Stantecs Consulting Services business performed well in the third quarter of 2018, experiencing organic gross and net revenue growth, a double-digit increase in adjusted diluted earnings per share (EPS), and higher than targeted EBITDA as a percentage of net revenue. During the third quarter, the Company also announced two strategic acquisitions. Stantecs positive results were offset by negative revenue and cost adjustments and a goodwill impairment related to the sale of Construction Services.
Our Consulting Services results demonstrate the strength of our core business, and with the divestiture of our Construction Services business, we look forward to focusing wholly on our primary area of expertise, said Gord Johnston, Stantec president and chief executive officer.
Highlights from the Quarter
|Quarter Ended September 30, 2018|
|Consulting Services||Construction Services||
Sale of Construction Services
|(In millions of Canadian dollars, except per share amounts and percentages)||$||% of NR||$||% of NR||$||$||% of NR|
|Administrative and marketing expenses||343.5||40.5%||17.8||32.8%||–||361.3||40.1%|
|Impairment of goodwill||–||0.0%||–||0.0%||53.0||53.0||5.9%|
|Net income (loss) before tax||77.8||9.2%||(15.1)||27.8%||
|Net income (loss)||62.9||7.4%||(19.2)||(35.4%)||(61.7)||(18.0)||(2.0%)|
|Adjusted EBITDA (note)||112.7||13.3%||(12.8)||(23.6%)||–||99.9||11.1%|
|Adjusted net income (loss) (note)||68.4||8.1%||(17.7)||(32.6%)||–||50.7||5.6%|
|Earnings (loss) per share – diluted||0.55||(0.17)||(0.54)||(0.16)|
|Adjusted EPS – diluted (note)||0.60||(0.16)||–||0.44|
Note: EBITDA, adjusted EBITDA, adjusted net income (loss), and adjusted diluted EPS are non-IFRS measures (discussed in the Definition section of Stantecs 2017 Annual Report and its Q3 18 Management’s Discussion and Analysis).
- Consulting Services gross revenue increased by 8.6% to $1.09 billion when compared to Q3 17. Net revenue increased 7.6% from $787.5 million in Q3 17 to $847.5 million in Q3 18.
- Consulting Services achieved gross and net organic revenue growth of 3.4% and 2.4%, respectively.
- Gross margin for Consulting Services in Q3 18 was 53.7%, down from 55.6% in Q3 17, mainly due to project mix, competitive pricing pressures, and increased revenues from the lower-margin Energy & Resources business.
- Administrative and marketing expenses for Consulting Services was 40.5% of net revenue, which is below the annual targeted range. Stantec achieved this through a combination of cost reduction efforts and continued focus on operational efficiencies.
- In Consulting Services, organic and acquisition growth and decreased administrative and marketing expenses contributed to a 21.3% increase in adjusted net income and a $0.10 increase in adjusted diluted EPS. EBITDA as a percentage of net revenue exceeded the top end of the annual targeted range at 13.2%.
- Stantec continued to expand its global footprint by announcing and closing the acquisition of Peter Brett Associates, a multidisciplinary firm in the United Kingdom. And in August, the Company signed a letter of intent to acquire True Grit Engineering Limited, an infrastructure engineering, project management, and environmental services firm based in Thunder Bay, Ontario.
- Consolidated backlog remained strong at $5.3 billion.
- Negative revenue and cost adjustments of $17.7 million were incurred in Q3 for UK Water projects, UK-based waste-to-energy projects, and legacy US-based hard-bid projects. These adjustments resulted from continued project delays and performance issues and negatively impacted consolidated gross margins and EBITDA. This resulted in the Construction Services segment reducing adjusted EPS by approximately $0.16 in the quarter.
Divestiture of MWH Constructors
On October 18, 2018, Stantec signed a binding agreement to sell its Construction Services business (MWH Constructors, inclusive of MWH Constructors UK and US divisions and Slayden Constructors, Inc.) to GFI Energy Group and Oaktree Power Opportunities Fund V, L.P., part of Oaktree Capital Management. The sale closed on November 2, 2018.
Stantec will retain responsibility for closing out the one remaining waste-to-energy project in the United Kingdom and will retain certain UK defined benefit pension funding obligations. Net of transaction fees and income tax expense, the sale will generate positive cash flow, thereby strengthening the Companys balance sheet and providing capital to finance future growth.
Gross proceeds from the sale were $102.6 million, less estimated transaction costs and working capital adjustments of $57.0 million. Since the carrying value of Construction Services was greater than the estimated net proceeds on sale, the Company recognized a non-cash impairment charge of $53.0 million against goodwill in Q3 18. In addition, the Company recorded an $8.7-million deferred tax charge related to the net investment in Construction Services. The sale negatively impacted net income and diluted EPS by $61.7 million and $0.54, respectively.
On October 5, 2018, Stantec closed the acquisition of True Grit Engineering Limited. On October 9, 2018, the Company signed a letter of intent to acquire Wood & Grieve Engineers, an award-winning buildings engineering firm based in Perth, Australia.
On November 7, 2018, Stantec declared a dividend of $0.1375 per share, payable on January 10, 2019, to shareholders of record on December 28, 2018.
Shelley Brown Appointed to Stantec Board of Directors
On November 7, 2018, Shelley Brown was appointed to Stantecs board of directors. Ms. Brown has more than 25 years of board experience serving on not-for-profit, association, and for-profit corporate boards, including Deloitte Canada, the Accounting Standards Board Oversight Council, and the University of Saskatchewan Board of Governors. She brings expertise in strategic planning, governance, finance, and risk management. During her distinguished 40-year career in accounting, Ms. Brown was a partner in two of the worlds largest professional services firms. And as chair of the Canadian Institute of Chartered Accountants, she played a key role in uniting Canadas accounting profession, culminating in the creation of the Chartered Professional Accountants of Canada. She is also a recognized leader in diversity and inclusion, having been listed on Canadas Top 100 Most Powerful Women for four years, earning her a position on the Womens Executive Network Hall of Fame.
On Thursday, November 8, 2018, at 7:00 AM MST (9:00 AM EST), Stantecs third 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 1-334-323-0522 (Canada and United States) or 1-877-260-1479 (international). Please provide confirmation code 5631280 when prompted.
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 servebecause 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.
Stantecs EBITDA, adjusted EBITDA, adjusted net income (loss), and adjusted diluted earnings (loss) 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 Companys 2017 Annual Report and the 2018 Third Quarter Managements Discussion and Analysis.
Certain statements contained in this news release constitute forward-looking statements. Such statements include Stantecs focus on Consulting Services and the anticipated impacts of the divestiture of its Construction Services business. Forward-looking statements also include any 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 Companys shareholders in understanding Stantecs 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 Stantecs 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 Third Quarter Managements 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|
|September 30||December 31|
|(In millions of Canadian dollars)||$||$|
|Cash and cash equivalents||170.2||239.5|
|Cash in escrow||–||7.9|
|Trade and other receivables||895.2||816.1|
|Income taxes recoverable||26.6||61.6|
|Other financial assets||12.2||9.3|
|Total current assets||1,709.4||1,608.2|
|Property and equipment||264.1||212.6|
|Investments in joint ventures and associates||10.1||11.9|
|Net employee defined benefit asset||18.0||12.7|
|Deferred tax assets||22.2||23.2|
|Other financial assets||194.4||186.1|
|LIABILITIES AND EQUITY|
|Trade and other payables||714.4||704.6|
|Income taxes payable||–||11.0|
|Other financial liabilities||1.2||4.0|
|Total current liabilities||1,022.7||1,155.5|
|Income taxes payable||8.8||18.3|
|Net employee defined benefit liability||42.5||31.2|
|Deferred tax liabilities||54.1||54.6|
|Other financial liabilities||8.0||9.1|
|Accumulated other comprehensive income||73.7||49.5|
|Total shareholders equity||1,902.3||1,896.3|
|Total liabilities and equity||4,114.0||3,883.1|
|Consolidated Statements of (Loss) Income|
|For the quarter ended||
For the three quarters ended
|September 30||September 30|
|(In millions of Canadian dollars, except per share amounts)||$||$||$||$|
|Less subconsultant/subcontractor and other direct expenses||462.8||446.1||1,318.3||1,281.8|
|Direct payroll costs||441.7||395.4||1,303.4||1,209.9|
|Administrative and marketing expenses||361.3||351.6||1,098.5||1,102.6|
|Depreciation of property and equipment||13.2||13.7||38.8||41.2|
|Impairment of goodwill||53.0||–||53.0||–|
|Amortization of intangible assets||15.9||19.3||55.0||61.5|
|Net interest expense||7.4||6.4||19.7||20.2|
|Other net finance expense||1.6||3.0||3.6||6.6|
|Share of income from joint ventures and associates||(0.5)||(0.8)||(1.2)||(2.8)|
|Foreign exchange loss (gain)||0.1||(0.4)||1.4||(0.2)|
|Gain on disposition of a subsidiary||–||–||–||(54.6)|
|Income before income taxes||9.7||67.4||117.3||231.8|
|Current tax on disposition of subsidiary||–||–||–||124.1|
|Deferred tax on construction services||8.7||–||8.7||–|
|Deferred tax on disposition of subsidiary||–||–||–||(29.5)|
|Total income taxes||27.7||21.2||58.9||146.0|
|Net (loss) income for the period||(18.0)||46.2||58.4||85.8|
|Weighted average number of shares outstanding – basic||113,868,318||113,841,129||113,935,950||114,005,332|
|Weighted average number of shares outstanding – diluted||113,868,318||114,122,270||114,101,964||114,339,901|
|Shares outstanding, end of the period||113,781,070||113,899,196||113,781,070||113,899,196|
|(Loss) Earnings per share|