Edgar Filing: GRANITE CONSTRUCTION INC

form10-q.htm

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-Q

ý	QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the quarterly period ended September 30, 2008

¨	TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the transition period from ___________ to ___________

Commission File Number: 1-12911

GRANITE CONSTRUCTION INCORPORATED

State of Incorporation:	I.R.S. Employer Identification Number:
Delaware	77-0239383

Corporate Administration:

585 W. Beach Street

Watsonville, California 95076

(831) 724-1011

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes ý No ¨

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See definition of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act.

Large accelerated filer ý

Accelerated filer ¨

Non-accelerated filer ¨

Smaller reporting company ¨

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). ¨ Yes ý No

Indicate the number of shares outstanding of each of the issuer’s classes of common stock, as of October 23, 2008.

Class		Outstanding
Common Stock, $0.01 par value		38,262,061 shares

Index


PART I. FINANCIAL INFORMATION
	Item 1.	Financial Statements (unaudited)
		Condensed Consolidated Balance Sheets as of September 30, 2008, December 31, 2007 and September 30, 2007
		Condensed Consolidated Statements of Income for the Three and Nine Months Ended September 30, 2008 and 2007
		Condensed Consolidated Statements of Cash Flows for the Nine Months Ended September 30, 2008 and 2007
		Notes to the Condensed Consolidated Financial Statements
	Item 2.	Management’s Discussion and Analysis of Financial Condition and Results of Operations
	Item 3.	Quantitative and Qualitative Disclosures About Market Risk
	Item 4.	Controls and Procedures
PART II. OTHER INFORMATION
	Item 1.	Legal Proceedings
	Item 1A.	Risk Factors
	Item 2.	Unregistered Sales of Equity Securities and Use of Proceeds
	Item 3.	Defaults Upon Senior Securities
	Item 4.	Submission of Matters to a Vote of Security Holders
	Item 5.	Other Information
	Item 6.	Exhibits
SIGNATURES
EXHIBIT 10.1
EXHIBIT 31.1
EXHIBIT 31.2
EXHIBIT 32

Table of Contents

PART I. FINANCIAL INFORMATION

Item 1. FINANCIAL STATEMENTS (unaudited)

GRANITE CONSTRUCTION INCORPORATED
CONDENSED CONSOLIDATED BALANCE SHEETS
(Unaudited - in thousands, except share and per share data)

	September 30,			December 31,		September 30,
	2008			2007		2007
ASSETS
Current assets
Cash and cash equivalents	$	281,046		$	352,434	$	265,605
Short-term marketable securities		101,112			77,758		106,675
Accounts receivable, net		480,315			397,097		536,519
Costs and estimated earnings in excess of billings		34,759			17,957		24,489
Inventories, net		61,342			55,557		50,438
Real estate held for development and sale		52,165			51,688		57,296
Deferred income taxes		46,233			43,713		36,041
Equity in construction joint ventures		45,219			34,340		36,851
Other current assets		65,182			96,969		43,370
Total current assets		1,167,373			1,127,513		1,157,284
Property and equipment, net		522,733			502,901		487,000
Long-term marketable securities		30,209			55,156		61,308
Investments in affiliates		27,518			26,475		23,256
Other noncurrent assets		73,696			74,373		78,119
Total assets	$	1,821,529		$	1,786,418	$	1,806,967
LIABILITIES AND SHAREHOLDERS’ EQUITY
Current liabilities
Current maturities of long-term debt	$	34,886		$	28,696	$	26,589
Accounts payable		234,126			213,135		261,379
Billings in excess of costs and estimated earnings		251,402			275,849		274,209
Accrued expenses and other current liabilities		227,611			212,265		209,894
Total current liabilities		748,025			729,945		772,071
Long-term debt		246,487			268,417		140,410
Other long-term liabilities		46,178			46,441		65,111
Deferred income taxes		18,733			17,945		19,788
Commitments and contingencies
Minority interest in consolidated subsidiaries		26,729			23,471		28,148
Shareholders’ equity
Preferred stock, $0.01 par value, authorized 3,000,000 shares, none outstanding		-			-		-
Common stock, $0.01 par value, authorized 150,000,000 shares; issued and outstanding 38,264,058 shares as of September 30, 2008, 39,450,923 shares as of December 31, 2007 and 41,916,706 shares as of September 30, 2007		383			395		419
Additional paid-in capital		83,041			79,007		82,678
Retained earnings		655,287			619,699		694,557
Accumulated other comprehensive (loss) income		(3,334	)		1,098		3,785
Total shareholders’ equity		735,377			700,199		781,439
Total liabilities and shareholders’ equity	$	1,821,529		$	1,786,418	$	1,806,967

The accompanying notes are an integral part of these condensed consolidated financial statements.

Table of Contents

GRANITE CONSTRUCTION INCORPORATED
CONDENSED CONSOLIDATED STATEMENTS OF INCOME
(Unaudited - in thousands, except per share data)

	Three Months Ended September 30,						Nine Months Ended September 30,
	2008			2007			2008			2007
Revenue
Construction	$	771,941		$	701,622		$	1,755,457		$	1,778,638
Material sales		124,478			123,453			283,321			289,655
Real estate		1,369			21,238			8,142			36,556
Total revenue		897,788			846,313			2,046,920			2,104,849
Cost of revenue
Construction		643,531			601,880			1,437,093			1,543,960
Material sales		109,068			96,130			247,959			229,116
Real estate		887			11,666			9,846			19,466
Total cost of revenue		753,486			709,676			1,694,898			1,792,542
Gross profit		144,302			136,637			352,022			312,307
General and administrative expenses		71,933			63,666			198,344			183,133
Gain on sales of property and equipment		2,008			2,994			4,564			8,053
Operating income		74,377			75,965			158,242			137,227
Other (expense) income
Interest income		5,439			7,514			15,087			20,796
Interest expense		(5,303	)		(1,884	)		(12,871	)		(4,998	)
Equity in (loss) income of affiliates		(1,257	)		4,037			(1,436	)		4,359
Other, net		549			(391	)		9,196			(1,057	)
Total other (expense) income		(572	)		9,276			9,976			19,100
Income before provision for income taxes and minority interest		73,805			85,241			168,218			156,327
Provision for income taxes		21,473			25,437			46,681			47,680
Income before minority interest		52,332			59,804			121,537			108,647
Minority interest in consolidated subsidiaries		(594	)		(6,504	)		(31,058	)		(13,750	)
Net income	$	51,738		$	53,300		$	90,479		$	94,897

Net income per common share
Basic	$	1.38		$	1.30		$	2.40		$	2.31
Diluted	$	1.36		$	1.28		$	2.37		$	2.28

Weighted average shares of common stock
Basic		37,430			41,106			37,664			41,065
Diluted		37,975			41,640			38,138			41,587

Dividends per common share	$	0.13		$	0.10		$	0.39		$	0.30

The accompanying notes are an integral part of these condensed consolidated financial statements.

Table of Contents

GRANITE CONSTRUCTION INCORPORATED
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited - in thousands)

Nine Months Ended September 30,	2008			2007
Operating Activities
Net income	$	90,479		$	94,897
Adjustments to reconcile net income to net cash provided by operating activities:
Impairment of real estate held for development and sale		4,500			-
Depreciation, depletion and amortization		64,036			60,621
Provision for doubtful accounts		8,914			1,119
Gain on sales of property and equipment		(4,564	)		(8,053	)
Change in deferred income taxes		1,116			(11	)
Stock-based compensation		5,135			4,600
Excess tax benefit on stock-based compensation		(743	)		(3,042	)
Minority interest in consolidated subsidiaries		31,058			13,750
Equity in loss (income) of affiliates		1,436			(4,359	)
Acquisition of minority interest		(16,616	)		-
Changes in assets and liabilities, net of the effects of acquisitions:
Accounts receivable		(85,557	)		(35,805	)
Inventories, net		(4,083	)		(4,794	)
Real estate held for development and sale		(13,425	)		(2,139	)
Equity in construction joint ventures		(10,879	)		(4,939	)
Other assets, net		34,698			18,621
Accounts payable		20,991			3,742
Accrued expenses and other current liabilities		19,650			25,685
Billings in excess of costs and estimated earnings, net		(41,249	)		(22,326	)
Net cash provided by operating activities		104,897			137,567
Investing Activities
Purchases of marketable securities		(68,732	)		(126,464	)
Maturities of marketable securities		64,090			140,225
Release of funds for acquisition of minority interest		28,332			-
Additions to property and equipment		(76,098	)		(82,744	)
Proceeds from sales of property and equipment		12,253			12,765
Acquisition of businesses		(14,022	)		(76,313	)
Contributions to affiliates		(5,345	)		(3,772	)
Other investing activities		626			3,459
Net cash used in investing activities		(58,896	)		(132,844	)
Financing Activities
Proceeds from long-term debt		2,660			111,634
Long-term debt principal payments		(15,748	)		(49,376	)
Cash dividends paid		(15,081	)		(12,572	)
Purchase of common stock		(45,489	)		(5,083	)
Contributions from minority partners		4,955			30,436
Distributions to minority partners		(37,713	)		(22,458	)
Acquisition of minority interest		(11,716	)		-
Excess tax benefit on stock-based compensation		743			3,042
Other financing, net		-			366
Net cash (used in) provided by financing activities		(117,389	)		55,989
(Decrease) increase in cash and cash equivalents		(71,388	)		60,712
Cash and cash equivalents at beginning of period		352,434			204,893
Cash and cash equivalents at end of period	$	281,046		$	265,605

The accompanying notes are an integral part of these condensed consolidated financial statements.

Table of Contents

GRANITE CONSTRUCTION INCORPORATED
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (continued)
(Unaudited - in thousands)

Nine Months Ended September 30,	2008		2007
Supplementary Information
Cash paid during the period for:
Interest	$	9,204	$	3,623
Income taxes		37,848		36,715
Non-cash investing and financing activity:
Restricted stock issued for services, net	$	6,934	$	10,809
Restricted stock units issued		3,208		-
Accrued cash dividends		4,974		4,192
Assets acquired through issuances of debt		2,660		1,492
Debt repayments from sale of assets		2,652		9,237

The accompanying notes are an integral part of these condensed consolidated financial statements.

Table of Contents

GRANITE CONSTRUCTION INCORPORATED

NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

1.	Basis of Presentation:

The condensed consolidated financial statements included herein have been prepared by Granite Construction Incorporated (“we,” “us,” “our” or “Granite”) without audit, pursuant to the rules and regulations of the Securities and Exchange Commission and should be read in conjunction with our Annual Report on Form 10-K for the year ended December 31, 2007. Certain information and footnote disclosures normally included in financial statements prepared in accordance with accounting principles generally accepted in the United States of America have been condensed or omitted, although we believe the disclosures which are made are adequate to make the information presented not misleading. Further, the condensed consolidated financial statements reflect, in the opinion of management, all normal recurring adjustments necessary to present fairly our financial position at September 30, 2008 and 2007 and the results of our operations and cash flows for the periods presented. The December 31, 2007 condensed consolidated balance sheet data was derived from audited consolidated financial statements, but does not include all disclosures required by accounting principles generally accepted in the United States of America.

Interim results are subject to significant seasonal variations and the results of operations for the three and nine months ended September 30, 2008 are not necessarily indicative of the results to be expected for the full year.

2.	Recently Issued Accounting Pronouncements:

In April 2008, the Financial Accounting Standards Board (“FASB”) issued FASB Staff Position 142-3, Determination of the Useful Life of Intangible Assets (“FSP 142-3”). FSP 142-3 amends the factors that should be considered in developing renewal or extension assumptions used to determine the useful life of a recognized intangible asset under Statement of Financial Accounting Standards No. 142, Goodwill and Other Intangible Assets. FSP 142-3 is effective for us in 2009. We are currently assessing the impact of FSP 142-3 on our consolidated financial statements.

In December 2007, the FASB issued Statement of Financial Accounting Standards No. 160, Noncontrolling Interests in Consolidated Financial Statements (“SFAS 160”). Under SFAS 160, the ownership interests in subsidiaries held by parties other than the parent must be clearly identified, labeled, and presented in the consolidated balance sheets within equity, but separate from the parent’s equity and the amount of consolidated net income attributable to the parent and to the noncontrolling interest be clearly identified and presented on the face of the consolidated statement of income. When a subsidiary is deconsolidated, any retained noncontrolling equity investment in the former subsidiary should be initially measured at fair value. The gain or loss on the deconsolidation of the subsidiary is measured using the fair value of any noncontrolling equity investment rather than the carrying amount of that retained investment. Lastly, SFAS 160 requires entities to provide sufficient disclosures that clearly identify and distinguish between the interests of the parent and the interests of the non-controlling owners. SFAS 160 is effective for us in 2009. We are currently assessing the impact of SFAS 160 on our consolidated financial statements.

In December 2007, the FASB issued Statement of Financial Accounting Standards No. 141-R, Business Combinations (“SFAS 141-R”) which revised SFAS 141, Business Combinations (“SFAS 141”). Under SFAS 141, organizations utilized the announcement date as the measurement date for the purchase price of the acquired entity. SFAS 141-R requires measurement at the date the acquirer obtains control of the acquiree, generally referred to as the acquisition date. SFAS 141-R will have a significant impact on the accounting for transaction costs, restructuring costs and the initial recognition of contingent assets and liabilities assumed during a business combination. Under SFAS 141-R, adjustments to the acquired entity’s deferred tax assets and uncertain tax position balances occurring outside the measurement period are recorded as a component of income tax expense, rather than goodwill. This pronouncement is effective for us in 2009. As the provisions of SFAS 141-R are applied prospectively, the impact on us cannot be determined until the transactions occur.

In February 2007, the FASB issued FASB Staff Position No. 157-2, Effective Date of FASB Statement No. 157 (“FSP 157-2) which delayed the effective date of this statement for non-financial assets and non-financial liabilities that are recognized or disclosed at fair value in the financial statements on a nonrecurring basis. This FSP will be effective for us in 2009. We are currently assessing the impact of FSP 157-2 on our consolidated financial statements.

3.	Change in Accounting Estimates:

Our gross profit for the three and nine months ended September 30, 2008 and 2007 include the effects of significant changes in the estimates of the profitability of certain of our projects.

Table of Contents

GRANITE CONSTRUCTION INCORPORATED

NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

Granite East

The impact of all changes in the estimates of profitability on Granite East gross profit is summarized as follows:

Granite East Change in Accounting Estimates	Three Months Ended September 30,								Nine Months Ended September 30,
(dollars in millions)	2008				2007				2008				2007
Reduction in gross profit		$	(6.2	)		$	(20.2	)		$	(16.1	)		$	(65.3	)
Increase in gross profit			12.1				11.6				68.6				43.5
Net increase (reduction) in gross profit		$	5.9			$	(8.6	)		$	52.5			$	(21.8	)

Changes in estimates of project profitability in Granite East that individually had an impact of $1.0 million or greater on gross profit are summarized as follows:

	Three Months Ended September 30,				Nine Months Ended September 30,
(dollars in millions)	2008		2007		2008		2007
Number of projects with downward estimate changes		2		3		3		10
Range of net reduction in gross profit from each project	$	2.0 - 2.3	$	1.9 - 10.9	$	1.4 - 4.0	$	1.0 - 36.5
Number of projects with upward estimate changes		4		6		6		10
Range of net increase in gross profit from each project	$	1.1 - 2.8	$	1.0 - 4.4	$	1.2 - 32.2	$	1.1 - 19.2

During the three and nine months ended September 30, 2008, Granite East recognized net increases in gross profit from the effects of changes in the estimates of project profitability of approximately $5.9 million and $52.5 million, respectively. These increases in gross profit for 2008 compare to net reductions in gross profit of approximately $8.6 million and $21.8 million, respectively, for the three and nine months ended September 30, 2007. The increases were primarily due to the resolution of project uncertainties, the settlement of outstanding revenue issues with various contract owners and improved productivity on certain projects. The changes in estimates for the nine months ended September 30, 2008 included an increase in gross profit in the first quarter of 2008 of approximately $28.6 million on the SR-22 project in Southern California, due primarily to the negotiated settlement of claims with the owner. Several of the projects with improved profitability estimates in 2008 had recognized significant margin deterioration in prior periods.

Table of Contents

GRANITE CONSTRUCTION INCORPORATED

NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

Granite West

The impact of all changes in the estimates of profitability on Granite West gross profit is summarized as follows:

Granite West Change in Accounting Estimates	Three Months Ended September 30,								Nine Months Ended September 30,
(dollars in millions)	2008				2007				2008				2007
Reduction in gross profit		$	(7.8	)		$	(7.8	)		$	(11.9	)		$	(13.0	)
Increase in gross profit			26.6				13.5				65.2				32.6
Net increase in gross profit		$	18.8			$	5.7			$	53.3			$	19.6

Changes in estimates of project profitability in Granite West that individually had an impact of $1.0 million or greater on gross profit are summarized as follows:

	Three Months Ended September 30,				Nine Months Ended September 30,
(dollars in millions)	2008		2007		2008		2007
Number of projects with downward estimate changes		2		-		2		2
Range of net reduction in gross profit from each project	$	1.1 - 1.7	$	-	$	1.1 - 3.0	$	1.4 - 1.4
Number of projects with upward estimate changes		6		1		11		5
Range of net increase in gross profit from each project	$	1.5 - 5.1	$	1.3	$	1.2 - 18.4	$	1.3 - 2.6

During the three and nine months ended September 30, 2008, Granite West recognized net increases in gross profit from the effects of changes in the estimates of project profitability of approximately $18.8 million and $53.3 million, respectively. This compares with an increase in gross profit of approximately $5.7 million and $19.6 million during the three and nine months ended September 30, 2007, respectively. The increased Granite West profitability estimates during the three and nine months ended September 30, 2008 were due primarily to the resolution of project uncertainties, higher productivity than originally estimated and the settlement of outstanding revenue and other issues with contract owners.

Table of Contents

GRANITE CONSTRUCTION INCORPORATED

NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

4.	Fair Value Measurement:

In September 2006, the FASB issued Statement of Financial Accounting Standards No. 157, Fair Value Measurements (“SFAS 157”). SFAS 157 introduces a framework for measuring fair value and expands required disclosure about fair value measurements of certain assets and liabilities. We adopted SFAS 157 as of January 1, 2008, and the impact of adoption was not significant. The FASB has deferred the effective date of SFAS 157 for all non-financial assets and non-financial liabilities, except those that are recognized or disclosed at fair value in the financial statements on a recurring basis, to fiscal years beginning after November 15, 2008. We are currently assessing the impact on our financial statements of SFAS 157 as it pertains to non-financial assets and liabilities measured on a non-recurring basis.

SFAS 157 defines fair value as the exchange price that would be received for an asset or paid to transfer a liability (an exit price) in the principal or most advantageous market for the asset or liability in an orderly transaction between market participants on the measurement date. SFAS 157 also establishes a fair value hierarchy which requires an entity to maximize the use of observable inputs and minimize the use of unobservable inputs when measuring fair value. The standard describes three levels of inputs that may be used to measure fair value:

Level 1 - Quoted prices in active markets for identical assets or liabilities.

Level 2 - Observable inputs other than Level 1 prices such as quoted prices for similar assets or liabilities; quoted prices in markets that are not active; or other inputs that are observable or can be corroborated by observable market data for substantially the full term of the assets or liabilities.

Level 3 - Unobservable inputs that are supported by little or no market activity and that are significant to the fair value of the assets or liabilities.

We utilize the active market approach to measure fair value for our financial assets and liabilities.

We have no financial liabilities measured at fair value on a recurring basis. Assets measured at fair value on a recurring basis are summarized below and included in short-term marketable securities at September 30, 2008.

September 30, 2008	Level 1		Level 2		Level 3		Total
(in thousands)
Available-for-sale securities	$	28,441	$	-	$	-	$	28,441

5.	Inventories, net:

Inventories, net consist primarily of quarry products, asphalt and fuel valued at the lower of average cost or market.

Table of Contents

GRANITE CONSTRUCTION INCORPORATED

NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

6.	Real Estate Entities:

We are participants in real estate entities through our Granite Land Company subsidiary (“GLC”). Generally, each entity is formed to accomplish a specific real estate development project. We have determined that certain of these entities are variable interest entities as defined by FASB Interpretation No. 46 (revised December 2003), Consolidation of Variable Interest Entities (“FIN 46(R)”). Accordingly, we have consolidated those entities for which we have determined that we are the primary beneficiary.

Due to the downturn in the residential housing market, most notably in California, together with tighter credit markets, we assessed whether our investments in residential and commercial projects were impaired. The carrying amounts of such real estate development assets are evaluated for recoverability in accordance with Statement of Financial Accounting Standards No. 144, Accounting for the Impairment or Disposal of Long-Lived Assets (“SFAS 144”). A real estate development asset is considered impaired when its carrying amount is greater than the undiscounted future net cash flows the asset is expected to generate. The carrying value of impaired real estate development assets is generally determined based on the sum of the discounted cash flows expected to result from the eventual disposal of the asset. Based on our evaluations, we recognized a pretax, non-cash impairment charge of $4.5 million in the second quarter of 2008 on assets classified as real estate held for development and sale. We recorded the charge in cost of revenue in our consolidated statements of income in our Granite Land Company segment.

Impairment assessment inherently involves judgment as to assumptions about expected future cash flows and the impact of market conditions on those assumptions. Future events and changing market conditions may impact our assumptions as to sales prices, costs, holding periods or other factors that may result in changes in our estimates of future cash flows. Although we believe the assumptions we used in testing for impairment are reasonable, changes in any one of our assumptions could produce a significantly different result.

Our agreements with our partners in our real estate entities define the management role of each partner and each partner’s financial responsibility in a residential and commercial project. If one of our partners is unable to make its required contribution or fulfill its management role, we may be required to assume full financial and management responsibility for completion of the project.

Consolidated Real Estate Entities

At September 30, 2008, the entities we have consolidated were engaged in residential and commercial development projects with total assets ranging from approximately $0.4 million to $27.1 million.

The breakdown by type and location of our real estate held for development and sale is summarized below:

	September 30,		December 31,		September 30,
(in thousands)	2008		2007		2007
Residential	$	42,576	$	42,344	$	43,860
Commercial		9,589		9,344		13,436
Total	$	52,165	$	51,688	$	57,296

Washington	$	29,134	$	26,521	$	25,394
California		15,153		17,606		25,954
Texas		7,878		7,561		5,948
Total	$	52,165	$	51,688	$	57,296

Additionally, at September 30, 2008 we had $16.1 million in real estate held for use included in property and equipment on our condensed consolidated balance sheet related to consolidated real estate entities. Of the combined total of real estate held for development, sale and use of $68.3 million, approximately $59.0 million was pledged as collateral for the obligations of the real estate entities. This debt, which totaled $25.4 million at September 30, 2008 is non-recourse to Granite. Our proportionate share of the results of these entities varies depending on the ultimate profitability of the entities.

Table of Contents

GRANITE CONSTRUCTION INCORPORATED

NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

Equity Method Real Estate Investments

We account for our share of the operating results of real estate entities in which we have determined we are not the primary beneficiary in “investments in affiliates” in our condensed consolidated balance sheets and in “other income (expense)” in our condensed consolidated statements of income. At September 30, 2008, these entities were engaged in real estate development projects with total assets ranging from approximately $6.3 million to $52.5 million. Our proportionate share of the operating results of these entities varies depending on the ultimate profitability of the entities. At September 30, 2008 we had approximately $20.2 million recorded on our condensed consolidated balance sheet related to our investment in these real estate entities.

The following table provides summarized financial information on a combined 100% basis for our real estate affiliates accounted for under the equity method:

	September 30,		December 31,		September 30,
(in thousands)	2008		2007		2007
Total assets	$	197,591	$	138,262	$	124,188
Net assets		91,985		66,589		60,103
Granite's share of net assets		20,192		17,472		14,575

Substantially all the assets of these entities are classified as real estate held for sale. All outstanding debt of these entities is non-recourse to Granite.

The breakdown by type and location of our interest in these real estate ventures is summarized below:

	September 30,		December 31,		September 30,
(in thousands)	2008		2007		2007
Residential	$	15,162	$	11,990	$	11,486
Commercial		5,030		5,482		3,089
Total	$	20,192	$	17,472	$	14,575

Texas	$	12,564	$	12,427	$	9,761
Oregon		4,766		5,045		4,814
Washington		2,862		-		-
Total	$	20,192	$	17,472	$	14,575

Table of Contents

GRANITE CONSTRUCTION INCORPORATED

NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

7.	Construction Joint Ventures and Line Item Joint Ventures:

We participate in various construction joint ventures. Generally, each construction joint venture is formed to accomplish a specific project and is jointly controlled by the joint venture partners. The joint venture agreements typically provide that our ownership share in any profits and assets, and our respective share in any losses and liabilities that may result from the performance of the contract are limited to our stated percentage equity ownership in the project. Although each construction joint venture’s contract with the project owner typically requires joint and several liability among the joint venture partners, our agreements with our joint venture partners provide that each partner will assume and pay its full proportionate share of any losses resulting from a project.

We have determined that certain of these construction joint ventures are variable interest entities as defined by FIN 46(R). Accordingly, we have consolidated those joint ventures where we have determined that we are the primary beneficiary. At September 30, 2008, the construction joint ventures we have consolidated were engaged in construction projects with total contract values ranging from approximately $11.5 million to $487.6 million. Our proportionate equity ownership share of the consolidated joint ventures ranges from 40% to 99%.

Consistent with Emerging Issues Task Force Issue 00-01, Investor Balance Sheet and Income Statement Display under the Equity Method for Investments in Certain Partnerships and Other Ventures we account for our equity ownership share of the operating results of construction joint ventures in which we have determined we are not the primary beneficiary on a pro rata basis in the condensed consolidated statements of income and as a single line item in the condensed consolidated balance sheets. At September 30, 2008, the joint ventures in which we held an equity ownership share but are not the primary beneficiary were engaged in construction projects with contract values ranging from approximately $94.4 million to $935.3 million. Our proportionate equity ownership share of these joint ventures ranges from 20% to 40%.

We also participate in various “line item” joint venture agreements under which each partner is responsible for performing certain discrete items of the total scope of contracted work. The revenue for these discrete items is defined in the contract with the project owner and each partner assumes the profitability risk associated with its own work. All partners in a line item joint venture are jointly and severally liable for completion of the total project under the terms of the contract with the project owner. There is not a single set of books and records for a line item joint venture. Each partner accounts for its items of work individually as it would for any self-performed contract. We account for our portion of these contracts as a project in our accounting system and include receivables and payables associated with our work on our condensed consolidated balance sheets.

Although our agreements with our joint venture partners for both construction joint ventures and line item joint ventures provide that each partner will assume and pay its share of any losses resulting from a project, if one of our partners is unable to make its required contribution, we would be fully liable under our contract with the project owner. Circumstances that could lead to a loss under our joint venture arrangements beyond our proportionate share include a partner’s inability to contribute additional funds to the venture in the event the project incurs a loss, or additional costs that we could incur should a partner fail to provide the services and resources toward project completion that had been committed to in the joint venture agreement. At September 30, 2008, approximately $600.0 million of work representing our partners’ share of unconsolidated and line item joint venture contracts in progress had yet to be completed.

8.	Property and Equipment, net:

Balances of major classes of assets and allowances for depreciation, depletion and amortization are included in property and equipment, net on our condensed consolidated balance sheets as follows:

	September 30,		December 31,		September 30,
(in thousands)	2008		2007		2007
Land and land improvements	$	115,389	$	93,862	$	74,693
Quarry property		140,917		135,749		130,319
Buildings and leasehold improvements		92,661		79,663		75,971
Equipment and vehicles		846,629		843,570		847,629
Office furniture and equipment		33,262		28,889		28,819
Property and equipment		1,228,858		1,181,733		1,157,431
Less: accumulated depreciation, depletion and amortization		706,125		678,832		670,431
Property and equipment, net	$	522,733	$	502,901	$	487,000

Table of Contents

GRANITE CONSTRUCTION INCORPORATED

NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

9.	Intangible Assets:

The balances of the following intangible assets from our Granite West segment are included in other noncurrent assets on our condensed consolidated balance sheets at carrying value:

	September 30,		December 31,		September 30,
(in thousands)	2008		2007		2007
Unamortized intangible assets:
Goodwill	$	9,900	$	9,900	$	9,900
Use rights		2,954		-		-
Total unamortized intangible assets	$	12,854	$	9,900	$	9,900

	September 30, 2008
			Accumulated
(in thousands)	Gross Value		Amortization			Net Value
Amortized intangible assets:
Permits	$	36,070	$	(3,249	)	$	32,821
Trade names		1,583		(1,256	)		327
Covenants not to compete		1,588		(593	)		995
Customer lists and other		3,725		(1,452	)		2,273
Total amortized intangible assets	$	42,966	$	(6,550	)	$	36,416

	December 31, 2007
(in thousands)	Gross Value			Accumulated Amortization				Net Value
Amortized intangible assets:
Permits		$	36,362		$	(1,953	)		$	34,409
Trade names			1,425			(972	)			453
Covenants not to compete			1,661			(410	)			1,251
Customer lists and other			1,712			(671	)			1,041
Total amortized intangible assets		$	41,160		$	(4,006	)		$	37,154

	September 30, 2007
(in thousands)	Gross Value			Accumulated Amortization				Net Value
Amortized intangible assets:
Permits		$	36,362		$	(1,502	)		$	34,860
Trade names			1,425			(921	)			504
Covenants not to compete			1,661			(308	)			1,353
Customer lists and other			1,712			(528	)			1,184
Total amortized intangible assets		$	41,160		$	(3,259	)		$	37,901

Amortization expense related to intangible assets was approximately $0.9 million and $2.5 million for the three and nine months ended September 30, 2008, respectively, and approximately $0.6 million and $1.4 million for the three and nine months ended September 30, 2007, respectively. Amortization expense expected to be recorded in the future is as follows: $0.9 million for the balance of 2008, $3.1 million in 2009, $2.5 million in 2010, $2.3 million in 2011, $2.2 million in 2012 and $25.4 million thereafter.

Table of Contents

GRANITE CONSTRUCTION INCORPORATED

NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

10.	Weighted Average Common Shares Outstanding:

A reconciliation of the weighted average shares outstanding used in calculating basic and diluted net income per share in the condensed consolidated statements of income is as follows:

	Three Months Ended September 30,		Nine Months Ended September 30,
(in thousands)	2008	2007	2008		2007
Basic weighted average common shares outstanding:
Weighted average common stock outstanding	38,272	41,939		38,486	41,906
Less: weighted average restricted stock outstanding	842	833		822	841
Total basic weighted average shares outstanding	37,430	41,106		37,664	41,065
Diluted weighted average common shares outstanding:
Basic weighted average shares outstanding	37,430	41,106		37,664	41,065
Effect of dilutive securities:
Restricted stock	418	489		378	477
Common stock options and units	127	45		96	45
Total diluted weighted average common shares outstanding	37,975	41,640		38,138	41,587

Restricted common stock, representing approximately 182,000 shares and 203,000 shares for the three and nine months ended September 30, 2008, respectively, and approximately 59,000 shares for the nine months ended September 30, 2007, has been excluded from the calculation of diluted common shares outstanding because their effect would be anti-dilutive.

11.	Comprehensive Income:

The components of comprehensive income are as follows:

	Three Months Ended September 30,						Nine Months Ended September 30,
(in thousands)	2008			2007			2008			2007
Net income	$	51,738		$	53,300		$	90,479		$	94,897
Other comprehensive income (loss):
Changes in unrealized (loss) gain on investments		(3,931	)		(66	)		(7,280	)		1,889
Tax benefit (provision) on unrealized (loss) gain		1,538			25			2,848			(735	)
Total comprehensive income	$	49,345		$	53,259		$	86,047		$	96,051

Table of Contents

GRANITE CONSTRUCTION INCORPORATED

NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

12.	Legal Proceedings:

Silica Litigation

Our wholly-owned subsidiary Granite Construction Company (“GCCO”) is one of approximately 100 to 300 defendants in eight active California Superior Court lawsuits. Of the eight lawsuits, five were filed against GCCO in 2005 and three were filed against GCCO in 2006, in Alameda County ( Molina vs. A-1 Aggregates, et al.; Dominguez vs. A-1 Aggregates, et al.; Cleveland vs. A. Teichert & Son.; Guido vs. A. Teichert & Son, Inc.; Williams vs. A. Teichert & Son, Inc.; Horne vs. Teichert & Son, Inc.; Kammer vs.A-1 Aggregates, et al.; and Solis vs. The 3M Company et al.). Each lawsuit was brought by a single plaintiff who is seeking money damages by way of various causes of action, including strict product and market share liability, and alleges personal injuries caused by exposure to silica products and related materials during the plaintiffs’ use or association with sand blasting or grinding concrete. The plaintiff in each lawsuit has categorized the defendants as equipment defendants, respirator defendants, premises defendants and sand defendants. We have been identified as a sand defendant, meaning a party that manufactured, supplied or distributed silica-containing products. Our preliminary investigation revealed that we have not knowingly sold or distributed abrasive silica sand for sandblasting, and therefore, we believe the probability of these lawsuits resulting in an incurrence of a material liability is remote. We have been dismissed from sixteen other similar lawsuits.

Hiawatha Project DBE Issues

The Hiawatha Light Rail Transit (“HLRT”) project was performed by Minnesota Transit Constructors (“MnTC”), a joint venture that consisted of GCCO and other unrelated companies. GCCO was the managing partner of the joint venture, with a 56.5% interest. The Minnesota Department of Transportation (“MnDOT”) is the contracting agency for this federally funded project. The Metropolitan Council is the local agency conduit for providing federal funds to MnDOT for this HLRT project. MnDOT and the U.S. Department of Transportation Office of Inspector General (“OIG”) each conducted a review of the Disadvantaged Business Enterprise (“DBE”) program maintained by MnTC for the HLRT project. In addition, the U.S. Department of Justice (“USDOJ”) is conducting an investigation into compliance issues with respect to MnTC’s DBE Program for the HLRT project. MnDOT and the OIG (collectively, the “Agencies”) have initially identified certain compliance issues in connection with MnTC’s DBE Program and, as a result, have determined that MnTC failed to meet the DBE utilization criteria as represented by MnTC. Although there has been no formal administrative subpoena issued, nor has a civil complaint been filed in connection with the administrative reviews or the investigation, MnDOT has proposed a monetary sanction of $4.3 million against MnTC and specified DBE training for personnel from the members of the MnTC joint venture as a condition of awarding future projects to joint venture members of MnTC on MnDOT and Metropolitan Council work. MnTC is fully cooperating with the Agencies and the USDOJ and, on July 2, 2007, presented its detailed written response to the initial determinations of the Agencies as well as the investigation by the USDOJ. We have yet to receive a formal reply from the Agencies or the USDOJ, those entities instead preferring to engage in informal discussions in attempt to resolve the matter. We cannot, however, rule out the possibility of a civil or criminal actions being brought against MnTC or one or more of its members which could result in civil and criminal penalties.

I-494 Project DBE Issues

The I-494 project was performed by a joint venture (“JV”) that consisted of GCCO and another unrelated party. GCCO was the managing partner of the JV, with a 60% interest. MnDOT is the contracting agency for this federally funded project. MnDOT conducted a review of the DBE program maintained by the JV for the I-494 project. MnDOT has initially identified certain compliance issues in connection with the JV’s DBE program, and as a result, has determined that the JV failed to meet the DBE utilization criteria as represented by the JV. On August 28, 2008 this matter was resolved by agreement between the parties without any final determination of any violations by MnDOT or any acknowledgement by the JV, or any member, of any violations. The settlement does not impose any future obligations or restrictions on the JV or any of its members.

US Highway 20 Project

GCCO and our wholly-owned subsidiary, Granite Northwest, Inc. are the members of a joint venture known as Yaquina River Constructors (“YRC”) which is currently constructing a new road alignment of US Highway 20 near Eddyville, Oregon under contract with the Oregon Department of Transportation (“ODOT”). The project involves constructing seven miles of new road through steep and forested terrain in the Coast Range Mountains. During the fall and winter of 2006, extraordinary rain events produced runoff that overwhelmed erosion control measures installed at the project and resulted in discharges to surface water in alleged violations of the stormwater permit. The Oregon Department of Environmental Quality has issued notices of violation and fine of $240,000 to YRC for these alleged violations which have been resolved by an agreement and final order entered into on July 25, 2008. The Oregon Department of Justice is, however, still conducting a criminal investigation in connection with stormwater runoff from the project. YRC and its members are fully cooperating in the investigation, but YRC does not know whether criminal charges or civil lawsuit, if any, will be brought or against whom. Therefore, we cannot estimate what if any criminal or civil penalty or conditional assessment will result from this investigation.

Table of Contents

GRANITE CONSTRUCTION INCORPORATED

NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

City of San Diego Fire Debris Cleanup

In the aftermath of the 2007 San Diego County wildfires, GCCO bid for and was awarded a fixed unit price, variable quantity contract with the City of San Diego to perform specified debris cleanup work. GCCO began work in November 2007 and completed the work in April 2008.

In August 2008, the City announced that it would conduct an independent audit of the project. GCCO offered and the City received GCCO’s full cooperation with such audit, providing all the information requested and meeting with the auditors. GCCO is informed that the final report of the City’s audit is largely complete, and is expected to be released in or about mid-November 2008. While it is difficult to predict the results of the City’s efforts, GCCO believes that the City’s audit will not reveal any significant discrepancies in our billings submitted to the City for the work.

In August and September 2008, GCCO received information that the office of San Diego City Attorney was conducting a separate investigation of GCCO’s work on the project. On October 17, 2008, in advance of completion of the City’s own audit, the City Attorney filed a lawsuit in California Superior Court, County of San Diego against GCCO and the one other contractor that had been awarded a similar cleanup contract with the City. In the complaint, the City Attorney alleges both contractors violated the California False Claims Act. That lawsuit seeks monetary damages and penalties, and alleges that GCCO engaged in a variety of wrongdoing, including inflating the costs of materials and the quantities and type of debris removed, and presenting claims for payment based on falsified records and incorrect information. The lawsuit seeks trebled damages, in an amount to be determined, and a civil penalty in the amount of $10,000 for each false claim made. GCCO believes the allegations in the complaint to be without factual or legal basis and, therefore, the City’s entitlement to relief sought under the California False Claims Act is remote. GCCO will vigorously defend itself against the allegations raised.

City of Sacramento West El Camino Project

In August 2003, the City of Sacramento and GCCO entered into a contract for the construction of a public work improvement referred to as West El Camino Widening and Bridge Replacement Project. During the course of the project, the City disputed GCCO’s entitlement to compensation for certain work. GCCO excavated significantly more material than the City’s engineer estimated and represented as a bid item in the contract. The City maintains the engineer’s estimate contained in the contract was substantially less than it should have been due to a clerical error. GCCO filed a complaint in the California Superior Court, County of Sacramento, against the City in November 2006 seeking payment in excess of $750,000 for the actual quantity of material excavated which the City refuses to pay. The City also claims GCCO submitted a false bid when GCCO offered its bid to the City using a quantity for the material excavation GCCO knew to be incorrect. On July 23, 2008 the City filed a cross-complaint against GCCO to assert false representation allegations and seek relief pursuant to the California False Claims Act and assert other fraud based causes of action. The City’s cross-complaint seeks $10,000 for each false claim, restitution and disgorgement of all earnings, punitive damages, attorney fees, costs and interest. GCCO disputes certain material facts as suggested by the City and believes the City’s entitlement to the relief sought under the causes of action pled, including the California False Claims Act, is remote. GCCO will vigorously defend itself against the allegations raised.

Other Legal Proceedings/Government Inquiries

We are a party to a number of other legal proceedings arising in the normal course of business. From time to time, we receive inquiries from public agencies seeking information concerning our compliance with government construction contracting requirements and related laws and regulations. We believe that the nature and number of these proceedings and compliance inquiries are typical for a construction firm of our size and scope. Our litigation typically involves claims regarding public liability or contract related issues. While management currently believes, after consultation with counsel, that the ultimate outcome of such proceedings and compliance inquiries which are currently pending, individually and in the aggregate, will not have a material adverse effect on our financial position or overall trends in results of operations or cash flows, litigation is subject to inherent uncertainties. Were an unfavorable ruling to occur, there exists the possibility of a material adverse impact on the results of operations, cash flows and/or financial position for the period in which the ruling occurs. While any one of our pending legal proceedings is subject to early resolution as a result of our ongoing efforts to settle, whether or when any legal proceeding will resolve through settlement is neither predictable nor guaranteed.

Table of Contents

GRANITE CONSTRUCTION INCORPORATED

NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

13.	Business Segment Information:

Our three reportable segments based on similar economic characteristics as defined in Statement of Financial Accounting Standards No. 131, Disclosures about Segments of an Enterprise and Related Information (“SFAS 131”) are Granite West; Granite East; and Granite Land Company (“GLC”).

Granite West is comprised of decentralized branch offices in the western United States that perform various heavy civil construction projects with a large portion of the work focused on new construction and improvement of streets, roads, highways and bridges as well as site preparation for residential and commercial development and sales of construction materials. Each branch reports under one of three operating groups: Northwest, Northern California and Southwest. Although most Granite West projects are started and completed within a year, the division also has the capability of constructing larger projects and at September 30, 2008 had six such active large projects, each with total contract revenue greater than $50.0 million. All of our revenue from the sale of construction materials is generated by Granite West which mines aggregates and operates plants that process aggregates into construction materials for internal use and for sale to others. These activities are vertically integrated into the Granite West business, providing both a source of profits and a competitive advantage to our construction business.

Granite East operates in the eastern portion of the United States with a focus on large, complex infrastructure projects, primarily east of the Rocky Mountains. With its division office in Lewisville, Texas, Granite East operates out of three regional offices: the Central Region, based in Lewisville, Texas; the Southeast Region, based in Tampa, Florida; and the Northeast Region, based in Tarrytown, New York. Granite East construction contracts are typically greater than two years in duration.

GLC purchases, develops, operates, sells and otherwise invests in real estate developments as well as provides real estate services for other Granite operations. GLC’s current portfolio consists of residential, retail and office site development projects for sale to home and commercial property developers or held for rental income in Washington, California, Texas, and Oregon.

The accounting policies of the segments are the same as those described in the Summary of Significant Accounting Policies contained in our 2007 Annual Report on Form 10-K. We evaluate performance based on operating profit or loss (excluding gain on sales of property and equipment), and do not include income taxes, interest income, interest expense or other income (expense). Unallocated other corporate expenses principally comprise corporate general and administrative expenses.

Summarized segment information is as follows:

	Three Months Ended September 30,
(in thousands)	Granite West		Granite East			Granite Land Company			Total
2008
Revenue from external customers	$	749,368	$	147,051		$	1,369			$	897,788
Intersegment revenue transfer		119		(119	)		-				-
Net revenue		749,487		146,932			1,369				897,788
Depreciation, depletion and amortization		18,865		1,949			86				20,900
Operating income (loss)		93,404		3,653			(191	)			96,866
2007
Revenue from external customers	$	641,717	$	183,358		$	21,238			$	846,313
Intersegment revenue transfer		711		(711	)		-				-
Net revenue		642,428		182,647			21,238				846,313
Depreciation, depletion and amortization		18,331		3,044			54				21,429
Operating income (loss)		89,755		(3,174	)		8,241				94,822

Table of Contents

GRANITE CONSTRUCTION INCORPORATED

NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

	Nine Months Ended September 30,
(in thousands)	Granite West		Granite East			Granite Land Company			Total
2008
Revenue from external customers	$	1,504,498	$	534,280		$	8,142		$	2,046,920
Intersegment revenue transfer		2,454		(2,454	)		-			-
Net revenue		1,506,952		531,826			8,142			2,046,920
Depreciation, depletion and amortization		54,546		6,125			267			60,938
Operating income (loss)		155,284		67,795			(3,795	)		219,284
Segment assets		460,347		20,575			68,284			549,206
2007
Revenue from external customers	$	1,478,561	$	589,732		$	36,556		$	2,104,849
Intersegment revenue transfer		4,408		(4,408	)		-			-
Net revenue		1,482,969		585,324			36,556			2,104,849
Depreciation, depletion and amortization		50,359		7,812			99			58,270
Operating income (loss)		186,476		(13,359	)		14,120			187,237
Segment assets		423,299		28,414			66,352			518,065

A reconciliation of segment operating income to consolidated income before tax and minority interest is as follows:

	Three Months Ended September 30,								Nine Months Ended September 30,
(in thousands)	2008				2007				2008				2007
Total operating income for reportable segments		$	96,866			$	94,822			$	219,284			$	187,237
Other (expense) income, net			(572	)			9,276				9,976				19,100
Gain on sales of property and equipment			2,008				2,994				4,564				8,053
Unallocated other corporate expense			(24,497	)			(21,851	)			(65,606	)			(58,063	)
Income before provision for income taxes and minority interest		$	73,805			$	85,241			$	168,218			$	156,327

14.	Acquisition:

In January 2008, we acquired certain assets and assumed certain liabilities of a construction materials supplier in Nevada for a purchase price of approximately $14.0 million in cash. The effect of the operating results of the acquired business on our consolidated operating results was not material. The estimated fair value of the assets acquired approximated the purchase price; therefore, no goodwill was recorded.

15.	Share Purchase Authorization:

In 2007, our Board of Directors authorized us to purchase, at management’s discretion, up to $200.0 million of our common stock. During the nine months ended September 30, 2008, we purchased 1.4 million common shares for a total of $43.2 million under this share purchase program. From the inception of this share purchase program in 2007 through September 30, 2008, we have purchased a total of 3.8 million common shares for an aggregate cost of $135.9 million. All shares were retired upon acquisition. At September 30, 2008, $64.1 million of the $200.0 million authorization was available for future common share purchases.

Table of Contents

Item 2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND

RESULTS OF OPERATIONS

Forward-Looking Disclosure

From time to time, Granite makes certain comments and disclosures in reports and statements, including in this Quarterly Report on Form 10-Q, or statements made by its officers or directors that are not based on historical facts and which may be forward-looking in nature. Under the Private Securities Litigation Reform Act of 1995, a “safe harbor” may be provided to us for certain of these forward-looking statements. Words such as “outlook,” “believes,” “expects,” “appears,” “may,” “will,” “should,” “anticipates” or the negative thereof or comparable terminology, are intended to identify such forward-looking statements. In addition, other written or oral statements which constitute forward-looking statements have been made and may in the future be made by or on behalf of Granite. These forward-looking statements are estimates reflecting the best judgment of senior management and are based on our current expectations and projections concerning future events, many of which are outside of our control, and involve a number of risks and uncertainties that could cause actual results to differ materially from those suggested by the forward-looking statements. Factors that might cause or contribute to such differences include, but are not limited to, those more specifically described in our Annual Report on Form 10-K under “Item 1A. Risk Factors.” Granite undertakes no obligation to publicly revise or update any forward-looking statements for any reason. As a result, the reader is cautioned not to rely on these forward-looking statements, which speak only as of the date of this Quarterly Report on Form 10-Q.

Overview

We are one of the largest heavy civil contractors and producers of construction materials in the United States and are engaged in the construction and improvement of streets, roads, highways and bridges as well as dams, airport infrastructure, mass transit facilities, and other infrastructure-related projects, as well as the production of construction material through the use of our extensive aggregate reserves and plant facilities. We also operate a real estate development company on a significantly smaller scale. We have offices in Alaska, Arizona, California, Florida, Nevada, New York, Oregon, Texas, Utah and Washington.

Our construction contracts are obtained primarily through competitive bidding in response to advertisements by federal, state and local agencies and private parties and to a lesser extent through negotiation with private parties. Our bidding activity is affected by such factors as backlog, available personnel, current utilization of equipment and other resources, our ability to obtain necessary surety bonds and competitive considerations. Bidding activity, backlog and revenue resulting from the award of new contracts may vary significantly from period to period. We have three reportable business segments: Granite West, Granite East and Granite Land Company (see Note 13 to the condensed consolidated financial statements).

The three primary economic drivers of our business are (1) the overall health of the economy, (2) federal, state and local public funding levels, both nationally and locally and (3) population growth and the resulting private development. The level of demand for our services will have a direct correlation to these drivers. For example, a stagnant or declining economy will generally result in a reduced demand for construction in the private sector. This reduced demand increases competition for private sector projects and will ultimately also increase competition in the public sector as companies migrate from bidding on scarce private sector work to projects in the public sector. Greater competition can reduce our revenue growth and/or have a downward impact on gross profit margins. In addition, a stagnant or declining economy tends to produce less tax revenue, thereby decreasing a source of funds available for spending on public infrastructure improvements. There are funding sources that have been specifically earmarked for infrastructure spending, such as diesel and gasoline taxes, which are not as directly impacted by a stagnant or declining economy. However, even these funding sources can be temporarily at risk as state and local governments struggle to balance their budgets. Additionally, high fuel prices can have a damping effect on consumption, resulting in overall lower tax revenue. Conversely, higher public funding as well as an expanding or robust economy will generally increase demand for our services and provide opportunities for revenue growth and margin improvement.

Our general and administrative costs include salaries and related expenses, incentive compensation, discretionary profit sharing, provision for doubtful accounts and other costs to support our business. In general, these costs will increase in response to the growth and the related increased complexity of our business. These costs will vary depending on the number of projects in process in a particular area and the corresponding level of estimating activity. For example, as large projects are completed or if the level of work slows down in a particular area, we will often re-assign project employees to estimating and bidding activities until another project gets underway, temporarily allocating their salaries and related costs from cost of revenue to general and administrative expense. Additionally, our compensation strategy for selected management personnel is to rely heavily on a variable cash and restricted stock performance-based incentive element. The cash portion of these incentives is expensed when earned while the restricted stock portion is expensed over the vesting period of the restricted stock award. Depending on the mix of cash and restricted stock, these incentives can have the effect of materially altering general and administrative expenses from year to year.

Table of Contents

Results of Operations:

Comparative Financial Summary	Three Months Ended September 30,						Nine Months Ended September 30,
(in thousands)	2008			2007			2008			2007
Revenue	$	897,788		$	846,313		$	2,046,920		$	2,104,849
Gross profit		144,302			136,637			352,022			312,307
General and administrative expenses		71,933			63,666			198,344			183,133
Gain on sales of property and equipment		2,008			2,994			4,564			8,053
Operating income		74,377			75,965			158,242			137,227
Other (expense) income, net		(572	)		9,276			9,976			19,100
Minority interest in consolidated subsidiaries		(594	)		(6,504	)		(31,058	)		(13,750	)
Net income		51,738			53,300			90,479			94,897

Our results of operations for the three and nine months ended September 30, 2008 reflect continued growth in Granite West public sector projects despite a slowing economy and a very competitive market, as well as a continuation of profitability improvement in Granite East.

Total Revenue	Three Months Ended September 30,										Nine Months Ended September 30,
	2008					2007					2008					2007
(in thousands)	Amount			%		Amount			%		Amount			%		Amount			%
Revenue by Division:
Granite West		$	749,487		83.4		$	642,428		75.9		$	1,506,952		73.6		$	1,482,969		70.5
Granite East			146,932		16.4			182,647		21.6			531,826		26.0			585,324		27.8
Granite Land Company			1,369		0.2			21,238		2.5			8,142		0.4			36,556		1.7
Total		$	897,788		100.0		$	846,313		100.0		$	2,046,920		100.0