated earnings in excess of billings, a $22.0 million increase in goodwill,
an $11.5 million increase in intangible assets, and a $13.0 million increase in
other assets. Our goodwill, accounts receivable, costs and estimated earnings in
excess of billings, intangible assets, and investments in associated companies
increased primarily as a result of growth from acquisitions during 2009, offset
by a $35.0 million goodwill impairment charge recorded in the third quarter.
Other assets increased mainly because of an increase in investments held for
self-insured liabilities. The carrying value of the assets and liabilities of
our US subsidiaries on our consolidated balance sheets was negatively impacted
by the strengthening of the Canadian dollar from US$0.82 at December 31, 2008,
to US$0.95 at December 31, 2009.
 
 Our total
assets increased by $331.3 million from 2007 to 2008. This increase was
primarily due to a $113.9 million increase in goodwill, a $61.1 million increase
in accounts receivable and in costs and estimated earnings in excess of
billings, a $27.0 million increase in property and equipment, and a $13.0
million increase in intangible assets. These items increased as a result of
internal growth and growth from acquisitions during 2008. Our cash and cash
equivalents increased by $89.8 million from 2007, mainly due to the cash we
borrowed to facilitate the Jacques Whitford acquisition as explained above. The
increase in goodwill would have been higher if not for a $53.0 million goodwill
impairment charge recorded in 2008.
 
 
 MANAGEMENT’S
DISCUSSION AND ANALYSIS
 December
31, 2009
 STANTEC
INC.
  M-13
  Our total
liabilities decreased by $29.9 million from 2008 to 2009 primarily due to a
$57.9 million decrease in our revolving credit facility from $192.5 million to
$134.6 million at December 31, 2009. Accounts payable and accrued liabilities
decreased by $22.2 million from 2008 to 2009 primarily due to the timing of
payroll at year-end. In addition, taxes payable decreased by $9.9 million due to
greater tax installments made in 2009 compared to 2008. These decreases were
offset by a $35.9 million increase in other notes payable primarily due to the
notes payable issued for the Jacques Whitford acquisition. Our total liabilities
also decreased due to the strengthening of the Canadian dollar from December 31,
2008, as explained above.
 
 Our total
liabilities increased by $235.0 million from 2007 to 2008 primarily due to a
$140.4 million increase in our revolving credit facility from $52.1 million to
$192.5 million at December 31, 2008, to finance the acquisitions completed in
2008 and to facilitate the acquisition of Jacques Whitford on January 2, 2009.
Our accounts payable and accrued liabilities also increased by $43.2 million
from 2007 to 2008 due to internal growth and growth through acquisitions during
2008.
 
 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
from year to year:
  Percentage
      IncreasePercentage of Net
    Revenue
                
                
                (Decrease)
      without Goodwillwith Goodwill Impairment
                
                
                Impairment*2009
                
                
                2008
                
                
                2007
                
                
                2009 vs. 2008
                
                2008
      vs. 2007Gross
      revenue
                
                
                122.3
                %
                
                
                119.6
                %
                
                
                114.9
                %
                
                
                12.4
                %
                
                
                41.6
                %Net
      revenue
                
                
                100.0
                %
                
                
                100.0
                %
                
                
                100.0
                %
                
                
                10.0
                %
                
                
                36.0
                %Direct
      payroll costs
                
                
                43.7
                %
                
                
                44.3
                %
                
                
                43.3
                %
                
                
                8.5
                %
                
                
                39.1
                %Gross
      margin
                
                
                56.3
                %
                
                
                55.7
                %
                
                
                56.7
                %
                
                
                11.1
                %
                
                
                33.7
                %Administrative
      and marketing expenses
                
                
                41.8
                %
                
                
                41.3
                %
                
                
                42.3
                %
                
                
                11.3
                %
                
                
                32.7
                %Depreciation
      of property and equipment
                
                
                2.0
                %
                
                
                1.9
                %
                **
                
                1.9
                %
                **
                
                12.4
                %
                
                
                40.6
                %
                **Amortization
      of intangible assets
                
                
                1.6
                %
                
                
                1.2
                %
                **
                
                0.9
                %
                **
                
                38.5
                %
                
                
                95.9
                %
                **Impairment
      of goodwill and intangible assets
                
                
                2.8
                %
                
                
                5.2
                %
                
                
                0.0
                %
                
                
                n/m
                
                
                
                n/mNet
      interest expense
                
                
                0.9
                %
                
                
                0.7
                %
                
                
                0.2
                %
                
                
                52.0
                %
                
                
                n/mShare
      of income from associated companies
                
                
                (0.3
                %)
                
                
                0.0
                %
                
                
                0.0
                %
                
                
                n/m
                
                
                
                (33.3
                %)Foreign
      exchange (gains) losses
                
                
                0.2
                %
                
                
                (0.2
                %)
                
                
                (0.3
                %)
                
                
                n/m
                
                
                
                (20.0
                %)Other
      income
                
                
                (0.1
                %)
                
                
                (0.1
                %)
                
                
                (0.2
                %)
                
                
                (33.3
                %)
                
                
                0.0
                %Income
      before income taxes
                
                
                7.4
                %
                
                
                5.7
                %
                
                
                11.9
                %
                
                
                7.8
                %
                
                
                18.6
                %Income
      taxes
                
                
                2.9
                %
                
                
                3.1
                %
                
                
                3.6
                %
                
                
                0.8
                %
                
                
                19.1
                %Net
      income
                
                
                4.5
                %
                
                
                2.6
                %
                
                
                8.3
                %
                
                
                10.9
                %
                
                
                18.3
                %
 *
                %
      increase (decrease) calculated based on the dollar change from the
      comparable period
 **
                Depreciation
      for certain software was reclassified from depreciation of property and
      equipment to amortization of intangibles due to the adoption of CICA
      Handbook Section 3064.
 n/m
      = not meaningful
 
 Our gross
and net revenue grew at a lower rate during 2009 than during 2008. This was due
to less acquisition growth in 2009 compared to 2008 and a decline in our
internal growth as management reduced staff levels to match the work available
in the year. Excluding the goodwill impairment charges of $35.0 million in 2009
and $53.0 million in 2008, our net income for 2009 grew 10.9%, closely in line
with the 10% growth in our net revenue year over year. In 2009, the rate of
growth in the amortization of intangible assets and net interest expense were
notably higher than the rate of growth in net revenue as further explained in
their respective sections of this report.
 
 
 MANAGEMENT’S
DISCUSSION AND ANALYSIS
 December
31, 2009
 STANTEC
INC.
  M-14
  Gross
and Net Revenue
 The
following table summarizes the impact of acquisitions, internal growth, and
foreign exchange on our gross and net revenue for 2009 compared to 2008 and for
2008 compared to 2007. For definitions of gross and net revenue, refer to the
Definition of Non-GAAP Measures in the Critical Accounting Estimates,
Developments, and Measures section of this discussion and analysis. Revenue
earned by acquired companies in the first 12 months following acquisition is
reported as revenue from acquisitions and thereafter as internal
growth.
  Gross
      Revenue(In
      millions of Canadian dollars)
                
                2009
      vs. 2008
                
                
                2008
      vs. 2007Increase
      (decrease) due to:Acquisition
      growth
                
                
                275.7
                
                
                
                404.1Internal
      growth
                
                
                (154.5
                )
                
                
                (4.4
                )Impact
      of foreign exchange rates on revenueearned
      by foreign subsidiaries
                
                
                46.7
                
                
                
                (2.3
                )Total
      net increase in gross revenue
                
                
                167.9
                
                
                
                397.4Net
      Revenue(In
      millions of Canadian dollars)
                
                2009
      vs. 2008
                
                
                2008
      vs. 2007Increase
      (decrease) due to:Acquisition
      growth
                
                
                203.7
                
                
                
                302.8Internal
      growth
                
                
                (131.0
                )
                
                
                (0.5
                )Impact
      of foreign exchange rates on revenueearned
      by foreign subsidiaries
                
                
                40.1
                
                
                
                (3.1
                )Total
      net increase in net revenue
                
                
                112.8
                
                
                
                299.2
   
 
 Gross
revenue earned in Canada during 2009 increased to $861.9 million from $649.5
million in 2008 and $539.3 million in 2007. Gross revenue generated in the
United States in 2009 decreased to $631.1 million compared to $677.5 million in
2008 and $405.2 million in 2007. Gross revenue earned outside Canada and the
United States in 2009 was $26.9 million compared to $25.0 million in 2008 and
$10.1 million in 2007. Revenues in both our US- and Canadian-based operations
were positively impacted by the acquisitions completed in 2009 and
2008.
 
 
 MANAGEMENT’S
DISCUSSION AND ANALYSIS
 December
31, 2009
 STANTEC
INC.
  M-15
  The
following table summarizes our gross revenue by practice area for 2009, 2008,
and 2007:
  Practice
      Area
                
                
                
                
                
                %
      of
                
                
                
                
                
                
                
                
                
                %
      of
                
                
                
                
                
                
                
                
                %
      ofGross
      Revenue
                
                
                
                
                
                Consulting
                
                
                
                
                
                
                
                
                
                Consulting
                
                
                
                
                
                
                
                
                ConsultingServices
                
                %
      Change
                
                
                
                
                
                
                
                Services
                
                %
      Change
                
                
                
                
                
                Services(In
      millions of Canadian dollars,
                
                
                
                
                
                Gross
                
                
                
                2009vs.
                
                
                
                
                
                
                Gross
                
                
                
                2008vs.
                
                
                
                
                
                Grossexcept
      %)
                
                
                
                2009
                
                
                Revenue
                
                
                
                2008
                
                
                
                
                2008
                
                
                Revenue
                
                
                
                2007
                
                
                
                2007
                
                
                RevenueBuildings
                
                
                
                281.4
                
                
                
                18.5
                %
                
                
                (0.4
                %)
                
                
                282.5
                
                
                
                20.9
                %
                
                
                33.4
                %
                
                
                211.8
                
                
                
                22.2
                %Environment
                
                
                
                642.4
                
                
                
                42.3
                %
                
                
                64.7
                %
                
                
                
                390.0
                
                
                
                28.9
                %
                
                
                121.7
                %
                
                
                175.9
                
                
                
                18.4
                %Industrial
                
                
                
                245.3
                
                
                
                16.1
                %
                
                
                1.7
                %
                
                
                
                241.2
                
                
                
                17.8
                %
                
                
                73.5
                %
                
                
                139.0
                
                
                
                14.6
                %Transportation
                
                
                
                182.0
                
                
                
                12.0
                %
                
                
                5.6
                %
                
                
                
                172.3
                
                
                
                12.7
                %
                
                
                20.4
                %
                
                
                143.1
                
                
                
                15.0
                %Urban
      Land
                
                
                
                168.8
                
                
                
                11.1
                %
                
                
                (36.5
                %)
                
                
                266.0
                
                
                
                19.7
                %
                
                
                (6.6
                %)
                
                
                284.8
                
                
                
                29.8
                %Total
      Consulting Services
                
                
                
                1,519.9
                
                
                
                100.0
                %
                
                
                12.4
                %
                
                
                
                1,352.0
                
                
                
                100.0
                %
                
                
                41.6
                %
                
                
                954.6
                
                
                
                100.0
                %
  
  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 as follows:
 
 
 MANAGEMENT’S
DISCUSSION AND ANALYSIS
 December
31, 2009
 STANTEC
INC.
  M-16
 Practice
      Area Gross Revenue
                
                
                
                
                2009
      Compared to 2008Change
      Due
                
                
                Change
      Due
                
                
                Change
      Dueto
                
                
                to
      Internal
                
                
                to
      Foreign(In
      millions of Canadian dollars)
                
                Total
      Change
                
                
                Acquisitions
                
                
                Growth
                
                
                ExchangeBuildings
                
                
                (1.1
                )
                
                
                5.0
                
                
                
                (11.2
                )
                
                
                5.1Environment
                
                
                252.4
                
                
                
                241.2
                
                
                
                (4.9
                )
                
                
                16.1Industrial
                
                
                4.1
                
                
                
                25.3
                
                
                
                (25.6
                )
                
                
                4.4Transportation
                
                
                9.7
                
                
                
                -
                
                
                
                1.2
                
                
                
                8.5Urban
      Land
                
                
                (97.2
                )
                
                
                4.2
                
                
                
                (114.0
                )
                
                
                12.6Total
                
                
                167.9
                
                
                
                275.7
                
                
                
                (154.5
                )
                
                
                46.7
  2008
      Compared to 2007Change
      Due
                
                
                Change
      Due
                
                
                Change
      Dueto
                
                
                to
      Internal
                
                
                to
      Foreign(In
      millions of Canadian dollars)
                
                Total
      Change
                
                
                Acquisitions
                
                
                Growth
                
                
                ExchangeBuildings
                
                
                70.7
                
                
                
                36.8
                
                
                
                33.0
                
                
                
                0.9Environment
                
                
                214.1
                
                
                
                209.5
                
                
                
                5.7
                
                
                
                (1.1
                )Industrial
                
                
                102.2
                
                
                
                97.0
                
                
                
                4.6
                
                
                
                0.6Transportation
                
                
                29.2
                
                
                
                21.3
                
                
                
                7.2
                
                
                
                0.7Urban
      Land
                
                
                (18.8
                )
                
                
                39.5
                
                
                
                (54.9
                )
                
                
                (3.4
                )Total
                
                
                397.4
                
                
                
                404.1
                
                
                
                (4.4
                )
                
                
                (2.3
                )
 
 The
following summarizes the acquisitions completed in 2009 and 2008 that affected
the acquisition growth of each of our practice areas during the
year:
 
 ·
              Buildings: Granary
      Associates, Inc. (October 2009)
 ·
              Environment: SII
      Holdings, Inc. (February 2008) and Jacques Whitford Group Ltd. and Jacques
      Whitford Global Group Limited (January
2009)
 ·
              Industrial: McIntosh
      Engineering Holdings Corporation (July
2008)
 ·
              Urban Land: RHL Design
      Group, Inc. (March 2008)
 
 All our
practice areas generate a portion of their gross revenue in the United States.
The average exchange rate for the Canadian dollar relative to the US dollar
decreased by approximately 6.4% from 2008 to 2009 (US$0.94 to US$0.88) and
increased by 1.1% from 2007 to 2008 (US$0.93 to US$0.94). The weakening of the
average rate for the Canadian dollar against the US dollar in 2009 compared to
2008 had a positive impact on the change in gross revenue by practice area year
over year. The strengthening of the average rate for the Canadian dollar against
the US dollar in 2008 compared to 2007 had a negative impact on the change in
gross revenue by practice area year over year.
  2009
versus 2008
 Buildings.Gross revenue for
the Buildings practice area declined by 0.4% from 2008 to 2009. Of the $1.1
million decrease in gross revenue in 2009, $11.2 million was due to a decline in
revenue from internal growth, offset by a $5.0 million increase in revenue due
to acquisitions and a $5.1 million foreign exchange impact. The decline in
revenue from internal growth resulted from a decrease in the use of
subconsultants and other direct costs compared to 2008 due to the nature of
projects worked on during the year. Despite the challenging economic climate,
the practice area remained relatively stable in 2009 because of its geographic
and sector diversification. We continued to secure significant projects in our
principle focus areas of health care and education and to seek opportunities in
the public-private partnership (P3) market. For example, during the year, we
were selected by a P3 client as the preferred proponent for a redevelopment
project at the Centre for Addiction and Mental Health in Toronto, Ontario. Our
responsibilities included full integrated design services—architecture;
mechanical, electrical, structural, and civil engineering; sustainable design
consulting; and transportation engineering. We were also chosen to serve as a
technical advisor for the redevelopment of the King Edward VII Memorial Hospital
in Hamilton, Bermuda. The redevelopment plans include a patient tower,
ambulatory care center, and new central utility plant. The design, construction,
financing, and maintenance of the facility will be delivered through a P3
client. Another notable health care project was the design of a new veterans’
outpatient mental health and research facility at the Puget Sound Medical Center
in Seattle, Washington, for the U.S. Department of Veterans Affairs. We were
also contracted by the University of the Fraser Valley to provide integrated
services in architecture, landscape architecture, interior design, and
structural, mechanical, electrical, and civil engineering for the first phase of
the relocation of its Chilliwack campus to a 35-hectare (86–acre) site. During
2009, the Buildings practice area continued to develop its expertise in the
commercial interior and retail sector and is well positioned to take on any
potential increased activity in this sector. For example, the practice area is
providing architecture and engineering-related services on a variety of Alberta
Treasury Branch corporate administration space renovations and branch
expansions.
 M-17
 We
believe that the outlook for the Buildings practice area remains stable for 2010
with moderate growth expected in the second half of the year. Going forward, we
will continue to focus on our key areas of competency, in particular health care
and education. Our priority for growth is the US market, where we aim to
leverage our successes in health care and with public clients, especially with
the acquisition of Granary in Q4 09. In Canada, we expect a softening in the
West, especially in British Columbia, once project activity associated with the
2010 Winter Olympics decreases. We expect this decline to be offset by
opportunities we may secure in 2010 resulting from our strength in P3 markets
and from the establishment of top-tier architecture and buildings engineering
practices in Canada.
 
 Environment.Gross revenue for
the Environment practice area grew by 64.7% from 2008 to 2009. Of the $252.4
million increase in gross revenue in 2009, $241.2 million was due to
acquisitions, and $16.1 million was due to the impact of foreign exchange,
offset by a $4.9 million decline in revenue from internal growth. The practice
area performed well during a challenging year. With the addition of Jacques
Whitford, it increased its geographic footprint and competitive profile, which
enabled it to pursue and win larger, multiyear, and higher-profile projects. For
example, we were awarded several multiyear indefinite delivery/indefinite
quantity contracts with the U.S. Army Corps of Engineers to conduct
multidiscipline engineering inspections of levees as part of its Levee Safety
Program. Because our environmental expertise is often required at the front end
of energy-related projects that operate on a long-term planning cycle, much of
the Environment practice area’s work for energy sector clients is not directly
affected by short-term fluctuations in oil and gas prices. During the year, we
secured work from a joint venture between TransCanada Pipelines and Exxon Mobil
Corporation to provide environmental management and regulatory support services
for the Alaska Pipeline Project. We were also awarded a global, multiyear,
preferred supplier contract to provide environmental assessment and remediation
services to Chevron at sites throughout North America, South America, the Asia
Pacific region, the Middle East, and Russia. Our environmental management and
remediation business, particularly with wind power clients, improved at the end
of the year as clients began to access more readily available project funding.
We also continued to win larger projects in the water and wastewater markets.
For example, during the year, the Massachusetts Water Resources Authority, one
of the largest water and wastewater utilities in the United States, chose our
Company to design the rehabilitation of the West Roxbury Tunnel in Boston,
Massachusetts. We will be examining the conditions of the tunnel and exploring
the viability of several rehabilitation and realignment options.We were also
chosen to assist several large US power producers in evaluating their coal
by-product disposal processes and facilities and were commissioned by the
Tennessee Valley Authority to perform facility assessments of the industrial
treatment ponds at its 11 fossil power plants in Tennessee, Kentucky, and
Alabama.
 
 
 MANAGEMENT’S
DISCUSSION AND ANALYSIS
 December
31, 2009
 STANTEC
INC.
  M-18
  We
believe that the outlook for the Environment practice area will range from
stable to a moderate decline in the first two quarters of 2010, supported by
stronger growth in the second half of the year. The practice area’s expanded
footprint in 2009 placed it in a top 10 category among world environmental
service providers, and we expect that our enhanced size, presence, and
reputation in the environment market will continue to increase our share of
larger, long-term projects with national and international scope in 2010.
 
 Industrial. Gross revenue for
the Industrial practice area grew by 1.7% from 2008 to 2009. Of the $4.1 million
increase in gross revenue in 2009, $25.3 million was due to acquisitions, and
$4.4 million was due to the impact of foreign exchange, offset by a $25.6
million decline in revenue from internal growth. The economic slowdown, as well
as the cancellation or placement on hold of some projects, impacted the practice
area’s backlog. In response to these market conditions, staff levels were
reduced in 2009. Despite our exposure to difficult market conditions in 2009,
our Industrial practice area performed well. For example, although there was a
severe decline in the mining industry during the year, we continued to secure
work on significant mining projects. We secured a project with Vale Inco to
perform mining studies and provide related engineering services on a number of
underground mining projects, including the Totten and Kelly Lake projects in
Ontario and the Voisey’s Bay project in Labrador. During the year, we positioned
ourselves to pursue projects in the potash industry and in the mining of
non-commodities such as gold and diamonds to counteract reduced opportunities
resulting from lower oil and mineral prices. As a result, we were selected to
provide specialty services for a number of Potash Corporation of Saskatchewan
underground projects and operations, including the Allan, Rocanville, and
Lanigan mines in Saskatchewan and the Picadilly mine in New Brunswick. We also
continued to provide services for the development of facilities and
infrastructure in support of major projects in western Canada as well as program
and project management services. For example, we were selected to provide
program management and technical support services for the multibillion-dollar
Capital Regional District—Core Area Wastewater Treatment Program in Victoria,
British Columbia. The practice area continues to strengthen its reputation in
the areas of clean coal and carbon capture, power transmission and distribution,
and renewable energy, such as wind power. During the year, we secured a project
to provide civil, structural, and electrical engineering services for the
development of a new 115-megawatt wind farm in southern Alberta.
 
 We
believe that the outlook for our Industrial practice area will remain stable for
the first half of 2010 with moderate growth in the second half of the year. With
commodity prices improving in late 2009, we expect increased activity in the
mining, power, and resource sectors. Because of our capabilities in renewable
energy, we will continue to monitor any market opportunities in carbon
mitigation and sustainable energy development. We believe that the practice area
has sufficient breadth and diversity and the recognized expertise to take
advantage of opportunities that arise in the marketplace and is well positioned
to meet its objectives in 2010.
 
 Transportation.Gross revenue
for the Transportation practice area grew by 5.6% from 2008 to 2009. Of the $9.7
million increase in gross revenue in 2009, $1.2 million was due to internal
growth, and $8.5 million was due to the impact of foreign exchange. During
2009, the Transportation practice area demonstrated its ability to expand its
expertise and capabilities by securing projects in rail, transit, and
intelligent transportation systems design. For example, the Los Angeles County
Metropolitan Transportation Authority (Metro) selected our Transportation group
to provide construction management support services for its major capital
projects. This contract, which has the potential to extend for seven years,
includes the Metro Orange Line Extension project and a high-occupancy vehicle
network expansion project in central Los Angeles, California. This is the
largest contract that our Transportation practice area has secured to date in
California. Our geographic expansion to Southern California has also enabled us
to be part of a team selected to provide on-call project management,
construction management, and staff assistance services to the Southern
California Regional Rail Authority in Los Angeles in support of a wide variety
of new capital construction and rehabilitation projects for its Metrolink
commuter rail system. We were also awarded a contract with the U.S. Department
of Transportation Federal Transit Administration to provide project management
oversight services. This five-year agreement involves overseeing and reviewing
work completed by transportation and transit agencies across the United States
and demonstrates our growing presence and increased profile in the US transit
market.
 
 
 MANAGEMENT’S
DISCUSSION AND ANALYSIS
 December
31, 2009
 STANTEC
INC.
  M-19
  During
the year, the Transportation practice area also continued to work on a stable
stream of projects in Canada. For example, we are providing preliminary and
detailed design services for the development of the Cumberland Transitway in
Ottawa, Ontario. This project includes drainage design, stormwater management,
underground services, and illumination design for an extension to North
America’s most comprehensive bus rapid transit system. We also obtained a
contract to complete the detailed design, contract administration, and
inspection of various local roadways in the Elmira, Ontario, area.
 
 We
believe that the outlook for the Transportation practice area is to achieve
modest internal growth in 2010. Although the US and Canadian stimulus packages
may not create new opportunities for 2010, they appear to have prevented the
deferral of some projects and have accelerated some previously deferred
construction-ready projects. Overall, we expect our rail and transit groups to
experience increased activity in 2010. However, decreasing tax revenues, state
and provincial deficits, and continued uncertainty in the United States about
the replacement of the Safe, Accountable, Flexible, Efficient, Transportation
Equity Act—A Legacy for Users (SAFETEA-LU) may cause delays in many planned
transportation projects moving forward.
 
 Urban Land.Gross revenue for
the Urban Land practice area declined by 36.5% from 2008 to 2009. Of the $97.2
million decrease in gross revenue in 2009, $114.0 million was due to a decline
in revenue from internal growth, offset by a $12.6 million foreign exchange
impact and a $4.2 million increase in revenue due to acquisitions. We offer
urban land services primarily in three core regions—Alberta and Ontario in
Canada and California in the United States—and these regions account for
approximately 66% of our urban land business. The remainder of our urban land
work is spread throughout a number of locations in the United States and
Canada.
 
 Revenue
for the Urban Land practice area was primarily impacted by a decline in housing
starts in the United States and Canada compared to 2008 and to a lesser extent
by a decline in commercial rollout programs. Single-family housing starts in the
United States reached their lowest levels during the first quarter of 2009 and
showed signs of recovery at the end of the year. Single-family housing starts in
Canada bottomed out in the second quarter of 2009 and improved in the second
half of the year. In response to these market conditions in 2009, our Urban Land
group continued to decrease and match its staff levels to the work available. As
well, it continued to share work between Canadian and US groups, to pursue
non-residential projects, and to work on projects being undertaken by other
practice areas to counteract the reduced opportunities resulting from low
housing starts. For example, we secured a project to provide consulting services
for the development of a new college athletic field complex at the University of
Guelph in Guelph, Ontario. This project demonstrates the strength of our
multidisciplinary team approach by combining the global expertise of our Sport
group in Boston,Massachusetts, with the
local strength of the Landscape Architecture group in Kitchener, Ontario. The practice area also
secured several public sector projects during the year. For example, we were
awarded a five-year contract with fees of up to $30.0 million from the US
federal government to provide three-dimensional laser scanning services to the
U.S. General Services Administration, the government body that oversees the
construction and management of federal buildings throughout the United States.
We were also awarded a project to complete an aesthetic design study for a
26-kilometre (16-mile) section of Highway 416 for the Ontario Ministry of
Transportation in Ottawa, Ontario. This project involves the expertise of
various discipline groups from Canada and the United States.
 
 Due to
the forecasted stabilization of the residential sectors in the United States and
Canada, we believe that the outlook for our Urban Land practice area in 2010 is
stable. In 2010, we expect to continue to diversify our client base, build and
leverage our reputation with the public sector, and focus on building
relationships with larger clients who require more complex services as well as
our multidisciplinary team approach.
 
 
 MANAGEMENT’S
DISCUSSION AND ANALYSIS
 December
31, 2009
 STANTEC
INC.
  M-20
  2008
versus 2007
 Buildings.Gross revenue for
the Buildings practice area grew by 33.4% from 2007 to 2008. Of the $70.7
million increase in gross revenue in 2008, $36.8 million was due to
acquisitions, and $33.0 million was due to internal growth and a $0.9 million
foreign exchange impact. Historically, 2008 was the strongest year for the
Buildings practice area. We continued to secure major projects by developing our
expertise and establishing a top-tier presence in three main sectors: health
care, airports, and education. For example, in 2008, we were awarded assignments
to provide integrated architecture and engineering services for the development
of a series of subacute care hospitals at state correctional facilities in
California; design services for a terminal expansion at the Edmonton
International Airport in Edmonton, Alberta; and architecture services for the
expansion of campus facilities at the Northern Alberta Institute of Technology
also in Edmonton. In addition, we were awarded an initial contract to secure all
the city and regulatory approvals and begin the early preliminary design for a
new building on the Toronto Western Hospital campus in Toronto, Ontario, an
assignment that brought together our expertise in architecture, urban planning,
clinical planning, and sustainable design. The Buildings practice area also
demonstrated its strength in both the public and private sectors and
increasingly in the P3 market. In 2008, we secured a project to provide
multidisciplinary services for the Kelowna and Vernon Hospitals P3 project,
which is currently the largest single investment in the health care system in
the BC Interior on record. We provided several aspects of the project, including
architectural design; mechanical, electrical, structural, and civil engineering;
and Leadership in Energy and Environmental Design (LEED) consulting
services.
 
 Environment.Gross revenue for
the Environment practice area grew by 121.7% from 2007 to 2008. Of the $214.1
million increase in gross revenue in 2008, $209.5 million was due to
acquisitions, and $5.7 million was due to internal growth, offset by a $1.1
million foreign exchange impact. Our increased geographical footprint and
top-tier presence in more markets enabled the Environment practice area to take
on larger, longer-term projects. Acquisitions made in Q3 07 and Q1 08 broadened
the practice area’s service capabilities to include new and expanded service
areas in geotechnical engineering, environmental management, and environmental
remediation. During 2008, we obtained a contract to provide geotechnical
engineering services for the U.S. Army Corps of Engineers, Tulsa District,
including establishing an on-site soils and materials testing laboratory at
Canton Dam in Oklahoma. We also secured an assignment to provide environmental
screening, heritage resource reviews, and permitting services for a proposed
Tristar oil well field and associated access road and pipeline development
activities in southeastern Saskatchewan. In addition, we worked on projects
in the areas of water supply master planning and water supply facility
development, including groundwater, surface water, and recycled water systems.
For example, in 2008, we were awarded an assignment to design odor control
upgrades and improve the process performance at the Humber Wastewater Treatment
Plant in Toronto, Ontario. As well, we were selected to design one of the
world’s largest ultraviolet drinking water disinfection systems for the San
Francisco Public Utilities Commission in California. In 2008, the Environment
practice area made efforts to improve its operating effectiveness in the US East
through better client selection, project management, sales efficiency, and staff
level management in relation to existing backlog.
 
 Industrial. Gross revenue for
the Industrial practice area grew by 73.5% from 2007 to 2008. Of the $102.2
million increase in gross revenue in 2007, $97.0 million was due to
acquisitions, and $4.6 million was due to internal growth and a $0.6 million
foreign exchange impact. The practice area’s internal growth was primarily due
to projects secured in Canada, especially during the period of high oil and
commodity prices. However, the decline in these prices in the fourth quarter
caused certain projects to be canceled or delayed. In 2008, the Industrial
practice area continued to provide services for the development of facilities
and infrastructure in support of major projects in British Columbia and Alberta
and to secure projects with repeat clients. For example, we increased our work
with Enbridge, a leader in energy transportation and distribution. We also
secured another contract with the South Coast British Columbia Transportation
Authority to provide the preliminary and detailed design and construction
supervision services for a multiuse, campus-style project, including a heavy bus
maintenance facility, training center, and educational building, at the British
Columbia Institute of Technology.
 
 Our
integrated capabilities enabled us to undertake larger, multiphase, and
multidisciplinary projects in the industrial market in 2008. For example, the
Industrial practice area joined efforts with other Stantec disciplines to
procure a project to design laboratory facilities at Pennsylvania State
University and Binghamton University in New York. Our program and project
management expertise continues to grow due to clients’ need and demand for
dedicated project managers. For example, we secured an assignment to provide
project control services to the Toronto Transit Commission for an extension of
the Spadina subway in Toronto, Ontario. In 2008, the Industrial practice area
began integrating over 200 staff from McIntosh. The acquisition of McIntosh has
enabled us to offer a complete, integrated package of environmental, scientific,
engineering, and project management services to global mining
clients.
 
 
 MANAGEMENT’S
DISCUSSION AND ANALYSIS
 December
31, 2009
 STANTEC
INC.
  M-21
  Transportation.Gross revenue
for the Transportation practice area grew by 20.4% from 2007 to 2008. Of the
$29.2 million increase in gross revenue in 2008, $21.3 million was due to
acquisitions, and $7.2 million was due to internal growth and a $0.7 million
foreign exchange impact. In 2008, the practice area demonstrated its ability to
adapt to the evolving transportation market as well as its diverse capabilities
by securing a project to develop a 5-mile (8-kilometre)-long streetcar system
connecting the University of Arizona to the central business district in Tucson,
Arizona. Although the private sector softened in the second half of 2008, the
practice area’s expertise and reputation continued to foster strong client
relationships, which translated into receiving several long-term projects with
repeat clients. For example, in 2008, we secured an assignment to perform
biennial and interim bridge inspections of approximately 500 bridges in New
York, New York, as well as contracts to provide design and construction
management services for the North Highway Connector project for the City of Red
Deer, Alberta, and to complete the final design of roadway improvements along
1.5 miles (2.4 kilometres) of Route 46 and Route 3 in New Jersey.
 
 Urban Land. Gross revenue for
the Urban Land practice area declined by 6.6% from 2007 to 2008. Of the $18.8
million decrease in gross revenue in 2008, $54.9 million was due to a decline in
revenue from internal growth and a $3.4 million foreign exchange impact, offset
by a $39.5 million increase in revenue due to acquisitions. The acquisition of
RHL in Q1 08 added commercial program development services to this practice
area, primarily in the western United States. Revenue for the Urban Land
practice area was impacted by a decline in housing starts in various parts of
the United States, particularly California, and, to a lesser degree, in Canada.
Single-family housing starts in the United States declined significantly in
2008. In response to these market conditions, our Urban Land group in the United
States reduced its staff levels in 2008 to match the work available. The
practice area continued to pursue opportunities to apply services and new
technologies in markets that are not dependent on housing, such as services for
municipal, energy, and utilities projects. For example, we offered expanded
services using light detection and ranging (LIDAR) scanning—an optical remote
sensing technology that measures properties of scattered light to find the range
and/or other information about a distant target. In 2008, we completed the LIDAR
scanning of a crane that collapsed over a high-rise construction site in New
York City. We also provided professional surveying services for the development
of over 200 new gas lines in the Fort Worth, Texas, area from one of the largest
natural gas reserves in North America. In 2008, the Urban Land practice area
continued to expand its services into the public sector. For example, we secured
assignments to provide services for improving streetscapes in the historic
district of downtown Newark, New Jersey. The practice area also continued to
take advantage of work-sharing opportunities by using US-based staff to complete
Canadian projects and to cross-sell services to other practice areas. In 2008,
the practice area secured a project involving several Stantec disciplines and
regional offices in designing a major waterfront park in Kelowna, British
Columbia.
 
 Gross
Margin
 For a
definition of gross margin, refer to the Definition of Non-GAAP Measures in the
Critical Accounting Estimates, Developments, and Measures section below. Gross margin increased to
56.3% in 2009 from 55.7% in 2008 and decreased to 55.7% in 2008 from 56.7% in
2007. Our gross margin for 2009 was slightly higher than the anticipated range
of 54 to 56% set out in our 2008 Financial Review. The increase in our gross
margin percentage from 2008 to 2009 was due to an increase in the gross margins
for the Environment, Industrial, and Transportation practice areas, partially
offset by a decrease in the gross margins for the Buildings and Urban Land
practice areas as further explained below.
 
 The
decrease in our gross margin percentage from 2007 to 2008 was due to a decline
in the gross margins for the Environment, Transportation, and Urban Land
practice areas due to the type of projects in progress during the year, the
impact of integration activities, and competition. As well, in 2008, the
Environment and Industrial practice areas grew at a greater rate than the other
practice areas. This growth impacted our overall gross margin since the gross
margins on environmental remediation and industrial projects are generally lower
than the gross margins on projects in other practice areas.
 
 
 MANAGEMENT’S
DISCUSSION AND ANALYSIS
 December
31, 2009
 STANTEC
INC.
  M-22
  The
following table summarizes our gross margin percentages by practice area for
2009, 2008, and 2007:
  Practice
      Area Gross Margin
                
                2009
                
                
                2008
                
                
                2007Buildings
                
                
                58.1
                %
                
                
                58.5
                %
                
                
                57.7
                %Environment
                
                
                57.7
                %
                
                
                55.9
                %
                
                
                58.4
                %Industrial
                
                
                51.8
                %
                
                
                51.6
                %
                
                
                51.2
                %Transportation
                
                
                53.7
                %
                
                
                53.5
                %
                
                
                53.8
                %Urban
      Land
                
                
                57.2
                %
                
                
                57.6
                %
                
                
                58.5
                %
  Our gross
margin percentages in 2009 were similar to 2008 in our Buildings, Industrial,
Transportation, and Urban Land practice areas. In general, fluctuations in the
gross margin reported from year to year depend on the mix of projects in
progress during any year and on our project execution. 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. In the Environment practice
area, gross margin increased due to improved project execution and the nature of
the projects assumed from Jacques Whitford, including more up-front planning and
environmental assessment work. Because of its growth, this practice area was
also able to secure larger projects, which, due to their nature, present greater
opportunities to produce higher margins.
 
 Administrative
and Marketing Expenses
 Our
administrative and marketing expenses increased by $52.9 million from 2008 to
2009. As a percentage of net revenue, our administrative and marketing expenses
were 41.8% in 2009 compared to 41.3% in 2008, falling within our expected range
of 41 to 43.5%. Administrative and marketing expenses may fluctuate from year to
year because 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, as well as by business development and integration
activities. In 2009, we incurred one-time costs such as severance payments and
other costs associated with the downsizing of our operations. Without these
one-time costs, our administrative and marketing expenses as a percentage of net
revenue would be at the low end of our targeted range for the year, which
demonstrates our focus on efficiency and cost management in difficult economic
times.
 
 Our
administrative and marketing expenses increased by $114.8 million from 2007 to
2008. As a percentage of net revenue, our administrative and marketing expenses
were 41.3% in 2008 compared to 42.3% in 2007, slightly below our expected range
of 41.5 to 43.5%. Administrative and marketing expenses as a percentage of net
revenue declined from 2007 to 2008 due to the mix of projects during the year,
the decrease in integration activities in 2008 compared to 2007, and staff focus
on more effectively managing our costs.
 
 Depreciation
of Property and Equipment
 Depreciation
of property and equipment as a percentage of net revenue was 2.0% in 2009, 1.9%
in 2008, and 1.9% in 2007. The $2.7 million increase in depreciation from 2008
to 2009 and the $6.4 million increase in depreciation from 2007 to 2008 were
primarily due to the addition of property and equipment from acquisitions made
in the year corresponding with our Company’s growth.
 
 
 MANAGEMENT’S
DISCUSSION AND ANALYSIS
 December
31, 2009
 STANTEC
INC.
  M-23
  With the
adoption of Section 3064, “Goodwill and Intangible Assets,” of the Canadian
Institute of Chartered Accountants (CICA) Handbook, we retrospectively
reclassified $3.6 million of the depreciation on certain software for both 2008
and 2007 from “Depreciation of Property and Equipment” to “Amortization of
Intangible Assets.”
 
 Goodwill
 We
conduct an annual goodwill impairment test on July 1 of each fiscal year. Our
goodwill is allocated to our reporting units. In 2008 and Q1 09, our reporting
units were defined as Canada, US West, and US East. Effective Q2 09, our
reporting units are defined as Canada West, Canada East, US West, and US East.
These units are determined based on the way we organize the Company for making
operating decisions and assessing performance. We do not monitor or allocate
goodwill to practice areas.
 
 Goodwill
impairment testing is a two-step process. In the first step, we compare the fair
value of our reporting units to their carrying value. We estimate the fair value
using a methodology that considers market information and projections of our
discounted after-tax cash flows, which is known as the income approach. For our
2009 impairment test, we discounted our reporting units’ cash flows using
discount rates ranging from 10.5% to 12.0% (2008 – 10.0% to 12.0%). If the
carrying value of the reporting unit is higher than its fair value, goodwill is
potentially impaired and step two of the impairment test must be performed.
Following step one of our 2009 test, we concluded that the carrying value of our
Canada West, Canada East, and US East reporting units was less than their fair
value and was therefore not impaired. However, we concluded that the carrying
value of our US West reporting unit was potentially impaired and therefore
performed step two of the impairment test for that reporting unit.
 
 In step
two of the testing process, we compare the estimated fair value of the goodwill
of our reporting units to their respective carrying value. We calculate the
estimated fair value of the goodwill in the same manner as if the reporting unit
were being acquired in a business combination, considering factors including the
cash flows and fair values of the net tangible and intangible assets. If the
estimated fair value of the goodwill is less than its carrying value, an
impairment charge is recorded for the difference.
 
 As
further discussed in note 4 of our 2009 audited consolidated financial
statements, step two of our 2009 impairment test determined that our US West
reporting unit’s goodwill was impaired. The impairment was due to fluctuations
in the market and uncertainties arising from overall economic conditions in 2009
primarily relating to our Urban Land practice area, which now comprises
approximately 19% of the reporting unit’s gross revenue year to date as compared
to approximately 60% for the same period in 2006 when economic conditions were
favorable for the practice area. The $35.0 million impairment charge was
allocated to our US West reporting unit and reflected as a non-cash charge to
income. Goodwill impairment charges are non-cash in nature and do not have any
adverse effect on our liquidity, cash flows from operating activities, or debt
covenants and will not have an impact on our future operations.
 
 As
further discussed in note 4 to our 2008 audited consolidated financial
statements, due to fluctuations in the market and uncertainties arising from
overall economic conditions in 2008, our annual impairment review resulted in a
goodwill impairment charge of $53.0 million during the third quarter of 2008.
This charge was allocated to our US West and US East reporting units and
reflected as a non-cash charge to income. For a more detailed explanation of the
methodology used in testing goodwill, refer to the Critical Accounting Estimates
section under the Critical Accounting Estimates, Developments, and Measurements
heading below.
 
 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 are amortized over estimated useful
lives ranging from 10 to 15 years, whereas contract backlog is amortized over an
estimated useful life of generally one to three years. Consequently, the impact
of the amortization of contract backlog can be significant in the 4 to 12
quarters following an acquisition. Backlog is a non-GAAP measure further
discussed in the Definition of Non-GAAP Measures in the Critical Accounting,
Estimates, Developments, and Measures section below. As at December 31, 2009,
$5.7 million of the $64.2 million in intangible assets related to backlog. Also
included in intangible assets are purchased and internally generated computer
software that isreplaceable and not an integral part of related hardware. This computer
software is amortized over estimated useful lives ranging from 3 to 7
years.
 
 
 MANAGEMENT’S
DISCUSSION AND ANALYSIS
 December
31, 2009
 STANTEC
INC.
  M-24
  The
following table summarizes the amortization of identifiable intangible
assets:
  Intangibles(In
      thousands of Canadian dollars)
                
                2009
                
                
                2008
                
                
                2007Amortization
      of client relationships
                
                
                5,043
                
                
                
                4,193
                
                
                
                2,384Amortization
      of backlog
                
                
                8,074
                
                
                
                6,211
                
                
                
                974Software
                
                
                5,343
                
                
                
                3,585
                *
                
                
                3,580
                *Other
                
                
                1,360
                
                
                
                275
                
                
                
                344Total
      amortization of intangible assets
                
                
                19,820
                
                
                
                14,264
                
                
                
                7,282
 *
              Prior
      years are restated due to the adoption of CICA Handbook Section 3064. See
      the discussion in the Critical Accounting Estimates, Developments, and
      Measures section below.
 
 The $5.6
million increase between 2008 and 2009 was mainly due to the amortization of the
backlog balances of Jacques Whitford, Secor, McIntosh, and RHL Design Group Inc.
During 2009, $27.3 million in intangible assets was acquired mainly from the
Jacques Whitford and Granary acquisitions and from the finalization of the
valuation of intangibles acquired from the McIntosh and RHL Design Group Inc.
acquisitions completed in 2008.
 
 The $7.0
million increase between 2007 and 2008 was primarily due to the amortization of
the backlog balances of Vollmer Associates LLP, the Neill and Gunter companies,
Secor, and McIntosh.
 
 Due to
the adoption of Section 3064, “Goodwill and Intangible Assets,” of the CICA
Handbook, we retrospectively reclassified $3.6 million of the depreciation on
certain software for both 2008 and 2007 from “Depreciation of Property and
Equipment” to “Amortization of Intangible Assets.”
 
 In
accordance with our accounting policies, we test intangible assets for
recoverability when events or a change in circumstances indicate that their
carrying amount may not be recoverable. The determination of recoverability is
based on an estimate of undiscounted cash flow, and the measurement of
impairment loss is based on the amount that the carrying value exceeds the fair
value. As part of the impairment test, we update our future cash flow
assumptions and estimates, including factors such as current and future
contracts with clients, margins, market conditions, and the useful lives of the
assets. Based on the results of this review, we concluded that there was no
impairment to intangible assets. For further discussion of the methodology used
in testing long-lived assets and intangibles for impairment, refer to the
Critical Accounting Estimates section under the Critical Accounting Estimates,
Developments, and Measurements heading below.
 
 During
the third quarter of 2008, based on the results of our annual impairment test,
we concluded that intangible assets relating to certain client relationships
were not fully recoverable and therefore recorded a non-cash $5.4 million
impairment charge to income. The impairment primarily reflected the financial
distress experienced by specific clients in regards to client relationships
acquired in The Keith Companies, Inc. acquisition in 2005. The remaining
carrying value of these client relationships after this impairment charge was
$6.0 million at December 31, 2008.
 
 
 MANAGEMENT’S
DISCUSSION AND ANALYSIS
 December
31, 2009
 STANTEC
INC.
  M-25
  Net
Interest Expense
 The $3.9
million increase in net interest expense in 2009 compared to 2008 was a result
of having more long-term debt throughout the first three quarters of 2009
compared to 2008, offset by lower interest rates over the same period. At
December 31, 2009, $134.6 million was outstanding on our credit facility versus
$192.5 million outstanding at December 31, 2008. Depending on the form under
which the credit facility is accessed and certain financial covenant
calculations, rates of interest may vary among Canadian prime, US base rate, or
LIBOR or bankers’ acceptance rates plus 65, 85, or 125 basis points. We minimize
our exposure to floating rates of interest on our revolving credit facility,
when appropriate, by entering into interest rate swap agreements. During the
third quarter of 2008, we entered into an interest rate swap agreement that has
the effect of converting the variable interest obligation associated with US$100
million of our credit facility, based on a LIBOR rate, into a fixed interest
rate of 3.43%, plus an applicable basis points spread, until September 3, 2010.
The fair value of the interest rate swap, estimated using third-party market
conditions and forecasts at December 31, 2009, was a loss of $1.5 million, net
of tax. Because we designated the interest rate swap as a cash flow hedge
against US$100 million of our credit facility and the hedge met the accounting
criteria for effectiveness during the year, we recorded the $1.5 million loss in
fair value since the hedge’s inception in accumulated other comprehensive
income. At December 31, 2009, $105.1 million of our bank loan was payable in US
funds (US$100.0 million), and $29.5 million was payable in Canadian
funds.
 
 Taking
the effect of the interest rate swap into consideration, our average interest
rate was 3.42% at December 31, 2009, compared to 3.36% at December 31, 2008. We
estimate that, based on our loan balance at December 31, 2009, a 0.5% increase
in interest rates, with all other variables held constant, would decrease our
net income by approximately $106,000 for the year and decrease our basic
earnings per share by less than $0.01 for the year. A 0.5% decrease in interest
rates would have an equal and opposite impact on our net income and basic
earnings per share.
 
 The $5.9
million increase in net interest expense in 2008 compared to 2007 was a result
of having more long-term debt throughout 2008 compared to 2007, offset by lower
interest rates over the same period. Throughout 2008, our long-term debt
position exceeded our 2007 position since we accessed our revolving credit
facility to finance acquisitions. At December 31, 2008, $192.5 million was
outstanding on our credit facility versus $52.1 million outstanding at December
31, 2007. Our average interest rate was 3.36% at December 31, 2008, compared to
5.51% at December 31, 2007.
 
 Foreign
Exchange Gains/Losses
 We
reported a foreign exchange loss of $2.3 million in 2009 compared to a $2.0
million gain in 2008 and a $2.5 million gain in 2007.These foreign exchange
gains and losses arose on the translation of the foreign-denominated assets and
liabilities (such as accounts receivable, accounts payable and accrued
liabilities, and long-term debt) 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. The foreign exchange loss in 2009 and gain in
2008 were due to the volatility of daily foreign exchange rates and the timing
of the recognition and relief of foreign-denominated assets and
liabilities.
 
 At
December 31, 2009, we had entered into foreign currency forward contracts that
provided for the purchase of US$75.0 million at rates between 1.05310 and
1.05485 per US dollar maturing in January 2010. The fair value of these
contracts, estimated using third-party market indicators and forecasts at
December 31, 2009, resulted in an unrealized loss of $270,000. These forward
contracts are categorized as held for trade; therefore, the unrealized loss was
recorded in income as a component of foreign exchange.
 
 During
2009, we also recorded a $57.2 million foreign exchange loss in our currency
translation adjustments in other comprehensive income compared to a $76.9
million gain in 2008 and a $45.7 million loss in 2007. These unrealized gains
and losses arose when translating the operations of our US-based subsidiaries.
We do not hedge for this foreign exchange translation risk. The loss recorded
during 2009 was due to the strengthening of the Canadian dollar from US$0.82 at
December 31, 2008, to US$0.95 at December 31, 2009, and the gain recorded in
2008 was due to the weakening of the Canadian dollar from US$1.01 at December
31, 2007, to US$0.82 at December 31, 2008.
 
 
 MANAGEMENT’S
DISCUSSION AND ANALYSIS
 December
31, 2009
 STANTEC
INC.
  M-26
  Income
Taxes
 Our
effective income tax rate for 2009 and 2008 would have been 28.2% and 30.2%,
respectively, compared to 30.1% in 2007 without the impact of the goodwill
impairment charge of $35.0 million recorded in 2009 and of $53.0 million
recorded in 2008. The 28.2% effective rate for 2009 was below the expected range
of 29 to 31% set out in our 2008 Financial Review and the 30.2% effective rate
for 2008 due to the following factors:
 
 ·
              Additional
      income earned in our lower tax rate
  jurisdictions
 ·
              An
      increase in income from associated companies, which we receive on an
      after-tax basis
 ·
              A
      reduction in the statutory tax rate in Canada in
  2009
 
 Including
the impact of the non-deductible charges for goodwill impairment, our effective
income tax rate for 2009 was 39.0% compared to 55.0% for 2008. We review our
estimated income tax rate quarterly and adjust it 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.
 
 Without the impact of the $53.0 million
goodwill impairment charge in 2008, our effective income tax rate would have
been 30.2% compared to 30.1% in 2007. The increase was due to the relative
amount of income earned in our higher rate jurisdictions.
 
 Fourth
Quarter Results and Quarterly Trends
 
 The
following is a summary of our quarterly operating results for the last two
fiscal years:
 
 Quarterly
Unaudited Financial Information
 
 (In
millions of Canadian dollars, except per share amounts)
 
 2009
              
              2008Dec
      31
              
              
              Sep
      30
              
              
              Jun
      30
              
              
              Mar
      31
              
              Dec
      31
              
              
              Sep
      30
              
              
              Jun
      30
              
              
              Mar
      31Gross
      revenue
              
              
              342.8
              
              
              
              384.2
              
              
              
              388.1
              
              
              
              404.8
              
              
              369.3
              
              
              
              347.6
              
              
              
              343.3
              
              
              
              291.8Net
      revenue
              
              
              274.8
              
              
              
              306.7
              
              
              
              318.1
              
              
              
              343.3
              
              
              297.0
              
              
              
              289.2
              
              
              
              289.0
              
              
              
              254.9Net
      income (loss)
              
              
              22.9
              
              
              
              (10.0
              )
              
              
              22.3
              
              
              
              20.7
              
              
              20.0
              
              
              
              (30.0
              )
              
              
              22.1
              
              
              
              16.9EPS
      – basic
              
              
              0.50
              
              
              
              (0.22
              )
              
              
              0.49
              
              
              
              0.45
              
              
              0.44
              
              
              
              (0.66
              )
              
              
              0.48
              
              
              
              0.37EPS
      – diluted
              
              
              0.50
              
              
              
              (0.22
              )
              
              
              0.49
              
              
              
              0.45
              
              
              0.44
              
              
              
              (0.66
              )
              
              
              0.48
              
              
              
              0.37
 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
 December
31, 2009
 STANTEC
INC.
  M-27
  The
following items impact the comparability of our quarterly results:
 
 Gross
      Revenue
                
                (In
      millions of Canadian dollars)
              
              Q4
      09 vs. Q4 08
              
              
              Q3
      09 vs. Q3 08
              
              
              Q2
      09 vs. Q2 08
              
              
              Q1
      09 vs. Q1 08Increase
      (decrease) in gross revenue due to:Acquisition
      growth
              
              
              50.6
              
              
              
              70.3
              
              
              
              68.7
              
              
              
              86.1Decline
      in internal growth
              
              
              (54.5
              )
              
              
              (43.2
              )
              
              
              (49.8
              )
              
              
              (7.0
              )Impact
      of foreign exchange rates on revenue earned by foreign
      subsidiaries
              
              
              (22.6
              )
              
              
              9.5
              
              
              
              25.9
              
              
              
              33.9Total
      net increase in gross revenue
              
              
              (26.5
              )
              
              
              36.6
              
              
              
              44.8
              
              
              
              113.0
 
 Fourth
Quarter Results
 As
indicated in the tables above, during Q4 09, our gross revenue decreased by
$26.5 million, or 7.2%, to $342.8 million compared to $369.3 million for the
same period in 2008. Approximately $54.5 million of this decrease resulted from
a decline in revenue from internal growth and a $22.6 million foreign exchange
impact—due to the strengthening of the Canadian dollar during Q4 09—partially
offset by a $50.6 million increase in revenue from acquisitions completed in
2009.
 
 The
following table summarizes our key operating results for Q4 09 on a percentage
of net revenue basis and the percentage increase in the dollar amount of these
results compared to the same period last year:
  %
      IncreaseQuarter
      Ended December 31
              
              
              %
      of Net Revenue
              
              (Decrease)*2009
              
              2008
              
              
              2009
              
              2008
              
              2009
              vs.(In
      millions of Canadian dollars)
              
              
              
              
              
              
              
              
              
              2008Gross
      revenue
              342.8
              
              369.3
              
              
              124.7
              %
              124.3
              %
              (7.2
              %)Net
      revenue
              274.8
              
              297.0
              
              
              100.0
              %
              100.0
              %
              (7.5
              %)Direct
      payroll costs
              119.0
              
              131.6
              
              
              43.3
              %
              44.3
              %
              (9.6
              %)Gross
      margin
              155.8
              
              165.4
              
              
              56.7
              %
              55.7
              %
              (5.8
              %)Administrative
      and marketing expenses
              112.9
              
              127.7
              
              
              41.1
              %
              43.0
              %
              (11.6
              %)Depreciation
      of property and equipment
              3.7
              
              3.1
              
              **
              1.4
              %
              1.1
              %
              19.4
              %Amortization
      of intangible assets
              7.9
              
              6.2
              
              **
              2.9
              %
              2.1
              %
              27.4
              %Net
      interest expense
              2.2
              
              2.1
              
              
              0.8
              %
              0.7
              %
              4.8
              %Share
      of income from associated companies
              (1.1
              )
              (0.3
              )
              
              (0.5
              %)
              (0.1
              %)
              266.7
              %Foreign
      exchange (gains) losses
              0.3
              
              (2.5
              )
              
              0.1
              %
              (0.9
              %)
              (112.0
              %)Other
      income
              (0.3
              )
              (0.3
              )
              
              (0.1
              %)
              (0.1
              %)
              0.0
              %Income
      before income taxes
              30.2
              
              29.4
              
              
              11.0
              %
              9.9
              %
              2.7
              %Income
      taxes
              7.3
              
              9.4
              
              
              2.7
              %
              3.2
              %
              (22.3
              %)Net
      income for the period
              22.9
              
              20.0
              
              
              8.3
              %
              6.7
              %
              14.5
              %


*
              %
      increase (decrease) calculated based on the dollar change from the
      comparable period
 **
              Depreciation
      for certain software was reclassified from depreciation of property and
      equipment to amortization of intangibles due to the adoption of CICA
      Handbook Section 3064.


Net
income during Q4 09 was negatively impacted by the decline in gross revenue, as
further described below, but positively impacted by an increase in gross margin
as a percentage of net revenue. Our gross margin percentage was 56.7% in Q4 09
compared to 55.7% in Q4 08. This increase quarter over quarter was mainly due to
an increase in the gross margin in our Environment practice area as a result of
the mix of projects during the quarter. With the growth of our Environment
practice area over the year, we were able to secure larger projects, which, due
to their nature, present greater opportunities to produce higher margins. 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, will continue to cause fluctuations in our
gross margin percentage from period to period depending on the mix of projects
during any quarter.
 
 
 MANAGEMENT’S
DISCUSSION AND ANALYSIS
 December
31, 2009
 STANTEC
INC.
  M-28
  Net
income in Q4 09 was positively impacted by a reduction in our administrative and
marketing expenses as a percentage of net revenue from 43.0% in Q4 08 to 41.1%
in Q4 09. This decrease was primarily due to a decrease in provisions for claims
for our self-insured liability and continued focus by staff on operating
efficiently and managing costs during difficult economic times. Staff time
charged to marketing and administrative labor may fluctuate from quarter to
quarter because it is influenced by the mix of projects in progress and being
pursued during the period, as well as by integration activities.
 
 The
following table summarizes the change in gross revenue by practice area in the
fourth quarter of 2009 compared to the same period in 2008.
  Practice
      Area Gross Revenue
                
                
                
                
                
                
                
                Quarter
      Ended December 31Change
      Due
                
                
                Change
      Due
                
                
                Change
      DueTotal
                
                
                to
                
                
                to
      Internal
                
                
                to
      Foreign(In
      millions of Canadian dollars)
                
                2009
                
                
                2008
                
                
                
                Change
                
                Acquisitions
                
                
                Growth
                
                
                ExchangeBuildings
                
                
                69.0
                
                
                
                75.6
                
                
                
                (6.6
                )
                
                
                5.0
                
                
                
                (9.4
                )
                
                
                (2.2
                )Environment
                
                
                144.6
                
                
                
                115.9
                
                
                
                28.7
                
                
                
                45.3
                
                
                
                (6.5
                )
                
                
                (10.1
                )Industrial
                
                
                53.7
                
                
                
                69.4
                
                
                
                (15.7
                )
                
                
                0.3
                
                
                
                (13.1
                )
                
                
                (2.9
                )Transportation
                
                
                40.8
                
                
                
                49.2
                
                
                
                (8.4
                )
                
                
                -
                
                
                
                (4.8
                )
                
                
                (3.6
                )Urban
      Land
                
                
                34.7
                
                
                
                59.2
                
                
                
                (24.5
                )
                
                
                -
                
                
                
                (20.7
                )
                
                
                (3.8
                )Total
      Consulting Services
                
                
                342.8
                
                
                
                369.3
                
                
                
                (26.5
                )
                
                
                50.6
                
                
                
                (54.5
                )
                
                
                (22.6
                )
 
 The $54.5
million decline in revenue from internal growth was mainly impacted by the Q4 09
results of the Urban Land and Industrial practice areas and, to a lesser degree,
by the Q4 09 results of the other practice areas. Revenue for the Urban Land
practice area was impacted by a decline in housing starts in various parts of
the United States, particularly California, and, to a lesser degree, in Canada.
Single-family housing starts in the United States declined significantly in
2009. In response to these market conditions, our Urban Land group in the United
States reduced its staff levels in 2009 to match the work available. Revenue in
the Industrial practice area was impacted by the drop in commodity prices,
resulting in the cancellation of projects. Revenue from internal growth in our
other practice areas also declined quarter over quarter due to staff reductions
in response to declining backlogs; projects being cancelled, placed on hold, or
delayed; and the general economic slowdown in 2009.
 
 Quarterly
Trends
 During Q1
09, our gross revenue increased by $113.0 million, or 38.7%, to $404.8 million
compared to $291.8 million in the same period in 2008. Approximately $86.1
million of this increase resulted from acquisitions completed in 2008 and 2009
and a $33.9 million foreign exchange impact—due to the weakening of the Canadian
dollar during Q1 09—offset by a $7.0 million decline in internal growth. Net
income during Q1 09 increased by $3.8 million, or 22.5%, from the same period in
2008. Diluted earnings per share in Q1 09 increased by $0.08, or 21.6%, compared
to the same period in Q1 08. Our Q1 09 results were negatively impacted by an
increase in administrative and marketing expenses as a percentage of net revenue
from 42.0% to 43.1%, an increase in the amortization of intangibles of $2.7
million, and an increase in interest expense of $1.9 million. Our Q1 09 results
were positively impacted by an increase in gross margin as a percentage of net
revenue from 55.0% in Q1 08 to 56.4% in Q1 09.
 
 
 MANAGEMENT’S
DISCUSSION AND ANALYSIS
 December
31, 2009
 STANTEC
INC.
  M-29
  During Q2
09, our gross revenue increased by $44.8 million, or 13.0%, to $388.1 million
compared to $343.3 million in the same period in 2008. Approximately $68.7
million of this increase resulted from acquisitions completed in 2008 and 2009
and a $25.9 million foreign exchange impact—due to the weakening of the Canadian
dollar during Q2 09 compared to Q2 08—offset by a $49.8 million decline in
internal growth. Net income during Q2 09 increased by $0.2 million, or 0.9%,
from the same period in 2008. Diluted earnings per share in Q2 09 increased by
$0.01, or 2.1%, compared to Q2 08. Our Q2 09 results were negatively impacted by
a reduction in gross margin as a percentage of net revenue from 55.9% in Q2 08
to 55.6% in Q2 09, an increase in our administrative and marketing expenses as a
percentage of net revenue from 40.8% to 41.3%, an increase in foreign exchange
loss of $1.0 million, an increase in the amortization of intangibles of $0.9
million, and an increase in net interest expense of $1.0 million. Our Q2 09
results were positively impacted by the growth in gross revenue.
 
 During Q3
09, our gross revenue increased by $36.6 million, or 10.5%, to $384.2 million
compared to $347.6 million for the same period in 2008. Approximately $70.3
million of this increase resulted from the acquisitions completed in 2008 and
2009 and a $9.5 million foreign exchange impact—due to the weakening of the
Canadian dollar during Q3 09 compared to Q3 08—offset by a $43.2 million decline
in internal growth. Net loss decreased from $(30.0) million in Q3 08 to $(10.0)
million in Q3 09, and diluted loss per share decreased from $(0.66) in Q3 08 to
$(0.22) in Q3 09. During the quarter, our net income and earnings per share were
negatively impacted by a $35.0 million impairment of goodwill. This non-cash
charge decreased our diluted earnings per share by $0.77. Excluding the
impact of the $35.0 million goodwill impairment charge, our net income for Q3 09
would have been $25.0 million, and our diluted earnings per share would have
been $0.55. Our Q3 09 results were positively impacted by an increase in our
gross margin as a percentage of net revenue from 56.0% to 56.5% due to improved
project execution and the nature of projects in progress during the quarter. Our
results were also positively impacted by a $23.4 million reduction in the
impairment of goodwill and intangible assets and a $1.7 million increase in
income from associated companies. Our Q3 09 results were negatively impacted by
an increase in interest expense of $0.9 million and an increase in
administrative and marketing expenses as a percentage of net revenue from 39.2%
to 41.3%, which included one-time charges for severance payments and costs
associated with downsizing our operations in certain areas.
 
 Liquidity
and Capital Resources
 
 The
following table represents summarized working capital information as at December
31, 2009, compared to December 31, 2008:
 
 (In
      millions of Canadian dollars, except ratio)
              
              Dec
      31, 2009
              
              
              Dec
      31, 2008
              
              
              ChangeCurrent
      assets
              
              
              409.3
              
              
              
              480.7
              
              
              
              (71.4
              )Current
      liabilities
              
              
              (283.8
              )
              
              
              (300.0
              )
              
              
              16.2Working
      capital (note
      1)
              
              
              125.5
              
              
              
              180.7
              
              
              
              (55.2
              )Current
      ratio (note
      1)
              
              
              1.44
              
              
              
              1.60
              
              
              
              n/a
 note
1: Working capital is calculated by subtracting current liabilities from current
assets. Current ratio is calculated by dividing current assets by current
liabilities. Both terms are further discussed in the Definition of Non-GAAP
Measures in the Critical Accounting Estimates, Developments, and Measures
section of this report.
 
 Our cash
flows from operating, investing, and financing activities, as reflected in our
consolidated statements of cash flows, are summarized in the following
table:
 
 (In
      millions of Canadian dollars)
              
              2009
              
              
              2008
              
              
              2007
              
              
              $
      Change 2009 vs. 2008
              
              
              $
      Change 2008 vs. 2007Cash
      flows from operating activities
              
              
              100.0
              
              
              
              160.0
              
              
              
              87.5
              
              
              
              (60.0
              )
              
              
              72.5Cash
      flows used in investing activities
              
              
              (103.2
              )
              
              
              (127.7
              )
              
              
              (135.2
              )
              
              
              24.5
              
              
              
              7.5Cash
      flows from (used in) financing activities
              
              
              (84.1
              )
              
              
              53.8
              
              
              
              33.9
              
              
              
              (137.9
              )
              
              
              19.9
 
 
 MANAGEMENT’S
DISCUSSION AND ANALYSIS
 December
31, 2009
 STANTEC
INC.
  M-30
  We are
able to meet our liquidity needs through a variety of sources, including cash
generated from operations, long- and short-term borrowings from our $300 million
credit facility, and the issuance of common shares. Our primary use of funds is
for paying operational expenses, completing acquisitions, sustaining capital
spending on property and equipment, and repaying long-term debt.
 
 We
believe that internally generated cash flows, supplemented by borrowings, if
necessary, will be sufficient to cover our normal operating and capital
expenditures. We also believe that the design of our business model reduces the
impact of changing market conditions on our operating cash flows. Consequently,
we do not anticipate any immediate need to access additional capital; however,
under certain favorable market conditions, we would consider issuing common
shares to facilitate acquisition growth or to reduce the utilized level on our
credit facility.
 
 We
continue to manage our capital structure according to the internal guideline
established in our 2008 Financial Review of maintaining a net debt to equity
ratio of less than 0.5 to 1.0. Our net debt to equity ratio, a non-GAAP measure,
is calculated as the sum of (1) long-term debt, including current portion, plus
bank indebtedness, less cash and cash held in escrow, divided by (2)
shareholders’ equity. At December 31, 2009, our net debt to equity ratio was
0.40 to 1.0. Going forward, there may be occasions when we exceed our target by
completing opportune acquisitions that increase our debt level above the target
for a period of time.
 
 We
continue to limit our exposure to credit risk by placing our cash and cash
equivalents in, and entering into derivative agreements with, high-quality
credit institutions. Our investment held for self-insured liabilities includes
bonds and equities, and the risk associated with these bonds and equities is
mitigated to some extent by the overall quality and mix of our investment
portfolio.
 
 Working
Capital
 Our
working capital (current assets less current liabilities) at the end of 2009 was
$125.5 million compared to $180.7 million in 2008. Current assets decreased by
$71.4 million, and current liabilities decreased by $16.2 million. The decrease
in current assets was mainly due to an $89.3 million decrease in cash and cash
equivalents and a $7.4 million decrease in cash held in escrow. On December 31,
2008, cash and cash equivalents included cash advanced from our credit facility
and held for the Jacques Whitford acquisition closing. The cash was paid to the
vendors on the completion of the transaction on January 2, 2009. This decrease
was partially offset by a $17.2 million increase in accounts receivable and in
costs and estimated earnings in excess of billings. These increases resulted
from growth from acquisitions during the year.
 
 The $16.2
million decrease in current liabilities from 2008 to 2009 was mainly due to a
$22.2 million decrease in accounts payable and accrued liabilities, which were
impacted by the timing of payroll at year-end. Our income taxes payable also
decreased by $9.9 million from 2008 to 2009 due to larger instalments made in
the year.
 
 In 2009,
our current ratio was lower than in 2008 mainly due to the decrease in cash and
cash equivalents during the year as explained above.
 
 Cash
Flows From Operating Activities
 Our cash
flows from operating activities were $100.0 million in 2009 compared to $160.0
million in 2008 and $87.5 million in 2007. Our cash flows from operating
activities are impacted by the timing of payroll and acquisitions—in particular,
the timing of payments of acquired accounts payable and accrued liabilities,
including employee annual bonuses. The $60.0 million decrease in cash flows from
operating activities for 2009 compared to 2008 was a result of the
following:
  ·
              Our
      cash paid to suppliers during 2009 was higher due primarily to the payment
      of acquired trade payables.
   MANAGEMENT’S
DISCUSSION AND ANALYSIS
 December
31, 2009
 STANTEC
INC.
  M-31
  ·
              Our
      cash paid to employees during 2009 was higher due primarily to the payment
      of acquired bonuses and severances as well as one week of additional
      payroll.
  ·
              Our
      interest paid during 2009 was higher because we had more long-term debt
      throughout the first three quarters of 2009 compared to the same period in
      2008.
  ·
              Our
      income taxes paid, net of income taxes recovered, increased during
      2009.
 
 Our cash
flows from operating activities in 2009 were positively impacted by a decrease
in our combined days of revenue in accounts receivable and costs and estimated
earnings in excess of billings from 83 days at December 31, 2008, to 81 days at
December 31, 2009. This decrease was the result of our continued focus on asset
management, including billings and collections.
 
 The $72.5
million increase in cash flows from operating activities in 2008 compared to
2007 was due to a net increase of $93.0 million in cash receipts from clients
less cash paid to suppliers and employees. In 2008, cash receipts from clients
less cash paid to suppliers and employees were high because of the additional
revenue generated by acquisitions completed in the second half of 2007 and in
2008. The successful integration of these acquisitions resulted in a reduction
in our combined investment in accounts receivable and costs and estimated
earnings in excess of billings from 94 days of revenue at the end of 2007 to 83
days at the end of 2008.
 
 Cash
Flows Used In Investing Activities
 Our cash
flows used in investing activities were $103.2 million in 2009 compared to
$127.7 million in 2008 and $135.2 million in 2007. In 2009, we used $73.1
million for the acquisition of Jacques Whitford and Granary compared to using
$92.1 million to finance 5 acquisitions completed in 2008 and using $105.4
million to finance 11 acquisitions completed in 2007. In addition, in 2008, $6.6
million was placed in an escrow account pending the outcome of purchase price
adjustment clauses included in the Zande and Secor purchase agreements.
Offsetting the reduction in cash flows used to finance acquisitions in 2009
compared to 2008 was an increase in the use of cash flows in 2009 to fund our
investments held in self-insured liabilities. In 2009, we increased our
investment by $11.0 million compared to decreasing our investment by $5.8
million in 2008 and increasing our investment by $3.8 million in
2007.
 
 As a
professional services organization, we are not capital intensive. In the past,
we have made capital expenditures primarily for items such as leasehold
improvements, computer equipment, furniture, and other office and field
equipment. Our cash outflows for property and equipment and software were $20.4
million, $35.6 million, and $27.3 million in 2009, 2008, and 2007, respectively.
One factor that contributed to the higher investment activities in 2008 was the
$8.0 million spent for improvements made to our Markham and Toronto, Ontario,
offices to accommodate office consolidations and to our Edmonton, Alberta,
office to accommodate growth.Our capital
expenditures during 2009 were financed by cash flows from operations. We expect
our total capital and software expenditures in 2010 to be in the range of $27 to
$30 million, excluding capital acquired from acquisitions. In 2010, we plan to
invest in enhancements to our information technology infrastructure to optimize
and streamline our business processes and prepare for continued
growth.
 
 Cash
Flows From (Used In) Financing Activities
 Our cash
flows used in financing activities were $84.1 million in 2009 compared to cash
flows from financing activities of $53.8 million in 2008 and $33.9 million in
2007. In 2009, we generated sufficient cash from operations to repay $152.5
million of our revolving credit facility and acquired debt from acquisitions and
used $68.8 million of the facility, in part to pay accounts payable, employee
bonuses, and notes payable due from acquisitions. At December 31, 2009, $163.4
million of our $300 million credit facility was available for future use. The
above use of cash was offset by $2.3 million generated from options exercised
during the year.
 
 In 2008,
we generated sufficient cash from our operations to repay $166.4 million of our
revolving credit facility and acquired debt from acquisitions and used $228.3
million of the facility, in part to finance the Zande, Rochester Signal, Secor,
RHL, McIntosh, and Jacques Whitford acquisitions. At December 31, 2008, $104.9
million of our credit facility was available for future use. During the year, we
also used $8.9 million to repurchase shares under our normal course issuer bid.
The above use of cash was offset by $1.2 million generated from options
exercised in 2008.
 
 
 MANAGEMENT’S
DISCUSSION AND ANALYSIS
 December
31, 2009
 STANTEC
INC.
  M-32
  Our
credit 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 and certain financial covenant calculations,
rates of interest will vary between Canadian prime, US base rate, or LIBOR or
bankers’ acceptance rates plus 65, 85, or 125 basis points. We are subject to
financial and operating covenants related to our credit facility. Failure to
meet the terms of one or more of these covenants may constitute a default,
potentially resulting in accelerated repayment of the debt obligation. In
particular, at each quarter-end, we must satisfy the following specified ratios:
1) the senior debt to EBITDA ratio must not exceed 2.5 to 1.0 at any time and 2)
the EBITDAR to debt service ratio must not be less than 1.25 to 1.0 at any time.
These EBITDA and EBITDAR to debt service ratios are defined in the Definition of
Non-GAAP Measures in the Critical Accounting Estimates, Developments, and
Measures section below. We were in compliance with all these covenants as at and
throughout the year ended December 31, 2009.
 
 Shareholders’
Equity
 Our
shareholders’ equity increased by $8.4 million in 2009 and by $96.3 million in
2008. The following table summarizes the reasons for these
increases:
 
 (In
      millions of Canadian dollars)
              
              2009
              
              
              2008Beginning
      shareholders’ equity
              
              
              539.0
              
              
              
              442.7Net
      income for the year
              
              
              55.9
              
              
              
              29.0Currency
      translation adjustments
              
              
              (57.2
              )
              
              
              76.9Unrealized
      (loss) gain on financial assets
              
              
              2.7
              
              
              
              (3.6
              )Unrealized
      (loss) gain on cash flow hedge
              
              
              1.4
              
              
              
              (3.0
              )Recognition
      of fair value of stock-based compensation
              
              
              3.0
              
              
              
              5.0Share
      options exercised for cash
              
              
              2.3
              
              
              
              1.2Shares
      repurchased under normal course issuer bid
              
              
              -
              
              
              
              (8.9
              )Other
              
              
              0.3
              
              
              
              (0.3
              )Total
      change
              
              
              8.4
              
              
              
              96.3Ending
      shareholders’ equity
              
              
              547.4
              
              
              
              539.0
 
 The
change arising on the translation of our US-based subsidiaries in 2009 was a
$57.2 million loss compared to a $76.9 million gain in 2008. The change in 2009
was due to the strengthening of the Canadian dollar—from US$0.82 to
US$0.95—during the year. In 2008, the Canadian dollar weakened from US$1.01 to
US$0.82 at the end of the year.
 
 In 2008,
we minimized our exposure to floating rates of interest until September 3, 2010,
on US$100 million of our revolving credit facility by entering into an interest
rate swap agreement as described in the Net Interest Expense section above. The
fair value of the interest rate swap, estimated using market rates as at
December 31, 2009, was a loss of $1.5 million, net of tax. Since we designated
the interest rate swap as a cash flow hedge against US$100 million of our credit
facility and the hedge met the accounting criteria for effectiveness during the
year, we recorded the $1.5 million loss in fair value in other comprehensive
income.
 
 We hold
investments for self-insured liabilities consisting of government and corporate
bonds and equity securities. These investments are classified as available for
sale and are stated at fair value with the unrecognized gain or loss recorded in
other comprehensive income. The change in the fair value of these investments
was a $2.7 million gain in 2009 and a $3.6 million loss in 2008.
 
 
 MANAGEMENT’S
DISCUSSION AND ANALYSIS
 December
31, 2009
 STANTEC
INC.
  M-33
  From time
to time, our board of directors grants share options as part of our incentive
programs. No share options were granted in 2009. In 2008, our board granted
480,000 stock options to various officers and employees of the Company (467,500
options were granted in 2007). These options vest equally over a three-year
period and have a contractual life of seven years from the grant date. Share
options exercised in 2009 generated $2.3 million in cash compared to generating
$1.2 million in 2008.
 
 Our
normal course issuer bid on the TSX was renewed in 2009 and allows us to
repurchase up to 2,273,722 of our common shares during the period of June 1,
2009, to May 31, 2010. We continue to believe that, from time to time, the
market price of our common shares does not fully reflect the value of our
business or future business prospects and that, at such times, outstanding
common shares are an attractive, appropriate, and desirable use of available
Company funds. In 2009, we did not purchase any common shares. In 2008, we
purchased 351,400 common shares at an average price of $25.37 per share for an
aggregate price of $8.9 million. In 2009 and 2008, we did not issue any shares
as consideration for an acquisition.
 
 Other
 
 Outstanding
Share Data
 At
December 31, 2009, there were 45,716,820 common shares and 1,752,298 share
options outstanding. During the period of December 31, 2009, to February 25,
2010, no shares were repurchased under our normal course issuer
bid, 17,000 share options were exercised, 1,667 share options were
forfeited, and 1,666 share options were cancelled. At February 25, 2010,
there were 45,733,820 common shares and 1,731,965 share options
outstanding.
 
 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, operating and capital lease commitments, purchase and
service obligations, and other liabilities as of December 31, 2009:
  Payment
      Due by PeriodLess
      than 1
                
                
                
                
                
                
                
                
                After
      5(In
      millions of Canadian dollars)
                
                Total
                
                
                Year
                
                
                1–3
      Years
                
                
                4–5
      Years
                
                
                YearsLong-term
      debt
                
                
                226.6
                
                
                
                32.5
                
                
                
                193.7
                
                
                
                0.2
                
                
                
                0.2Interest
      on debt
                
                
                12.5
                
                
                
                7.9
                
                
                
                4.6
                
                
                
                -
                
                
                
                -Operating
      lease commitments
                
                
                350.5
                
                
                
                66.9
                
                
                
                108.9
                
                
                
                77.3
                
                
                
                97.4Capital
      lease commitments
                
                
                7.6
                
                
                
                2.9
                
                
                
                4.7
                
                
                
                -
                
                
                
                -Purchase
      and Service Obligations
                
                
                32.4
                
                
                
                11.0
                
                
                
                18.7
                
                
                
                2.7
                
                
                
                -Other
      liabilities
                
                
                4.3
                
                
                
                0.4
                
                
                
                0.4
                
                
                
                0.7
                
                
                
                2.8Total
      contractual obligations
                
                
                633.9
                
                
                
                121.6
                
                
                
                331.0
                
                
                
                80.9
                
                
                
                100.4
  For
further information regarding the nature and repayment terms of our long-term
debt and capital lease obligations, refer to the Cash Flows From Financing
Activities section and notes 8 and 11 in our audited consolidated financial
statements for the year ended December 31, 2009. Our operating lease commitments
include obligations under office space rental agreements, and our purchase and
service obligations include agreements to purchase future goods and services
that are enforceable and legally binding. Our other liabilities include amounts
payable under our deferred share unit plan and a commitment to purchase the
non-controlling interests of The National Testing Laboratories Limited over a
period ending in 2014. Failure to meet the terms of our operating lease
commitments may constitute a default, potentially resulting in a lease
termination payment, accelerated payments, or a penalty as detailed in each
lease agreement.
 
 
 MANAGEMENT’S
DISCUSSION AND ANALYSIS
 December
31, 2009
 STANTEC
INC.
  M-34
  Off-Balance
Sheet Arrangements
 As of
December 31, 2009, we had off-balance sheet financial arrangements relating to
letters of credit in the amount of $2.7 million that expire at various
dates before January 2011. These letters of credit were issued in the normal
course of operations, including the guarantee of certain office rental
obligations. We also have a surety facility to facilitate, as part of the normal
course of operations, the issuance of bonds for certain types of project work.
As at December 31, 2009, $11.5 million in bonds were issued under this
agreement.
 
 During
2009, we issued a guarantee up to a maximum of US$60.0 million for project work
with the US federal government. If the guarantee is exercised, we have recourse
to its insurers, subject to certain deductibles, policy terms, and limits, to
recover claims costs and damages arising from errors or omissions in
professional services. We have not made any payments under this guarantee, and
no amounts have been accrued in our audited consolidated financial statements
with respect to the guarantee.
 
 In the
normal course of business, we also provide indemnifications and, in very limited
circumstances, surety bonds. These are often standard contractual terms and are
provided to counterparties in transactions such as purchase and sale contracts
for assets or shares, service agreements, and leasing transactions. In addition,
we indemnify our directors and officers against any and all claims or losses
reasonably incurred in the performance of their service to the Company to the
extent permitted by law. These indemnifications may require us to compensate the
counterparty for costs incurred through various events. The terms of these
indemnification agreements will vary based on the contract, the nature of which
prevents us from making a reasonable estimate of the maximum potential amount
that could be required to pay counterparties. Historically, we have not made any
significant payments under such indemnifications, and no amounts have been
accrued in our consolidated financial statements with respect to these
guarantees.
 
 Financial
Instruments and Market Risk
 Fair value.As at December 31,
2009, we value and record our financial instruments as follows:
  ·
              Cash
      and cash equivalents and cash held in escrow are recorded at fair value,
      with realized and unrealized gains and losses reported in
      income.
  ·
              Accounts
      receivable are initially accounted for at fair value and subsequently
      adjusted for any allowance for doubtful accounts, with realized gains and
      losses reported in income.
  ·
              Investments
      held for self-insured liabilities are recorded at fair value, with
      accumulated unrealized gains and losses reported in other comprehensive
      income until disposed of, at which time the realized gains and losses are
      recognized in income.
  ·
              Accounts
      payable and accrued liabilities and long-term debt are initially recorded
      at fair value and subsequently recorded at amortized cost using the
      effective interest rate method, with realized gains and losses reported in
      income.
  ·
              Derivatives
      are accounted for at fair value, with realized and unrealized gains and
      losses reported in income unless the derivative qualifies and is
      designated as an effective hedge, in which case unrealized gains and
      losses are recorded in other comprehensive income. As at December 31,
      2009, we hold derivative financial instruments in the form of foreign
      exchange forward contracts and an interest rate swap agreement that we
      designate as a hedge.
 
 The fair
values of financial instruments are based on the bid prices in quoted active
markets for financial assets and on the ask prices for financial liabilities.
The fair values of cash and cash equivalents, cash held in escrow, accounts
receivable, and accounts payable and accrued liabilities approximate their
carrying amounts because of the short-term maturity of these instruments. The
carrying amount of bank loans approximates their fair value because the
applicable interest rate is based on variable reference rates.
 
 
 MANAGEMENT’S
DISCUSSION AND ANALYSIS
 December
31, 2009
 STANTEC
INC.
  M-35
  Market risk.We are exposed to
various market factors that can affect our performance, primarily with respect
to currency and interest rates.
 
 Currency. Our currency
exchange rate risk results primarily from the following three
factors:
  ·
              A
      significant portion of our revenue and expenses is generated or incurred
      in US dollars; therefore, we are exposed to fluctuations in exchange
      rates. To the extent that US-dollar revenues are greater than US-dollar
      expenses in a strengthening US-dollar environment, we expect to see a
      positive impact on our income from operations. Conversely, to the extent
      that US-dollar revenues are greater than US-dollar expenses in a weakening
      US-dollar environment, we expect to see a negative impact. This exchange
      rate risk primarily reflects, on an annual basis, the impact of
      fluctuating exchange rates on the net difference between total US-dollar
      professional revenue and US-dollar expenses. Other exchange rate risk
      arises from the revenue and expenses generated or incurred by subsidiaries
      located outside Canada and the United States. Our income from operations
      will be impacted by exchange rate fluctuations used in translating these
      revenues and expenses. We do not hedge for this foreign exchange
      translation risk.
  ·
              Foreign
      exchange fluctuations may also arise on the translation of the balance
      sheet of (net investment in) our US-based subsidiaries and are recorded as
      currency translation adjustments in other comprehensive income. We do not
      hedge for this foreign exchange translation
  risk.
  ·
              Foreign
      exchange gains or losses arise on the translation of foreign-denominated
      assets and liabilities (such as accounts receivable, accounts payable and
      accrued liabilities, and long-term debt) held in our Canadian operations
      and non-US-based foreign subsidiaries. We minimize our exposure to foreign
      exchange fluctuations on these items by matching US-dollar liabilities
      and, when appropriate, by entering into forward contracts to buy or sell
      US dollars in exchange for Canadian
dollars.
 
 Although
we may buy or sell US dollars in exchange for Canadian dollars in accordance
with our foreign exchange risk mitigation strategy, on occasion we may have a
net exposure to foreign exchange fluctuations because of the timing of the
recognition and relief of foreign-denominated assets and liabilities. At
December 31, 2009, due to a slight net exposure, a $0.01 increase or decrease in
the US- to Canadian-dollar exchange rate, with all other variables held
constant, would have an immaterial impact on our net income for the
year.
 
 Interest Rate.Changes
in interest rates also present a risk to our performance. Our credit facility
carries a floating rate of interest. In addition, we are subject to interest
rate pricing risk to the extent that our investments held for self-insured
liabilities contain fixed-rate government and corporate bonds. In 2008, we
minimized our exposure to floating rates of interest by entering into an
interest rate swap agreement as explained in the Net Interest Expense section
above. We estimate that, based on our loan balance at December 31, 2009, a 0.5%
increase in interest rates, with all other variables held constant, would impact
our basic earnings per share by less than $0.01 for the year.
 
 Related-Party
Transactions
 We have
not entered into any related-party transactions as defined in Section 3840
ofthe CICA
Handbook.
 
 
 MANAGEMENT’S
DISCUSSION AND ANALYSIS
 December
31, 2009
 STANTEC
INC.
  M-36
  OUTLOOK
 
 The
following table summarizes our expectations for the coming year:
 
 Measure
              
              Expected
      RangeGross
      margin as % of net revenue
              
              Between
      54.5 and 56.5%Administrative
      and marketing expenses as % of net revenue
              
              Between
      41.0 and 43.0%Net
      income as % of net revenue
              
              At
      or above 6%Effective
      income tax rate
              
              Between
      32.5 and 34.5%Return
      on equity (note
      1)
              
              At
      or above 14%Net
      debt to equity ratio (note
      2)
              
              At
      or below 0.5 to 1
 note
1: Return on equity is calculated as net income for the year divided by average
shareholders’ equity over each of the last four quarters.
 note
2: Net debt to equity ratio is calculated as the sum of (1) long-term debt,
including current portion, plus bank indebtedness, less cash and cash held in
escrow, divided by (2) shareholders’ equity.
 
 We
revised the following targets for 2010 compared to 2009:
  ·
              We
      revised our target for gross margin as a percentage of net revenue from
      between 54 and 56% in 2009 to between 54.5 and 56.5% in 2010. Our actual
      gross margin in 2009 was 56.3%.
  ·
              We
      revised our target for administrative and marketing expenses as a
      percentage of net revenue from between 41.0 and 43.5% in 2009 to between
      41.0 and 43.0% in 2010. Our actual administrative and marketing expenses
      as a percentage of net revenuein
      2009 was 41.8%, which we believe we can sustain into 2010. Our 2009
      administrative and marketing expenses were impacted by one-time costs such
      as severance payments and other costs associated with the downsizing of
      our operations. In 2010, we will continue to emphasize cost efficiencies
      and strive for improved operational
  effectiveness.
  ·
              We
      revised our target for our effective income tax rate from between 29 and
      31% in 2009 to between 32.5 and 34.5% in 2010. In January 2010, we
      reorganized our corporate structure, which will increase our effective tax
      rate in 2010 but will lead to a decrease in our effective tax rate in
      years thereafter. In addition, we revised this target since we anticipate
      that less income will be earned in our lower tax rate jurisdictions in
      2010 compared to 2009.
 
 Overall,
fluctuations in our actual performance occur due to the particular client and
project mix achieved as well as the number of acquisitions completed in a year.
Some targets, such as net debt to equity ratio, could be impacted and
potentially exceeded by completing an opportune larger acquisition that
increases our debt level above our target for a period of time.
 
 The
infrastructure and facilities design market in North America, our principal area
of operation, is large and is estimated to generate approximately US$90.0
billion in revenue annually. The North American market is diverse, consisting of
many technical disciplines, practice areas, client types, and industries in both
the private and public sectors, and is affected by alternate delivery models and
opportunities arising from government stimulus packages in Canada and the United
States. Overall, we expect the outlook for professional services in our key
markets and practice areas to remain stable in the first half of 2010, compared
to the last half of 2009, with a moderate increase in the second half of 2010
supported by a variety of factors, including the material factors described
below.
 
 Canada
 The
outlook for Canada in 2010 is moderate growth. The Canadian real gross domestic
product (GDP) is expected to grow by 2.7% in the year according to the
Conference Board of Canada. In determining our Canadian outlook in areas that
directly impact infrastructure spending, we considered the following
factors:
 
 MANAGEMENT’S
DISCUSSION AND ANALYSIS
 December
31, 2009
 STANTEC
INC.
  M-37
  ·
              Real
      GDP is expected to rebound more positively in Canada than in the United
      States. Any shock to the projected recovery, including increased interest
      rates and reduced government spending, may erode business and consumer
      confidence. Projections of a slower recovery for economic conditions in
      the United States may also hamper the return to growth in Canada, which is
      already expected to be more weighted in the second half of
      2010.
  ·
              The
      0.25% overnight rate target conditionally committed for the first half of
      2010 by the Bank of Canada is at historic lows. Incremental increases are
      projected only with sustained economic
recovery.
  ·
              The
      World Bank predicts that metal prices will remain relatively stable, and
      the Energy Information Administration suggests that energy prices will
      continue to rise gradually as the world economy rebounds. Stable commodity
      prices suggest that interest in large capital projects will increase as
      firms manage their spending in accordance with market
  risk.
  ·
              The
      deep federal and provincial government deficits will force a rebalancing
      of the books, which is likely to impact public infrastructure spending;
      however, the timing of these effects is
  uncertain.
  ·
              Volatility
      and strength in the Canadian dollar are working to slow growth and could
      continue to offset favorable developments in 2010. The Bank of Canada
      estimates a 2010 Canadian/US exchange rate averaging US$0.96, a marked
      increase from our average exchange rate in 2009 of
  US$0.88.
  ·
              Governments
      and the public continue to be conscious of environmental issues. This
      awareness has numerous impacts, including increased interest in
      sustainable design and development, improvements to water distribution and
      treatment, and reductions in the ecological footprint of industrial
      activity. In the regulatory realm, the Canadian government is expected to
      announce policy on climate change only when US and global approaches are
      clear.
  ·
              Housing
      prices are expected to rise moderately in 2010. The Canadian Mortgage and
      Housing Corporation (CMHC) also forecasts 164,900 single detached housing
      starts, a marked increase over the 2009 total of
  75,659.
  ·
              We
      continue to believe that the Infrastructure Stimulus Fund announced in
      2009 for the construction of infrastructure projects over the next two
      years (2009–10 and 2010–11) will contribute to maintaining previous levels
      of work.
 
 United
States
 The
outlook for the United States in 2010 is a modest rebound. Uncertainty remains
about the time frame and pace of emergence from the current recession with
projections from the Congressional Budget Office of a 2.1% growth in GDP. The
following factors related to infrastructure support our outlook for the
year:
  ·
              Housing
      activity in the United States is expected to increase in 2010 with the
      seasonally adjusted annual rate recovering to 560,000 from 439,000 in
      2009.
  ·
              According
      to the Congressional Budget Office, the US deficit may remain close
      to 9.0% of GDP in 2010. Future adjustments to reduce the deficit may
      impact public infrastructure
spending.
  ·
              Fiscal
      revenue pressures at the state and municipal levels along with a
      pronounced federal deficit may impact public infrastructure spending. The
      timing of this impact is uncertain and remains linked to the persistence
      of challenging economic conditions.
  ·
              Environmental
      issues continue to be a focus for government and the public. Any changes
      in regulations related to climate change are expected to create
      opportunities in some sectors and uncertainties in
  others.
 
 
 MANAGEMENT’S
DISCUSSION AND ANALYSIS
 December
31, 2009
 STANTEC
INC.
  M-38
  Overall
Outlook
 We
believe that our overall outlook for 2010 is stable with moderate growth
beginning in the second half of the year in regions and practice areas where we
are a top-tier service provider. Although the difficult economic environment of
the past year appears to be slowly improving, related pressures, such as
increased competition, margin compressions, and project delays, are not expected
to subside immediately. Due to the diversity of our operations, the mixture of
our clients, and the flexibility of our organization, we believe that we can
continue adapting our business to changing economic conditions and that we will
emerge well positioned as the market improves.
 
 Outlooks
for each of our practice areas for 2010 can be found in the Results section of
this Management’s Discussion and Analysis. The outlook for each practice area in
2010 ranges from stable to moderate growth for Buildings, Environment,
Transportation, and Industrial and stable for Urban Land. In establishing the
outlook for our Buildings practice area, we assume that demonstrating our
capabilities in the health care sector will lead to new opportunities. We also
assume that the P3 market in Canada will remain strong and that we are well
positioned to win these projects. We developed the outlook for our Environment
practice area assuming that our expanded capabilities and critical mass in
numerous regions and sectors will enable us to attract larger and longer-term
projects. In outlining our outlook for the Industrial practice area, we assume
that oil, gas, and commodity prices will either continue to increase or
stabilize. We also assume a continued government and public interest in carbon
mitigation, renewable energy, and sustainable initiatives. In establishing our
outlook for the Transportation practice area, we assume that the US and Canadian
stimulus packages have prevented the deferral of projects and accelerated some
construction-ready projects and that this will remain the case for 2010. We also
assume that decreasing tax revenues and increasing state deficits will impact
future transportation funding and that the future of the Safe, Accountable,
Flexible, Efficient, Transportation Equity Act—A Legacy for Users (SAFETEA-LU)
will not be resolved immediately, which could contribute to funding uncertainty
and project delays. Finally, we outlined our outlook for the Urban Land practice
area with the assumption that housing starts will increase in Canada and the
United States as forecast by the CMHC and National Association of Home
Builders.
 
 Going
forward, we target to achieve a long-term average annual compound growth rate
for gross revenue of 15%—a target we have realized since our initial public
offering in 1994. Continued growth allows us to enhance the depth of our
expertise and broaden our service offerings, provide expanded opportunities for
our employees, and lever our integrated enterprise systems. Further maximizing
the critical mass of staff and maturity we have achieved in certain practice
areas and geographic regions also enables us to increase our business with key
clients and sell our services across local markets. Our ability to expand 15%
annually depends on our strategic efforts to grow organically and the
availability of acquisition opportunities. We do not expect to encounter
constraints in locating available acquisition candidates considering our success
to date as well as the trend in our industry for smaller firms to join larger,
more stable organizations. At any one time, we are engaged in discussions with
many firms. Since it is important to find an appropriate cultural fit and
complementary services, the acquisition process can extend over months or even
years. Due to economic difficulties over the past year, the process is currently
being impacted by discrepancies between the perceived historical values of firms
and their values given their current financial performance.
 
 In
establishing our operating budgets for 2010, we assume that the Canadian dollar
will remain stable compared to the US dollar throughout the year. As well, we
assume that the average interest rate will remain stable for the first half of
the year and increase incrementally in the second half. In establishing our
effective income tax rate, we assume the tax rate substantially enacted at
December 31, 2009, for the countries in which we operate, primarily Canada and
the United States. We expect to support our targeted level of growth using a
combination of cash flows from operations and borrowings. Under certain market
conditions, we will also consider issuing common shares.
 
 
 MANAGEMENT’S
DISCUSSION AND ANALYSIS
 December
31, 2009
 STANTEC
INC.
  M-39
  CRITICAL
ACCOUNTING ESTIMATES, DEVELOPMENTS, AND MEASURES
 
 Critical
Accounting Estimates
 Our
consolidated financial statements are prepared in accordance with Canadian GAAP,
which require us to make various estimates and assumptions. The notes to our
December 31, 2009, consolidated financial statements outline our significant
accounting estimates. The accounting estimates discussed below are considered
particularly important because they require the most difficult, subjective, and
complex management judgments. However, because of the uncertainties inherent in
making assumptions and estimates regarding unknown future outcomes, future
events may result in significant differences between estimates and actual
results. We believe that each of our assumptions and estimates is appropriate to
the circumstances and represents the most likely future outcome.
 
 Unless
otherwise specified in our discussion of specific critical accounting estimates,
we expect no material changes in overall financial performance and financial
statement line items to arise either from reasonably likely changes in material
assumptions underlying an estimate or within a valid range of estimates from
which the recorded estimate was selected. In addition, we are not aware of
trends, commitments, events, or uncertainties that can reasonably be expected to
materially affect the methodology or assumptions associated with our critical
accounting estimates, subject to items identified in the Caution Regarding
Forward-Looking Statements and Risk Factors sections of this discussion and
analysis.
 
 Revenue and Cost Recognition
Estimates on Contracts.Revenue from fixed-fee and
variable-fee-with-ceiling contracts is recognized using the percentage of
completion method based on the ratio of contract costs incurred to total
estimated contract costs. We believe that costs incurred are the best available
measure of progress toward completion of these contracts. Estimating total
direct contract costs is subjective and requires the use of our best judgments
based on the information we have available at that point in time. Our estimate
of total direct contract costs has a direct impact on the revenue we recognize.
If our current estimates of total direct contract costs turn out to be higher or
lower than our previous estimates, we will have over- or underrecognized revenue
for the previous period. We also provide for estimated losses on incomplete
contracts in the period in which such losses are determined. Changes in our
estimates are reflected in the period in which they are made and would affect
our revenue and costs and estimated earnings in excess of billings.
 
 Goodwill.Goodwill is
assessed for impairment on July 1 of each fiscal year. In addition to completing
our annual test, we regularly evaluate whether events and circumstances have
occurred between annual tests that may indicate a possible impairment of
goodwill.
 
 Goodwill
impairment testing is a two-step process. In the first step, to evaluate whether
there is an impairment of goodwill, we calculate the estimated fair value of our
reporting units using a methodology that considers market information and
projections of our after-tax cash flows, referred to as the income approach. If
we determine that the estimated fair value of a reporting unit is less than its
carrying value, goodwill is potentially impaired and step two of the impairment
test is performed. In step two, we compare the estimated fair value of the
goodwill of our reporting units to their carrying value. We calculate this
impairment by considering the cash flows and the fair values of the net tangible
and intangible assets. Our reporting units are defined as Canada West, Canada
East, US West, and US East. Our reporting units are determined based on the way
management organizes the Company for making operating decisions and assessing
performance. We allocate our goodwill to these geographic areas. We do not
monitor or allocate goodwill to our practice areas.
 
 The
methodology we use to test for goodwill impairment includes significant
judgments and estimates, such as assumptions for revenue growth rates, expected
operating income, appropriate discount rates, and the fair values of the net
assets of our reporting units. We believe that our methodology provides us with
a reasonable basis for determining whether an impairment charge should be taken.
Note 4 in our 2009 and 2008 audited consolidated financial statements provides
more detail about our goodwill impairment test.
 
 
 MANAGEMENT’S
DISCUSSION AND ANALYSIS
 December
31, 2009
 STANTEC
INC.
  M-40
  Due to
fluctuations in the market and uncertainties arising from overall economic
conditions in 2009 and 2008, our annual impairment review resulted in an
impairment charge of $35.0 million in the third quarter of 2009 and of $53.0
million in the third quarter of 2008. These charges were allocated to our US
West reporting unit in 2009 and to our US West and US East reporting units in
2008 and are reflected as a non-cash charge to income.
 
 If market
and economic conditions deteriorate further or if continued volatility in the
financial markets increases our weighted-average cost of capital, changes cash
flow multiples, or other inputs to our goodwill assessment, our goodwill may
require testing for impairment between our annual testing periods. In addition,
it is reasonably possible that changes in the numerous variables associated with
the judgments, assumptions, and estimates we made in assessing the fair value of
our goodwill could cause our reporting units to be further impaired, which would
decrease our goodwill assets and increase our reported expenses. Goodwill
impairment charges are non-cash charges that could have a material adverse
affect on our consolidated financial statements but would not have any adverse
effect on our liquidity, cash flows from operating activities, or debt covenants
and will not have an impact on future operations.
 
 Provision for Doubtful
Accounts. We use estimates in determining our allowance for doubtful
accounts related to trade receivables. These estimates are based on our best
assessment of the collectibility of the related receivable balance based, in
part, on the age of the specific receivable balance. A provision is established
when the likelihood of collecting the account has significantly diminished.
Future collections of receivables that differ from our current estimates would
affect the results of our operations in future periods as well as our accounts
receivable and general and administrative expenses.
 
 Self-Insured Liabilities.We
self-insure certain risks, including professional liability and automobile
liability. The accrual for self-insured liabilities includes estimates of the
costs of reported claims and is based on estimates of loss using our
assumptions, including consideration of actuarial projections. These estimates
of loss are derived from loss history that is then subjected to actuarial
techniques in the determination of the proposed liability. Estimates of loss may
vary from those used in the actuarial projections and may result in a larger
loss than estimated. Any increase in loss would be recognized in the period in
which the loss is determined and would increase our self-insured liability and
reported expenses.
 
 Income Taxes. Our income tax
assets and liabilities are based on interpretations of income tax legislation
across various jurisdictions in Canada and the United States. Our effective tax
rate can change from year to year based on the mix of income among different
jurisdictions, changes in tax laws in these jurisdictions, and changes in the
estimated value of future tax assets and liabilities. Our income tax expense
reflects an estimate of the cash taxes we expect to pay for the current year, as
well as a provision for changes arising in the values of future tax assets and
liabilities during the year. The tax value of these assets and liabilities is
impacted by factors such as accounting estimates inherent in these balances, our
expectations about future operating results, and possible audits of our tax
filings by regulatory authorities. We assess the likelihood of recovering value
from future tax assets, such as loss carryforwards, on a regular basis, as well
as the future tax depreciation of capital assets, and may establish a valuation
provision.If our
estimates or assumptions change from those used in our currentvaluation, we may be
required to recognize an adjustment in future periods that would increase or
decrease our future income tax asset or liability and increase or decrease our
income tax expense.
 
 Long-Lived Assets and
Intangibles. We regularly review long-lived assets and intangible assets
with finite lives when events or changes in circumstances indicate that the
carrying amount of such assets may not be fully recoverable. The determination
of recoverability is based on an estimate of undiscounted future cash flows, and
the measurement of impairment loss is based on the fair value of the asset. To
determine recoverability, we compare the estimated undiscounted future cash
flows projected to be generated by these assets to their respective carrying
value. In performing this analysis, we make estimates or assumptions about
factors such as current and future contracts with clients, margins, market
conditions, and the useful lives of assets.
 
 
 MANAGEMENT’S
DISCUSSION AND ANALYSIS
 December
31, 2009
 STANTEC
INC.
  M-41
  Based on
the results of our review during 2009, we concluded that there was no impairment
to intangible assets in 2009. During 2008, we conducted our review of these
assets to determine if their carrying amount was fully recoverable. As part of
the impairment review, we updated our future cash flow assumptions and
estimates, including factors such as current and future contracts with clients,
margins, market conditions, and the useful lives of assets. Based on the results
of this review, we concluded that the intangible assets relating to client
relationships acquired in The Keith Companies, Inc. acquisition in 2005 were not
fully recoverable and therefore recorded a non-cash $5.4 million impairment
charge to income. The remaining carrying value of these client relationships
after this impairment charge was $6.0 million at December 31, 2008.
 
 It is
reasonably possible that changes in the numerous variables associated with the
judgments, assumptions, and estimates we made in assessing the fair value of our
long-lived assets and intangible assets could cause these assets to be further
impaired, which would decrease our long-lived and intangible assets and increase
our reported expenses. These impairments are non-cash charges that could have a
material adverse affect on our consolidated financial statements but would not
have any adverse effect on our liquidity, cash flows from operating activities,
or debt covenants and will not have an impact on future operations.
 
 Liabilities for Lease Exit
Activities. We accrue charges when closing offices in existing operations
or finalizing plans to downsize offices in locations assumed from an acquiree
upon a business acquisition. Included in these liabilities is the present value
of the remaining lease payments reduced by estimated sublease rentals that can
reasonably be obtained. These provisions are based on our estimates and reflect
plans in place at the time the liability is recorded. If actual sublease
payments and rental circumstances change from our original estimate, the
liability will change, and we will be required to increase or decrease it and
adjust goodwill or reported expenses, depending on whether the adjustment
relates to a liability established pursuant to an acquisition and on the timing
of the change in estimate.
 
 Business Combinations—Purchase Price
Allocation.In a business combination, we may acquire the assets and
assume certain liabilities of an acquired entity. The allocation of the purchase
price for these transactions involves judgment in determining the fair values
assigned to the tangible and intangible assets (i.e., backlog and client
relationships) acquired and the liabilities assumed on the acquisition. The
determination of these fair values involves a variety of assumptions, revenue
growth rates, expected operating income, discount rates, and earning multiples.
If our estimates or assumptions change prior to finalizing the purchase price
allocation for a transaction, a revision to the purchase price allocation or to
the carrying value of the related assets and liabilities acquired may impact our
net income in future periods. We are currently in the process of finalizing the
purchase price allocation for Granary.
 
 Accounting
Developments
 
 Canadian
 
 Recently
Adopted Accounting Pronouncements
 
 Fair Value of Financial Assets and
Financial Liabilities. Effective January 1, 2009, we adopted the new CICA
Emerging Issues Committee (EIC) Abstract EIC-173, "Credit Risk and the Fair
Value of Financial Assets and Financial Liabilities." EIC-173 provides further
information on the determination of the fair value of financial assets and
financial liabilities under CICA Handbook Section 3855, "Financial
Instruments—Recognition and Measurement." It states that an entity's own credit
and the credit risk of the counterparty should be taken into account in
determining the fair value of financial assets and financial liabilities,
including derivative instruments. EIC-173 should be applied retrospectively,
without restatement of prior periods, to all financial assets and liabilities
measured at fair value. We adopted this abstract during the first quarter of the
2009 fiscal year, and this adoption did not have a significant effect on our
financial position or on the results of our operations. We adopted this new
accounting standard retrospectively without restatement of prior
periods.
 
 
 MANAGEMENT’S
DISCUSSION AND ANALYSIS
 December
31, 2009
 STANTEC
INC.
  M-42
  Goodwill and Intangible
Assets. Effective January 1, 2009, we adopted CICA Handbook Section 3064,
"Goodwill and Intangible Assets," which replaced Section 3062, "Goodwill and
Other Intangible Assets," and Section 3450, "Research and Development Costs."
This pronouncement further aligns Canadian GAAP with US GAAP and International
Financial Reporting Standards (IFRS). Section 3064 establishes standards for the
recognition, measurement, presentation, and disclosure of goodwill and
intangible assets subsequent to their initial recognition. Standards concerning
goodwill are unchanged from the standards included in the previous Section 3062.
The new standard also provides guidance for the recognition of internally
developed intangible assets, including assets produced from research and
development activities, ensuring the consistent treatment of all intangible
assets, whether separately acquired or internally generated. We were required to
adopt the new standard retrospectively with restatement of prior figures. The
adoption of this standard did not have an effect on our financial position or on
the results of our operations; however, it resulted in a retrospective
reclassification of intangible assets relating to software with a net book value
of $6.6 million at December 31, 2008, from “Property and Equipment” to
“Intangible Assets.” Also, we retrospectively reclassified the depreciation of
software of $3.6 million in both 2008 and 2007 from “Depreciation of Property
and Equipment” to “Amortization of Intangible Assets.”
 
 Financial
Instruments—Disclosure. Effective December 31, 2009, we adopted
amendments to the CICA Handbook Section 3862, “Financial
Instruments—Disclosure.” These amendments require enhanced disclosures of fair
value measurements of financial instruments and liquidity risks. The additional
disclosures of fair value measurements include the categorization of fair value
measurements into one of three levels, ranging from those that are determined
through quoted market prices in an active market to those that are based on
inputs that are not derived from observable market data. The additional
disclosures of liquidity risk require greater clarification of the risk as well
as maturity analysis for derivative financial liabilities. The adoption of these
amendments has not had an effect on our financial position or on the results of
our operations.
 
 Recent
Accounting Pronouncements
 
 International Financial Reporting
Standards. The CICA will transition Canadian GAAP for public entities to
IFRS for interim and annual financial statements effective for fiscal years
beginning on or after January 1, 2011, including comparative figures for the
prior year. As a result, we will prepare our consolidated financial statements
in accordance with IFRS for our 2011 fiscal year beginning January 1, 2011, and
include comparative figures for our 2010 fiscal year. IFRS uses a conceptual
framework similar to that used by Canadian GAAP, but there are differences in
recognition, measurement, and disclosure.
 
 a)
Project Management and Status:
 We
started our IFRS conversion project in 2008. This project consists of five
phases: 1) preliminary planning and scoping, 2) detailed assessment, 3) solution
development, 4) implementation, and 5) post-implementation review. We completed
the preliminary planning and scoping, detailed assessment, and solution
development phases and started the implementation phase. To date, we are on
target with the established timeline in our detailed work plan. Below is a
summary of the key activities, milestones, and deliverables for each phase,
along with its status.
 
 The preliminary planning and scoping
phase included the establishment of a dedicated team to work on the IFRS
transition and an IFRS Advisory Committee consisting of representatives from our
Financial Services, Treasury, Internal Audit, Investor Relations, Information
Technology, and Operations groups. The IFRS team provides updates to the IFRS
Advisory Committee and the Audit Committee, including reports on the progress
made on the detailed work plan. During this phase, we also completed a
high-level diagnostic that identified the major differences between Canadian
GAAP and IFRS and prioritized the IFRS requirements based on their financial
reporting impact, business impact, and complexity.
 
 
 MANAGEMENT’S
DISCUSSION AND ANALYSIS
 December
31, 2009
 STANTEC
INC.
  M-43
  The detailed assessment phase
involved the establishment of issue-specific workgroups to perform a detailed
diagnostic and select accounting policies when alternatives are available. IFRS
1, “First-Time Adoption of International Financial Reporting Standards,”
provides entities that are adopting IFRS for the first time with a number of
optional exemptions and mandatory exceptions, in certain areas, to the general
requirements for full retrospective application of IFRS. Our Audit Committee
reviewed our potential choice of policies and optional exemptions, all of which
are further described below.
 
 The solution development phase
involved the formulation, documentation, and approval of solutions for the
implementation of IFRS. Considering the impacts of IFRS on our business
processes, information technology, and internal control over financial reporting
was integral to this phase. Items that could have a major impact on business
processes and financial reporting were reviewed by the Audit Committee and are
further described below. At this point in time, we believe that there will be a
minimal impact on our information technology systems and internal control over
financial reporting. During this phase, we also established a communication and
training plan and provided training to our board of directors, Audit Committee,
key employees, and stakeholders. In addition, we completed a plan for the
parallel processing of 2010 financial results under IFRS.
 
 In 2009,
we started the implementation
phase, which we expect to complete by the fourth quarter of 2010. In
2010, we will continue to make changes to certain processes to enable the
recording of transactions under IFRS. We will also compile IFRS-compliant
information for comparative reporting purposes in 2011 and finalize our
assessment of the impact IFRS will have on our internal control over financial
reporting, compensation plans, debt covenants, key performance indicators, and
budgeting and forecasting processes.
 
 b)
Accounting Policies and Statement Presentation:
 Set out
below are the key areas where changes in accounting policies are expected that
may impact our audited consolidated financial statements. The list, and
comments, below should not be regarded as a complete list of changes that will
result from the transition to IFRS. It is intended to highlight those areas we
believe to be the most significant; however, analysis of changes to other areas
were identified. The differences described below are those existing based on
Canadian GAAP and IFRS today. We continue to monitor standard developments
issued by the International Accounting Standards Board and regulatory
developments issued by the Canadian Securities Administrators, which may affect
the timing, nature, or disclosure of our adoption of IFRS. Since IFRS is
expected to change prior to 2011, its impact on our audited consolidated
financial statements is not reasonably determinable at this time.
 
 ·
              Presentation
      of Financial Statements (IAS 1)
 Under IAS
1, a complete set of financial statements should include a statement of
financial position, a statement of comprehensive income, a statement of changes
in equity, and a statement of cash flows, accounting policies, and explanatory
notes. IAS 1 prescribes various formats and requirements for statement
presentation and disclosure. We expect the adoption of IAS 1 to result in
several changes to the format of our financial statements and in expanded note
disclosure. For example, we expect to change our current consolidated statements
of shareholders’ equity and comprehensive income by moving all other
comprehensive income items to new consolidated statements of comprehensive
income.
 
 ·
              Impairment
      of Assets (IAS 36)
 Under IAS
36, an entity must assess at the end of each reporting period whether there is
an indication that an asset may be impaired. When there is an indication of
impairment, an impairment test is required. Under IAS 36, the impairment test
for definite-lived intangible assets and long-lived assets is only one
step—comparing the recoverable amount of the asset with the carrying amount. If
the carrying amount exceeds the recoverable amount, the asset value is written
down to the recoverable amount. Under Canadian GAAP, the impairment of
intangible assets with definite lives is a two-step process.
 
 
 MANAGEMENT’S
DISCUSSION AND ANALYSIS
 December
31, 2009
 STANTEC
INC.
  M-44
  Canadian
GAAP also uses a two-step impairment testing approach for goodwill, whereas IFRS
takes a one-step approach. Under IFRS, an entity estimates the recoverable
amount of the cash generating unit (CGU) or group of CGUs that the goodwill has
been allocated to and compares it with the carrying amount of the CGU(s). If the
carrying amount of the CGU(s) exceeds the recoverable amount, an impairment loss
is recognized. A CGU is the smallest group of assets that includes the asset and
generates cash inflows that are largely independent of the cash inflows from
other assets or groups of assets. The recoverable amount is the higher of the
fair value less cost to sell and the value in use.
 
 ·
              Business
      Combinations (IFRS 3R)
 Under
IFRS 3R, postacquisition restructuring costs, such as lease exits, and
acquisition-related costs, such as advisory, legal, accounting, valuation, and
other professional or consulting fees, are expensed as incurred. Under Canadian
GAAP, if certain criteria are met, many of these costs are recognized as
liabilities in the purchase price allocation and impact goodwill. Also, under
IFRS 3R, an acquirer recognizes contingent consideration as part of the
consideration transferred and measures it at the acquisition-date fair value.
The remeasurement of the liability each quarter-end impacts earnings until the
liability is settled. Under Canadian GAAP, contingent consideration is recorded
in goodwill when the contingency is resolved. Therefore, goodwill and net income
will be impacted by these changes.
 
 c)
IFRS 1 exemptions:
 Most
adjustments required on transition to IFRS will be made retrospectively against
opening retained earnings as of the date of the first comparative balance sheet
presented based on standards applicable at that time. IFRS 1, “First-Time
Adoption of International Financial Reporting Standards,” provides entities
adopting IFRS for the first time with a number of optional exemptions and
mandatory exceptions, in certain areas, to the general requirement for full
retrospective application of IFRS. The most significant exemptions that apply to
us include the following:
  ·
              Business
      combinations. We expect to apply the business combinations exemption in
      IFRS 1 to not apply IFRS 3R, “Business Combinations,” retrospectively to
      past business combinations. Accordingly, we will not restate business
      combinations that took place prior to the January 1, 2010, transition date
      or modify the carrying amounts arising on business combinations occurring
      before the transition date.
  ·
              Cumulative
      translation adjustment. We expect to elect to recognize all cumulative
      translation adjustments (CTAs) of foreign subsidiaries into opening
      retained earnings as of January 1, 2010. This will result in resetting the
      CTA balance in accumulated other comprehensive income to zero at January
      1, 2010.
  ·
              Fair
      value or revaluation as deemed cost. We expect to elect to measure certain
      items of property, plant, and equipment at fair value as at January 1,
      2010, and to use that amount as deemed cost as at January 1,
      2010.
  ·
              Share-based
      payments. We expect to elect not to apply IFRS 2, “Share-Based Payments,”
      to equity instruments granted on or before November 7, 2002, or granted
      after November 7, 2002, that vested before January 1,
  2010.
 
 Business Combinations. In
January 2009, the CICA issued the new handbook Section 1582, “Business
Combinations,” effective for fiscal years beginning on or after January 1, 2011.
Earlier adoption of Section 1582 is permitted. This pronouncement further aligns
Canadian GAAP with US GAAP and IFRS and changes the accounting for business
combinations in a number of areas. It establishes principles and requirements
governing how an acquiring company recognizes and measures, in its financial
statements, identifiable assets acquired, liabilities assumed, any
non-controlling interest in the acquiree, and goodwill acquired. The section
also establishes disclosure requirements that will enable users of the acquiring
company's financial statements to evaluate the nature and financial effects of
its business combinations. Although we are considering the impact of adopting
this pronouncement on our consolidated financial statements in connection with
our conversion to IFRS, the impact will be limited to any future acquisitions
beginning in fiscal 2011.
 
 
 MANAGEMENT’S
DISCUSSION AND ANALYSIS
 December
31, 2009
 STANTEC
INC.
  M-45
  Consolidation and Non-Controlling
Interests. In January 2009, the CICA issued the new handbook Section
1601, “Consolidated Financial Statements,” and Section 1602, “Non-Controlling
Interests,” effective for fiscal years beginning on or after January 1, 2011.
Earlier adoption of these recommendations is permitted. These pronouncements
further align Canadian GAAP with US GAAP and IFRS. Sections 1601 and 1602 change
the accounting and reporting of ownership interests in subsidiaries held by
parties other than the parent. Non-controlling interests are to be presented in
the consolidated statements of financial position within equity but separate
from the parent’s equity. The amount of consolidated net income attributable to
the parent and to the non-controlling interest is to be clearly identified and
presented on the face of the consolidated statements of income. In addition,
these pronouncements establish standards for a change in a parent’s ownership
interest in a subsidiary and the valuation of retained non-controlling equity
investments when a subsidiary is deconsolidated. They also establish reporting
requirements for providing sufficient disclosures that clearly identify and
distinguish between the interests of the parent and the interests of the
non-controlling owners. We are currently considering the impact of adopting
these pronouncements on our consolidated financial statements in fiscal 2011 in
connection with our conversion to IFRS.
 
 United
States
 
 Recently
Adopted Accounting Pronouncements
 
 Fair
Value Measurements
 Effective
January 1, 2009, we adopted Financial Accounting Standards Board (FASB)
Statement of Financial Accounting Standards (SFAS) No. 157, “Fair Value
Measurements,” (ASC 820-10/SFAS 157) for non-financial assets and liabilities
measured at fair value on a non-recurring basis. ASC 820-10/SFAS 157 establishes
a framework for measuring fair value under US GAAP and requires additional
disclosure. The standard defines a fair value hierarchy, with the highest
priority being quoted prices in active markets. Under this standard, fair value
measurements are disclosed by level within the hierarchy. This standard does not
require any new fair value measurements. The prospective adoption of this
standard for non-financial assets and liabilities measured at fair value on a
non-recurring basis had no effect on our financial position or results of
operations except for additional disclosures presented in note 25 (a)
(iv).
 
 Effective
January 1, 2009, we adopted FASB Staff Position (FSP) Financial Accounting
Standard (FAS) 157-4, “Determining Fair Value When the Volume and Level of
Activity for the Asset or Liability Have Significantly Decreased and Identifying
Transactions That Are Not Orderly” (ASC 820-10-65-4/FSP 157-4). Based on this
guidance, if an entity determines that the level of activity for an asset or
liability has significantly decreased and that a transaction is not orderly,
further analysis of transactions or quoted prices is needed, and a significant
adjustment to the transaction or quoted prices may be necessary to estimate fair
value in accordance with ASC 820-10/SFAS 157. The prospective adoption of this
standard had no material effect on our financial position or results of
operations.
 
 Business
Combinations
 Effective
January 1, 2009, we adopted SFAS 141R, “Business Combinations” (ASC 805-10/SFAS
141R). This standard establishes principles and requirements governing how an
acquiring company recognizes and measures in its financial statements
identifiable assets acquired, liabilities assumed, any non-controlling interest
in the acquiree, and goodwill acquired. The standard also establishes disclosure
requirements that will enable users of the acquiring company's financial
statements to evaluate the nature and financial effects of its business
combinations. We were required to adopt this standard prospectively. The
adoption of this standard had a material impact on our financial position and
results of operations under US GAAP as disclosed in note 25 (a)
(i).
 
 
 MANAGEMENT’S
DISCUSSION AND ANALYSIS
 December
31, 2009
 STANTEC
INC.
  M-46
  Effective
January 1, 2009, we adopted FASB FSP FAS 141R-1, “Accounting for Assets Acquired
and Liabilities Assumed in a Business Combination That Arise from Contingencies”
(ASC 805-20/SFAS 141R-1), which amends the provisions in ASC 805-10/SFAS 141R
for the initial recognition and measurement, subsequent measurement and
accounting, and disclosure for assets and liabilities arising from contingencies
in business combinations. The amendment eliminates the distinction between
contractual and non-contractual contingencies, including the initial recognition
and measurement criteria in ASC 805-10/SFAS 141R, and instead carries forward
most of the provisions in ASC 805-10/SFAS 141 for acquired contingencies. We
were required to adopt this standard for business combinations completed on or
after January 1, 2009. The adoption of this standard had no material effect on
our financial position or results of operations.
 
 Effective
January 1, 2009, we adopted FASB SFAS No. 160, “Non-Controlling Interests in
Consolidated Financial Statements—An Amendment of ARB No. 51” (ASC
810-10-65/SFAS 160). This standard requires all entities to report
non-controlling interests as equity in their consolidated financial statements.
The amount of consolidated net income attributable to the parent and to the
non-controlling interest is to be clearly identified and presented on the face
of the consolidated statement of income. The standard also requires that the
transactions between an entity and non-controlling interest be treated as equity
transactions. The standard is to be applied prospectively except for the
presentation and disclosure requirements; however, we did not have
non-controlling interests prior to 2009. The adoption of this standard had an
impact on the presentation of our financial statements as disclosed in note 25
(a) (i) but had no effect on our financial position or results of
operations.
 
 Other
 Effective
January 1, 2009, we adopted FASB SFAS No. 161, “Disclosures about Derivative
Instruments and Hedging Activities—An Amendment of FASB Statement No. 133” (ASC
815-10-65/SFAS 161). This standard applies to all derivative instruments and
related hedged items accounted for under SFAS No. 133, “Accounting for
Derivative Instruments and Hedging Activities” (ASC 815-10/SFAS 133). ASC
815-10-65/SFAS 161 requires entities to provide greater transparency about how
and why they use derivative instruments, how they account for derivative
instruments and related hedged items under ASC 815-10/SFAS 133, and how
derivative instruments and related hedged items affect their financial position,
results of operations, and cash flows. The prospective adoption of this standard
had no impact on our financial position or results of operations but required
additional disclosure as presented in note 25 (a) (v).
 
 Effective
January 1, 2009, we adopted EITF Issue No. 08-6, “Equity Method Investment
Considerations” (ASC 323-10/EITF 08-6), which clarifies the accounting for
certain transactions and impairment considerations involving equity method
investments. The statement addresses issues such as how to determine the initial
carrying value of an equity method investment, how to account for any subsequent
purchases and sales of additional ownership interests, and whether the investor
must separately assess its underlying share of the investee‘s indefinite-lived
intangible assets for impairment. The prospective adoption of this standard had
no effect on our financial position or results of operations.
 
 Effective
January 1, 2009, we adopted EITF Issue No. 08-7, “Accounting for Defensive
Intangible Assets” (ASC 350-30/EITF 08-7). ASC 350-30/EITF 08-7 applies to
defensive intangible assets, which are acquired intangible assets that the
acquirer does not intend to actively use but to hold to prevent its competitors
from obtaining access to them. Because these assets are identifiable separately,
ASC 350-30/EITF 08-7 requires an acquiring entity to account for them as
separate units of accounting. Defensive intangible assets must be recognized at
fair value. The prospective adoption of this standard had no material effect on
our financial position or results of operations.
 
 
 MANAGEMENT’S
DISCUSSION AND ANALYSIS
 December
31, 2009
 STANTEC
INC.
  M-47
  Effective
January 1, 2009, we adopted FASB FSP SFAS No. 115-2 and FAS 124-2, “Recognition
and Presentation of Other than Temporary Impairments” (ASC 320-10-65/FSP 115-2
and 124-2). This standard changes existing guidance for determining whether an
impairment of debt securities is other than temporary. The standard requires
that an entity record an other than temporary impairment when it is more likely
than not that the entity will sell or be required to sell a debt security before
anticipated recovery of the cost basis. The other than temporary impairment must
be separated into the amount that represents the decrease in cash flow expected
to be collected from a security (referred to as a credit loss) and the amount
related to other factors (referred to as non-credit losses). The entity will
recognize only the credit loss of an other than temporary impairment of a debt
security in earnings and the non-credit portion in other comprehensive income.
When adopting this standard, an entity is required to record a cumulative effect
adjustment as of the beginning of the period of adoption to reclassify the
non-credit loss component of a previously recognized other than temporary
impairment from retained earnings to accumulated other comprehensive income. The
prospective adoption of this standard had no material effect on our financial
position or results of operations.
 
 Effective
January 1, 2009, we adopted SFAS No. 165, “Subsequent Events” (ASC 855-10/SFAS
165). ASC 855-10/SFAS 165 provides rules on the recognition and disclosure for
events and transactions occurring after the balance sheet date but before the
financial statements are issued or available to be issued. The prospective
adoption of this standard had no effect on our financial position or results of
operations other than disclosure of the date through which subsequent events
have been evaluated.
 
 Effective
September 30, 2009, we adopted FASB SFAS No. 168, "The FASB Accounting Standards
Codification and the Hierarchy of Generally Accepted Accounting Principles—A
Replacement of FASB Statement No. 162" (ASC 105-10/SFAS 168). The FASB
Accounting Standards Codification is the source of authoritative GAAP that is
recognized by the FASB to be applied by non-governmental entities. The rules and
interpretive releases of the SEC under authority of federal securities laws are
also sources of authoritative GAAP for SEC registrants. Although it is not
intended to change GAAP, the codification significantly changes the way in which
the accounting literature is organized. The adoption of the codification did not
have an effect on our financial position or results of operations. However,
because the codification completely replaced existing standards, its adoption
affected the way we reference GAAP in our consolidated financial statements and
accounting policies.
 
 Effective
September 30, 2009, we adopted FASB Accounting Standards Update (ASU) No.
2009-06, “Implementation Guidance on Accounting for Uncertainty in Income Taxes
and Disclosure Amendments for Nonpublic Entities” (ASU 2009-06). This ASU
provides additional implementation guidance on accounting for uncertainty in
income taxes. The adoption of ASU 2009-06 did not have a material impact on our
financial position or results of operations.
 
 Effective
December 31, 2009, we adopted FASB ASU No. 2010-02, “Consolidation (Topic 810):
Accounting and Reporting for Decreases in Ownership of a Subsidiary” (ASU
2010-02). This ASU addresses implementation issues related to the changes in
ownership provisions outlined in “Consolidation—Overall Subtopic” (Subtopic
810-10), which was originally issued as FASB Statement No. 160, “Non-Controlling
Interests in Consolidated Financial Statements.” ASU 2010-02 also improves the
disclosures for fair value measurements relating to retained investments in a
deconsolidated subsidiary or a preexisting interest held by an acquirer in a
business combination. The Company adopted ASU 2010-02 effective January 1, 2009,
and this adoption did not have an impact on our financial position or results of
operations.
 
 Recent
Accounting Pronouncements
 In June
2009, the FASB issued SFAS No. 167, “Amendments to FASB Interpretation No.
46(R)” (ASC 810-10/SFAS 167), which changes how to determine when an entity that
is insufficiently capitalized or is not controlled through voting (or similar
rights) should be consolidated. Under ASC 810-10/SFAS 167, determining whether a
company is required to consolidate an entity will be based on, among other
things, the entity’s purpose and design and the company’s ability to direct
those activities of the entity that most significantly impact the entity’s
economic performance. ASC 810-10/SFAS No. 167 is effective for fiscal years, and
interim reporting periods within those fiscal years, beginning after November
15, 2009, and will be adopted by us in fiscal 2010. We are currently considering
the impact of adopting ASC 810-10/SFAS 167 on our consolidated financial
statements and cannot reasonably estimate the effect at this time.
 
 
 MANAGEMENT’S
DISCUSSION AND ANALYSIS
 December
31, 2009
 STANTEC
INC.
  M-48
  In
December 2009, the FASB issued ASU No. 2009-17, “Consolidations (Topic
810)—Improvements to Financial Reporting by Enterprises Involved with Variable
Interest Entities” (ASU 2009-17), which codifies FASB Statement No. 167,
“Amendments to FASB Interpretation No. 46(R).” This ASU represents a revision to
former FASB Interpretation No. 46 (Revised December 2003), “Consolidation of
Variable Interest Entities,” and changes how a reporting entity determines when
an entity that is insufficiently capitalized or is not controlled through voting
(or similar rights) should be consolidated. The determination of whether a
reporting entity is required to consolidate another entity is based on the other
entity’s purpose and design and the reporting entity’s ability to direct those
activities of the other entity that most significantly impact the other entity’s
economic performance. ASU 2009-17 also requires additional disclosures about a
reporting entity’s involvement in variable interest entities. This guidance is
effective for our consolidated financial statements beginning January 1, 2010.
Early application is not permitted. We are currently considering the impact of
adopting ASU 2009-17 on our consolidated financial statements and cannot
reasonably estimate the effect at this time.
 
 In
January 2010, the FASB issued ASU No. 2010-05, “Compensation—Stock Compensation
(Topic 718): Escrowed Share Arrangements and the Presumption of Compensation”
(ASU 2010-05). This ASU codifies EITF Topic D-110, “Escrowed Share Arrangements
and the Presumption of Compensation.” ASU 2010-05 states that when evaluating
whether a presumption of compensation has been overcome, an entity should
consider the substance of the arrangement, including whether it was entered into
for purposes unrelated to, and not contingent upon, continued employment. The
ASU is effective immediately upon being issued. We are currently considering the
impact of adopting 2010-05 on our consolidated financial statements and cannot
reasonably estimate the effect at this time.
 
 In
January 2010, the FASB issued ASU No. 2010-06, "Fair Value Measurements and
Disclosures (Topic 820): Improving Disclosures about Fair Value Measurements"
(ASU 2010-06). This ASU requires new disclosures for transfers in and out of
levels 1 and 2 of fair value measurement categories and a description of the
reasons for the transfers. This requirement is effective for our 2010 fiscal
year. ASU 2010-06 also requires a separate presentation of information about
purchases, sales, issuances, and settlements in the reconciliation for fair
value measurements using significant unobservable inputs (level 3). This
requirement is effective for us in our 2011 fiscal year. The adoption of ASU
2010-06 is not expected to have a material impact on our consolidated financial
statements with the exception of additional disclosures.
 
 Materiality
 We
determine whether or not information is “material” based on whether we believe
that a reasonable investor’s decision to buy, sell, or hold securities in our
Company would likely be influenced or changed if the information were omitted or
misstated.
 
 Definition
of Non-GAAP Measures
 This
Management’s Discussion and Analysis includes references to and uses terms that
are not specifically defined in the CICA Handbook and do not have any
standardized meaning prescribed by Canadian GAAP. These non-GAAP measures may
not be comparable to similar measures presented by other companies. We believe
that these measures are useful for providing investors with additional
information to assist them in understanding components of our financial
results.
 
 Working Capital. We use
working capital as a measure for assessing our overall liquidity. Working
capital is calculated by subtracting current liabilities from current assets.
There is no directly comparable GAAP measure for working capital.
 
 Current Ratio. We also use
current ratio as a measure for assessing our overall liquidity. Current ratio is
calculated by dividing current assets by current liabilities. There is no
directly comparable GAAP measure for current ratio.
 
 
 MANAGEMENT’S
DISCUSSION AND ANALYSIS
 December
31, 2009
 STANTEC
INC.
  M-49
  Net Debt to Equity Ratio.As
part of our overall assessment of our financial condition, we monitor our net
debt to equity ratio to ensure that it is maintained within our established
range. Our net debt to equity ratio is calculated as long-term debt plus the
current portion of long-term debt plus bank indebtedness less cash and cash held
in escrow, all divided by shareholders’ equity. There is no directly comparable
GAAP measure for net debt to equity ratio.
 
 Gross Revenue and Net Revenue.
Our Company provides knowledge-based solutions for infrastructure and facilities
projects through value-added professional services principally under
fee-for-service agreements with clients. In the course of providing 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 to gross revenue. The most directly comparable measure
in accordance with GAAP for gross revenue is revenue. There is no directly
comparable GAAP measure for net revenue.
 
 Gross Margin. We monitor our
gross margin percentage levels to ensure that they are within an established
acceptable range for the profitability of our operations. Gross margin is
calculated as the difference of net revenue minus direct payroll costs. Direct
payroll costs include the cost of salaries and related fringe benefits for labor
hours that are directly associated with the completion of projects. Labor costs
and related fringe benefits for labor hours that are not directly associated
with the completion of projects are included in administrative and marketing
expenses. There is no directly comparable GAAP measure for gross
margin.
 
 Return on Equity Ratio. As
part of our overall assessment of value added for shareholders, we monitor our
return on equity ratio. Return on equity is calculated as net income for the
last four quarters divided by the average shareholders’ equity over each of the
last four quarters. There is no directly comparable GAAP measure for return on
equity ratio.
 
 EBITDA. EBITDA represents
earnings before interest expense, income taxes, depreciation, and amortization.
This measure is referenced in our credit facility as part of our debt covenants,
and we use it as part of our overall assessment of our profitability. It is
defined as net income for such period, plus all amounts deducted in the
calculation thereof on account of interest expense, income taxes, depreciation,
amortization, goodwill impairment, or any minority interest. There is no
directly comparable GAAP measure for EBITDA.
 
 EBITDAR. This measure is
referenced in our credit facility as part of our debt covenants. It is defined
in the credit facility as an amount equal to EBITDA plus building rental
obligations net of common area costs, taxes, charges, and levies. There is no
directly comparable GAAP measure for EBITDAR.
 
 EBITDAR to Debt Service Ratio.
This ratio is referenced in our credit facility agreement as part of our debt
covenants. It is defined in the credit facility as EBITDAR divided by permanent
principal and interest payments in respect of the debt plus building rental
obligations net of common area costs, taxes, charges, and levies. There is no
directly comparable GAAP measure for EBITDAR to debt service ratio.
 
 Backlog.As part of our
assessment of our financial condition, we monitor our backlog. We define backlog
as the total value of secured work that has not yet been completed that a) is
assessed by management as having a high certainty of being performed by either
the existence of an executed contract or work order specifying the job scope,
value, and timing or b) has been awarded to us through an executed binding or
non-binding letter of intent or agreement describing the general job scope,
value, and timing. Management must be reasonably assured that the letter of
intent or agreement will be finalized in the form of a formal contract. Backlog
is not a recognized performance measure under Canadian GAAP and does not have
any standardized meaning prescribed by Canadian GAAP. We believe that backlog is
a useful means of projecting activity in future periods. There is no directly
comparable GAAP measure for backlog.
 
 
 MANAGEMENT’S
DISCUSSION AND ANALYSIS
 December
31, 2009
 STANTEC
INC.
  M-50
  RISK
FACTORS
 
 The
following factors, among others, could cause our actual results to differ
materially from those projected in our forward-looking statements:
 
 ·
              Global
      capital market activities
 ·
              Fluctuations
      in interest rates or currency
values
 ·
              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
 ·
              Technological
      changes
 
 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 our forward-looking statements to make decisions with
respect to Stantec. 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 by the organization or on its behalf.
 
 Like all
professional services firms in the infrastructure and facilities industry, we
are exposed to a number of risks in carrying out the day-to-day activities of
our operations, including market factors and factors arising from growth and
acquisition activities. These factors are listed below in order of seriousness—a
combination of the impact on our Company and the probability of occurrence.
These risk factors include the following:
 
 Economic downturns could have a
negative impact on our business since our clients may curtail investment in
infrastructure projects or may experience difficulty in paying for services
performed.
 
 Demand
for the services we offer has been, and is expected to continue to be, subject
to significant fluctuations due to a variety of factors beyond our control,
including economic conditions. During economic downturns, the ability of both
private and government entities to make expenditures may decline significantly,
which could have a material adverse effect on our revenue and profitability. We
cannot be certain that economic or political conditions will generally be
favorable or that there will not be significant fluctuations that adversely
affect our industry as a whole or the key markets we target.
 
 The
professional consulting services industry is highly competitive, which could
have a negative impact on our profit margins and market share.
 
 The
markets we serve are highly competitive, and we have numerous competitors for
the services we offer. The principal competitive factors include reputation,
experience, breadth and quality of services, technical proficiency, local
offices, competitive total project fees, and service delivery. The number and
identity of competitors vary widely with the type of service we provide. For
small- to medium-sized projects, we compete with many engineering,
architecture, and other professional consulting firms. For larger projects,
there are fewer but still many competitors, and many of these competitors have
greater financial and other resources than we do. Although we compete with other
large private and public companies in certain geographic locations, our primary
competitors are small and midsized, privately held regional firms in the United
States and Canada. Generally, competition places downward pressure on our
contract prices and profit margins. However, such impact is difficult to
quantify. Intense competition is expected to continue in these markets,
presenting significant challenges to our ability to maintain strong growth rates
and acceptable profit margins. If we are unable to meet these competitive
challenges, we could lose market share to our competitors and experience an
overall reduction in our profits. We may not be able to compete successfully
with such competitors, and such competition could cause us to lose customers,
increase expenditures, or reduce pricing, any of which could have a material
adverse effect on our earnings and stock price.
 
 
 MANAGEMENT’S
DISCUSSION AND ANALYSIS
 December
31, 2009
 STANTEC
INC.
  M-51
  The
nature of our business exposes us to potential liability claims and contract
disputes, which may reduce our profits.
 Our
operations are subject to the risk of third-party claims in the normal course of
business, some of which may be substantial. We have been and may in the future
be named as a defendant in legal proceedings where parties may make a claim for
damages or other remedies with respect to our projects or other matters. Any
litigation resulting from our business operations could distract management’s
attention from normal business operations, divert financial resources to the
defense of such claims, or result in significant attorney fees and damage
awards for which we may not be fully insured and which could harm our
reputation. Any of these circumstances could adversely affect our
profitability.
 
 Our
backlog is subject to unexpected adjustments and cancellations and is,
therefore, an uncertain indicator of our future earnings.
 
 As of
December 31, 2009, our backlog was $948 million. However, the revenue projected
in our backlog is determined by the judgment of management and may not be
realized or, if realized, may not result in profits. Projects may remain in
our backlog for an extended period of time. In addition, project cancellations
or scope adjustments may occur from time to time with respect to contracts
reflected in our backlog. Backlog reductions can adversely affect the revenue
and profit we actually receive from contracts reflected in our backlog. Future
project cancellations and scope adjustments could further reduce the dollar
amount of our backlog and the revenue and profits we actually receive. Finally,
poor project or contract performance could also impact our profits.
 
 Changing
markets may offer opportunities to provide services through alternate models.
Failure to respond to these market demands may result in lost
revenues.
 
 There may
be instances when opportunities to provide services through models other than
the fee-for-service business, for example, P3s, arise due to changing markets.
Failure to respond to these market demands may result in clients awarding
projects to our competitors, resulting in lost revenues.
 
 We
derive significant revenue from contracts with government agencies. Any
disruption in government funding or in our relationship with those agencies
could adversely affect our business.
 
 The
demand for our services is related to the level of government funding that is
allocated for rebuilding, improving, and expanding infrastructure systems. We
derive a significant amount of our revenue from government or government-funded
projects and expect to continue to do so in the future. Between 30 and
57% of our gross revenue during the years ended December 31, 2007,
through December 31, 2009, was derived from government or government-funded
projects. Significant changes in the level of government funding could have an
unfavorable impact on our business, financial position, results of operations,
and cash flows.
 
 
 MANAGEMENT’S
DISCUSSION AND ANALYSIS
 December
31, 2009
 STANTEC
INC.
  M-52
  We
believe that the success and further development of our business depends, in
part, on the continued funding of these government programs and on our ability
to participate in these programs. However, governments may not have available
resources to fund these programs or may not fund these programs even if they
have available financial resources. Some of these government contracts are
subject to renewal or extensions annually, so we cannot be assured of our
continued work under these contracts in the future. In addition, government
agencies can terminate these contracts at their convenience. We may incur costs
in connection with the termination of these contracts and suffer a loss of
business. Contracts with government agencies are sometimes subject to
substantial regulation and audit of the actual costs incurred. Consequently,
there may be a downward adjustment to our revenue if accrued recoverable costs
exceed actual recoverable costs.
 
 Interruption
to our systems and network infrastructure could adversely impact our ability to
operate.
 
 We rely
heavily on computer information, communications technology, and related systems
in order to operate properly. If we are unable to continually add software and
hardware, effectively upgrade our systems and network infrastructure, and take
other steps to improve the efficiency of and protect our systems, our systems
operation could be interrupted or delayed. In addition, our computer and
communications systems and operations could be damaged or interrupted by natural
disasters, telecommunications failures, acts of war or terrorism, computer
viruses, physical or electronic security breaches, or similar events or
disruptions. Any of these or other events could cause system interruptions,
delays, and loss of critical data; could delay or prevent operations; and may
adversely affect our operating results.
 
 We
bear the risk of cost overruns in a significant number of our contracts. We may
experience reduced profits or, in some cases, losses under these contracts if
costs increase above our estimates.
 
 We
conduct our business under various types of contractual arrangements, most of
which are fee-for-service agreements. However, approximately 70% of the dollar
value of our contracts in 2009 was based on a fixed-fee or time-and-materials
contract with a ceiling on the maximum costs to the client. Under fixed-fee
contracts, we perform services at a stipulated price. Under
time-and-materials contracts with not-to-exceed provisions, we are reimbursed
for the number of labor hours expended at an established hourly rate plus
the cost of materials incurred subject, however, to a stated maximum dollar
amount for the services to be provided. In both of these types of contracts, we
agree to provide services based on our estimate of the costs a particular
project will involve. These estimates are established in part on cost and
scheduling projections, which may prove to be inaccurate, or circumstances may
arise, such as unanticipated technical problems, weaknesses in project
management, difficulties in obtaining permits or approvals, changes in local
laws, or delays beyond our ability to control, that make our projections
inaccurate. The underestimation of costs for these types of contracts may cause
us to incur losses or result in a project not being as profitable as we
expect. In addition, projects that are not completed on schedule further reduce
profitability because our staff must continue to work on them longer than
anticipated, which may prevent staff from pursuing and working on new projects.
Projects that are over budget or not on schedule may also lead to client
dissatisfaction.
 
 Uncertainties
associated with an acquisition may cause a loss of employees.
 
 The
ability to attract and retain trained professionals is one of the key drivers of
our business and results. Therefore, the success of an acquisition depends in
part on our ability to retain key employees of the acquired firm. Competition
for qualified staff can be very intense. In addition, key employees may depart
because of issues relating to the uncertainty and difficulty of the completion
of the acquisition or integration or a desire not to remain with the combined
company. Accordingly, we may be unable to retain key employees to the same
extent that we were able to do so in the past.
 
 
 MANAGEMENT’S
DISCUSSION AND ANALYSIS
 December
31, 2009
 STANTEC
INC.
  M-53
  We
may be unsuccessful in our goal to increase the size and profitability of our
operations, which could lead to a reduction in our market share and
competitiveness as our industry consolidates.
 
 We may
not be able to locate suitable acquisitions or to consummate any such
transactions on terms and conditions that are acceptable to us. As the
professional services industry consolidates, suitable acquisition candidates are
expected to become more difficult to locate and may only be available at prices
or under terms that are less favorable than in the past. In addition, some of
our competitors are much larger than us, have greater financial resources, and
can better afford to pay a premium for potential acquisition candidates. If we
are unable to effectively compete for or locate suitable acquisitions, our
business will not grow in the manner we expect, and we will have difficulty
achieving our growth plan.
 
 We
may experience difficulties in integrating an acquired entity’s business into
our existing operations and so may not realize the anticipated benefits of the
acquisition.
 
 Our
rationale for acquiring a firm is, in part, predicated on our ability to
leverage the combined strengths of the two companies to increase our
opportunities and grow our revenue. Integrating an acquired firm’s operations
and staff into our own is a complex endeavor, and we may not be able to complete
the process rapidly or without encountering difficulties. Successful integration
requires, among other things, the assimilation of the firm’s professional
services, sales and marketing operations, and information and software systems
as well as the coordination of employee retention and hiring and training
operations. The diversion of management’s attention to the integration effort
and any difficulties encountered in combining operations could adversely affect
the combined company’s business and prevent it from realizing the anticipated
improvement in professional service offerings, market penetration, and
geographic presence that formed the foundation for the acquisition.
 
 To
attain our goal of increasing the size and profitability of our operations, we
may pursue and invest in business opportunities outside North America.
Unfamiliarity with markets and political environments may impair our ability to
grow our international revenues.
 
 Because
of our international expansion strategy, we are now and will be increasingly
subject in the future to additional risks, including risks related to complying
with a wide variety of national and local laws, the difficulties and costs of
staffing and managing international operations, changes in regulatory
requirements, changes in exchange rates, multiple and possibly overlapping tax
structures, and political and economic instability. In addition, we may face
competition in other countries from companies that may have more experience with
operations in such countries or with international operations
generally.
 
 Goodwill
and intangible assets acquired from our acquisitions represent substantial
portions of our total assets. If our acquired businesses do not perform as
expected, we may be required to write down the value of our goodwill and
intangible assets, which could have a material adverse effect on our
earnings.
 
 Goodwill
and intangible assets represent approximately 47% of our total assets. When we
acquire a consulting business, a significant portion of the purchase price for
the acquisition is generally allocated to goodwill and identifiable intangible
assets. The amount of the purchase price allocated to goodwill is determined by
the excess of the purchase price paid by us to acquire the consulting business
over the fair value of the net identifiable assets acquired. Canadian and US
accounting rules require us to perform an annual impairment test of our goodwill
and intangible assets. A deterioration in the operating results of such acquired
businesses or the failure of these businesses to meet our expectations may
adversely affect the carrying value of our goodwill and intangible assets and
could result in an impairment of the goodwill associated with such businesses.
As part of our annual review of goodwill for impairment, we consider the actual
performance of each of our reporting units compared to our expectations and
update our future expectations for such reporting units. An impairment of
goodwill would be recorded as a charge in our income statement, which could have
a material effect on our earnings.
 
 
 MANAGEMENT’S
DISCUSSION AND ANALYSIS
 December
31, 2009
 STANTEC
INC.
  M-54
  One
of our primary competitive advantages is our reputation. If our reputation is
damaged due to client dissatisfaction, our ability to win additional business
may be materially damaged.
 
 Although
we serve many diverse clients and are not dependent on any one client or group
of clients to sustain our business, our reputation for delivering effective and
efficient solutions for complex projects is one of our most valuable business
development assets. The loss of this reputation due to client dissatisfaction
represents a significant risk to our ability to win additional business both
from existing clients and from those with whom we may have dealings in the
future.
 Our
employees may face environmental, health, and safety risks and hazards in the
workplace resulting in injury or lost time.
 
 Our
Health, Safety & Environment program is aimed at reducing risks to people,
the environment, and our business; however, our employees are subject to
environmental, health, and safety risks in the course of their employment. A
number of these risks could result in personal injury, loss of life, or
environmental and other damage to our property or the property of others.
Alternatively, we could be exposed to civil and/or statutory liability to
employees arising from injuries or deaths because of inadequate health and
safety policies and practices. We cannot fully protect against all these risks,
nor are all these risks insurable. We may become liable for damages arising from
these events against which we cannot insure or against which we may elect not to
insure because of high premium costs or other reasons. As well, we risk
incurring additional costs on projects that have sustained environmental,
health, and safety hazards because they may require additional time to complete
or because employee time may be lost due to injury.
 
 We
could be exposed to civil and/or statutory liability to employees arising from
injuries or deaths because of inadequate health and safety policies and
procedures.
 
 Although
we maintain a Health, Safety & Environment program that assists employees in
identifying hazards and risks in the workplace, if our policies are not current
or periodically reviewed and understood by our employees in light of the
projects we are working on with our clients, we run the risk that injuries or
deaths may occur, resulting in potential liability in either, or both, the civil
or statutory context.
 
 Because
we report our results in Canadian dollars and a substantial portion of our
revenue and expenses is recorded in US dollars, our results are subject to
currency exchange risk.
 
 Although
we report our financial results in Canadian dollars, a substantial portion of
our revenue and expenses is generated or incurred in US dollars. For the
purposes of financial reporting under Canadian GAAP measures, revenue and
expenses denominated in foreign currencies are translated into Canadian dollars
at the average exchange rates prevailing during the year. We expect to continue
to report our financial results in Canadian dollars in accordance with
Canadian GAAP measures. Therefore, if the Canadian dollar were to
strengthen relative to the US dollar and other currencies, the amount of
net income from our non-Canadian-dollar-denominated business could decrease,
which could have a material adverse effect on our business, financial condition,
and results of operations.
 
 The value
of the Canadian dollar relative to the US dollar is subject to volatility.
For example, the average exchange rates for the years ended December 31, 2009;
December 31, 2008; and December 31, 2007, for C$1.00 were US$0.88,US$0.94, and US$0.93,
respectively. Furthermore, this volatility may continue in the future, and, as
discussed above, increases in the strength of the Canadian dollar relative to
the US dollar may have a negative impact on the results of our
operations.
 
 
 MANAGEMENT’S
DISCUSSION AND ANALYSIS
 December
31, 2009
 STANTEC
INC.
  M-55
  From time
to time, we enter into forward contracts to manage risk associated with net
operating assets outside our US operations denominated in US dollars
(other than with respect to net operating assets that are owned by
US subsidiaries). These derivative contracts, which are not accounted for
as hedges, are marked to market, and any changes in the market value are
recorded in income or expense when they occur. Consequently, we may not benefit
from any weakening of the Canadian dollar relative to the
US dollar.
 
 Increasing
awareness of environmental factors may result in the cancellation of major
projects by key clients and thus adversely affect our
profitability.
 
 As part
of increasing awareness of global climate change, some experts have suggested
that companies involved in industries that impact the environment may be subject
to litigation from governments, shareholders, or environmental activists. The
cancellation of major projects due to environmental concerns or significant
environmental litigation impacting key clients could affect our future
results.
 
 At
any given time, a significant portion of our revenue may be derived from a
specific geographic region, industry, or sector. Consequently, our business
could suffer materially if there were a downturn in that geographic region,
industry, or sector.
 
 Our
three-dimensional business model mitigates risk by diversifying our operations
across several geographic regions, practice areas, and all phases of the
infrastructure and facilities project life cycle. If at any given time, a
significant portion of our revenue is derived from a specific geographic region,
industry, or sector, our business may be impacted by a number of factors, which
may include the following:
 
 ·
                Changes
      in employment levels and other general economic
  conditions
 ·
                Changes
      in interest rates and in the availability, cost, and terms of
      financing
 ·
                The
      impact of present or future environmental, zoning, or other laws and
      regulations
 ·
                Changes
      in real estate tax rates and assessments and other operating
      expenses
 ·
                Changes
      in levels of government infrastructure spending and fiscal
      policies
 ·
                Natural
      or human-made disasters and other factors that are beyond our
      control
 
 If we are
unable to adjust our workforce or service mix to a downturn in a geographic
region, industry, or sector in a timely manner, it could have a material adverse
effect on our overall business, including the results of our operations and
liquidity.
 
 If
we are unable to manage our growth effectively, we may experience a decline in
our revenue and profitability.
 
 We have
grown rapidly in the last few years, and we intend to pursue further growth
through acquisitions and internal hiring as part of our business strategy.
However, there is a risk that we may not be able to manage our growth
effectively and efficiently. Our inability to manage our growth could cause us
to incur unforeseen costs, time delays, or other negative impacts, any of which
could cause a decline in our revenue and profitability. Our rapid growth has
presented, and will continue to present, numerous administrative and operational
challenges, including the management of an expanding array of engineering and
consulting services, the assimilation of financial reporting systems, increased
pressure on our senior management, and increased demand on our systems and
internal controls. Furthermore, as we expand our service offerings and
geographic presence, we may not be able to maintain the current quality of our
services.
 
 We may
also encounter difficulties in integrating acquisitions that we do make.
Acquired businesses may not be profitable, because we may not be successful in
generating the same level of operating performance that an acquired company
experienced prior to its acquisition. As well, we may not be able to maintain
our reputation in an acquired company’s geographic or service areas, which may
negatively impact our ability to attract and retain clients in these or other
areas. Any of these integration issues could divert management’s attention from
other business activities and impact our ability to grow our business
effectively.
 
 
 MANAGEMENT’S
DISCUSSION AND ANALYSIS
 December
31, 2009
 STANTEC
INC.
  M-56
  From
time to time, we have pursued and may continue to pursue and invest in business
opportunities that are not directly within our core competencies. These new
business opportunities may require a disproportionate amount of management’s
time to develop profitably and may not perform as expected.
 
 Acquisitions
may bring us into businesses that we have not previously conducted and expose us
to additional business risks that are different from those we have traditionally
experienced. Consequently, we may depend in part on the knowledge and expertise
of the professional service providers and management teams that we acquire in
order to make these business opportunities profitable. New business
opportunities frequently bring a learning curve that may require substantial
management time and changes to our business systems, which may create a
distraction from our day-to-day business operations. If these business
opportunities do not perform as anticipated or are not profitable, our earnings
during periods of greater learning may be materially adversely affected, and we
may experience a partial or complete loss of our investment.
 
 If
we experience delays and/or defaults in customer payments, we could suffer
liquidity problems or be unable to recover our expenditures.
 
 Because
of the nature of our contracts, at times we commit resources to projects prior
to receiving payments from the customer in amounts sufficient to cover
expenditures as they are incurred. Delays in customer payments may require us to
make a working capital investment. If a customer defaults in making payments on
a project to which we have devoted significant resources, it could have a
material negative effect on our liquidity as well as on the results of our
operations. In our experience, clients who withhold payment are more likely to
bring claims against us and have a higher tendency toward dissatisfaction with
the services we provide.
 
 We
may have difficulty in attracting and retaining qualified staff, which may
affect our reputation in the marketplace and restrict our ability to implement
our business strategy.
 
 We derive
our revenue almost exclusively from services performed by our employees.
Consequently, one of the key drivers of our business is our ability to attract
and retain qualified staff. However, we may not be able to attract and retain
the desired number of qualified staff over the short or long term. There is
significant competition for staff with the skills necessary for providing our
services from major and boutique consulting, engineering, public agency,
research, and other professional services firms. Our inability to attract and
retain qualified staff could impede our ability to secure and complete
engagements, in which event we may lose market share and our revenue and profits
could decline. In addition, if our employees were to leave our Company and
become competitors of ours, we could lose other employees and some of our
existing clients who have formed relationships with such former employees. We
could also lose future clients to a former employee as a new competitor. In
either event, we could lose clients and revenue, and our profitability could
decline.
 
 We may be unable
to secure the additional capital required to fund our acquisition strategy,
which could lead to a reduction in our market share and
competitiveness.
 
 In order
to fund future acquisitions, we will need access to substantial amounts of
capital. However, we may be unable to obtain the necessary capital to finance a
successful acquisition program while meeting our other cash needs. If we are
unable to obtain additional capital on acceptable terms, we may be required to
reduce the scope of our anticipated expansion, which may negatively affect our
future competitiveness and results of operations.
 
 Using
internally generated cash or taking on debt to complete acquisitions could
substantially limit our operational and financial flexibility. The extent to
which we will be able or willing to use our common shares for acquisitions will
depend on the market value of our shares from time to time and the willingness
of potential sellers to accept our shares as full or partial
payment.
 
 
 MANAGEMENT’S
DISCUSSION AND ANALYSIS
 December
31, 2009
 STANTEC
INC.
  M-57
  If
we need to sell or issue additional common shares and/or incur additional debt
to finance future acquisitions, our share ownership could be diluted and the
results of our operations could be adversely affected.
 
 Our
business strategy is to expand into new markets and enhance our position in
existing markets through internal growth and through the acquisition of
complementary businesses. In order to successfully complete targeted
acquisitions or to fund our other activities, we may issue additional equity
securities that could dilute share ownership. We may also incur additional debt
if we acquire another company, and this could increase our debt repayment
obligations, which could have a negative impact on our future liquidity and
profitability.
 
 As
mentioned previously, we currently have a $300 million credit facility. However,
we have no assurance that debt financing will continue to be available from our
current lenders or other financial institutions on similar terms.
 
 Adverse
weather conditions and natural or other disasters may delay or eliminate net
revenue that otherwise would have been realized and thus adversely affect our
profitability.
 
 Our field
activities are generally performed outdoors and may include professional
surveying, resident engineering services, field data surveys and collection,
archeology, geotechnical investigations and exploratory drilling, construction
oversight and inspection, plant start-up and testing, and plant operations.
Extreme weather conditions and natural or other disasters, such as earthquakes,
fires, floods, influenza pandemics, and similar events, may cause postponements
in the initiation and/or completion of our field activities and may hinder the
ability of our office employees to arrive at work, which may result in a delay
or elimination of revenue that otherwise would be recognized while certain costs
continue to be incurred. Adverse weather conditions or disasters may also delay
or eliminate the start and/or completion of various phases of work relating to
other engineering services that commence concurrent with or subsequent to our
field activities. Any delay in the completion of our services may require us to
incur additional non-compensable costs, including overtime work, that are
necessary to meet our clients’ schedules. Due to various factors, a delay in the
commencement or completion of a project may also result in the cancellation of
contracts, adversely affecting our net revenue and profitability.
 
 Our
share price could be adversely affected if a large number of our common shares
are offered for sale or sold.
 
 There may
be instances in which we negotiate an acquisition where the consideration for
the purchase may include Stantec shares. In the event that the acquired entity’s
shareholders subsequently decide to dispose of Stantec shares following the
acquisition, there could be a large supply of our common shares on the market.
If the supply of our common shares is significantly greater than the associated
demand, the market price of our common shares may significantly decline and may
not recover.
 
 Our share price
has historically been subject to volatility. Accordingly, the price of our
common shares may decrease in the future due to a number of Company- and
industry-specific or general economic factors.
 
 Our share
price has experienced volatility in the past and will likely be volatile in the
future. For example, the intraday high and low prices for our common shares on
the TSX and New York Stock Exchange (NYSE) during the 52 weeks ended December
31, 2009, were $30.85 and $18.56, respectively, and US$29.53 and US$14.19,
respectively.
 
 
 MANAGEMENT’S
DISCUSSION AND ANALYSIS
 December
31, 2009
 STANTEC
INC.
  M-58
  The price
of our common shares may fluctuate substantially in the future due to, among
other things, the following factors: (1) the failure of our quarterly or
annual operating results to meet expectations, (2) the reaction of markets
and securities analysts to announcements and developments involving our Company,
(3) adverse developments in the worldwide, Canadian, or US economy; the
financial markets; or the engineering and consulting services market,
(4) changes in interest rates, (5) announcements by key competitors,
(6) additions or departures of key staff, (7) announcements of legal
proceedings or regulatory matters, or (8) general volatility in the stock
market.
 
 In
addition, the stock market has experienced volatility that has affected the
market prices of the equity securities of many companies and that has often been
unrelated to the operating performance of such companies. A number of other
factors, many of which are beyond our control, could also cause the market price
of our common shares to fluctuate substantially.
 
 Uncertainties
associated with an acquisition or merger or with Stantec as a new owner may
cause an acquired entity to lose customers.
 
 An
acquired company’s customers may, in response to the announcement of the
acquisition, delay or defer decisions concerning their use of its services
because of uncertainties related to the consummation of the acquisition,
including the possibility that the acquisition may not be completed if all the
conditions of the transaction are not fulfilled. This circumstance could have an
adverse effect on our revenue and profitability.
 
 We
could be exposed to civil and/or statutory liability to employees arising from
non-payment of wages, discrimination, and misclassification regarding overtime
entitlements.
 
 We are
required to comply with state, provincial, and federal employment laws as well
as internal policies concerning the payment of wages, discrimination, and
misclassification regarding overtime entitlements. Failure to comply with any of
these regulatory schemes could result in a material cost to the Company. We face
the additional risk of losing the support of our employee base, which could
result in a failure to attract and retain key staff. We maintain insurance
coverage for our operations, including employment practices liability insurance;
however, it may not be sufficient to cover liability that could
arise.
 
 Inadequate
internal controls or disclosure controls may result in events that could
adversely affect our business.
 
 Inadequate
internal controls or disclosure controls over financial reporting could result
in material misstatement in our financial statements and related public
disclosures. Inadequate controls could also result in system downtime, delayed
processing, inappropriate decisions based on non-current internal financial
information, fraud, or the inability to continue our business
operations.
 
 The
Canadian Accounting Standards Board requires all public companies to adopt IFRS
for interim and annual financial statements relating to fiscal years beginning
on or after January 1, 2011. The transition date of January 1, 2011, will
require restatement for comparative purposes of amounts we reported for the year
ending December 31, 2010. A robust system of internal controls is our best
method of ensuring reporting integrity and minimizing the risk of misstatement
and fraud. A period of change, such as that encountered during an accounting
conversion, could lead to modifications in the design and effectiveness of
internal controls, hence increasing risk. Other significant risk areas include
the communication of impacts and results to stakeholders and the inability of
management to conclude and certify the design or effectiveness of our internal
controls over financial reporting.
 MANAGEMENT’S
DISCUSSION AND ANALYSIS
 December
31, 2009
 STANTEC
INC.
  M-59
  We
may not be able to meet legal and regulatory requirements related to corporate
governance, labor relations, industry standards, and the
environment.
 
 We are
subject to a variety of regulations and standards, and compliance with all such
regulation could materially increase our costs. Our business model includes a
variety of practice areas, each with its own set of industry-specific rules and
regulations. In order to comply with increasingly complex laws and regulations
covering the protection of the environment and human health and safety, we may
be required to increase the fees we charge to our clients. This could impact our
ability to remain competitive in our industry.
 
 Our
insurance may not cover all claims for which we may be liable, and expenses
related to insurance coverage may adversely impact our
profitability.
 
 Although
we believe that we have made adequate arrangements for insuring against
potential liability claims, these arrangements may be insufficient to cover any
particular risk. When it is determined that we have liability, we may not be
covered by insurance, or, if covered, the dollar amount of these liabilities may
exceed our policy limits. Our professional liability coverage is on a
“claims-made” basis, covering only claims actually made during the policy period
currently in effect. Even where insurance is maintained for such exposures, the
policies have deductibles resulting in our assuming exposure for a layer of
coverage with respect to any such claims. Any liability not covered by our
insurance, in excess of our insurance limits, or covered by insurance but
subject to a high deductible could result in a significant cost to us, which may
reduce our profits and cash available for operations. Moreover, we may become
subject to liability that cannot be insured against or against which we may
choose not to insure because of high premium costs or for other reasons. Our
expansion into new services or geographic areas could result in our failure to
obtain coverage for these services or areas, or the coverage being offered may
be at a higher cost than our current coverage. Due to the current insurance
environment, including losses sustained by insurers in their investments, we may
experience increases in our insurance premiums. We may not be able to pass these
increases on to our clients in increased billing rates.
 
 Reliance
on key personnel who may be unable or unwilling to continue their employment may
adversely impact our business.
 
 Our
operations are dependent on the abilities, experience, and efforts of senior
management and other key personnel. If any of these individuals are unable or
unwilling to continue their employment with us, and if we do not have a
well-developed succession plan prior to their departure, our business,
operations, and prospects may be materially adversely affected. The transition
of key leadership positions may result in increased training costs as well as a
loss of institutional knowledge, industry relationships, or expertise developed
by the leader.
 
 During
2009, we seamlessly implemented our management succession plan for key members
of our leadership team, including the CEO, CFO, and COO, who all had years of
experience with the Company and were promoted internally.
 
 If
fraud occurs and remains undetected, we may have a loss of assets or
misstatement in our financial statements.
 
 Fraud may
occur and remain undetected, resulting in a loss of assets and/or misstatement
in our financial statements and related public disclosures.
 If
we are unable to engage qualified subconsultants, we may lose projects, revenue,
and clients.
 
 We often
contract with outside companies to perform designated portions of the services
we provide to our clients. In 2009, subconsultant costs accounted for
approximately 12.4% (2008 – 11.1%) of our gross revenue. If we are unable to
engage qualified subconsultants, our ability to perform under some of our
contracts may be impeded and the quality of our service may decline. As a
consequence, we may lose projects, revenue, and clients.
 
 
 MANAGEMENT’S
DISCUSSION AND ANALYSIS
 December
31, 2009
 STANTEC
INC.
  M-60
  We
may not be able to adequately protect our intellectual property, which could
force us to take costly protective measures such as litigation.
 To
establish and protect our intellectual property rights, we rely on a combination
of trademark and trade secret laws, along with licenses, exclusivity agreements,
and other contractual covenants. However, the measures we take to protect our
intellectual property rights may prove inadequate to prevent the
misappropriation of our intellectual property. Litigation may be necessary to
enforce our intellectual property rights or to determine the validity and scope
of the proprietary rights of others. Litigation of this type could result in
substantial costs and the diversion of resources, may result in counterclaims or
other claims against us, and could significantly harm the results of our
operations.
 
 Managing
Our Risks
 We
mitigate our operating, market, and growth and acquisition integration risks
through our business strategy and other measures. As mentioned previously, our
three-dimensional business model based on geographic, practice area, and life
cycle diversification reduces our dependency on any particular industry or
economic sector for our income. To help reduce our susceptibility to
industry-specific and regional economic cycles and to take advantage of
economies of scale in the highly fragmented professional services industry, we
intend to continue to diversify our business both in terms of geographic
presence and service offerings. From the beginning of 2002 to December 31, 2009,
we have completed 42 acquisitions, and we expect to continue to pursue selective
acquisitions that will enable us to enhance our market penetration and increase
and diversify our revenue base. We also differentiate our Company from
competitors by entering into a diverse range of contracts with a variety of fee
amounts. Focusing on this project mix continues to ensure that we do not rely on
a few large, single projects for our revenue and that no single client or
project accounts for more than 5% of our overall business.
 
 To
address the risk of competition for qualified personnel, we offer a number of
employment incentives, including training programs, access to a plan that
provides the benefit of employee share ownership, and opportunities for
professional development and enhancement, along with compensation plans that we
believe to be competitive, flexible, and designed to reward top performance. In
2009, we completed a number of activities, including updating our Career
Development Center to include more forms, tools, and assessments. The Career
Development Center is the online source for all our learning, coaching and
mentoring, and professional and career development resources. During the year,
we also continued to roll out the leadership development program we launched in
2008 to leaders throughout our regions; updated and enhanced the content and
exams in our project management learning series; and enhanced our methods for
measuring the impact of our training programs to better determine the return on
our investment. We also invested in our staff by focusing on health and safety
initiatives, including education and training in risk and hazard identification.
In addition, we continue to improve our project manager and leadership portal
dashboard training programs. These programs are intended to make financially
related information more visible in order to assist our operations leaders in
improving performance and decision making. We recognize that by improving
project management across our operations we will increase our ability to deliver
projects on schedule and within budget.
 
 With
regards to effective project management and execution, in 2008 we achieved
registration with the International Organization for Standardization’s (ISO)
9001:2000 quality management standard and in 2009 updated this certification to
the ISO 9001:2008 standard. In 2008 and 2009, we achieved ISO/IEC 20000-1:2005
certification, which is specific to information technology systems. ISO
9001:2008 is a globally recognized set of requirements for establishing
effective quality management systems, and ISO/IEC 20000 is a standard that sets
out the requirements for establishing an information technology service
management system.
 
 
 MANAGEMENT’S
DISCUSSION AND ANALYSIS
 December
31, 2009
 STANTEC
INC.
  M-61
  Since our
operations are dependent on the abilities and efforts of senior management and
other key personnel, the Corporate Governance and Compensation Committee of our
board of directors and our senior leaders regularly review succession planning
measures for management.
 
 To
mitigate the risk of fraud, we have various business conduct policies, including
our Code of Ethics, Conflict of Interest, and Integrity policies. In addition,
our Internal Audit team evaluates risks and opportunities relating to fraud as
part of its control evaluation program.
 
 We
maintain insurance coverage for our operations, including policies covering
general liability, automobile liability, environmental liability, workers’
compensation and employers’ liability, directors’ and officers’ liability,
and professional liability. We have a regulated captive insurance company to
insure and fund the payment of any professional liability self-insured
retentions related to claims arising after August 1, 2003. We, or our clients,
also obtain project-specific insurance for designated projects from time to
time. In addition, we invest resources in a Risk Management team that is
dedicated to providing Company-wide support and guidance on risk avoidance
practices and procedures. One of our practices is to carry out select client
evaluations, including credit risk appraisals, before entering into contract
agreements to reduce the risk of non-payment for our services.
 
 To
address the risk of being unsuccessful in integrating acquired companies, we
have an acquisition and integration program managed by a dedicated acquisition
team. The team supports, or is responsible for, the tasks of identifying and
valuing acquisition candidates, undertaking and coordinating due diligence,
negotiating and closing transactions, and integrating employees and systems
immediately following an acquisition. A senior regional or practice leader is
appointed for each acquisition to support the integration process. We also have
a coordinated integration plan that involves the implementation of our
Company-wide information technology and financial management systems as well as
provision of support services from our corporate and regional
offices.
 
 In
addition, we have a dedicated IFRS conversion team. The team has prepared a
detailed work plan for the implementation of IFRS, completed the detailed
assessment and solution development phases of the plan, and started the
implementation phase. We have also established an IFRS Advisory Committee
consisting of representatives from our Financial Services, Treasury, Internal
Audit, Investor Relations, Information Technology, and Operations groups. The
IFRS conversion team provides regular updates to the IFRS Advisory Committee and
the Audit Committee, including reports on the progress made on the detailed work
plan.
 
 
 CONTROLS
AND PROCEDURES
 
 Disclosure
controls and procedures are designed to ensure that information we are required
to disclose in reports filed with securities regulatory agencies is recorded,
processed, summarized, and reported on a timely basis and is accumulated and
communicated to management, including our CEO and CFO, as appropriate, to allow
timely decisions regarding required disclosure.
 
 Under the
supervision and with the participation of management, including our CEO and CFO,
we carried out an evaluation of the effectiveness of our disclosure controls and
procedures as of December 31, 2009, (as defined in rules adopted by the
Securities and Exchange Commission [SEC] in the United States and as defined in
Canada by National Instrument 52-109, Certification of Disclosure in Issuer’s
Annual and Interim Filings). Based on this evaluation, our CEO and CFO concluded
that the design and operation of our disclosure controls and procedures were
effective.
 
 Internal
control over financial reporting is a process designed to provide reasonable
assurance regarding the reliability of financial reporting and preparation of
financial statements for external purposes in accordance with generally accepted
accounting principals. A control system, no matter how well designed and
operated, can provide only reasonable, not absolute, assurance with respect to
the reliability of our financial reporting and preparation of our financial
statements. Accordingly, management, including our CEO and CFO, does not expect
that our internal control over financial reporting will prevent or detect all
errors and all fraud. Management’s Annual Report on Internal Control over
Financial Reporting and the Independent Auditors’ Report on Internal Controls
are included in our 2009 consolidated financial statements.
 
 
 MANAGEMENT’S
DISCUSSION AND ANALYSIS
 December
31, 2009
 STANTEC
INC.
  M-62
  There has
been no change in our internal control over financial reporting during the year
ended December 31, 2009, that materially affected, or is reasonably likely to
materially affect, our internal control over financial reporting.
 
 We will
continue to periodically review our disclosure controls and procedures and
internal control over financial reporting and may make modifications from time
to time as considered necessary or desirable.
  
 CORPORATE
GOVERNANCE
 
 Disclosure
Committee
 In 2005,
our Company established a Disclosure Committee consisting of a cross section of
management. The committee’s mandate is to provide ongoing review of Stantec’s
continuous disclosure policy and to facilitate compliance with applicable
legislative and regulatory reporting requirements.
 
 Board
of Directors
 Stantec’s
board of directors currently includes nine members, seven of whom are
independent under Canadian securities laws and under the rules of the SEC and
the NYSE and free from any interest or relationship that could materially
interfere with their ability to act in the best interest of our Company and
shareholders.
 
 The
board’s mandate is to supervise Stantec’s management with a view to the
Company’s best interests. The board fulfils its mandate by
 
 ·
              Overseeing
      the Company’s strategic planning
process
 ·
              Satisfying
      itself as to the integrity of the CEO and other executive
      officers
 ·
              Ensuring
      that the Company has a policy in place for communicating effectively with
      shareholders, other stakeholders, and the
public
 ·
              Reviewing
      and monitoring the Company’s principal business risks as identified by
      management, along with the systems for managing such
  risks
 ·
              Overseeing
      senior management succession planning, including the appointment,
      development, and monitoring of senior
management
 ·
              Ensuring
      that management maintains the integrity of the Company’s internal controls
      and management information systems
 
 In 2009,
Stantec’s board included two committees—the Audit Committee and the Corporate
Governance and Compensation Committee. Both committees are composed entirely of
unrelated, independent directors.
 
 Audit
Committee
 The Audit
Committee monitors, evaluates, approves, and makes recommendations on matters
affecting Stantec’s external audit, financial reporting, and accounting control
policies. The committee met five times in 2009. The chairman of the committee
provides regular reports at the Company’s board meetings. The board has
determined that each of the Audit Committee's members is financially literate
and that the majority of the members are "financial experts" as such term is
defined under the rules of the SEC and NYSE.
 
 
 MANAGEMENT’S
DISCUSSION AND ANALYSIS
 December
31, 2009
 STANTEC
INC.
  M-63
  Corporate
Governance and Compensation Committee
 The
Corporate Governance and Compensation Committee monitors, evaluates, approves,
and makes recommendations on matters affecting governance and compensation.
Governance matters include, but are not limited to, board size, nominations,
orientation, education, and self-evaluation. Compensation matters include, but
are not limited to, executive management compensation, performance review, and
succession plans. The Corporate Governance and Compensation Committee met four
times in 2009. The chairman of the committee provides regular reports at the
Company’s board meetings.
 
 More
information about Stantec’s corporate governance can be found on our web site
(www.stantec.com) and in the Management
Information Circular for our May 13, 2010, annual meeting of shareholders. In
addition, the following documents are posted on our web site:
 
 ·
              Code
      of Ethics
 ·
              Corporate
      Governance Guidelines
 ·
              Audit
      Committee Terms of Reference
 ·
              Corporate
      Governance and Compensation Committee Terms of
  Reference
 
 The above
information is not and should not be deemed to be incorporated by reference
herein. Copies of these documents will be made available in print form to any
shareholder who requests them.
 
 
 SUBSEQUENT
EVENT
 
 Subsequent
events have been evaluated through to February 25, 2010, which is the date the
consolidated financial statements were issued.
 
 
 MANAGEMENT’S
DISCUSSION AND ANALYSIS
 December
31, 2009
 STANTEC
INC.
  M-64
  
 
 
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 MANAGEMENT’S
DISCUSSION AND ANALYSIS
 December
31, 2009
 STANTEC
INC.


M-65