Market Overview

Stantec's Second Quarter 2018 Results Demonstrate the Strength of Consulting Services

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Growth offset by continued issues with legacy Construction Services
projects

TSX, NYSE:STN

Stantec's Consulting Services business reports positive organic growth
and financial results, generating $0.58 adjusted diluted earnings per
share (EPS) during the quarter. Consolidated earnings were strengthened
by the Company's ongoing focus on revenue generation and operational
efficiencies and by three strategic acquisitions. Strong performance in
Consulting Services was offset by project issues in Construction
Services, where delays and revised estimates to complete continued for
legacy waste-to-energy projects in the United Kingdom and hard-bid and
design-build projects in the United States. This negatively impacted Q2
18 EPS by approximately $0.17.

"Our Consulting Services business continues to perform well. We're
focusing on our long-term strategy, meeting targets, growing
organically, and reducing costs," explains Stantec president and chief
executive officer, Gord Johnston. "Though we believe that our core
Construction Services business is solid, several legacy projects
continued to negatively impact results. We have placed a hold on
hard-bid projects outside our area of expertise, we are winding down our
exposure to the UK waste-to-energy market, and we continue to make
positive progress on our strategic review."

Summary of Results

  Quarter Ended June 30, 2018
Consulting Services     Construction Services     Total
(In millions of Canadian dollars, except per share amounts and
percentages)
  $   % of NR     $   % of NR     $   % of NR
Gross revenue 1,092.0   126.5%   266.2   598.2%   1,358.2   149.6%
Net revenue 863.3 100.0% 44.5 100.0% 907.8 100.0%
Gross margin 470.1 54.5% (4.9) (11.0%) 465.2 51.2%
Administrative and marketing expenses 356.8 41.3% 18.8 42.2% 375.6 41.4%
Other (income) expenses   (4.5)   (0.4%)     (0.2)   (0.4%)     (4.7)   (0.6%)
EBITDA (note) 117.8 13.6% (23.5) (52.8%) 94.3 10.4%
Adjusted EBITDA (note) 117.9 13.7% (23.5) (52.8%) 94.4 10.4%
Adjusted net income (note) 65.7 7.6% (19.2) (43.1%) 46.5 5.1%
Adjusted EPS - Basic (note) 0.58 (0.17) 0.41
Adjusted EPS - Diluted (note)   0.58         (0.17)         0.41    
note: EBITDA, adjusted EBITDA, adjusted net income, and adjusted
basic and diluted earnings per share (EPS) are non-IFRS measures
discussed in the Definition section of our 2017 Annual Report and
our Q2 18 Management's Discussion and Analysis.

Consulting Services

Stantec's Consulting Services business achieved 4.5% organic net revenue
growth when comparing Q2 18 to Q2 17, highlighted by 32.4% net organic
growth in the Energy & Resources business operating unit (BOU).
Consulting Services – Canada achieved 6.9% organic net revenue growth,
and Consulting Services – United States achieved 3.3% organic net
revenue growth. Consulting Services – Global achieved 3.9% net organic
revenue growth, mainly due to new project starts in the Water BOU and
the Mining sector. Positive momentum in organic growth resulted in 13.6%
EBITDA as a percentage of net revenue and a 7.4% increase in adjusted
diluted EPS—from $0.54 in Q2 17 to $0.58 in Q2 18.

Construction Services

Stantec's core US and UK Construction Services business is meeting
management's expectations. However, project delays and performance
issues in legacy waste-to-energy projects in the United Kingdom and
legacy hard-bid and design-build projects in the United States continued
to impact results. During the quarter, Stantec recorded additional
negative revenue and cost adjustments of $16.3 million for UK-based
waste-to-energy projects, $5.4 million on a major US design-build
contract, and $3 million on legacy US-based hard-bid projects.
Adjustments related to these projects negatively impacted gross margins
and EBITDA and decreased EPS by approximately $0.17. Settlement
agreements in two of the three UK waste-to-energy projects have been
agreed upon in principle, and minimal additional costs are expected.
Further costs associated with the remaining project are related to
additional estimated costs to complete the project takeover, currently
expected in Q3 18.

The Company continues to make positive progress in its strategic review
of the Construction Services business, which it announced in April. As
part of the review, Stantec will evaluate a range of strategic options
to optimize the value of the Construction Services business and provide
the best prospects for shareholders, clients, and employees.

Additional Information from the Second Quarter of 2018

(In millions of Canadian dollars, except per share amounts and
percentages)
  Q2 2018

$

  Q2 2017

$

  Change

$

 

% Increase
(Decrease)

Gross revenue   1,358.2   1,318.6   39.6   3.0%
Net revenue 907.8 888.4 19.4 2.2%
EBITDA (note) 94.3 158.2 (63.9) (40.4%)
Adjusted EBITDA (note) 94.4 103.5 (9.1) (8.8%)
Net income 39.6 97.6 (58.0) (59.4%)
Adjusted net income (note) 46.5 57.9 (11.4) (19.7%)
EPS - basic 0.35 0.86 (0.51) (59.3%)
EPS - diluted 0.35 0.85 (0.50) (58.8%)
Adjusted EPS – basic (note) 0.41 0.51 (0.10) (19.6%)
Adjusted EPS – diluted (note) 0.41 0.51 (0.10) (19.6%)
Dividends declared per common share   0.1375   0.1250   0.0125   10.0%

note: EBITDA, adjusted EBITDA, adjusted net income, and
adjusted basic and diluted earnings per share (EPS) are non-IFRS
measures discussed in the Definition section of our 2017 Annual
Report and our Q2 18 Management's Discussion and Analysis. Certain
comparative figures have been reclassified to conform to the
presentation adopted for the current period. Gross and net revenue
were accounted for using IAS 11 in 2017 and IFRS 15 in 2018.

  • During the quarter, Stantec acquired Traffic Design Group Limited, a
    transportation engineering firm in New Zealand; Norwest Corporation,
    an Alberta-based energy and resources firm; and Cegertec, a
    Quebec-based top-tier engineering firm.
  • Contract backlog was $5.3 billion at June 30, 2018—$4 billion in
    Consulting Services and $1.3 billion in Construction Services.
  • In Consulting Services, gross revenue was up 4.4% to $1,092 million,
    and net revenue was up 3.8% to $863.3 million in Q2 18 compared to Q2
    17.
  • Gross margin in Consulting Services decreased—from 55.1% in Q2 17 to
    54.5% in Q2 18—mainly due to project mix, competitive pricing
    pressures, and increased revenues in all Energy & Resources sectors,
    which are at lower margins.
  • Administrative and marketing expenses as a percentage of net revenue
    was 41.4% in Q2 18 compared to 42.1% in Q2 17. Year-to-date
    administrative and marketing expenses as a percentage of net revenue
    was 41.3% in Q2 18 compared to 42.7% for 2017, mainly due to
    operational efficiencies, lower integration costs, improved
    utilization, and lower occupancy costs.
  • Stantec's effective annual income tax rate increased from 27% in Q1 18
    to 29% in Q2 18. The change is mainly due to losses incurred in the UK
    Construction Services operation. These losses attract a tax benefit at
    a UK expected deferred tax rate of 17%, which is significantly lower
    than Stantec's Q1 18 effective tax rate of 27%. The relationship
    between the tax rates and the estimated earnings in the jurisdiction
    in which Stantec operates resulted in the increase to the annual
    effective tax rate. This increase to the annual tax rate increased the
    Q2 18 tax rate to 30.8%, resulting in a reduction in EPS of
    approximately $0.02 in the quarter.
  • In Consulting Services, adjusted net income was up 5.8% and adjusted
    diluted EPS was up $0.04 in Q2 18 compared to Q2 17. These increases
    were due to acquisitions and organic revenue growth and improvements
    in administrative and marketing expenses as a percentage of net
    revenue.
  • On June 28, 2018, Stantec announced the amendment of its syndicated
    credit facilities agreement, which removed provisions for Stantec and
    its subsidiaries to grant collateral, thereby making all facilities
    unsecured. The amendment extended the maturity date of its revolving
    credit facility to five years and Tranches B and C of its term loans
    to four years and five years respectively. The accordion feature of
    the facility was also increased from $200 million to $400 million.

Subsequent Event

Stantec declared a dividend of $0.1375 per share on May 9, 2018, that
was paid on July 12, 2018, to shareholders of record on June 29, 2018.
Subsequent to the quarter end, on August 7, 2018, the Company declared a
dividend of $0.1375 per share, payable on October 11, 2018, to
shareholders of record on September 28, 2018.

Conference Call

On Wednesday, August 8, at 7:00 AM MDT (9:00 AM EDT), Stantec's second
quarter 2018 conference call and slideshow presentation will be
broadcast live and archived in their entirety in the Investors
section of stantec.com.
Those wishing to listen to the call can phone toll-free at
1-888-220-8451 (Canada and the United States) or 1-647-484-0475
(international). Please provide the operator with confirmation code
6973125.

About Stantec

Communities are fundamental. Whether around the corner or across the
globe, they provide a foundation, a sense of place and of belonging.
That's why at Stantec, we always design with community in mind.

We care about the communities we serve—because they're our
communities too. This allows us to assess what's needed and connect our
expertise, to appreciate nuances and envision what's never been
considered, to bring together diverse perspectives so we can collaborate
toward a shared success.

We're designers, engineers, scientists, and project managers,
innovating together at the intersection of community, creativity, and
client relationships. Balancing these priorities results in projects
that advance the quality of life in communities across the globe.

Stantec trades on the TSX and the NYSE under the symbol STN. Visit us
at stantec.com or find us on social media.

Cautionary Statements

Stantec's EBITDA, adjusted EBITDA, adjusted net income, and adjusted
basic and diluted earnings per share are non-IFRS measures. For a
definition and explanation of non-IFRS measures, refer to the Critical
Accounting Estimates, Developments, and Measures section of the
Company's 2017 Annual Report and the 2018 Second Quarter Management's
Discussion and Analysis.

Certain statements contained in this news release constitute
forward-looking statements. Forward-looking statements in this news
release include, but are not limited to, statements relating to the
strategic review of the Company's Construction Services business, and
further costs and completion dates associated with certain Construction
Services projects. Forward-looking statements also include any other
statements that do not refer to historical facts. Any such statements
represent the views of management only as of the date hereof and are
presented for the purpose of assisting the Company's shareholders in
understanding Stantec's operations, objectives, priorities, and
anticipated financial performance as at and for the periods ended on the
dates presented and 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.

We caution readers of this news release not to place undue reliance
on our forward-looking statements since a number of factors could cause
actual future results to differ materially from the expectations
expressed in these forward-looking statements. These factors include,
but are not limited to, changing market conditions for Stantec's
services and the risk that Stantec fails to capitalize on its strategic
initiatives. 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.

For more information about how other material risk factors could
affect our results, refer to the Risk Factors section and Cautionary
Note Regarding Forward-Looking Statements section in our 2017 Annual
Report and the 2018 Second Quarter Management's Discussion and Analysis.
You may obtain these documents by visiting EDGAR on the SEC website at
sec.gov,
on the CSA website at
sedar.com,
or at
stantec.com.
Or you may obtain a hard copy of the 2017 Annual Report free of charge
from our investor contact noted below.

Design with community in mind

 

Consolidated Statements of Financial Position

(Unaudited)

     

     June 30

December 31

2018

2017

(In millions of Canadian dollars)

 

$

    $

ASSETS

Current

Cash and cash equivalents

216.5

239.5
Cash in escrow

5.7

7.9
Trade and other receivables

846.1

816.1
Unbilled receivables

445.1

414.8
Contract assets

89.3

-
Income taxes recoverable

47.4

61.6
Prepaid expenses

51.1

54.3
Other financial assets

13.2

9.3
Other assets  

7.2

    4.7

Total current assets

1,721.6

1,608.2

Non-current

Property and equipment

253.1

212.6
Goodwill

1,640.6

1,556.6
Intangible assets

269.2

262.4
Investments in joint ventures and associates

12.3

11.9
Net employee defined benefit asset

16.9

12.7
Deferred tax assets

27.5

23.2
Other financial assets

186.6

186.1
Other assets  

13.2

    9.4

Total assets

 

4,141.0

    3,883.1

LIABILITIES AND EQUITY

Current

Bank indebtedness

21.7

-
Trade and other payables

720.3

704.6
Deferred revenue

181.0

187.4
Income taxes payable

2.1

11.0
Long-term debt

51.2

198.2
Provisions

25.9

28.1
Other financial liabilities

1.5

4.0
Other liabilities  

15.4

    22.2

Total current liabilities

1,019.1

1,155.5

Non-current

Income taxes payable

19.2

18.3
Long-term debt

860.3

541.4
Provisions

85.8

81.7
Net employee defined benefit liability

28.1

31.2
Deferred tax liabilities

49.0

54.6
Other financial liabilities

7.7

9.1
Other liabilities  

92.9

    92.0
Total liabilities  

2,162.1

    1,983.8

Shareholders' equity

Share capital

881.8

878.2
Contributed surplus

22.8

21.5
Retained earnings

958.7

947.1
Accumulated other comprehensive income  

113.3

    49.5

Total shareholders' equity

 

1,976.6

    1,896.3

Non-controlling interests

 

2.3

    3.0

Total liabilities and equity

 

4,141.0

    3,883.1
 
 

Consolidated Statements of Income

(Unaudited)

   

For the quarter ended

For the two quarters ended

June 30

June 30

2018

  2017

2018

  2017

(In millions of Canadian dollars, except per share amounts)

 

$

    $    

$

    $  
 

Gross revenue

1,358.2

1,318.6

2,639.9

2,594.9
Less subconsultant/subcontractor and other direct expenses  

450.4

    430.2    

855.5

    835.7  

Net revenue

907.8

888.4

1,784.4

1,759.2
Direct payroll costs  

442.6

    412.7    

861.7

    814.5  

Gross margin

465.2

475.7

922.7

944.7
Administrative and marketing expenses

375.6

373.7

737.2

751.0
Depreciation of property and equipment

12.9

13.6

25.6

27.5
Amortization of intangible assets

17.5

18.7

39.1

42.2
Net interest expense

6.7

6.2

12.3

13.8
Other net finance expense

0.4

1.4

2.0

3.6
Share of income from joint ventures and associates

(0.4

)

(1.3 )

(0.7

)

(2.0 )
Foreign exchange (gain) loss

(0.9

)

(1.0 )

1.3

0.2
Gain on disposition of a subsidiary

-

(54.6 )

-

(54.6 )
Other income  

(3.8

)

  (0.7 )  

(1.7

)

  (1.4 )

Income before income taxes

 

57.2

    119.7    

107.6

    164.4  

Income taxes

Current

22.2

18.9

36.1

28.4
Current tax on disposition of subsidiary

-

124.1

-

124.1
Deferred

(4.6

)

(1.0 )

(4.9

)

1.8
Deferred tax on disposition of subsidiary  

-

    (119.9 )   -     (29.5 )

Total income taxes

 

17.6

    22.1    

31.2

    124.8  
 

Net income for the period

 

39.6

   

97.6

   

76.4

   

39.6

 
Weighted average number of shares outstanding - basic  

113,877,678

    114,045,875    

113,970,164

    114,087,887  
Weighted average number of shares outstanding - diluted  

113,987,518

    114,355,587    

114,149,597

    114,454,989  
Shares outstanding, end of the period  

113,852,947

    113,816,504    

113,852,947

    113,816,504  

Earnings per share

Basic  

0.35

    0.86    

0.67

    0.35  
Diluted  

0.35

    0.85    

0.67

    0.35  

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