Exhibit
99.2




TABLE
      OF CONTENTSMANAGEMENT’S
      DISCUSSION AND ANALYSIS
              PageCaution
      Regarding Forward-Looking Statements
              M-1Vision,
      Core Business, and Strategy
              M-3Key
      Performance Drivers and Capabilities
              M-7Results
              M-9Overall
      Performance
              M-9Acquisitions
              M-12Selected
      Annual Information
              M-12Results
      of Operations
              M-14Fourth
      Quarter Results and Quarterly Trends
              M-26Liquidity
      and Capital Resources
              M-29Other
              M-33Outlook
              M-35Critical
      Accounting Estimates, Developments, and Measures
              M-37Risk
      Factors
              M-44Controls
      and Procedures
              M-55Corporate
      Governance
              M-56Subsequent
      Event
              M-57CONSOLIDATED
      FINANCIAL STATEMENTSManagement
      Report
              F-1Independent
      Auditors’ Report on Financial Statements
              F-2Independent
      Auditors’ Report on Internal Control Over Financial
    Reporting
              F-3Consolidated
      Balance Sheets
              F-4Consolidated
      Statements of Income
              F-5Consolidated
      Statements of Shareholders’ Equity and Comprehensive
Income
              F-6Consolidated
      Statements of Cash Flows
              F-7Notes
      to the Consolidated Financial Statements
              F-8
   This book is part of
      a two-part publication. It focuses on Stantec Inc.'s 2008
      financial and operating results. For a more general
      overview of our Company, refer to our 2008 Business Review. Our
      2008 Financial Review and Business Review can be viewed on-line
      at www. stantec.com under the Investor Relations
      section.
  
 
 MANAGEMENT’S
DISCUSSION AND ANALYSIS
 
 
 February
25, 2009
 
 This
discussion and analysis of Stantec Inc.’s operations and financial position,
dated February 25, 2009, should be read in conjunction with the Company’s 2008
audited consolidated financial statements and related notes. Our 2008 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 24 of the 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 2009 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
2018 international growth target and our goals for each of our practice areas)
in the Vision, Core Business, and Strategy section as well as the Results (under
the Overall Performance, Gross and Net Revenue: 2008 versus 2007 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.
  
 MANAGEMENT’S
DISCUSSION AND ANALYSIS
 December 31,
2008
 STANTEC
INC.
 M-
1
 
 
 Market
Risks
 ·
              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.
  ·
              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.
  ·
              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.
  ·
              We
      derive significant revenue from contracts with government agencies; thus,
      any disruption in government funding or in our relationship with those
      agencies could adversely affect our
business.
  ·
              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.
  ·
              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.
  
 Operating
Risks
 ·
              The
      nature of our business exposes us to potential liability claims and
      contract disputes, which may reduce our
profits.
  ·
              Interruption
      to our systems and network infrastructure could adversely impact our
      ability to operate.
  ·
              If
      we experience delays and/or defaults in customer payments, we could suffer
      liquidity problems or be unable to recover our
    expenditures.
  ·
              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.
  ·
              Inadequate
      internal controls or disclosure controls may result in events that could
      adversely affect our business.
  ·
              Our
      backlog is subject to unexpected adjustments and cancellations and is,
      therefore, an uncertain indicator of our future
  earnings.
  ·
              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.
  ·
              We
      bear the risk of cost overruns in a significant number of our contracts;
      thus, we may experience reduced profits or, in some cases, losses under
      these contracts if costs increase above our
  estimates.
  
 Growth
and Acquisition Integration Risks
 ·
              Goodwill
      and other 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 other intangible assets, which could have a material adverse
      effect on our earnings. Refer to the discussion in the Results section
      (under the Goodwill and Intangible Assets subheading)
    below.
  ·
              If
      we are unable to manage our growth effectively, we may experience a
      decline in our revenue and
profitability.
  MANAGEMENT’S
DISCUSSION AND ANALYSIS
 December 31,
2008
 STANTEC
INC.
 M-
2
 
 ·
              We
      or an acquired entity may experience difficulties in integrating the
      acquired entity’s business into our existing operations and so may not
      realize the anticipated benefits of the
  acquisition.
  ·
              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.
  ·
              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.
  ·
              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.
  
 Assumptions
 In
determining our forward-looking statements, we consider material factors
including assumptions about the performance of the Canadian and US economies in
2009 and its effect on our business. The assumptions we made about the outlook
for each of our practice areas, our annual targets, and our outlook for 2009 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, 2009, 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 2009, 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.
 
 
 VISION,
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 Delivery.”
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 providing professional services in the infrastructure and
facilities market principally on a fee-for-service basis. To achieve our
objective, we must expand the depth and breadth of our services, which will
result in growth. We intend to continue to pursue a prudent growth plan. 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.
 
 Looking
ahead, we plan to gradually and systematically expand our geographic reach
outside North America in markets that are best suited and receptive to our
services as these services evolve and mature. International work currently
accounts for 2% of our business. By 2018, we target to generate up to 20% of our
revenue from our international work, most likely by expanding to the United
Kingdom, Australia, and New Zealand. In determining this goal, we reviewed
the growth of our peers.During 2007, three quarters of the growth
generated by the top
  
 MANAGEMENT’S
DISCUSSION AND ANALYSIS
 December 31,
2008
 STANTEC
INC.
 M-
3
 
 35 global
design firms, many of which are headquartered in North America, came from
international markets, and we assume that we can take advantage of this
trend. We believe that earning up to 20% of our revenue internationally
will give us the critical mass of staff and cost effectiveness needed to
support international growth.
 
 Our
business strategy 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
 
 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 area with increased demand for services in
another area.
 
 Through
our “One Team. Infinite Solutions.” and “Global Expertise. Local Delivery.”
operating philosophy and 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 across all our geographic
regions.
 
 The
following discussion outlines the three main components of our business
model.
 
 Geographic
Diversification
 Currently,
we operate in three main regions in North America—Canada, the US East, and the
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 and distinct 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
 
 MANAGEMENT’S
DISCUSSION AND ANALYSIS
 December 31,
2008
 STANTEC
INC.
 M-
4
 
 building
types and market sectors across North America and internationally. Our primary
focus is the design of health care, retail and commercial, education,
sports and recreation, and airport 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 2008,
we expanded our Buildings practice area through organic growth in our existing
geographic locations. Going forward, our focus in 2009 and over the next 10
years will be to develop the Buildings practice area to a top 10 level globally.
Initially, we intend to expand our architecture and engineering practice in the
United States to match the critical mass of staff and reputation we have built
in Canada, and thereafter we plan to establish a significant international
presence.
 
 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.
 
 We
expanded our Environment practice area through organic growth in our existing
geographic locations as well as acquisitions in 2008 and through the addition of
Jacques Whitford Group Ltd. and Jacques Whitford Global Group Limited (Jacques
Whitford) at the beginning of 2009. This acquisition, our largest to date with
40 offices mainly located in Canada, expanded and enhanced our capabilities in
environmental assessment, documentation and permitting, environmental site
management and remediation, and geotechnical engineering.
 
 In 2009,
we will focus on strengthening the Environment practice area by continuing to
expand our profile and market share throughout North America, primarily in the
water and energy sectors. Over the next 10 years, we expect to experience our
greatest growth in the US environmental market along with significant expansion
into markets overseas.
 
 Industrial. We provide
industrial solutions to clients in the bio/pharmaceutical, power generation,
utilities, mining, automotive, chemical, consumer products, forestry, food and
beverage, pulp and paper, and general manufacturing sectors. Our core services
include planning, engineering, and project management, which we deliver through
five specialist practice areas: 1) Manufacturing, 2) Power, 3) Resources, 4)
Bio/Pharmaceuticals, and 5) Program & Project Management. We also provide
specialty services in occupational health and safety, system integration,
instrumentation and control, electrical energy and power management, facility
planning and design, industrial engineering, logistics, materials handling, and
commissioning.
 
 In 2008,
we strengthened the services this practice area provides for the mining sector
through the acquisition of McIntosh Engineering, a mining engineering firm with
offices in Arizona and Ontario.
 
 In 2009,
we will focus on strengthening our presence in the power transmission and
renewable energy markets as well as pursuing opportunities to work on larger
projects for clients with national accounts. Our goal for the next 10 years is
to further position our industrial practice as the largest of the midtier
consultants with the ability to undertake most projects in the industrial sector
with the exception of large turnkey oil and gas
projects.
  
 MANAGEMENT’S
DISCUSSION AND ANALYSIS
 December
31, 2008
 STANTEC
INC.
 M-
5
 
 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 2008,
the Transportation practice area expanded through organic growth in our existing
geographic locations as well as through acquisitions.
 
 In 2009,
we will focus on further strengthening and developing our leadership in the
Transportation practice area as well as on developing a critical mass of staff
in key emerging markets and expanding our services. Our goal over the next 10
years is to strengthen the Transportation practice area by expanding primarily
in growing urban areas across North America and by adding more specialized skill
sets.
 
 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 2008,
we expanded our services in the Urban Land practice area through the acquisition
of a design firm with offices in California and other western states. This
addition gave us a commercial program development practice, which provides
program and project management and integrated design services for retail and
commercial clients with facilities across the United States.
 
 Our
priority for this practice area in 2009 is to continue to diversify the
services we provide for nonresidential development sectors and to adapt to
changes in the North American housing market. In the next 10 years,
we expect to continue to position ourselves to serve a rebounding housing
market in North America.
 
 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 type 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.
 
 MANAGEMENT’S
DISCUSSION AND ANALYSIS
 December
31, 2008
 STANTEC
INC.
 M-
6
 
 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 and to strengthen our full “cradle to
grave” approach.
 
 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; 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
 Because
we are a professional services firm, the most important driver of our
performance is our people. Our 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 2008, our employee numbers increased to approximately 8,700 from
7,800 in 2007. As at December 31, 2008, our workforce was made up of about 4,700
professionals, 2,800 technical staff, and 1,200 support personnel. With the
addition of Jacques Whitford on January 2, 2009, our employee numbers exceeded
10,000.
 
 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. Infinite Solutions.” culture. In 2008 we
completed a number of activities, including the introduction of an employment
equity program. Along with ensuring that there are no barriers to hiring and
promoting talented people, the program looks at ways to better understand the
needs of a diverse workforce. We also implemented a wellness program that offers
a variety of services, including access to a health coach, online health
information, on-site biometrics testing, and free miniphysicals. In addition, we
expanded our Career Development Center with updated content and new in-house
programs and training, including a leadership training program, which we
delivered across the Company to help develop and enhance the skills and
capabilities of new and evolving leaders. The Career Development Center is the
online source for all our learning, coaching and mentoring, and professional and
career development resources, and the new leadership training program covers
eight core competencies that align with Stantec values. We also updated the
professional development section of the center to include continuing education
requirements according to state and provincial boards for professional
engineers, landscape architects, architects, geologists, and land surveyors.
Going forward, we will continue to update and improve our learning and career
development programs in response to the needs of our staff.
 
 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
 
 MANAGEMENT’S
DISCUSSION AND ANALYSIS
 December
31, 2008
 STANTEC
INC.
 M-
7
 
 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.
 
 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. Since we became publicly
traded on the Toronto Stock Exchange (TSX) in 1994 to date, we have integrated a
total of over 7,600 employees into the Stantec team from throughout Canada, the
United States, and the Caribbean. In 2008, we completed five acquisitions,
including one in Canada, which expanded our business into the Northwest
Territories, and four in the United States, which gave us a new presence in
Alabama, Illinois, Kansas, Minnesota, and Oklahoma. 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 the Engineering
News-Record, the largest 500 engineering and architecture companies
headquartered in the United States—our principal competitors—generate
approximately US$80 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 three years to complete.
It involves the implementation of our Company-wide information technology and
financial management systems as well as provision of “back office” 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 TSX in 1994, we have grown our gross revenue at a
compound annual rate of 21.4%. 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 $104.9 million was available as at December 31, 2008,
for future activities.
 
 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
 
 MANAGEMENT’S
DISCUSSION AND ANALYSIS
 December
31, 2008
 STANTEC
INC.
 M-
8
 
 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.
 
 One
metric we use to gauge our success with market penetration is staff numbers per
population in a region. Generally, we estimate that to be among the top three
service providers in any given location we require 100 or more employees serving
a population of 1 million people. To date, we calculate that we have a mature
market presence in the following provinces and states: Alberta, British
Columbia, Manitoba, Maine, New Brunswick, Newfoundland, Nova Scotia,
Saskatchewan, and Vermont.
 
 
 RESULTS
 
 Overall
Performance
 
 Highlights
for 2008
 
 (In
      millions of Canadian dollars,
                except
      per share amounts)
              2008
              2007
              $
      Change
              %
      ChangeGross
      revenue
              1,352.0
              954.6
              397.4
              41.6%Net
      income
              29.0
              69.3
              (40.3)
              (58.2%)Earnings
      per share – basic
              0.64
              1.52
              (0.88)
              (57.9%)Earnings
      per share – diluted
              0.63
              1.50
              (0.87)
              (58.0%)Cash
      flows from operating activities
              160.0
              87.5
              72.5
              n/mCash
      flows used in investing activities
              (127.7)
              (135.2)
              7.5
              n/mCash
      flows from financing activities
              53.8
              33.9
              19.9
              n/m
 n/m
= not meaningful
  
  The
following highlights our major financial achievements and strategic activities
in 2008, as well as other factors that contributed to our financial performance
and overall financial condition:
 
 ·
              Record results prior to the
      impairment of goodwill.In 2008, we achieved a 41.6% increase in
      gross revenue and a 36.0% increase in net revenue (the term net revenue is
      defined in the Critical Accounting Estimates, Developments, and Measures
      section of this report) along with a strong operating performance prior to
      the write-down of goodwill related to our US
  operations.
 
 During
the year, we conducted our annual goodwill impairment test. Due to the recent
fluctuations in the market and the uncertainties arising from overall economic
conditions, we recorded a $53.0 million impairment to goodwill. This decreased
our diluted earnings per share by $1.15. 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
 
 MANAGEMENT’S
DISCUSSION AND ANALYSIS
 December
31, 2008
 STANTEC
INC.
 M-
9
 
 future
operations. Excluding the impact of this goodwill impairment, our financial
results for the year reached record levels, with $160.0 million in cash flows
from operating activities. Our net income would have been $82.0 million, with
diluted earnings per share of $1.78 for the year.
 
 Including
the impact of the goodwill impairment charge, our net income for 2008 was $29.0
million compared to $69.3 million in 2007 and $60.2 million in 2006. Diluted
earnings per share for 2008 were $0.63 compared to $1.50 in 2007 and $1.31 in
2006. These results were
 
 o
              Positively
      impacted by a reduction in our administrative and marketing expenses as a
      percentage of net revenue from 42.3% to
41.3%
  o
              Negatively
      impacted by a reduction in our gross margin percentages (the term gross
      margin is defined in the Critical Accounting Estimates, Developments, and
      Measures section of this report) from 56.7% to 55.7%, a $58.4 million
      impairment of goodwill and intangible assets, a $7.0 million increase in
      our amortization of intangibles, and a $5.9 million increase in interest
      expense
 
 ·
              Achievement of 10-year goal.In 2008, we met and exceeded the 10-year goal we set in 1998 to
      become a $1.0 billion annual gross revenue
  company.
 
 ·
              Ability to adapt to challenging
      economic conditions.Excluding the impact of the goodwill
      impairment, our operating results demonstrated continuing strength
      compared to 2007 as well as the ability of our business model to adapt to
      changing market conditions throughout North America. Continued weakness in
      the residential market and the economic slowdown in the United States
      contributed to decreased revenue in our Urban Land practice area compared
      to 2007. This decrease was offset by an increase in revenue in our other
      practice areas, particularly Environment, Industrial, and
      Buildings.
 
 Despite
the economic slowdown in North America, we believe that we are well positioned
to maintain our business in 2009 for a number of reasons:
 
 o
              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 projects give us the
      flexibility to timely adapt to changing market
  conditions.
  o
              We
      continue to generate sufficient cash flow to meet our operating needs and
      have a strong balance sheet.
  o
              We
      have a strong leadership team that emphasizes asset management and
      continues to monitor our short-term backlog and manage staff levels to the
      work available.
  o
              We
      have a dedicated team of employees who have shown commitment to
      controlling costs and pursuing efficiency in our
    operations.
 
 ·
              Growth through acquisitions.Acquisitions completed in 2007 and 2008 contributed $404.1 million
      to our change in gross revenue from 2007 to 2008. We completed five
      acquisitions in 2008.
 
 ·
              Continued growth. On
      January 2, 2009, we completed the acquisition of Jacques Whitford for cash
      consideration of $64 million and notes payable of $79 million, adding over
      1,700 employees and 40 offices to our operations and strengthening our
      service capabilities in geotechnical engineering, air quality evaluation,
      and environmental and geoscientific
assessment.
 
 ·
              Strong balance sheet.Our balance sheet remains solid, and as at December 31, 2008,
      taking into account the amount borrowed to enable the Jacques Whitford
      acquisition, $104.9 million of our $300 million credit facility was
      available for future acquisitions, working capital needs, capital
      expenditures, and general corporate
  MANAGEMENT’S
DISCUSSION AND ANALYSIS
 December
31, 2008
 STANTEC
INC.
 M-
10
 
 purposes.
      During the year, we negotiated an extension of the due date of our credit
      facility to August 2011 and renewed our normal course issuer bid with the
      TSX. As well, during the year, we were successful in increasing the limit
      of our credit facility from $160 million to $300 million to provide
      additional flexibility for continued
growth.
 
 ·
              Leadership succession.During the year, we announced that Robert (Bob) Gomes will succeed
      Tony Franceschini as the next president and chief executive officer (CEO)
      of our Company, effective May 14, 2009. On his retirement, Tony will
      assume a role on the Stantec Board of Directors. 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.
 
 During
the year, Don Wilson, our senior vice president and chief financial officer
(CFO), announced that he would retire from his role on December 31, 2008. Dan
Lefaivre, our vice president of Finance & Treasury, subsequently assumed the
CFO role. Dan, a certified management accountant, joined Stantec in 1990 and has
played an integral role in numerous acquisitions, conversion activities,
financing activities, and the integration of business systems.
 
 ·
              ISO certification.During the year, we achieved registration with the International
      Organization for Standardization’s (ISO) 9001:2000 quality management
      standard. ISO 9001:2000 is a globally recognized set of requirements for
      establishing effective quality management systems. In addition, during the
      year, we achieved certification with ISO/IEC 20000, which is a standard
      that sets out the requirements for establishing an information technology
      (IT) service management system.
 
 ·
              Increased backlog.Our
      consolidated revenue backlog at the end of 2008 was $1 billion compared to
      $831 million at the end of 2007 and $685 million at the end of 2006. For a
      definition of backlog, refer to the Definition of Non-GAAP Measures in the
      Critical Accounting Estimates, Developments, and Measures section of this
      report.
 
 ·
              A solid foundation for the
      future. Through the guidance of our CEO over the last 10 years, we
      have built a solid foundation for continued prudent growth by expanding
      geographically and adding new or complementary practice areas. As we
      continue to evolve and mature, we will have a more significant presence
      outside North America. By 2018, we target to generate up to 20% of our
      revenue from international work.
 
 Results
compared to 2007 targets
 In our
2007 Management’s Discussion and Analysis, we established various ranges of
expected performance for 2008. The following table presents the results we
achieved in 2008:
 
 Measure
              Expected
      Range
              Results
                Achieved
              Results
      before
                Goodwill
                ImpairmentDebt
      to equity ratio (note1)
              At
      or below 0.5 to 1
              0.26    P
              0.23
      PReturn
      on equity (note
      2)
              At
      or above 14%
              6.1%   Ï
              16.5%
      PNet
      income as % of net revenue
              At
      or above 6%
              2.6%   Ï
              7.3%
      PGross
      margin as % of net revenue
              Between
      55 and 57%
              55.7%   P
              55.7%
      PAdministrative
      and marketing expenses
                as
      % of net revenue
              Between
      41.5 and 43.5%
              41.3%   P
              41.3%
      PEffective
      income tax rate
              Between
      29 and 31%
              55.0%  Ï
              30.2%
      P
 note
1: 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.
 note
2: Return on equity is calculated as net income for the year divided by average
shareholders’ equity over each of the last four quarters 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
exceeded target
 X
Did not meet target
  MANAGEMENT’S
DISCUSSION AND ANALYSIS
 DECEMBER
31, 2008
 STANTEC
INC.
 M-
11
  In 2008,
we met or performed better than our targets for all items except return on
equity, net income as a percentage of net revenue, and effective income tax
rate. 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 $122.9 million in 2008 and $150.0
million in 2007. In 2008, we completed the following acquisitions:
 
 ·
              On
      January 2, 2008, we acquired The Zande Companies, Inc. (Zande), which
      added approximately 285 staff to our Company. The acquisition of this firm
      strengthened our operations in the midwestern United States and increased
      the depth of our service offerings to public sector clients in the
      environment sector. Zande provides services mainly in water and wastewater
      treatment facility design, environmental management, and transportation,
      as well as complementary services in planning, landscape architecture,
      surveying, and land development.
 
 ·
              On
      January 2, 2008, we acquired Rochester Signal, Inc. (Rochester Signal),
      which added approximately 25 staff. The acquisition of this firm
      supplemented the existing transit-related services offered by our Company.
      Rochester Signal provides signal design and related construction
      management, installation, and testing services, along with engineering
      support for the development of all types of rail systems, from main and
      commuter lines to rapid transit and light
rail.
 
 ·
              On
      February 1, 2008, we acquired SII Holdings, Inc. (Secor), adding
      approximately 700 staff. The acquisition of this firm significantly
      increased our environmental service offerings, particularly for clients in
      the private sector. Secor provides expertise in downstream marketing
      remedial services to the US energy industry, as well as comprehensive
      environmental remediation services to the manufacturing, chemical, pulp
      and paper, and transportation
industries.
 
 ·
              On
      March 14, 2008, we acquired RHL Design Group, Inc. (RHL), which added
      approximately 170 employees. The acquisition of this firm, headquartered
      in Petaluma, California, with several offices in the western United
      States, significantly increased our commercial development services. RHL
      provides full program implementation and comprehensive design services for
      commercial clients with facilities in multiple
  locations.
 
 ·
              On
      July 2, 2008, we acquired the shares and business of McIntosh Engineering
      Holdings Corporation (McIntosh), adding over 200 staff. The acquisition of
      this firm provided us with a more visible presence in the mining sector
      and expanded our operations in Tempe, Arizona, and Sudbury and North Bay,
      Ontario.
 
 Through our
investment in our enterprise management system in 2003 as well as subsequent
enhancements, we were able to begin quickly integrating the five acquisitions
completed during 2008. We will finish integrating Secor’s systems in Q1
09.
 
 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:
 
 MANAGEMENT’S
DISCUSSION AND ANALYSIS
 December
31, 2008
 STANTEC
INC.
 M-
12
 
 Selected
Annual Information
  (In
      millions of Canadian dollars,
                except
      per share and share amounts)
              2008
              2007
              2006Gross
      revenue(note
      1)
              1,352.0
              954.6
              816.1Net
      income (note
      2)
              29.0
              69.3
              60.2Earnings
      per share – basic (note
      2)
              0.64
              1.52
              1.34Earnings
      per share – diluted (note
      2)
              0.63
              1.50
              1.31Cash
      dividends declared per common share
              Nil
              Nil
              NilTotal
      assets
              1,144.9
              813.6
              634.5Total
      long-term debt
              249.2
              96.1
              16.2Outstanding
      common shares – as at December 31
              45,448,123
              45,698,143
              45,201,785Outstanding
      common shares – as at February 25, 2009
              45,458,123Outstanding
      share options – as at December 31
              2,061,828
              1,751,022
              1,702,784Outstanding
      share options – as at February 25, 2009
              2,046,828
 note
1: The term gross revenue is defined 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 in 2008
would have been $82.0 million, $1.80, and $1.78, respectively, without the $53
million goodwill impairment charge.
 
 The five
acquisitions completed in 2008, the 11 completed in 2007, and the three
completed in 2006 contributed to our year-over-year growth in gross revenue, net
income, and basic and diluted earnings per share.
 
 Balance Sheet. Our total
assets increased by $331.3 million from 2007 to 2008. This increase was mainly
due to an increase of $113.9 million in goodwill, $61.1 million in accounts
receivable and in costs and estimated earnings in excess of billings, $26.3
million in property and equipment, and $13.7 million in intangible assets. These
items increased as a result of internal growth and growth from acquisitions
during 2008, offset by a $58.4 million goodwill and intangible asset impairment
charge recorded in the third quarter. As well, our cash and cash equivalents
increased $89.8 million from December 31, 2007, mainly due to the cash advanced
from our credit facility and held for the Jacques Whitford acquisition closing.
At the end of December 2008, we borrowed on our revolving credit facility to
facilitate the purchase of Jacques Whitford and to support normal operations.
The cash was paid to the vendors on the completion of the transaction on January
2, 2009. In addition, the carrying value of the assets and liabilities of our US
subsidiaries on our consolidated balance sheets was positively impacted by the
weakening of the Canadian dollar from US$1.01 at December 31, 2007, to US$0.82
at December 31, 2008.
 
 Our total
assets increased by $179.1 million from 2006 to 2007. This increase was mainly
due to an increase of $81.4 million in goodwill, $65.0 million in accounts
receivable and in costs and estimated earnings in excess of billings, $23.1
million in property and equipment, and $9.5 million in intangible assets. These
items increased as a result of internal growth and growth from acquisitions
during the year.
 
 Our total
liabilities increased by $235.0 million from 2007 to 2008 mainly 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. In
addition, accounts payable and accrued liabilities increased $43.2 million from
2007 to 2008 due to internal growth and growth through acquisitions during the
year. As well, total liabilities increased due to the weakening of the Canadian
dollar from December 31, 2007, as explained above.
 
 Our total
liabilities increased by $147.3 million from 2006 to 2007 mainly due to a $43.9
million increase in our revolving credit facility from $8.2 million at December
31, 2006, to $52.1 million at December 31, 2007, to finance the acquisitions
completed in 2007. In addition, accounts payable and accrued liabilities
increased $47.9 million from 2006 to 2007 due to internal growth and growth
through acquisitions during the year.
 
 MANAGEMENT’S
DISCUSSION AND ANALYSIS
 December
31, 2008
 STANTEC
INC.
 M-
13
  Our
balance sheet remained strong in 2008 as shareholders’ equity increased $96.3
million as further described in the Shareholders’ Equity section
below.
 
 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
      of Net Revenue
                
                
                Percentage
      Increase (decrease)*2008
                
                
                2007
                
                
                2006
                
                
                2008
      vs. 2007
                
                
                2007
      vs. 2006Gross
      revenue
                
                
                119.6
                %
                
                
                114.9
                %
                
                
                115.3
                %
                
                
                41.6
                %
                
                
                17.0
                %Net
      revenue
                
                
                100.0
                %
                
                
                100.0
                %
                
                
                100.0
                %
                
                
                36.0
                %
                
                
                17.4
                %Direct
      payroll costs
                
                
                44.3
                %
                
                
                43.3
                %
                
                
                43.0
                %
                
                
                39.1
                %
                
                
                18.2
                %Gross
      margin
                
                
                55.7
                %
                
                
                56.7
                %
                
                
                57.0
                %
                
                
                33.7
                %
                
                
                16.7
                %Administrative
      and marketing expenses
                
                
                41.3
                %
                
                
                42.3
                %
                
                
                41.3
                %
                
                
                32.7
                %
                
                
                20.3
                %Depreciation
      of property and equipment
                
                
                2.2
                %
                
                
                2.3
                %
                
                
                2.2
                %
                
                
                33.5
                %
                
                
                22.4
                %Amortization
      of intangible assets
                
                
                0.9
                %
                
                
                0.5
                %
                
                
                0.9
                %
                
                
                189.2
                %
                
                
                (39.3
                %)Impairment
      of goodwill and intangible assets
                
                
                5.2
                %
                
                
                0.0
                %
                
                
                0.0
                %
                
                
                100.0
                %
                
                
                n/aNet
      interest expense
                
                
                0.7
                %
                
                
                0.2
                %
                
                
                0.3
                %
                
                
                368.8
                %
                
                
                (15.8
                %)Share
      of income from associated companies
                
                
                (0.0
                %)
                
                
                0.0
                %
                
                
                (0.1
                %)
                
                
                (33.3
                %)
                
                
                50.0
                %Foreign
      exchange (gains) losses
                
                
                (0.2
                %)
                
                
                (0.3
                %)
                
                
                0.0
                %
                
                
                (20.0
                %)
                
                
                n/mOther
      income
                
                
                (0.1
                %)
                
                
                (0.2
                %)
                
                
                (0.2
                %)
                
                
                0.0
                %
                
                
                (20.0
                %)Income
      before income taxes
                
                
                5.7
                %
                
                
                11.9
                %
                
                
                12.6
                %
                
                
                (34.9
                %)
                
                
                10.9
                %Income
      taxes
                
                
                3.1
                %
                
                
                3.6
                %
                
                
                4.1
                %
                
                
                19.1
                %
                
                
                2.1
                %Net
      income
                
                
                2.6
                %
                
                
                8.3
                %
                
                
                8.5
                %
                
                
                (58.2
                %)
                
                
                15.1
                %*
      % increase (decrease) calculated based on the dollar change from the
      comparable periodn/m
      = not meaningfuln/a
      = not applicable
 Our gross
and net revenue grew at a higher rate during 2008 than during 2007 mainly due to
the larger size of acquisitions that occurred in the fourth quarter of 2007 and
in the first quarter of 2008. In particular, the completion of the Neill and
Gunter acquisition in October 2007; the Fuller, Mossbarger, Scott & May
Engineers (FMSM) acquisition in December 2007; the Zande acquisition in January
2008; and the Secor acquisition in February 2008 added over 1,900 employees to
our Company. In 2008, our administrative and marketing expenses grew at a lower
rate than the rate of growth in revenue as further explained in the
Administrative and Marketing Expenses section below. This growth was offset by
increases in the amortization of intangible assets, goodwill and intangible
asset impairment charges, and net interest as further explained in their
respective sections of this report.
 
 Gross
and Net Revenue
 The
following table summarizes the impact of acquisitions, internal growth, and
foreign exchange on our gross and net revenue for 2008 compared to 2007 and for
2007 compared to 2006. 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.
 
 MANAGEMENT’S
DISCUSSION AND ANALYSIS
 December
31, 2008
 STANTEC
INC.
 M-
14
  Gross
      Revenue(In
      millions of Canadian dollars)
                                2008
      vs. 2007
                                
                                2007
      vs. 2006Increase
      (decrease) due to:Acquisition
      growth
                                404.1
                                
                                109.1Internal
      growth
                                (4.4
                                )
                                47.1Impact
      of foreign exchange rates on revenueearned
      by foreign subsidiaries
                                (2.3
                                )
                                (17.7
                                )Total
      net increase in gross revenue
                                397.4
                                
                                138.5Net
      Revenue(In
      millions of Canadian dollars)
                                2008
      vs. 2007
                                
                                2007
      vs. 2006Increase
      (decrease) due to:Acquisition
      growth
                                302.8
                                
                                92.0Internal
      growth
                                (0.5
                                )
                                46.5Impact
      of foreign exchange rates on revenueearned
      by foreign subsidiaries
                                (3.1
                                )
                                (15.5
                                )Total
      net increase in net revenue
                                299.2
                                
                                123.0
 
 Gross
revenue earned in Canada during 2008 increased to $649.5 million from
$539.3 million in 2007 and $461.3 million in 2006. Gross revenue generated in
the United States in 2008 increased to $677.5 million compared to $405.2 million
in 2007 and $348.0 million in 2006. Gross revenue earned outside Canada and the
United States in 2008 was $25.0 million compared to $10.1 million in 2006 and
$6.8 million in 2005. The increase in revenues in both our US- and
Canadian-based operations was positively impacted by the acquisitions completed
in 2008 and 2007.
 
 MANAGEMENT’S
DISCUSSION AND ANALYSIS
 December
31, 2008
 STANTEC
INC.
 M-
15
 The
following table summarizes our gross revenue by practice area for 2008, 2007,
and 2006:
  Practice
      Area Gross
                
                %
      of
                
                
                
                
                %
      of
                
                
                
                
                %
      ofRevenue
                
                Consulting
                
                
                
                
                Consulting
                
                
                
                
                ConsultingServices
                %
      Change
                
                
                Services
                %
      Change
                
                
                Services(In
      millions of Canadian dollars,
                
                Gross
                
                2008
                vs.
                
                Gross
                
                2007
                vs.
                
                Grossexcept
      %)
                2008
                Revenue
                
                2007
                
                2007
                Revenue
                
                2006
                
                2006
                RevenueBuildings
                282.5
                20.9
                %
                33.4
                %
                211.8
                22.2
                %
                15.0
                %
                184.2
                22.6
                %Environment
                390.0
                28.9
                %
                121.7
                %
                175.9
                18.4
                %
                17.7
                %
                149.4
                18.3
                %Industrial
                241.2
                17.8
                %
                73.5
                %
                139.0
                14.6
                %
                46.6
                %
                94.8
                11.6
                %Transportation
                172.3
                12.7
                %
                20.4
                %
                143.1
                15.0
                %
                35.0
                %
                106.0
                13.0
                %Urban
      Land
                266.0
                19.7
                %
                (6.6
                %)
                284.8
                29.8
                %
                1.1
                %
                281.7
                34.5
                %Total
      Consulting Services
                1,352.0
                100.0
                %
                41.6
                %
                954.6
                100.0
                %
                17.0
                %
                816.1
                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, 2008
 STANTEC
INC.
 M-
16
 
 Practice
      Area Gross Revenue
                
                
                
                
                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
                )
   2007
      Compared to 2006Change
      Due
                
                
                Change
      Due
                
                
                Change
      Dueto
                
                
                to
      Internal
                
                
                to
      Foreign(In
      millions of Canadian dollars)
                
                Total
      Change
                
                
                Acquisitions
                
                
                Growth
                
                
                ExchangeBuildings
                
                
                27.6
                
                
                
                17.2
                
                
                
                11.7
                
                
                
                (1.3
                )Environment
                
                
                26.5
                
                
                
                13.1
                
                
                
                17.5
                
                
                
                (4.1
                )Industrial
                
                
                44.2
                
                
                
                11.8
                
                
                
                33.8
                
                
                
                (1.4
                )Transportation
                
                
                37.1
                
                
                
                35.8
                
                
                
                4.2
                
                
                
                (2.9
                )Urban
      Land
                
                
                3.1
                
                
                
                31.2
                
                
                
                (20.1
                )
                
                
                (8.0
                )Total
                
                
                138.5
                
                
                
                109.1
                
                
                
                47.1
                
                
                
                (17.7
                )
  The
following summarizes the acquisitions completed from 2007 to 2008 that affected
the acquisition growth of each of our practice areas:
 
 ·
              Buildings: Nicolson
      Tamaki Architects Inc. (March 2007); Vollmer Associates LLP (April 2007);
      Chong Partners Architecture, Inc. (September 2007); Neill and Gunter
      companies (October 2007); Moore Paterson Architects Inc. (November 2007);
      and Murphy Hilgers Architects Inc., Brentcliffe Financial Services Inc.,
      and Dekko Studio Inc. (November
2007)
 
 ·
              Environment: Vollmer
      Associates LLP (April 2007); Trico Engineering Consultants Inc. (August
      2007); Woodlot Alternatives, Inc. (October 2007); Neill and Gunter
      companies (October 2007); Fuller, Mossbarger, Scott & May Engineers,
      Inc. (December 2007); The Zande Companies, Inc. (January 2008); and SII
      Holdings, Inc. (February 2008)
 
 ·
              Industrial: Neill and
      Gunter companies (October 2007) and McIntosh Engineering Holdings
      Corporation (July 2008)
 
 ·
              Transportation: Vollmer
      Associates LLP (April 2007); Neill and Gunter companies (October 2007);
      Rochester Signal, Inc. (January 2008); and The Zande Companies, Inc.
      (January 2008)
 
 ·
              Urban Land: Vollmer
      Associates LLP (April 2007); Land Use Consultants, Inc. (April 2007);
      Geller DeVellis Inc. (May 2007); Trico Engineering Consultants Inc.
      (August 2007); The Zande Companies, Inc. (January 2008); and 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
increased by approximately 1.1% from 2007 to 2008 (US$0.93 to US$0.94) and by
5.7% from 2006 to 2007 (US$0.88 to US$0.93). The strengthening of the average
rate for the
 
 MANAGEMENT’S
DISCUSSION AND ANALYSIS
 December
31, 2008
 STANTEC
INC.
 M-
17
 
 Canadian
dollar against the US dollar in 2008 compared to 2007 and in 2007 compared to
2006 had a negative impact on the change in gross revenue by practice area year
over year.
 
 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 foreign
exchange impact of $0.9 million. This year was, historically, 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, during the year, 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 will bring together our expertise
in architecture, urban planning, clinical planning, and sustainable design. The
Buildings practice area has also demonstrated its strength in both the public
and private sectors and increasingly in the public-private partnership (P3)
market. During the year, 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 are providing several aspects of the project, including architectural
design; mechanical, electrical, structural, and civil engineering; and
Leadership in Energy and Environmental Design (LEED) consulting services. The
Buildings practice area was not directly impacted by the downturn in the
residential housing market in 2008, because it does not have a presence in the
single- and multifamily residential housing market.
 
 We
believe that the outlook for the Buildings practice area remains stable for
2009. With top-tier architecture and buildings engineering practices in Canada,
we expect to enhance our architecture presence in the United States. Due to our
leadership in sustainable design, we also believe that we are well positioned to
secure projects funded by the US stimulus package that are aimed at improving
energy efficiencies in buildings.
 
 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 foreign
exchange impact of $1.1 million. 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. For example, 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, during the year, 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. During the year, 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.
 
 The
outlook for the Environment practice area is stable for 2009 due to the strength
and breadth of our presence and services. With the addition of Jacques Whitford
on January 2, 2009, we expanded and enhanced our capabilities in geotechnical
engineering, air quality evaluation, and environmental and geoscientific
assessment. Despite the
 
 MANAGEMENT’S
DISCUSSION AND ANALYSIS
 DECEMBER
31, 2008
 STANTEC
INC.
 M-
18
 
 slowdown
in the North American economy, the backlog for the Environment practice area is
at historically high levels and is expected to remain at these levels as the
practice area continues to attract clients with larger and long-term projects.
The practice area is well positioned to carry out P3 projects because of its
presence in many locations and its many relationships. We will continue to
cultivate our reputation in the environment market by developing our expertise
in water and wastewater engineering, geotechnical engineering, wet weather
programs, environmental review and permitting, and environmental
remediation.
 
 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 foreign exchange
impact of $0.6 million. 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. During the year, 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 project 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. As well, we continued
to work on various projects for the Department of National Defence across
Canada.
 
 Our
integrated capabilities enabled us to undertake larger, multiphase, and
multidisciplinary projects in the industrial market during the year. 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. During the year, 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.
 
 The
decline and any future fluctuations in commodity and oil prices may negatively
impact the continuity of projects in the energy and mining sector in 2009. We
will continue to monitor our short-term backlog and manage our staff levels to
match the amount of work available. As well, in 2009 the Industrial practice
area will continue to pursue more projects in the power transmission and
distribution sector as well as opportunities that may arise from an expected
increase in construction activity related to renewable and sustainable energy
(i.e., ethanol, biomass, wind, and solar energy) initiatives in North America.
In addition, given the aging population in North America, we remain optimistic
that we will continue to secure opportunities in the bio/pharmaceutical sector.
We believe that the outlook for the Industrial practice area remains stable to a
moderate decline for 2009.
 
 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 foreign exchange
impact of $0.7 million. During 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 street
car system connecting the University of Arizona to the central business district
in Tucson, Arizona. Although the private sector softened in the second half of
the year, the practice area’s expertise and reputation continues 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.
  MANAGEMENT’S
DISCUSSION AND ANALYSIS
 December
31, 2008
 STANTEC
INC.
 M-
19
  We
believe that the outlook for the Transportation practice area remains stable for
2009. Future funding for transportation, especially roadway projects, in our
principal markets may decline in 2009 due to a decrease in revenue from our
public sector clients from sources such as gas and sales taxes. As well, due to
the current economic slowdown, we expect clients to continue to have difficulty
obtaining interim financing through municipal bonds in 2009. These difficulties
could result in project deferrals. However, the introduction of the US stimulus
package could prevent the deferral of certain projects and possibly accelerate
some previously deferred construction-ready projects by stabilizing project
funding in the transportation sector.
 
 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 foreign exchange impact of $3.4 million,
offset by a $39.5 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 operations accounted for
approximately 66% of our urban land business in 2008. The remainder of our urban
land work is spread throughout a number of locations in the United States and
Canada. 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. During the year, 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. During the
year, 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 cross-sell services to
other practice areas. For example, during 2008, the practice area secured a
project involving several Stantec disciplines and regional offices in designing
a major waterfront park in Kelowna, British Columbia.
 
 The
National Association of Home Builders (NAHB) in the United States forecasts a
continued decline in US single-family housing starts for the first half of 2009.
In addition, the Canada Mortgage and Housing Corporation (CMHC) forecasts a
slight decline in single detached housing starts in Canada for 2009. Therefore,
we anticipate a further decline in project volumes for this practice area for
the year. To mitigate the impact of this decline in activity, the Urban Land
practice area will continue to monitor its short-term backlog and manage its
staff levels as closely as possible to the work available. It will focus on
providing multidisciplinary, integrated services, continuing its work-sharing
initiatives, and expanding its services into non-housing sectors.
 
 2007
versus 2006
 Buildings.Gross revenue for
the Buildings practice area grew by 15.0% from 2006 to 2007. Of the $27.6
million increase in gross revenue in 2007, $17.2 million was due to
acquisitions, and $11.7 million was due to internal growth, offset by a foreign
exchange impact of $1.3 million. In 2007, the Buildings practice area continued
to secure significant projects and to experience consistently high project
volumes. Activity was especially strong in western Canada in both the public and
private sectors. For example, in 2007 we secured a contract to provide
architecture; planning; landscape architecture; and structural, mechanical,
electrical, civil, and transportation engineering services for the development
of a 16.2-hectare (40-acre) greenfield site for a new 300-bed acute care
hospital in Grand
 
 MANAGEMENT’S
DISCUSSION AND ANALYSIS
 December
31, 2008
 STANTEC
INC.
 M-
20
 
 Prairie,
Alberta. We also completed an award-winning design of an expansion of the
Vancouver International Airport in British Columbia. Due to our growing presence
and project activity in the United States, we were awarded an assignment to
provide design solutions for a renovation of the Sheraton New York Hotel and
Towers in New York City.
 
 Environment.Gross revenue for
the Environment practice area grew by 17.7% from 2006 to 2007. Of the $26.5
million increase in gross revenue in 2007, $13.1 million was due to
acquisitions, and $17.5 million was due to internal growth, offset by a foreign
exchange impact of $4.1 million. The strength demonstrated by the Environment
practice area in 2007 was primarily due to the strong economy in western Canada,
the procurement of additional work in the public sector in eastern Canada, and
development as a top-tier provider of environmental infrastructure expertise in
certain areas of Canada and the United States, which gave us the ability to
secure larger and more complex projects. For example, in 2007 we completed the
design work for the Seymour-Capilano Water Filtration Plant in North Vancouver,
British Columbia, which will be the largest greenfield water treatment facility
in North America. The project has achieved LEED Gold certification. During the
year, the practice area also continued to improve its operating effectiveness in
the US East in terms of client selection, project management, and sales
efficiency. Continuing concerns in the US West about the inadequacy of existing
water supplies due to drought conditions, as well as legal and regulatory
activities, translated into new projects in the areas of water supply master
planning and water supply facility development, including groundwater, surface
water, and recycled water systems.
 
 Industrial.Gross revenue for
the Industrial practice area grew by 46.6% from 2006 to 2007. Of the $44.2
million increase in gross revenue in 2007, $11.8 million was due to
acquisitions, and $33.8 million was due to internal growth, offset by a foreign
exchange impact of $1.4 million. The strong internal growth was primarily due to
projects secured as a result of the strong economy in Canada, especially in
western Canada. In 2007, 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. For example, we continued to
work with an international pipeline company, providing engineering design
services for major tank terminal facilities. We also secured an assignment to
develop facilities and infrastructure for the Athabasca Upgrader in northern
Alberta for Total E&P Canada Ltd. In addition, we were selected as one of
six firms to complete various projects for the Department of National Defence
across Canada over the next five years. Because of this selection, in Q4 07 we
secured an assignment to complete the preliminary design and planning of the
C-17 hanger at Canadian Forces Base Trenton in Ontario. The revenue from our
bio/pharmaceuticals practice continued to grow in 2007 as we completed our work
on the development of a world-class oral solid dosage manufacturing facility for
Wyeth Pharmaceuticals in Puerto Rico.
 
 Transportation.Gross revenue
for the Transportation practice area grew by 35.0% from 2006 to 2007. Of the
$37.1 million increase in gross revenue in 2007, $35.8 million was due to
acquisitions, and $4.2 million was due to internal growth, offset by a foreign
exchange impact of $2.9 million. Through acquisitions and internal growth, our
Transportation practice area established a more significant presence in the US
East in 2007. In particular, the acquisition of Vollmer in Q2 07 assisted our US
East operations in securing new projects during the year. Partly fueled by
public concern over infrastructure deficiencies, funding for transportation
projects remained strong at all levels of government in 2007, which translated
into contracts for our Company. For example, during the year, we secured
assignments to provide system integration analysis and planning services for
several light rail transit projects in the southern United States. Highlights
for our Canadian operations in 2007 were the completion of the southeast leg of
Anthony Henday Drive—Edmonton, Alberta’s ring road—and of improvements to the
TransCanada Highway through the challenging terrain of Kicking Horse Canyon in
British Columbia.
 
 Urban Land.Gross revenue for
the Urban Land practice area grew by 1.1% from 2006 to 2007. Of the $3.1 million
increase in gross revenue in 2007, $31.2 million was due to acquisitions, offset
by a foreign exchange impact of $8.0 million and a decline in revenue from
internal growth of $20.1 million. In 2007, we offered urban land services
primarily in three core regions—Alberta and Ontario in Canada and California in
the United States—and these operations accounted for approximately 68.8% of our
urban land business. In addition, we had a modest urban land presence in
Arizona, Nevada, Utah, Colorado, North Carolina, and Georgia and a small
presence in other Canadian
  MANAGEMENT’S
DISCUSSION AND ANALYSIS
 December
31, 2008
 STANTEC
INC.
 M-
21
 
 markets.
Acquisitions in the US Northeast increased our presence in New England and the
Tri-State (New York, New Jersey, and Connecticut) area, and the addition of
Trico strengthened our presence in the southeastern United States and expanded
our services further into the coastal areas of the Carolinas. Revenue for the
Urban Land practice area in 2007 was impacted by a decline in housing starts in
various parts of the United States, particularly California, offset by an
increase in starts in Alberta, Canada. Although acquisitions in 2007 added
employees to the practice area, certain of our urban land operations in the
United States decreased their staff levels in reaction to the market conditions,
resulting in less revenue generated from these operations in 2007 compared to
2006.
 
 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 decreased to
55.7% in 2008 from 56.7% in 2007 and to 56.7% in 2007 from 57.0% in 2006. Our
gross margin for 2008 fell within the anticipated range of 55 to 57% set out in
our 2007 Financial Review. 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 as further explained below. 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 and industrial projects are
generally lower than the gross margins on projects in other practice
areas.
 
 The
decline in our gross margin percentage from 2006 to 2007 was partially due to an
increase in the revenue earned by the Transportation practice area in the United
States compared to Canada. Gross margins on transportation projects in the
United States are typically lower than gross margins on transportation projects
in Canada.
 
 The
following table summarizes our gross margin percentages by practice area for
2008, 2007, and 2006:
 
 Practice
      Area Gross Margin
                
                2008
                
                
                2007
                
                
                2006Buildings
                
                
                58.5
                %
                
                
                57.7
                %
                
                
                57.3
                %Environment
                
                
                55.9
                %
                
                
                58.4
                %
                
                
                58.1
                %Industrial
                
                
                51.6
                %
                
                
                51.2
                %
                
                
                50.4
                %Transportation
                
                
                53.5
                %
                
                
                53.8
                %
                
                
                55.7
                %Urban
      Land
                
                
                57.6
                %
                
                
                58.5
                %
                
                
                58.6
                %
  Our gross
margin percentages in 2008 compared to 2007 improved in the Buildings and
Industrial practice areas and declined in the Environment, Transportation, and
Urban Land practice areas due to the following:
 
 ·
              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, there was an increase in the percentage of
      projects with lower margins. The majority of these projects were added
      through acquisitions completed in 2008 and Q3 07 and mainly related to
      environmental remediation work. As well, there was a reduction in the
      gross margin percentage for this practice area due to integration
      activities during the year.
 
 ·
              In
      the Transportation practice area, there was an increase in the revenue
      earned in the United States, where gross margins on transportation
      projects are typically lower than in
Canada.
 
 ·
              In
      the Urban Land practice area, there was a decrease in project fees because
      of competition in a declining
market.
  MANAGEMENT’S
DISCUSSION AND ANALYSIS
 December
31, 2008
 STANTEC
INC.
 M-
22
  Administrative
and Marketing Expenses
 Our
administrative and marketing expenses increased $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 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 integration activities. In
addition, administrative and marketing expenses as a percentage of net revenue
declined from 2007 to 2008 due to staff focusing on more effectively managing
our costs during the year.
 
 Our
administrative and marketing expenses increased $59.3 million from 2006 to 2007.
As a percentage of net revenue, our administrative and marketing expenses were
42.3% in 2007 compared to 41.3% in 2006, slightly above our expected range of 40
to 42%. The increase was mainly due to integration activities during the year.
In the months following the completion of an acquisition, there can be an
increase in staff time charged to administration and marketing due to systems
integration and the orientation and integration of newly acquired staff. In
2007, we integrated staff from the 11 acquisitions completed during the year.
Administrative and marketing expenses were also affected by an increase in bad
debt expense and in the accrual of performance and retention bonuses arising
from acquisitions.
 
 Depreciation
of Property and Equipment
 Depreciation
of property and equipment as a percentage of net revenue was 2.2% in 2008, 2.3%
in 2007, and 2.2% in 2006. The $6.4 million increase in depreciation from 2007
to 2008 and the $3.4 million increase in depreciation from 2006 to 2007 were
primarily due to the addition of property and equipment from acquisitions made
in the year.
 
 Goodwill
and Intangible Assets
 Goodwill. During the third
quarter, we conducted our annual goodwill impairment test. Goodwill impairment
testing is a two-step process. In the first step, we compare the fair value of
our reporting units, determined on a discounted after-tax cash flow basis, to
their carrying value. If the carrying value of our reporting units exceeds their
fair value, goodwill is potentially impaired and step two of the impairment test
must be performed. In step two, we compare the estimated fair value of the
goodwill of our reporting units to their carrying value. If it is concluded that
an impairment to goodwill exists, a reduction in the carrying value of goodwill
is recorded on the consolidated balance sheets and recognized as a non-cash
charge to income.
 
 Due to
current fluctuations in the market and uncertainties arising from overall
economic conditions, step one of our test indicated that an impairment to
goodwill may exist since the fair value of our US reporting units fell below
their carrying value. The step two impairment test was completed by determining
the fair value of goodwill in the same manner as if we had acquired the
reporting units as of the date of the annual assessment. We concluded that the
carrying value of the goodwill associated with the reporting units exceeded the
fair value of the goodwill of the reporting units, and we recorded a $53.0
million impairment charge. The goodwill impairment charge is non-cash in nature
and does not affect our liquidity, cash flows from operating activities, or debt
covenants and will not have an impact on future operations.
 
 Intangible assets. During the
third quarter, we also conducted our annual impairment test of intangible assets
to determine if the carrying amount of these assets is fully 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 of an intangible asset exceeds its fair value. As part of the
impairment test, 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 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 relation to client
relationships acquired in The Keith Companies, Inc. (Keith)
acquisition.
  MANAGEMENT’S
DISCUSSION AND ANALYSIS
 December
31, 2008
 STANTEC
INC.
 M-
23
  The
timing of completed acquisitions, the size of acquisitions, and the type of
intangible assets acquired impact the amount of amortization of intangible
assets in a period. Client relationships and other intangible assets are
amortized over estimated useful lives ranging from 10 to 15 years, whereas
contract backlog is amortized over an estimated useful life of generally one and
a half years. Consequently, the impact of the amortization of contract backlog
can be significant in the two to six quarters following an acquisition. As at
December 31, 2008, $2.7 million of the $46.0 million in intangible assets
related to backlog.
 
 The
following table summarizes the amortization of identifiable intangible
assets:
  Intangibles(In
      thousands of Canadian dollars)
                
                2008
                
                
                2007
                
                
                2006Amortization
      of client relationships
                
                
                4,193
                
                
                
                2,384
                
                
                
                2,401Amortization
      of backlog
                
                
                6,211
                
                
                
                974
                
                
                
                3,508Other
                
                
                275
                
                
                
                344
                
                
                
                223Total
      amortization of intangible assets
                
                
                10,679
                
                
                
                3,702
                
                
                
                6,132
  The $7.0
million increase between 2007 and 2008 was mainly due to the amortization of the
backlog balances of Vollmer Associates LLP, the Neill and Gunter companies,
Secor, and McIntosh. During 2008, $22.3 million in intangible assets was
acquired mainly from the RHL, Secor, and McIntosh acquisitions and from the
finalization of the valuation of intangibles acquired from the Neill and Gunter
companies acquisition in 2007.
 
 The $2.4
million decrease between 2006 and 2007 was primarily due to the backlog balances
of Keen Engineering Co. Ltd. (Keen) and CPV Group Architects & Engineers
Ltd. (CPV) being fully amortized at the end of 2006 and to the backlog balances
of Keith being fully amortized at the beginning of Q2 07.
 
 Net
Interest Expense
 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. At December 31, 2007, we had used $52.1
million of our credit facility, and at December 31, 2008, we had used $192.5
million. 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 market rates as at December 31, 2008, is a loss of $3.0 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 $3.0 million loss in
fair value in other comprehensive income. As at December 31, 2008, $131,544,000
of our bank loan was payable in US funds (US$108,000,000), and $61,000,000 was
payable in Canadian funds.
 
 Taking
the effect of the interest rate swap into consideration, our average interest
rate was 3.36% at December 31, 2008, compared to 5.51% at December 31, 2007. We
estimate that, based on our loan balance at December 31, 2008, a 0.5% increase
in interest rates, with all other variables held constant, would decrease our
net income by approximately $247,000 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.
 
 MANAGEMENT’S
DISCUSSION AND ANALYSIS
 December
31, 2008
 STANTEC
INC.
 M-
24
  The
$298,000 decrease in net interest expense in 2007 compared to 2006 was a result
of having less long-term debt throughout the second, third, and most of the
fourth quarter of 2007 than in 2006, offset by higher interest rates in the
first three quarters of 2007 compared to the same period in 2006. Near the end
of the fourth quarter of 2007, our long-term debt position exceeded our 2006
position since we accessed our revolving credit facility to finance
acquisitions. At December 31, 2006, we had used $8.2 million of our credit
facility, and at December 31, 2007, we had used $52.1 million. Our average
interest rate was 5.51% at December 31, 2007, compared to 6.0% at December 31,
2006.
 
 Foreign
Exchange Gains
 We
reported a foreign exchange gain of $2.0 million in 2008 compared to $2.5
million in 2007 and $0.1 million in 2006.These foreign exchange
gains arose on the translation of the foreign-denominated assets and liabilities
held in our Canadian companies and 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.
 
 As at
December 31, 2008, we had entered into foreign currency forward contracts that
provided for the purchase of US$74.0 million at rates between 1.1932 and 1.2198
per US dollar maturing in January 2009. With the fluctuation of the Canadian
dollar near the end of 2008, the fair value of these contracts, estimated using
market rates at December 31, 2008, resulted in an unrealized gain of $1.6
million.
 
 The
foreign exchange gains reported from 2006 to 2007 arose on transactions related
to the financing of acquisitions. By entering into these transactions, there was
a period in 2006 and 2007 when our US-dollar-denominated liabilities exceeded
our US-dollar-denominated assets while the Canadian dollar strengthened,
resulting in exchange gains.
 
 Income
Taxes
 Our
effective income tax rate for 2008 was 55.0% compared to 30.1% for 2007 and
32.7% for 2006. The increase in 2008 was due to the $53.0 million non-deductible
charge to income for the goodwill impairment recorded in the year. Without the
impact of this charge, our effective income tax rate for 2008 would be 30.2%.
This effective income tax rate is within the expected range of 29 and 31% set
out in our 2007 Financial Review. 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 our estimated earnings in each of these
jurisdictions. The 30.2% effective income tax rate was above the 30.1% for 2007
due to the relative amount of income earned in our higher tax rate
jurisdictions.
 
 Our
effective income tax rate for 2007 was 30.1% compared to 32.7% for 2006. This
decrease in the effective income tax rate was due to the statutory rate
reductions introduced in the fall of 2007 as well as the relative amount of
income earned in our lower tax rate jurisdictions.
  MANAGEMENT’S
DISCUSSION AND ANALYSIS
 December
31, 2008
 STANTEC
INC.
 M-
25
 
 Fourth
Quarter Results and Quarterly Trends
 
 The
following is a summary of our quarterly operating results for the last two
fiscal years:
  Quarterly
      Operating Results(In millions of Canadian
      dollars, except per share amounts)2008
                
                
                2007Dec
      31
                
                
                Sep
      30
                
                
                Jun 30
                
                
                Mar
      31
                
                
                Dec
      31
                
                
                Sep
      30
                
                
                Jun
      30
                
                
                Mar 31Gross
      revenue
                
                
                369.3
                
                
                
                347.6
                
                
                
                343.3
                
                
                
                291.8
                
                
                
                258.3
                
                
                
                235.3
                
                
                
                244.7
                
                
                
                216.3Net
      revenue
                
                
                297.0
                
                
                
                289.2
                
                
                
                289.0
                
                
                
                254.9
                
                
                
                215.9
                
                
                
                207.0
                
                
                
                215.7
                
                
                
                192.3Net
      income (loss)
                
                
                20.0
                
                
                
                (30.0
                )
                
                
                22.1
                
                
                
                16.9
                
                
                
                19.0
                
                
                
                17.4
                
                
                
                17.5
                
                
                
                15.4EPS
      – basic
                
                
                0.44
                
                
                
                (0.66
                )
                
                
                0.48
                
                
                
                0.37
                
                
                
                0.42
                
                
                
                0.38
                
                
                
                0.38
                
                
                
                0.34EPS
      – diluted
                
                
                0.44
                
                
                
                (0.66
                )
                
                
                0.48
                
                
                
                0.37
                
                
                
                0.41
                
                
                
                0.38
                
                
                
                0.38
                
                
                
                0.33The
      quarterly earnings per share on a basic and diluted basis are not additive
      and may not equal the annual earnings per share reported. This is due to
      the effect of shares issued or repurchased during the year on the weighted
      average number of shares. Diluted earnings per share on a quarterly and
      annual basis are also affected by the change in the market price of our
      shares, since we do not include in dilution options whose exercise price
      is not in the money.
 
 The
following items impact the comparability of our quarterly results:
 
 Q4
      08 vs.
                Q4
      07
              
              
              Q3
      08 vs.
                Q3
      07
              
              
              Q2
      08 vs.
                Q2
      07
              
              
              Q1
      08 vs.
                Q1
      07(In
      millions of Canadian dollars)
              
              
              
              
              Restated
      *
              
              
              Restated
      *
              
              
              Restated
      *Increase
      (decrease) in gross revenue due to:Acquisition
      growth
              
              
              102.0
              
              
              
              111.9
              
              
              
              96.5
              
              
              
              93.7Internal
      growth
              
              
              (12.5
              )
              
              
              1.1
              
              
              
              11.3
              
              
              
              (4.3
              )Impact
      of foreign exchange rates on revenue
                earned
      by foreign subsidiaries
              
              
              21.5
              
              
              
              (0.7
              )
              
              
              (9.2
              )
              
              
              (13.9
              )Total
      net increase in gross revenue
              
              
              111.0
              
              
              
              112.3
              
              
              
              98.6
              
              
              
              75.5
 *
Q1 08 to Q3 08 figures were restated to reclassify gross revenue from acquired
joint ventures from internal growth to acquisition growth.
 
 Fourth
Quarter Results
 As
indicated in the tables above, during Q4 08, our gross revenue increased by
$111.0 million, or 43.0%, to $369.3 million compared to $258.3 million for the
same period in 2007. Approximately $102.0 million of this increase resulted from
acquisitions completed in 2007 and 2008 and a foreign exchange impact of $21.5
million—due to the weakening of the Canadian dollar during Q4 08—offset by a
decline in internal growth of $12.5 million.
 
 The
following table summarizes our key operating results for Q4 08 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:
 
 MANAGEMENT’S
DISCUSSION AND ANALYSIS
 December
31, 2008
 STANTEC
INC.
 M-
26
 
 %
      IncreaseQuarter
      Ended December 31
                
                
                %
      of Net Revenue
                
                
                (Decrease)*2008
                
                
                2007
                
                
                2008
                
                
                2007
                
                
                2008
      vs.(In
      millions of Canadian dollars)
                
                
                
                
                
                
                
                
                
                
                
                
                
                2007Gross
      revenue
                
                
                369.3
                
                
                
                258.3
                
                
                
                124.3
                %
                
                
                119.6
                %
                
                
                43.0
                %Net
      revenue
                
                
                297.0
                
                
                
                215.9
                
                
                
                100.0
                %
                
                
                100.0
                %
                
                
                37.6
                %Direct
      payroll costs
                
                
                131.6
                
                
                
                91.7
                
                
                
                44.3
                %
                
                
                42.5
                %
                
                
                43.5
                %Gross
      margin
                
                
                165.4
                
                
                
                124.2
                
                
                
                55.7
                %
                
                
                57.5
                %
                
                
                33.2
                %Administrative
      and marketing expenses
                
                
                127.6
                
                
                
                93.8
                
                
                
                43.0
                %
                
                
                43.5
                %
                
                
                36.0
                %Depreciation
      of property and equipment
                
                
                6.8
                
                
                
                6.0
                
                
                
                2.3
                %
                
                
                2.7
                %
                
                
                13.3
                %Amortization
      of intangible assets
                
                
                2.6
                
                
                
                1.1
                
                
                
                0.9
                %
                
                
                0.5
                %
                
                
                136.4
                %Net
      interest expense
                
                
                2.1
                
                
                
                0.9
                
                
                
                0.7
                %
                
                
                0.4
                %
                
                
                133.3
                %Share
      of income from associated companies
                
                
                (0.3
                )
                
                
                (0.1
                )
                
                
                (0.1
                %)
                
                
                (0.1
                %)
                
                
                200.0
                %Foreign
      exchange (gains) losses
                
                
                (2.5
                )
                
                
                (1.2
                )
                
                
                (0.9
                %)
                
                
                (0.5
                %)
                
                
                108.3
                %Other
      income
                
                
                (0.3
                )
                
                
                (0.3
                )
                
                
                (0.1
                %)
                
                
                (0.1
                %)
                
                
                0.0
                %Income
      before income taxes
                
                
                29.4
                
                
                
                24.0
                
                
                
                9.9
                %
                
                
                11.1
                %
                
                
                22.5
                %Income
      taxes
                
                
                9.4
                
                
                
                5.0
                
                
                
                3.2
                %
                
                
                2.3
                %
                
                
                88.0
                %Net
      income for the period
                
                
                20.0
                
                
                
                19.0
                
                
                
                6.7
                %
                
                
                8.8
                %
                
                
                5.3
                %*
      % increase (decrease) calculated based on the dollar change from the
      comparable period
  Net
income during Q4 08 increased by $1.0 million, or 5.3%, from the same period in
2007. Diluted earnings per share in Q4 08 increased by $0.03, or 7.3%, compared
to the same period in Q4 07.
 
 Net
income during Q4 08 was positively impacted by the growth in gross revenue, as
further described below, but negatively impacted by a reduction in gross margin
as a percentage of net revenue. Our gross margin percentage was 55.7% in Q4 08
compared to 57.5% in Q4 07. This reduction quarter over quarter was mainly due
to a decline in the gross margin of our Urban Land practice area. This decline
was due to decreased project fees resulting from competition in a declining
market. As well, because of the nature of our business model, which is based on
diversifying our operations across geographic regions, practice areas, and all
phases of the infrastructure and facilities project life cycle, there will
continue to be fluctuations in our gross margin percentage from period to period
depending on the mix of projects during any quarter.
 
 Net
income in Q4 08 compared to Q4 07 was positively impacted by a reduction in our
administrative and marketing expenses as a percentage of net revenue from 43.5%
to 43.0% quarter over quarter. This decrease was mainly due to a reduction in
staff time charged to marketing and administration. 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. In 2007, we integrated staff from
11 acquisitions completed in the year compared to 5 acquisitions completed in
2008. Staff from acquired companies are required to learn new practices and
processes and understand new systems, and such a learning curve can result in
decreased productivity until the learning is complete.
 
 Net
income in Q4 08 compared to Q4 07 was negatively impacted by a $1.5 million
increase in the amortization of intangibles and a $1.2 million increase in
interest expense. The amortization of intangible assets increased in Q4 08
compared to Q4 07 mainly due to the amortization of the backlog balances
acquired from the Neill and Gunter companies, Secor, and McIntosh acquisitions.
Interest expense increased in Q4 08 compared to Q4 07 because we had more
long-term debt throughout Q4 08 compared to Q4 07, offset by lower interest
rates over the same period. At December 31, 2007, we had used $52.1 million of
our credit facility, and at December 31, 2008, we had used $192.5
million.
 
 Net
income in Q4 08 compared to Q4 07 was positively impacted by an increase in
foreign exchange gains from $1.2 million to $2.5 million as explained in the
Foreign Exchange Gains section above.
  MANAGEMENT’S
DISCUSSION AND ANALYSIS
 December
31, 2008
 STANTEC
INC.
 M-
27
 Our
income tax expense was $4.4 million greater in Q4 08 compared to Q4 07 because
our income tax expense in Q4 07 was positively impacted by the recovery of
previously recognized expense on Quebec Bill 15 and by the reduction in the
carrying value of our future taxes due to reduced statutory income tax rates in
certain of the jurisdictions in which we operate.
 
 The
following table summarizes the change in gross revenue by practice area in the
fourth quarter of 2008 compared to the same period in 2007.
  Practice
      Area Gross Revenue
                  
                  
                  
                  
                  
                  
                  
                  Quarter
      Ended December 31Change
      Due
                  
                  
                  Change
      Due
                  
                  
                  Change
      DueTotal
                  
                  
                  to
                  
                  
                  to
      Internal
                  
                  
                  to
      Foreign(In
      millions of Canadian dollars)
                  
                  2008
                  
                  
                  2007
                  
                  
                  
                  Change
                  
                  Acquisitions
                  
                  
                  Growth
                  
                  
                  ExchangeBuildings
                  
                  
                  75.6
                  
                  
                  
                  60.5
                  
                  
                  
                  15.1
                  
                  
                  
                  3.4
                  
                  
                  
                  9.0
                  
                  
                  
                  2.7Environment
                  
                  
                  115.9
                  
                  
                  
                  44.2
                  
                  
                  
                  71.7
                  
                  
                  
                  65.9
                  
                  
                  
                  2.0
                  
                  
                  
                  3.8Industrial
                  
                  
                  69.4
                  
                  
                  
                  45.3
                  
                  
                  
                  24.1
                  
                  
                  
                  23.3
                  
                  
                  
                  (2.2
                  )
                  
                  
                  3.0Transportation
                  
                  
                  49.2
                  
                  
                  
                  40.2
                  
                  
                  
                  9.0
                  
                  
                  
                  2.5
                  
                  
                  
                  1.3
                  
                  
                  
                  5.2Urban
      Land
                  
                  
                  59.2
                  
                  
                  
                  68.1
                  
                  
                  
                  (8.9
                  )
                  
                  
                  6.9
                  
                  
                  
                  (22.6
                  )
                  
                  
                  6.8Total
      Consulting Services
                  
                  
                  369.3
                  
                  
                  
                  258.3
                  
                  
                  
                  111.0
                  
                  
                  
                  102.0
                  
                  
                  
                  (12.5
                  )
                  
                  
                  21.5
  The $12.5
million decline in revenue from internal growth was impacted by the Q4 08
results of the Urban Land and Industrial 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 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.
Revenue for the Industrial practice area was impacted by the decline in oil and
commodity prices in Q4 08, which caused certain projects to be canceled or
delayed.
 
 Quarterly
Trends
 During Q1
08, our gross revenue increased by $75.5 million, or 34.9%, to $291.8 million
compared to $216.3 million for the same period in 2007. Approximately $93.7
million of this increase resulted from acquisitions completed in 2007 and 2008,
offset by a $4.3 million decline in internal growth and a $13.9 million foreign
exchange impact due to the stronger Canadian dollar in Q1 08 compared to Q1 07.
Net income increased by $1.5 million, or 9.7%, in Q1 08 compared to the same
period in 2007, and diluted earnings per share increased by $0.04, or 12.1%,
compared to Q1 07. Net income did not increase in line with net revenue mainly
due to a greater portion of gross revenue growth from acquisitions in Q1 08
compared to Q1 07 resulting in integration activities, which translated into
slower growth in the bottom line. As well, our gross margin declined from 56.8%
in Q1 07 to 55.0% in Q1 08 due to the mix of projects in progress during the
quarter, reduced realized billing rates, and increased costs to execute work.
Compared to Q1 07, our Q1 08 results were negatively impacted by a $1.7 million
increase in the amortization of intangible assets and by a $1.6 million increase
in interest expense.
 
 During Q2
08, our gross revenue increased by $98.6 million, or 40.3%, to $343.3 million
compared to $244.7 million for the same period in 2007. Approximately $96.5
million of this increase resulted from acquisitions completed in 2007 and 2008
and $11.3 million in internal growth, offset by a $9.2 million foreign exchange
impact due to the stronger Canadian dollar in Q2 08 compared to Q2 07. Net
income increased by $4.6 million, or 26.3%, in Q2 08 compared to the same period
in 2007, and diluted earnings per share increased by $0.10, or 26.3%, compared
to the same period in 2007. Compared to Q2 07, our Q2 08 net income was
positively impacted by a reduction in our administrative and marketing expenses
as a percentage of net revenue from 42.0% to 40.8%. Our Q2 08 results were
negatively impacted by a decline in gross margin from 56.1% to 55.9%, an
increase in the amortization of intangibles of $1.7 million, and an increase in
interest expense of $1.6 million.
  MANAGEMENT’S
DISCUSSION AND ANALYSIS
 December
31, 2008
 STANTEC
INC.
 M-
28
  During Q3 08,
our gross revenue increased by $112.3 million, or 47.7%, to $347.6 million
compared to $235.3 million for the same period in 2007. Approximately $111.9
million of this increase resulted from acquisitions completed in 2007 and 2008
and $1.1 million in internal growth, offset by a $0.7 million foreign exchange
impact due to the stronger Canadian dollar in Q3 08 compared to Q3 07. Net
income decreased by $47.4 million in Q3 08 compared to the same period in 2007,
and diluted earnings per share decreased by $1.04 compared to the same period
last year. During the quarter, net income and earnings per share were negatively
impacted by a $53.0 million impairment of goodwill and a $5.4 million impairment
of intangible assets. These non-cash charges decreased our diluted
earnings per share by $1.21. Without the negative impact of the goodwill
and intangible asset impairment charges, our net income for Q3 08 would have
been $25.1 million, with diluted earnings per share of $0.55. Our Q3 08 results
were positively impacted by a reduction of our administrative and marketing
expenses as a percentage of net revenue from 41.1% to 39.2%. Our Q3 08 results
were negatively impacted by a decline in gross margin from 56.2% to 56.0%, an
increase in the amortization of intangibles of $2.1 million, and an increase in
interest expense of $1.5 million.
 
 Liquidity
and Capital Resources
 
 The
following table represents summarized working capital information as at December
31, 2008, compared to December 31, 2007:
 
 (In
      millions of Canadian dollars, except ratio)
              
              Dec
      31, 2008
              
              
              Dec
      31, 2007
              
              
              ChangeCurrent
      assets
              
              
              480.7
              
              
              
              323.2
              
              
              
              157.5Current
      liabilities
              
              
              (300.0
              )
              
              
              (232.7
              )
              
              
              (67.3
              )Working
      capital (note
      1)
              
              
              180.7
              
              
              
              90.5
              
              
              
              90.2Current
      ratio
              
              
              1.60
              
              
              
              1.39
              
              
              
              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)
              
              2008
              
              
              2007
              
              
              2006
              
              
              $
      Change
                2008
      vs.
                2007
              
              
              $
      Change
                2007
      vs.
                2006Cash
      flows from operating activities
              
              
              160.0
              
              
              
              87.5
              
              
              
              93.4
              
              
              
              72.5
              
              
              
              (5.9
              )Cash
      flows used in investing activities
              
              
              (127.7
              )
              
              
              (135.2
              )
              
              
              (15.6
              )
              
              
              7.5
              
              
              
              (119.6
              )Cash
      flows from (used in) financing
                activities
              
              
              53.8
              
              
              
              33.9
              
              
              
              (77.4
              )
              
              
              19.9
              
              
              
              111.3
 
 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. As well, we
regularly monitor our short-term backlog and are able to manage our staff levels
to the work available. 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.
  MANAGEMENT’S
DISCUSSION AND ANALYSIS
 December
31, 2008
 STANTEC
INC.
 M-
29
 
 We
continue to manage according to our internal guideline of maintaining a debt to
equity ratio of less than 0.5 to 1. Our 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, 2008, our net debt to equity ratio was
0.26 to 1. 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. For example, taking into account the consideration paid for the
Jacques Whitford acquisition completed on January 2, 2009, with all other
variables held constant, our debt to equity ratio would be 0.52. We believe that
with the expected cash flows from operations in 2009 we will reduce our debt to
equity ratio to below 0.5.
 
 We have
not invested in any asset-backed commercial paper (ABCP) and, therefore, do not
consider ourselves to be directly exposed to current uncertainties in the ABCP
marketplace. 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 at the end of 2008 was $180.7 million compared to $90.5 million
in 2007. Current assets increased by $157.5 million, and current liabilities
increased by $67.3 million. The increase in current assets was mainly due to an
$89.8 million increase in cash and cash equivalents and a $61.1 million increase
in accounts receivable and in costs and estimated earnings in excess of
billings, partially offset by a $6.9 million decrease in other assets. These
increases resulted from internal growth and growth from acquisitions during the
year. As well, cash and cash equivalents increased from 2007 since, at the end
of December 2008, we borrowed from our long-term debt and held cash and cash
equivalents of $64 million to facilitate the purchase of Jacques Whitford. The
cash was paid to the vendors on the completion of the transaction on January 2,
2009.
 
 The $67.3
million increase in current liabilities from 2007 to 2008 was mainly due to a
$43.2 million increase in accounts payable and accrued liabilities. This
increase was the result of internal growth and growth from acquisitions during
the year. As well, the current portion of long-term debt increased by $12.5
million due to promissory notes used to finance various acquisitions coming
due in 2009.
 
 In 2008,
our current ratio was higher than in 2007 mainly due to having additional cash
and cash equivalents in 2008 as explained above.
 
 Cash
Flows From Operating Activities
 Our cash
flows from operating activities increased by $72.5 million in 2008 from
2007 and decreased by $5.9 million in 2007 from 2006. The increase in 2008 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 due to 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.
 
 Our cash
flows from operating activities in 2008 were impacted by a $13.2 million
increase in net income tax paid in 2008 compared to 2007. In addition, interest
paid increased by $2.3 million because we had more long-term debt throughout
2008 than in 2007. Interest received decreased by $4.6 million due to having
less cash and cash equivalents throughout 2008.
 
 Our cash
flows from operating activities decreased by $5.9 million in 2007 from 2006 due
to a net decrease of $13.2 million in cash receipts from clients less cash paid
to suppliers and employees In 2006, cash receipts from clients less cash paid to
suppliers and employees were high due to the impact and timing of acquisitions
completed in the second half of 2005. The successful integration of these
acquisitions in the
  MANAGEMENT’S
DISCUSSION AND ANALYSIS
 December
31, 2008
 STANTEC
INC.
 M-
30
  second half of
2005 resulted in a reduction in our combined investment in accounts receivable
and costs and estimated earnings in excess of billings from 101 days of revenue
at the end of 2005 to 92 days at the end of 2006.
  Cash
Flows Used In Investing Activities
 Cash
flows used in investing activities decreased by $7.5 million from 2007 to 2008
and increased by $119.6 million from 2006 to 2007. In 2008, we used $92.1
million to finance the 5 acquisitions completed during the year versususing $105.4 million in
2007 to finance 11 acquisitions and using $12.2 million in 2006 to finance 3
acquisitions. In addition, US$6.6 million was placed in an escrow account in the
second quarter of 2008. This account was partially settled in January and
February of 2009 pursuant to the outcome of purchase price adjustment clauses
included in the Zande and Secor purchase agreements.
 
 Our
investment activities in 2008 compared to 2007 also included an $8.3 million
increase in purchases of property and equipment. One factor that contributed to
this increase was the $8.0 million spent on improvements made to our Markham and
Toronto, Ontario, offices to accommodate office consolidations and to our
Edmonton, Alberta, office to accommodate growth. Our investment activities in
2007 compared to 2006 increased due to the use of $8.1 million for improvements
made to our Toronto, Ontario; Markham, Ontario; Vancouver, British Columbia; and
Edmonton, Alberta, offices.
 
 As a
professional services organization, we are not capital intensive. In the past,
we have made capital expenditures primarily for property and equipment including
such items as leasehold improvements, computer equipment and business
information systems software, furniture, and other office and field equipment.
Our cash outflows for property and equipment were $35.6 million, $27.3 million,
and $18.9 million in 2008, 2007, and 2006, respectively. Our capital
expenditures during 2008 were financed by cash flows from operations. We expect
our total capital expenditures in 2009 to be in the range of $25 to $28 million,
excluding capital acquired from acquisitions.
 
 Cash
Flows From (Used In) Financing Activities
 Our cash
flows from financing activities increased by $19.9 million from 2007 to 2008 and
by $111.3 million from 2006 to 2007. In 2008, we generated sufficient cash from
our operations to reduce the amount outstanding on our long-term debt by $164.6
million and to repay $1.8 million of our acquired debt. However, during the
year, we also accessed our credit facility for acquisition purposes. As at
December 31, 2008, $104.9 million of our $300 million credit facility was
available for future use. As well, we used $8.9 million to repurchase shares
under our normal course issuer bid in 2008. The above use of cash was offset by
$1.2 million generated from options exercised during the year.
 
 In 2007,
we generated sufficient cash from our operations to reduce the amount
outstanding on our long-term debt by $78.5 million and repay $6.3 million of our
acquired debt. At December 31, 2007, $106.5 million of our credit facility was
available for future use. As well, we used $0.3 million to repurchase shares
under our normal course issuer bid in 2007. The above use of cash was offset by
$1.9 million generated from options exercised during the year.
 
 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. During the year, we
were successful in reaching an agreement with our lenders to increase our
revolving credit facility from $160 million to $300 million and to extend the
maturity date to August 31, 2011. 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. We were in compliance with these
covenants as at and throughout the year ended December 31,
2008.
 
 MANAGEMENT’S
DISCUSSION AND ANALYSIS
 December
31, 2008
 STANTEC
INC.
 M-
31
 
 Shareholders’
Equity
 Our
shareholders’ equity increased by $96.3 million in 2008 and by $31.8 million in
2007. The following table summarizes the reasons for these
increases:
 
 (In
      millions of Canadian dollars)
              
              2008
              
              
              2007Beginning
      shareholders’ equity (before change in accounting policy)
              
              
              442.7
              
              
              
              410.9Change
      in accounting policy
              
              
              0
              
              
              
              0.5Beginning
      shareholders’ equity
              
              
              442.7
              
              
              
              411.4Net
      income for the year
              
              
              29.0
              
              
              
              69.3Currency
      translation adjustments
              
              
              76.9
              
              
              
              (45.7
              )Unrealized
      (loss) gain on financial assets
              
              
              (3.6
              )
              
              
              1.2Unrealized
      loss on cash flow hedge
              
              
              (3.0
              )
              
              
              -Shares
      issued on acquisition
              
              
              -
              
              
              
              3.4Recognition
      of fair value of stock-based compensation
              
              
              5.0
              
              
              
              2.1Share
      options exercised for cash
              
              
              1.2
              
              
              
              1.9Shares
      repurchased under normal course issuer bid
              
              
              (8.9
              )
              
              
              (0.3
              )Other
              
              
              (0.3
              )
              
              
              (0.6
              )Total
      change
              
              
              96.3
              
              
              
              31.3Ending
      shareholders’ equity
              
              
              539.0
              
              
              
              442.7
  Effective
January 1, 2007, we adopted the Canadian Institute of Chartered Accountants
(CICA) Handbook Section 3855, “Financial Instruments—Recognition and
Measurement”; Section 1530, “Comprehensive Income”; and Section 3251, “Equity.”
By adopting these standards, we recorded investments held for self-insured
liabilities at fair value on January 1, 2007. In accordance with transitional
provisions, we increased other assets by approximately $493,000, opening
shareholders’ equity by approximately $481,000 (after-tax), and future income
tax liabilities by $12,000.
  The
change arising on the translation of our US-based subsidiaries in 2008 was a
$76.9 million gain compared to a $45.7 million loss in 2007. The change in 2008
was due to the weakening of the Canadian dollar—from US$1.01 to US$0.82—during
the year. In 2007, the Canadian dollar strengthened from US$0.86 to US$1.01 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, 2008, was a loss of $3.0 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 $3.0 million loss in fair value in other comprehensive
income. In 2007, we did not enter into any interest rate swaps.
 
 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 $3.6 million loss in 2008 and a $1.2 million gain in 2007.
 
 In 2008,
under our share option plan and as part of our incentive program, our Board of
Directors 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.
 
 Our
normal course issuer bid on the TSX was renewed in 2008 and allows us to
repurchase up to 2,283,272 of our common shares. 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 2008, we purchased
 
 MANAGEMENT’S
DISCUSSION AND ANALYSIS
 December
31, 2008
 STANTEC
INC.
 M-
32
 
 351,400
common shares at an average price of $25.37 per share for an aggregate price of
$8.9 million. In 2007, we purchased 9,200 common shares at an average price of
$31.94 per share for an aggregate price of $0.3 million.
 
 In 2008,
we did not issue any shares as consideration for an acquisition. In October
2007, we issued 96,925 of our common shares as part of the consideration for the
purchase of the Neill and Gunter companies. The $3.4 million in consideration
was based on the average of the closing price of our common shares on the TSX
for five trading days around the acquisition date.
 
 Other
 
 Outstanding
Share Data
 As at
December 31, 2008, there were 45,448,123 common shares and 2,061,828 share
options outstanding. During the period of December 31, 2008, to February 25,
2009, no shares were repurchased under our normal course issuer
bid, 10,000 share options were exercised, 4,167 share
options were forfeited, and 833 share options were cancelled. As at February 25,
2009, there were 45,458,123 common shares
and 2,046,828 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, other liabilities, and operating lease commitments as
of December 31, 2008:
 
 Contractual
      Obligations
                
                
                
                
                Payment
      Due by PeriodLess
      than 1
                
                
                
                
                
                
                
                
                After
      5(In
      millions of Canadian dollars)
                
                Total
                
                
                Year
                
                
                1–3
      Years
                
                
                4–5
      Years
                
                
                YearsLong-term
      debt
                
                
                249.2
                
                
                
                34.1
                
                
                
                214.9
                
                
                
                -
                
                
                
                0.2Interest
      on debt
                
                
                20.2
                
                
                
                8.4
                
                
                
                11.8
                
                
                
                -
                
                
                
                -Operating
      lease commitments
                
                
                329.6
                
                
                
                64.1
                
                
                
                102.0
                
                
                
                71.3
                
                
                
                92.2Purchase
      and Service Obligations
                
                
                6.6
                
                
                
                2.8
                
                
                
                3.4
                
                
                
                0.4
                
                
                
                -Other
      liabilities
                
                
                3.4
                
                
                
                0.7
                
                
                
                0.4
                
                
                
                0.1
                
                
                
                2.2Total
      contractual obligations
                
                
                609.0
                
                
                
                110.1
                
                
                
                332.5
                
                
                
                71.8
                
                
                
                94.6
  For
further information regarding the nature and repayment terms of our long-term
debt, refer to the Cash Flows From Financing Activities section. Our operating
lease commitments include obligations under office space rental agreements.
Failure to meet the terms of these lease agreements may constitute a default,
potentially resulting in a lease termination payment, accelerated payments, or a
penalty as detailed in each lease agreement. Our other liabilities primarily
include amounts payable under our deferred share unit plan.
 
 Off-Balance
Sheet Arrangements
 As of
December 31, 2008, we had off-balance sheet financial arrangements relating to
letters of credit in the amount of $2.6 million that expire at various dates
before October 2010. These letters of credit were issued in the normal course of
operations, including the guarantee of certain office rental obligations. As
well, we have a US$4 million 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, 2008, $243,000 in bonds were issued under this
agreement.
 
 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
 
 MANAGEMENT’S
DISCUSSION AND ANALYSIS
 December
31, 2008
 STANTEC
INC.
 M-
33
 
 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,
2008, 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,
      2008, we hold derivative financial instruments in the form of foreign
      exchange forward contracts and an interest rate swap agreement that we
      designated 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.
 
 Market risk.We are exposed to
various market factors that can affect our performance, primarily with respect
to currency and interest rates.
 
 Currency. Our 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.
  MANAGEMENT’S
DISCUSSION AND ANALYSIS
 December
31, 2008
 STANTEC
INC.
 M-
34
 
 ·
              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
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.
 
 Interest Rate.Changes
in interest rates also present a risk to our performance. Our credit facility
carries a floating rate of interest. As well, 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, 2008, 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.
 
 OUTLOOK
 
 The
following table summarizes our expectations for the coming year:
 
 Measure
              Expected
      RangeDebt
      to equity ratio (note
      1)
              At
      or below 0.5 to 1Return
      on equity (note
      2)
              At
      or above 14%Net
      income as % of net revenue
              At
      or above 6%Gross
      margin as % of net revenue
              Between
      54 and 56%Administrative
      and marketing expenses
                as
      % of net revenue
              Between
      41 and 43.5%Effective
      income tax rate
              Between
      29 and 31%
 note
1: 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.
 note
2: Return on equity is calculated as net income for the year divided by average
shareholders’ equity over each of the last four quarters.
 
 We have
revised our target for gross margin as a percentage of net revenue from between
55 an 57% in 2008 to between 54 and 56% in 2009. We expect a decline in our
gross margin percentage compared to 2008 since we anticipate greater revenue to
be generated from practice areas in which gross margins are typically lower than
in other practice areas. As well, due to the economic slowdown in North America,
which is expected to continue in 2009, we believe that competition may reduce
our contract prices and profit margins, especially in our Urban Land practice
area. 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 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 market in North America, our principal area of
operation, is large and is estimated to generate approximately US$80 billion in
revenue for our addressable market. The North American market is also diverse,
consisting of many technical disciplines, practice areas, client types, and
industries in both the private and public sectors. Overall, we expect the
outlook for professional services in our key markets and practice areas to
remain stable or decline in 2009, with opportunities arising from announced
government stimulus packages in
 
 MANAGEMENT’S
DISCUSSION AND ANALYSIS
 December
31, 2008
 STANTEC
INC.
 M-
35
 
 Canada
and the United States and potential funding through P3s. We base this
expectation on a variety of factors, including the material factors described
below.
 
 Canada
 The
outlook for Canada in 2009 is a moderate slowdown. According to the Conference
Board of Canada, the Canadian real gross domestic product (GDP) is expected to
decline by 0.5% in 2009. The following factors are evidence for our Canadian
outlook for 2009 in areas that directly impact infrastructure
spending:
  ·
              Challenging
      financial conditions in the United States are creating uncertainty on a
      global scale. Canada’s domestic economy might continue to feel the effects
      of tight credit conditions and declining business and consumer
      confidence.
  ·
              Weaker
      commodity prices have led to significant downward revisions to the
      Conference Board of Canada’s near-term economic
  outlook.
  ·
              According
      to the CMHC, the rising house prices of previous years will moderate
      single detached housing starts, where activity is forecasted to dip below
      the 100,000 mark. Single detached housing starts are expected to decrease
      an additional 11.3% to 83,600 in 2009, coming off 10-year
      highs.
  ·
              The Canadian
      federal budget announced on January 27, 2009, added $12 billion in
      additional infrastructure stimulus over two years to the $33 billion
      Building Canada Plan. This funding will include $1 billion for a Green
      Infrastructure Fund focused on “sustainable energy” infrastructure, such
      as modern transmission lines, and up to $2 billion over the next two years
      for the repair, retrofit, and expansion of facilities at universities and
      colleges.
  ·
              P3s
      will continue to be a means of funding projects, even with tightening
      credit conditions persisting through
2009.
  ·
              Governments
      and the public continue to be conscious of environmental issues as well as
      sustainable design and development. This awareness includes, for instance,
      an increased interest in the development of buildings and facilities that
      require less energy for operation and have a reduced ecological impact, as
      well as improvements to water, water distribution, and water treatment
      infrastructure.
 
 United
States
 The
outlook for the United States for 2009 is a continued decline. A lengthy
contraction in household spending is expected to keep the United States in a
recession during the year. The Congressional Budget Office anticipates, in its
Budget and Economic Outlook, that the US GDP will decrease by 2.2% in 2009. The
following factors support our outlook for the year:
  ·
              The
      housing market is forecasted to continue to decline in 2009, with
      seasonally adjusted annual rates of single-family housing starts expected
      to bottom out at 461,000 units before recovering in 2010. Since 2007, we
      have been generating a lower percentage of our revenue from the urban land
      market, and our Urban Land practice area is continuing to manage its
      staffing levels to the amount of work
available.
  ·
              Despite
      the unfavorable outlook for the United States in 2009, in February the US
      federal government passed the $787.2 billion American Recovery and
      Reinvestment Act of 2009, which will invest heavily in infrastructure. It
      is expected to not only address the immediate economic downturn but also
      position the United States for long-term, sustained growth. We believe
      that projects funded by this stimulus package will help us maintain our
      level of backlog and replace projects that were curtailed because of
      difficult economic conditions.
 
 Our
Overall Outlook
 Going
into 2009, we believe that our overall outlook is stable, particularly in
regions where we are a top-tier service provider. We also believe that we are
well positioned to maintain our business throughout the economic downturn
in
 
 MANAGEMENT’S
DISCUSSION AND ANALYSIS
 December
31, 2008
 STANTEC
INC.
 M-
36
 
 North
America because of the diversity of our operations as well as our mixture of
private and public projects, which give us the flexibility to timely adapt to
changing market conditions.
 
 We
established outlooks for each of our practice areas for 2009 in the Results
section of this Management’s Discussion and Analysis. All outlooks for 2009 are
generally stable except for a moderate decline in the Industrial practice
area and an expected further decline in the Urban Land practice area in 2009. In
establishing the outlook for our Buildings practice area, we assumed that we are
well positioned to secure projects from P3 clients and from the US stimulus
package that are aimed at improving energy efficiencies in buildings. As well,
we assumed the enhancement of our architecture presence in the United States. In
establishing the outlook for our Environment practice area, we considered the
expanded and enhanced capabilities we gained with the addition of Jacques
Whitford on January 2, 2009, our high backlog level and ability to attract
larger and long-term projects, and our ability to secure work on design-build
projects because of our presence in many locations and our many client
relationships. In establishing the outlook for our Industrial practice area, we
assumed a negative impact from the decline and future fluctuation in commodity
and oil prices as well as a positive impact from opportunities in the power
transmission and distribution sectors, renewable and sustainable energy
initiatives, and life sciences industries. In establishing the outlook for our
Transportation practice area, we assumed that the introduction of the US
stimulus package will likely prevent the deferral of certain projects and
possibly accelerate some previously deferred construction-ready projects. In
establishing the outlook for the Urban Land practice area, we assumed a
continued decline in single-family housing starts in the United States and a
decline in single detached housing starts in Canada as forecasted by the NAHB
and CMHC.
 
 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 information technology and other “back office” systems. Our ability to grow
at this rate depends on the availability of acquisition opportunities. To date,
locating available acquisition candidates has not been an issue, and we do not
expect it to become one since our industry is made up of many small to midsize
firms and there is a consolidation trend occurring as smaller firms desire to
join larger, more stable organizations. Because it is important to find an
appropriate cultural fit and complementary services, the process of courting an
acquisition can extend over months or even years. Consequently, at any one time
we are engaged in discussions with many firms.
 
 In
establishing our operating budgets for 2009, we assumed that the Canadian dollar
would remain stable compared to the US dollar throughout the year. As well, we
assumed that the average interest rate would remain stable. In establishing our
effective income tax rate, we assumed the tax rate substantially enacted at
December 31, 2008, 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.
 
 
 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, 2008, 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
 
 MANAGEMENT’S
DISCUSSION AND ANALYSIS
 December
31, 2008
 STANTEC
INC.
 M-
37
 
 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 at least annually. This assessment includes a comparison of the
carrying value of the reporting unit to the estimated fair value to ensure that
the fair value is greater than the carrying value. We arrive at the estimated
fair value of a reporting unit using valuation methods such as discounted cash
flow analysis. These valuation methods employ a variety of assumptions,
including revenue growth rates, expected operating income, discount rates, and
earnings multiples. Estimating the fair value of a reporting unit is a
subjective process and requires the use of our best judgments. If our estimates
or assumptions change from those used in our current valuation, we may be
required to recognize an impairment loss in future periods, which would decrease
our goodwill assets and increase our reported expenses.
 
 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
 
 MANAGEMENT’S
DISCUSSION AND ANALYSIS
 December
31, 2008
 STANTEC
INC.
 M-
38
 
 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. If our estimates or assumptions change from those used
in our current analysis, we may be required to recognize an impairment loss in
future periods, which would decrease our long-lived and intangible assets and
increase our reported expenses.
 
 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 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 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 allocations for RHL
and McIntosh.
 
 Accounting
Developments
 
 Canadian
 Financial Instruments—Disclosures and
Presentation. Effective January 1, 2008, we adopted the new CICA Handbook
Section 3862, “Financial Instruments—Disclosures,” and Section 3863, “Financial
Instruments—Presentation.” These pronouncements further aligned Canadian GAAP
with US GAAP and International Financial Reporting Standards (IFRS). Section
3862 requires companies to provide disclosures in their financial statements
that enable users to evaluate a) the significance of financial instruments for
their financial position and performance and b) the nature and extent of risks
arising from financial instruments to which they are exposed during the period
and at the balance sheet date and how they manage those risks. Section 3863
establishes standards for the presentation of financial instruments. It
addresses the classification of financial instruments between liability and
equity; the classification of related interest, dividends, and losses and gains;
and the circumstances in which financial assets and financial liabilities are
offset. The adoption of these new standards has not had an effect on our
financial position or on the results of our operations. We have applied these
new accounting standards prospectively in note 14, Financial Instruments, to our
2008 audited consolidated financial statements.
 
 Capital Disclosures. Effective
January 1, 2008, we adopted the new CICA Handbook Section 1535, “Capital
Disclosures.” This section establishes standards for disclosing information
about a company’s capital and how it is managed in order that a user of the
company’s financial statements may evaluate its objectives, policies, and
processes for managing capital. The adoption of this new standard has not had an
effect on our financial position or
  MANAGEMENT’S
DISCUSSION AND ANALYSIS
 December
31, 2008
 STANTEC
INC.
 M-
39
 
 on the
results of our operations. We have applied this new accounting standard
prospectively in note 15, Capital Management, to our 2008 audited consolidated
financial statements.
 
 International Financial Reporting
Standards.In 2005, the CICA announced its plans to converge Canadian
GAAP for public entities with IFRS over a transition period that will end in
2011. In February 2008, the CICA confirmed that Canadian reporting issuers will
need to begin reporting under IFRS by the first quarter of 2011 with comparative
figures. IFRS uses a conceptual framework similar to that used by Canadian GAAP,
but there are differences in recognition, measurement, and
disclosure.
 
 We
started our IFRS conversion project in 2008. The project consists of five
phases: 1) preliminary planning and scoping, 2) detailed assessment, 3) solution
development, 4) implementation, and 5) postimplementation review.
 
 In 2008,
we completed the preliminary planning and scoping phase and started the detailed
assessment and solution development phases. The first phase
included:
  ·
              Establishment
      of a dedicated team to work on the IFRS
  transition
  ·
              Development
      of a detailed work plan for the implementation of
  IFRS
  ·
              Establishment
      of an IFRS Advisory Committee consisting of a cross section of management.
      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.
  ·
              Completion
      of a high-level diagnostic. The high-level diagnostic involved a review of
      the major differences between Canadian GAAP and IFRS and prioritized the
      IFRS requirements based on their financial reporting impact, business
      impact, and complexity.
 
 In 2008,
we also started the detailed assessment and solution development phase, which we
expect to complete by the end of 2009. These phases involve the establishment of
issue-specific workgroups to perform a detailed diagnostic, the selection of
accounting policies when alternatives are available, and the formulation of
solutions for the implementation of IFRS. As well, during this phase, we will
establish and implement a communication and training plan. Before 2010, we
expect to make changes to certain processes and systems, in time to enable us to
record transactions under IFRS for comparative purposes in our financial
reporting for 2011. At this stage of the project, it is not practically possible
to quantify the financial reporting impact of the differences between Canadian
GAAP and IFRS.
 
 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, it will be limited
to any future acquisitions beginning in fiscal 2011.
 
 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 for ownership interests in subsidiaries held by parties other than the
parent. Non-controlling interests are to be presented in the consolidated
statement of financial position within equity but separate from the parent’s
equity. The amount of consolidated net
 
 MANAGEMENT’S
DISCUSSION AND ANALYSIS
 December
31, 2008
 STANTEC
INC.
 M-
40
 
 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. 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.
 
 Fair Value of Financial Assets and
Financial Liabilities. In January 2009, the CICA issued the Emerging
Issues Committee (EIC) Abstract EIC-173, “Credit Risk and the Fair Value of
Financial Assets and Financial Liabilities,” effective for interim and annual
financial statements ending on or after January 20, 2009. Earlier adoption of
this abstract is permitted. EIC-173 provides further information on the
determination of the fair value of financial assets and financial liabilities
under 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 will adopt this abstract
during the first quarter of the 2009 fiscal year. We are currently considering
the impact of adopting EIC-173 on our consolidated financial statements and
cannot reasonably estimate its effect at this time.
 
 United
States
 Fair
value measurements
 In
September 2006, the FASB issued Statement of Financial Accounting Standards No.
157, “Fair Value Measurements” (SFAS 157), effective for fiscal years beginning
after November 15, 2007. SFAS 157 establishes a framework for measuring fair
value under US GAAP and requires additional disclosure. The statement defines a
fair value hierarchy, with the highest priority being quoted prices in active
markets. Under this statement, fair value measurements are disclosed by level
within the hierarchy. This standard does not require any new fair value
measurements. The adoption of this standard for financial assets and liabilities
had no material effect on our financial position or results of operations. Our
adoption of SFAS 157 for non-financial assets and liabilities is deferred to
fiscal 2009 as allowed by FASB Staff Position (FSP) FAS 157-2, “Effective Date
of FASB Statement No. 157.”
 
 In
February 2007, the FASB issued Statement of Financial Accounting Standards No.
159, “The Fair Value Option for Financial Assets and Financial
Liabilities—Including an Amendment to FASB Statement No. 115” (SFAS 159),
effective for fiscal years beginning after November 15, 2007, although earlier
adoption was permitted. SFAS 159 allows an entity to choose to measure certain
financial instruments and other items at fair value that are not currently
required to be measured at fair value. At each subsequent reporting period,
unrealized gains and losses would be reported in earnings on items for which the
fair value option has been elected. The adoption of this standard had no
material effect on our financial position or results of operations.
 
 Business
combinations
 In
December 2007, the FASB issued Statement of Financial Accounting Standards No.
141R, “Business Combinations” (SFAS 141R), effective for fiscal years beginning
after December 15, 2008. This pronouncement changed the accounting for business
combinations in a number of areas. SFAS 141R 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 statement
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 currently considering the impact of
adopting this standard on our consolidated financial statements, it will be
limited to any future acquisitions beginning in fiscal 2009.
  MANAGEMENT’S
DISCUSSION AND ANALYSIS
 December
31, 2008
 STANTEC
INC.
 M-
41
 
 In
December 2007, the FASB issued Statement of Financial Accounting Standards No.
160, “Noncontrolling Interests in Consolidated Financial Statements—An Amendment
of ARB No. 51” (SFAS 160), effective for fiscal years beginning after December
15, 2008. SFAS 160 changed the accounting and reporting for ownership interests
in subsidiaries held by parties other than the parent. These non-controlling
interests are to be presented in the consolidated statement 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 statement of income. In addition, SFAS 160 establishes 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. It also establishes 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 this standard on our consolidated
financial statements and cannot reasonably estimate its effect at this
time.
 
 Other
 In March
2008, the FASB issued Statement of Financial Accounting Standards No. 161,
“Disclosures about Derivative Instruments and Hedging Activities—An Amendment of
FASB Statement No. 133” (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” (SFAS 133). 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 SFAS 133, and how derivative instruments and related hedged
items affect their financial position, results of operations, and cash flows.
SFAS 161 is effective for financial statements issued for fiscal years and
interim periods beginning after November 15, 2008, and we will adopt it in
fiscal 2009. We do not expect the adoption of this standard to have a material
effect on our consolidated financial statements.
 
 In
November 2008, the FASB issued FSP Emerging Issues Task Force (EITF) 03-6-1,
“Determining Whether Instruments Granted in Share-Based Payment Transactions Are
Participating Securities.” FSP EITF 03-6-1 clarifies that share-based payment
awards that entitle their holders to receive non-forfeitable dividends or
dividend equivalents before vesting should be considered participating
securities. This interpretation is effective for financial statements issued for
fiscal years beginning after December 15, 2008, and we will adopt it in fiscal
2009. We are currently considering the impact of adopting FSP EITF 03-6-1 on our
consolidated financial statements and cannot reasonably estimate its effect at
this time.
 
 In
November 2008, the FASB ratified EITF Issue No. 08-7, “Accounting for Defensive
Intangible Assets” (EITF 08-7). 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, 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. EITF 08-7 is effective for
defensive intangible assets acquired in fiscal years beginning on or after
December 15, 2008, and we will adopt it in fiscal 2009. We are currently
considering the impact of adopting EITF 08-7 on our consolidated financial
statements and cannot reasonably estimate its effect at this time.
 
 In
November 2008, the EITF issued EITF Issue No. 08-6, “Equity Method Investment
Considerations” (EITF 08-6), which clarifies the accounting for certain
transactions and impairment considerations involving equity method investments.
This interpretation is effective for financial statements issued for fiscal
years beginning on or after December 15, 2008. We will adopt this standard in
fiscal 2009. We are currently considering the impact of adopting EITF 08-6 on
our consolidated financial statements and cannot reasonably estimate its effect
at this time.
 
 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.
 
 MANAGEMENT’S
DISCUSSION AND ANALYSIS
 December
31, 2008
 STANTEC
INC.
 M-
42
 
 
 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.
 
 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 gross 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 and Company. 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.
 
 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.
 
 Debt to Equity Ratio.As part
of our overall assessment of our financial condition, we monitor our debt to
equity ratio to ensure that it is maintained within our established range. Our
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.
 
 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
year divided by the average shareholders’ equity over each of the last four
quarters.
 
 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.
 
 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.
 
 MANAGEMENT’S
DISCUSSION AND ANALYSIS
 December
31, 2008
 STANTEC
INC.
 M-
43
 
 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. Although these factors are listed below in order of
seriousness of outcome, we do not believe that they all have the same risk of
occurrence. These risk factors include the following:
 
 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 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.
 
 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.
 
 Currently,
we intend to use cash and our common shares as consideration in making future
acquisitions. 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
 
 MANAGEMENT’S
DISCUSSION AND ANALYSIS
 December
31, 2008
 STANTEC
INC.
 M-
44
 
 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. In addition,
using our shares for future acquisitions may result in a significant dilution to
existing shareholders.
  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.
  Goodwill
and other 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 other intangible assets, which could have a material adverse effect on our
earnings.
 
 Goodwill
and other intangible assets represent 43.1% 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 other 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.
 
 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.
 
 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.
 
 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
 
 MANAGEMENT’S
DISCUSSION AND ANALYSIS
 December
31, 2008
 STANTEC
INC.
 M-
45
 
 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.
 
 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 addition, 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.
 
 Stantec
and an acquired entity may experience difficulties in integrating the acquired
entity’s business into the existing operations of Stantec 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.
 
 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.
 
 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,
 
 MANAGEMENT’S
DISCUSSION AND ANALYSIS
 December
31, 2008
 STANTEC
INC.
 M-
46
 
 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 reported by us 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.
 
 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 midsize, 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.
 
 Our
backlog is subject to unexpected adjustments and cancellations and is,
therefore, an uncertain indicator of our future earnings.
 
 As of
December 31, 2008, our backlog was $1 billion. 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.
 
 MANAGEMENT’S
DISCUSSION AND ANALYSIS
 December
31, 2008
 STANTEC
INC.
 M-
47
 
 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, 2006,
through December 31, 2008, 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.
 
 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. As well, 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.
 
 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.
 
 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 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.
 
 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
 
 MANAGEMENT’S
DISCUSSION AND ANALYSIS
 DECEMBER
31, 2008
 STANTEC
INC.
 M-
48
 
 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, 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.
 
 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, 2008;
December 31, 2007; and December 31, 2006, for C$1.00 were
US$0.94,US$0.93,
and US$0.88, 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.
 
 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.
 
 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 2008 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.
 
 MANAGEMENT’S
DISCUSSION AND ANALYSIS
 December
31, 2008
 STANTEC
INC.
 M-
49
 
 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.
 
 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.
 
 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.
  As part
of our current succession plan, the roles of CFO and CEO have been or will be
transitioned to new leaders during 2009. The transition of these key leadership
positions may result in increased training costs as well as a loss of
institutional knowledge, industry relationships, or expertise developed by the
former CFO and CEO.
  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.
 
 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,
 
 MANAGEMENT’S
DISCUSSION AND ANALYSIS
 December
31, 2008
 STANTEC
INC.
 M-
50
 
 and
safety hazards because they may require additional time to complete or because
employee time may be lost due to injury.
 
 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.
 
 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.
 
 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. In addition, 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.
 
 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 subject 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.
 
 MANAGEMENT’S
DISCUSSION AND ANALYSIS
 December
31, 2008
 STANTEC
INC.
 M-
51
 
 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, 2008, were $40.10 and $16.35, respectively, and US$40.30 and US$12.70,
respectively.
  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.
 
 MANAGEMENT’S
DISCUSSION AND ANALYSIS
 December
31, 2008
 STANTEC
INC.
 M-
52
 
 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.
 
 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.
 
 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 2008, subconsultant costs accounted for
approximately 11.1% (2007 – 8.6%) 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.
 
 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 is based on 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.
 
 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
 
 MANAGEMENT’S
DISCUSSION AND ANALYSIS
 December
31, 2008
 STANTEC
INC.
 M-
53
 
 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, 2008,
we have completed 40 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
2008, we completed a number of activities, including the introduction of an
employment equity program. Along with ensuring that there are no barriers to
hiring and promoting talented people, the program looks at ways to better
understand the needs of a diverse workforce. We also implemented a wellness
program that offers a variety of services, including access to a health coach,
online health information, on-site biometrics testing, and free miniphysicals.
In addition, we expanded our Career Development Center with updated content and
new in-house programs and training, including a leadership training program,
which we delivered across the Company to help develop and enhance the skills and
capabilities of new and evolving leaders. The Career Development Center is the
online source for all our learning, coaching and mentoring, and professional and
career development resources, and the new leadership training program covers
eight core competencies that align with Stantec values. We also updated the
professional development section of the center to include continuing education
requirements according to state and provincial boards for professional
engineers, landscape architects, architects, geologists, and land surveyors. As
well, 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 leadership in
improving performance and decision making. We recognize that through improved
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. In addition, we achieved ISO/IEC 20000
certification, which is specific to IT systems. ISO 9001:2000 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 IT service management system.
 
 Since our
operations are dependent on the abilities and efforts of senior management and
other key personnel, our Board of Directors and senior leaders regularly review
succession plans 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 reviews opportunities and indicators for fraud as part
of its control evaluation program.
 
 MANAGEMENT’S
DISCUSSION AND ANALYSIS
 December
31, 2008
 STANTEC
INC.
 M-
54
 
 
 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. In addition, 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 “back office” support services from our corporate and regional
offices.
 
 As well,
we have a dedicated IFRS conversion team in place. The team has prepared a
detailed work plan for the implementation of IFRS and is in the process of
completing the detailed assessment and solution development phases of the plan.
We have also established an IFRS Advisory Committee consisting of a cross
section of management. 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, 2008, (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 of the
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 of the 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 2008 consolidated financial
statements.
 
 There has
been no change in our internal control over financial reporting during the year
ended December 31, 2008, that materially affected, or is reasonably likely to
materially affect, our internal control over financial reporting.
 
 MANAGEMENT’S
DISCUSSION AND ANALYSIS
 December
31, 2008
 STANTEC
INC.
 M-
55
 
 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 seven members, six 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 2008,
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 11 times in 2008. 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.
 
 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 three
times in 2008. The chairman of the committee provides regular reports at the
Company’s board meetings.
 
 MANAGEMENT’S
DISCUSSION AND ANALYSIS
 December
31, 2008
 STANTEC
INC.
 M-
56
 
 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 14,
2009, 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
 
 Acquisition
 On
January 2, 2009, we acquired the shares and business of Jacques Whitford, for
cash consideration of $64 million and notes payable of $79 million, which added
approximately 1,700 staff to our Company. The acquisition of this firm will
significantly strengthen the service offerings in our Environment practice. This
acquisition also increases our presence in Atlantic Canada; expands and enhances
our geotechnical engineering capabilities; increases our ability to provide
environmental and geoscientific assessments in Canada’s Arctic and Alberta for
resource development; expands our ability to support the mining sector; and
expands our air quality services.
    MANAGEMENT’S
DISCUSSION AND ANALYSIS
 December
31, 2008
 STANTEC
INC.
 M-
57