Edgar Filing: GRANITE CONSTRUCTION INC

Granite Construction Incorporated Form 10-Q 09/30/2006

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, 2006

¨	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 checkmark 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 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. ý Yes ¨ No

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

Large accelerated filer ý

Accelerated filer ¨

Non-accelerated filer ¨

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 20, 2006.

Class		Outstanding
Common Stock, $0.01 par value		41,845,981 shares

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Index



PART I. FINANCIAL INFORMATION
	Item 1.	Financial Statements (unaudited)
		Condensed Consolidated Balance Sheets as of September 30, 2006, December 31, 2005 and September 30, 2005
		Condensed Consolidated Statements of Operations for the Three and Nine Months Ended September 30, 2006 and 2005
		Condensed Consolidated Statements of Cash Flows for the Nine Months Ended September 30, 2006 and 2005
		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 31.1
EXHIBIT 31.2
EXHIBIT 32

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PART I. FINANCIAL INFORMATION

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Item 1.

FINANCIAL STATEMENTS (unaudited)

Granite Construction Incorporated CONDENSED CONSOLIDATED BALANCE SHEETS (Unaudited - in thousands, except share and per share data)
	September 30, 2006		December 31, 2005			September 30, 2005
Assets
Current assets
Cash and cash equivalents	$	202,382	$	199,881		$	159,297
Short-term marketable securities		140,869		68,540			81,043
Accounts receivable, net		634,548		476,453			586,476
Costs and estimated earnings in excess of billings		31,199		43,660			50,306
Inventories		42,020		33,161			31,699
Real estate held for sale		50,141		46,889			45,931
Deferred income taxes		22,475		22,996			20,581
Equity in construction joint ventures		37,969		27,408			24,514
Other current assets		32,988		57,960			30,329
Total current assets		1,194,591		976,948			1,030,176
Property and equipment, net		422,212		397,111			408,912
Long-term marketable securities		45,759		32,960			32,163
Investments in affiliates		20,564		15,855			10,887
Other assets		63,656		49,356			49,889
Total assets	$	1,746,782	$	1,472,230		$	1,532,027
Liabilities and Shareholders’ Equity
Current liabilities
Current maturities of long-term debt	$	27,673	$	26,888		$	21,772
Accounts payable		322,537		232,807			309,281
Billings in excess of costs and estimated earnings		327,272		208,883			189,067
Accrued expenses and other current liabilities		183,968		140,569			176,901
Total current liabilities		861,450		609,147			697,021
Long-term debt		90,151		124,415			128,539
Other long-term liabilities		56,335		46,556			46,007
Deferred income taxes		37,325		37,325			44,135
Commitments and contingencies
Minority interest in consolidated subsidiaries		11,840		33,227			28,995
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 as of September 30, 2006 and 100,000,000 shares as of December 31, 2005 and September 30, 2005; issued and outstanding 41,845,981 shares as of September 30, 2006, 41,682,010 shares as of December 31, 2005 and 41,699,060 shares as of September 30, 2005		418		417			417
Additional paid-in capital		72,742		80,619			79,148
Retained earnings		614,141		549,101			517,460
Accumulated other comprehensive income		2,380		1,602			2,112
Unearned compensation		-		(10,179	)		(11,807	)
Total shareholders’ equity		689,681		621,560			587,330
Total liabilities and shareholders’ equity	$	1,746,782	$	1,472,230		$	1,532,027

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

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Granite Construction Incorporated CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS (Unaudited - in thousands, except per share data)

	Three Months Ended September 30,						Nine Months Ended September 30,
	2006			2005			2006			2005
Revenue
Construction	$	808,297		$	756,390		$	1,946,121		$	1,723,231
Material sales		133,375			107,772			303,556			238,569
Total revenue		941,672			864,162			2,249,677			1,961,800
Cost of revenue
Construction		737,281			670,178			1,779,494			1,558,990
Material sales		98,459			84,283			230,906			189,462
Total cost of revenue		835,740			754,461			2,010,400			1,748,452
Gross profit		105,932			109,701			239,277			213,348
General and administrative expenses		58,560			50,149			155,751			129,625
Provision for legal judgment		-			-			-			9,300
Gain on sales of property and equipment		1,230			2,441			9,517			4,656
Operating income		48,602			61,993			93,043			79,079
Other income (expense)
Interest income		7,055			2,693			16,732			6,820
Interest expense		(1,319	)		(1,734	)		(4,105	)		(5,401	)
Equity in income of affiliates		770			85			1,521			8
Other, net		(8	)		176			2,700			(548	)
Total other income		6,498			1,220			16,848			879
Income before provision for income taxes and minority interest		55,100			63,213			109,891			79,958
Provision for income taxes		22,796			18,791			39,068			23,319
Income before minority interest		32,304			44,422			70,823			56,639
Minority interest in consolidated subsidiaries		13,421			(3,771	)		6,769			(9,301	)
Net income	$	45,725		$	40,651		$	77,592		$	47,338

Net income per share
Basic	$	1.12		$	1.00		$	1.90		$	1.17
Diluted	$	1.10		$	0.98		$	1.87		$	1.15

Weighted average shares of common stock
Basic		40,923			40,656			40,853			40,594
Diluted		41,546			41,340			41,434			41,192

Dividends per share	$	0.10		$	0.10		$	0.30		$	0.30

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

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Granite Construction Incorporated CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (Unaudited - in thousands)
Nine Months Ended September 30,	2006			2005
Operating Activities
Net income	$	77,592		$	47,338
Adjustments to reconcile net income to net cash provided by operating activities:
Depreciation, depletion and amortization		51,153			48,881
Gain on sales of property and equipment		(9,517	)		(4,656	)
Change in deferred income taxes		-			80
Stock-based compensation		5,762			4,451
Common stock contributed to ESOP		1,995			1,994
Minority interest in consolidated subsidiaries		(6,769	)		9,301
Equity in income of affiliates		(1,521	)		(8	)
Changes in assets and liabilities:
Accounts receivable		(162,174	)		(232,220	)
Inventories		(8,859	)		12
Real estate held for sale		(5,042	)		(12,112	)
Equity in construction joint ventures		(10,561	)		(3,619	)
Other assets		20,611			12,745
Accounts payable		89,730			117,499
Billings in excess of costs and estimated earnings, net		130,850			48,744
Accrued expenses and other liabilities		44,709			62,317
Net cash provided by operating activities		217,959			100,747
Investing Activities
Purchases of marketable securities		(147,229	)		(61,538	)
Maturities of marketable securities		69,024			70,414
Additions to property and equipment		(90,103	)		(84,615	)
Proceeds from sales of property and equipment		15,681			9,285
Contributions to affiliates		(6,600	)		(401	)
Distributions to affiliates		1,978			247
Issuance of notes receivable		(500	)		-
Collection of notes receivable		2,911			-
Other investing activities		(634	)		-
Net cash used in investing activities		(155,472	)		(66,608	)
Financing Activities
Additions to long-term debt		51,074			27,769
Repayments of long-term debt		(75,990	)		(44,159	)
Dividends paid		(12,537	)		(12,504	)
Repurchases of common stock		(6,369	)		(5,255	)
Contributions from minority partners		5,909			911
Distributions to minority partners		(22,988	)		(3,505	)
Other financing activities		915			274
Net cash used in financing activities		(59,986	)		(36,469	)
Increase (decrease) in cash and cash equivalents		2,501			(2,330	)
Cash and cash equivalents at beginning of period		199,881			161,627
Cash and cash equivalents at end of period	$	202,382		$	159,297

Supplementary Information
Cash paid during the period for:
Interest	$	4,159		$	4,708
Income taxes		42,009			6,436
Non-cash investing and financing activity:
Restricted stock issued for services		9,639			5,370
Dividends accrued but not paid		4,185			4,170
Financed acquisition of assets		4,835			2,337
Escrow funds from sale of assets		-			1,250
Debt repayments from sale of assets		13,398			-

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

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Granite Construction Incorporated

NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)

1.	Basis of Presentation:

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, 2005. 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, 2006 and 2005 and the results of our operations and cash flows for the periods presented. The December 31, 2005 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, 2006 are not necessarily indicative of the results to be expected for the full year.

Revenue Recognition: As more fully described in Note 1 to our consolidated financial statements “Summary of Significant Accounting Policies,” included in our 2005 Form 10-K, revenue and earnings on construction contracts, including construction joint ventures, are recognized on the percentage of completion method in the ratio of costs incurred to estimated final costs. For all projects, revenue in an amount equal to cost incurred is recognized prior to contracts reaching 25% completion. The related profit is deferred until the period in which 25% completion is attained. It is our judgment that until a project reaches 25% completion, there is insufficient information to determine what the estimated profit on the project will be with a reasonable level of assurance.

Additionally, as a result of experience gained on past design/build projects, we now evaluate each design/build project individually to determine whether it is appropriate to begin profit recognition at 25% complete or at a later point. The factors considered in this evaluation of risk associated with each design/build project include the stage of design completion, the stage of construction completion, status of outstanding purchase orders and subcontracts, certainty of quantities, certainty of schedule and the relationship with the owner.

2.	Recently Issued Accounting Pronouncements:

In July 2006, the Financial Accounting Standards Board (“FASB”) issued Interpretation No. 48, “Accounting for Uncertainty in Income Taxes - an Interpretation of FASB Statement 109” (“FIN 48”). FIN 48 prescribes a comprehensive model for recognizing, measuring, presenting and disclosing in the financial statements tax positions taken or expected to be taken on a tax return, including a decision whether to file or not to file in a particular jurisdiction. FIN 48 is effective for fiscal years beginning after December 15, 2006. We are currently evaluating the impact of implementing FIN 48 on our consolidated financial statements.

In September 2006, the Securities and Exchange Commission (“SEC”) issued Staff Accounting Bulletin No. 108 (“SAB 108”). Due to diversity in practice among registrants, SAB 108 expresses SEC staff views regarding the process by which misstatements in financial statements are evaluated for purposes of determining whether financial statement restatement is necessary. SAB 108 is effective for fiscal years ending after November 15, 2006, and early application is encouraged. We are currently evaluating the impact of SAB 108 on our consolidated financial statements.

In September 2006, the FASB issued Statement of Financial Accounting Standard No. 157, “Fair Value Measurements” (“SFAS 157”). SFAS 157 defines fair value, establishes a framework for measuring fair value and expands disclosures about fair value measurements, but does not change existing guidance as to whether or not an instrument is carried at fair value. SFAS 157 is effective for fiscal years beginning after November 15, 2007. We are currently evaluating the impact of implementing SFAS 157 on our consolidated financial statements.

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Granite Construction Incorporated

NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)

3.	Change in Accounting Estimate:

Our gross profit in the three and nine months ended September 30, 2006 and 2005 include the effects of significant changes in the estimates of the profitability of certain of our Heavy Construction Division ("HCD") projects. The net effect of these estimate changes decreased gross profit in each period.


Heavy Construction Division Change in Accounting Estimate	Three Months Ended September 30,						Nine Months Ended September 30,
(dollars in millions)	2006			2005			2006			2005
Reduction in gross profit from projects with downward estimate changes	$	(56.0	)	$	(11.0	)	$	(104.2	)	$	(33.5	)
Increase in gross profit from projects with upward estimate changes		16.1			1.0			23.7			1.0
Net reduction in gross profit	$	(39.9	)	$	(10.0	)	$	(80.5	)	$	(32.5	)
Number of projects with significant downward estimate changes		10			5			16			11
Range of reduction to gross profit from each project*	$	1.3 - 22.2		$	1.0 - 3.2		$	1.0 - 26.5		$	1.2 - 6.8
Number of projects with significant upward estimate changes		6			1			7			1
Range of increase to gross profit from each project*	$	1.0 - 8.3		$	1.0		$	1.0 - 7.2		$	1.0

*	The reduction to gross profit from each project is net of any increases in the respective periods. The increase to gross profit from each project is net of any reductions in the respective periods.

The downward adjustments in estimated project profitability were made in response to unanticipated changes in project conditions occurring during the periods when recorded and were due to a variety of factors, including changes in productivity and quantity estimates based on experience gained in the quarter, design issues on design/build projects, site conditions that differed from our expectations, issues related to subcontractors, costs associated with owner directed scope changes and owner delays, changes in cost expectations in response to market factors for labor and certain materials and liquidated damages.

Our minority partners’ share of the net reduction in gross profit was $15.1 million and $20.9 million for the three and nine months ended September 30, 2006, respectively, and $1.1 million and $1.8 million for the three and nine months ended September 30, 2005, respectively. Four joint venture projects are forecasted at a loss at September 30, 2006 and will require additional capital contributions from our minority partners if the forecasts do not improve. Our joint venture agreements require that such capital contributions be made and we currently believe that our partners have the ability to contribute the additional capital if it is needed. The minority interest balance for these projects is $11.2 million at September 30, 2006 and has been included in other long-term assets in our condensed consolidated balance sheet.

The ten HCD projects with significant downward adjustments in estimated project profitability during the third quarter of 2006 were at various stages of completion at September 30, 2006 ranging from 22.6% to 98.0%. Eight of these projects also had significant downward estimate changes in 2005 and/or the first two quarters of 2006. Two of the ten HCD projects with downward estimate changes during the three months ended September 30, 2006 had combined downward adjustments that totaled approximately $30.8 million. As of September 30, 2006 and September 30, 2005, HCD had 45 and 50 active projects, respectively.

There was an increase in estimated profitability of six HCD projects during the three months ended September 30, 2006, four of which were substantially complete. These increases partially offset the downward adjustments on gross profit. The majority of the increases in estimated profitability related to the settlement of outstanding issues and resolution of uncertainties for which the associated cost was recognized in prior periods. Three of the six projects had significant downward estimate changes in 2005 and/or the first two quarters of 2006.

When there are contract forecast changes having the significance of those we experienced in the quarter ended September 30, 2006, we undergo a process that includes reviewing the nature of the changes to ensure that there are no material amounts that should have been recorded in a prior period rather than as a change in estimate. In our review of the changes for the 2006 quarter we did not identify any material amounts that should have been recorded in a prior period.

We believe we are entitled to additional compensation related to some of our downward estimate changes and are actively pursuing these issues with the contract owners, but the amount and timing of any future recovery is highly uncertain. While we recognize the impact of estimated costs immediately when known, under our accounting policies we do not recognize revenue from contract changes until we have a signed change order or executed claim settlement. We believe that our current estimates of the gross profit are achievable. However, it is possible that the actual cost to complete will vary from our current estimate and any future estimate changes could be significant.

Additionally, our gross profit in the nine months ended September 30, 2006 include the effects of changes in the estimates of the profitability of certain of our Branch Division projects. The net impact of these estimate changes for the nine months ended September 30, 2006 was an increase to gross profit of approximately $3.9 million due primarily to the settlement of outstanding issues on two projects with no associated cost, partially offset by additional estimated costs on several other projects. The net impact of these estimate changes for the nine months ended September 30, 2005 was a decrease to gross profit of approximately $4.9 million due primarily to unanticipated costs related to quality issues in work originally performed by a subcontractor on one project and changes in site conditions from our original expectations on a second project.

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Granite Construction Incorporated

NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)

4.	Inventories:

Inventories consist primarily of quarry products valued at the lower of average cost or market.

5.	Property and Equipment, Net:


(in thousands)	September 30, 2006		December 31, 2005		September 30, 2005
Land	$	60,372	$	54,782	$	54,714
Quarry property		106,773		104,662		106,185
Buildings and leasehold improvements		71,140		77,788		76,962
Equipment and vehicles		792,327		746,014		754,180
Office furniture and equipment		23,983		21,047		19,663
Property and equipment		1,054,595		1,004,293		1,011,704
Less: accumulated depreciation, depletion and amortization		632,383		607,182		602,792
Property and equipment, net	$	422,212	$	397,111	$	408,912

6.	Intangible Assets:

The following table indicates the allocation of goodwill by reportable segment which is included in other assets on our condensed consolidated balance sheets:


(in thousands)	September 30, 2006		December 31, 2005		September 30, 2005
Goodwill by segment:
Heavy Construction Division	$	18,011	$	18,011	$	18,011
Branch Division		9,900		9,900		9,900
Total goodwill	$	27,911	$	27,911	$	27,911

Also included in other assets on our condensed consolidated balance sheets are other intangible assets with a net book value of $2.5 million, $2.3 million and $2.5 million at September 30, 2006, December 31, 2005 and September 30, 2005, respectively. Amortization expense related to intangible assets was approximately $236,000 and $426,000 for the three and nine months ended September 30, 2006, respectively, and approximately $151,000 and $453,000 for the three and nine months ended September 30, 2005, respectively. Amortization expense expected to be recorded in the future is as follows: $133,000 for the balance of 2006, $558,000 in 2007, $554,000 in 2008, $269,000 in 2009, $231,000 in 2010 and $747,000 thereafter.

The Heavy Construction Division goodwill relates to our 2001 acquisition of Halmar Builders in New York, which has had difficulty achieving operating results that are consistent with our expectations. We have reviewed the goodwill balance for impairment at September 30, 2006 and have concluded that goodwill is not impaired. However, events or circumstances could arise in the future that may create a need to record an impairment adjustment.

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Granite Construction Incorporated

NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)

7.	Construction Joint Ventures:

We participate in various construction joint venture partnerships. 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 interest 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 interest in the project. Although each 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 no significant commitments beyond completion of the contract.

We have determined that certain of these joint ventures are variable interest entities as defined by FASB Interpretation No. 46 (revised December 2003), “Consolidation of Variable Interest Entities.” Accordingly, we have consolidated those joint ventures where we have determined that we are the primary beneficiary. At September 30, 2006, the joint ventures we have consolidated were engaged in construction projects with total contract values ranging from $66.2 million to $441.9 million. Our proportionate share of the consolidated joint ventures ranges from 52.0% to 79.0%.

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 share of the operations of construction joint ventures in which we have determined we are not the primary beneficiary on a pro rata basis in the consolidated statements of operations and as a single line item in the consolidated balance sheets. At September 30, 2006, the joint ventures in which we hold a significant interest but are not the primary beneficiary were engaged in construction projects with total contract values ranging from $2.2 million to $347.9 million. Our proportionate 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 venture partner bears 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 balance sheet.

Although our agreements with our joint venture partners for both construction joint ventures and line item joint ventures provide that each party will assume and pay its share of any losses resulting from a project, if one of our partners is unable to pay its share, 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, 2006, approximately $424.7 million of work representing our partners’ share of unconsolidated and line item joint venture contracts in progress had yet to be completed.

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Granite Construction Incorporated

NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)

8.	Real Estate Partnerships:

We participate in real estate partnerships. Generally, each partnership is formed to accomplish a specific real estate development project. We have determined that certain of these partnerships are variable interest entities as defined by FASB Interpretation No. 46 (revised December 2003), “Consolidation of Variable Interest Entities.” Accordingly, we have consolidated those partnerships where we have determined that we are the primary beneficiary. At September 30, 2006, the partnerships we have consolidated were engaged in development projects with total assets ranging from approximately $1.4 million to $23.6 million. At September 30, 2006, approximately $50.1 million was classified as real estate held for sale on our condensed consolidated balance sheet and of that balance approximately $48.1 million was pledged as collateral for the obligations of consolidated real estate partnerships. Our proportionate share of the results of these partnerships varies depending on the ultimate profitability of the partnerships.

We account for our share of the operations of real estate partnerships in which we have determined we are not the primary beneficiary as a single line item in the consolidated balance sheets and consolidated statements of operations. At September 30, 2006, the partnerships in which we hold a significant interest but are not the primary beneficiary were engaged in development projects with total assets ranging from approximately $2.8 million to $57.4 million. Total liabilities of real estate partnerships where we are not the primary beneficiary were approximately $72.0 million at September 30, 2006. Our proportionate share of the results of these partnerships varies depending on the ultimate profitability of the partnerships.

9.	Stock-based Compensation:

We provide certain stock-based compensation under our Amended and Restated 1999 Equity Incentive Plan (the “Plan”). Prior to January 1, 2006, we accounted for stock-based compensation under Statement of Financial Accounting Standard No. 123. Effective January 1, 2006, we adopted FASB Statement No. 123 (revised 2004), “Share-Based Payment” (“SFAS 123-R”) and Securities and Exchange Commission Staff Accounting Bulletin No. 107 (“SAB 107”) using the modified prospective transition method.

The primary change to our accounting for stock-based compensation as a result of this change in accounting principle is that forfeitures of restricted stock will be estimated and accounted for at the time of grant and updated based on actual forfeitures over the vesting period rather than accounting for forfeitures as they occur. The cumulative effect of our transition to SFAS 123-R, resulting from the change in accounting for forfeitures, was not significant and therefore was recognized as an adjustment to compensation cost, representing previously recognized compensation cost on restricted shares outstanding as of January 1, 2006 which we do not expect to vest. Additionally, prior to our adoption of SFAS 123-R, we presented all tax benefits for deductions resulting from our stock-based compensation as operating cash flows on our consolidated statements of cash flows. SFAS 123-R requires the benefits of tax deductions in excess of recognized compensation expense (“Excess Tax Benefits”) to be reported as a financing cash flow, rather than as an operating cash flow. This requirement will reduce net operating cash flows and increase net financing cash flows in periods after adoption. Total cash flow will remain unchanged from what would have been reported under prior accounting rules. There were no Excess Tax Benefits recorded during the three and nine months ended September 30, 2006.

The Plan provides for the grant of restricted common stock, incentive and nonqualified stock options, performance units and performance shares to employees and awards to members of our Board of Directors in the form of stock units or stock options (“Director Options”). A total of 4,250,000 shares of our common stock have been reserved for issuance under the Plan of which approximately 2,321,000 remained available as of September 30, 2006.

Restricted Stock: Restricted common stock is issued for services to be rendered and may not be sold, transferred or pledged for such period as determined by our compensation committee. Restricted stock compensation cost is measured as the stock’s fair value based on the market price at the date of grant. We recognize compensation cost only on restricted shares that will ultimately vest. We estimate the number of shares that will ultimately vest at each grant date based on our historical experience and adjust compensation cost and the carrying amount of unearned compensation based on changes in those estimates over time. Prior to our adoption of SFAS 123-R, we did not estimate forfeitures at the time of grant; rather, we recognized the effects of forfeitures in the period in which the forfeitures occurred.

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Granite Construction Incorporated

NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)

Restricted stock compensation cost is recognized ratably over the shorter of the vesting period (generally three to five years) or the period from grant date to the first maturity date after the holder reaches age 62 and has completed certain specified years of service, when all restricted shares become fully vested. Vesting of restricted shares is not subject to any market or performance conditions. An employee may not sell or otherwise transfer unvested shares and, in the event that employment is terminated prior to the end of the vesting period, any unvested shares are surrendered to us. We have no obligation to repurchase restricted stock.

A summary of the status of our restricted stock as of September 30, 2006 and changes during the three months and nine months ended September 30, 2006 are as follows:


	Three Months Ended September 30, 2006				Nine Months Ended September 30, 2006
(shares in thousands)	Shares		Weighted-average grant-date fair value per share		Shares			Weighted-average grant-date fair value per share
Restricted shares outstanding, beginning balance		919	$	27.13		1,005		$	21.44
Restricted shares granted		-		-		214			47.94
Restricted shares vested		-		-		(288	)		22.65
Restricted shares forfeited		-		-		(12	)		28.79
Restricted shares outstanding, ending balance		919	$	27.13		919		$	27.13

Compensation cost related to restricted shares was approximately $2.0 million ($1.2 million net of tax) and $5.8 million ($3.7 million net of tax) for the three and nine months ended September 30, 2006, respectively. The grant date fair value of restricted shares vested during the nine months ended September 30, 2006 was approximately $6.5 million. As of September 30, 2006 there was $13.8 million of unrecognized compensation cost related to restricted shares which will be recognized over a remaining weighted-average period of 2.3 years. Prior to the adoption of SFAS 123-R, unrecognized compensation cost related to restricted shares was included in unearned compensation on our condensed consolidated balance sheet. Upon adoption of SFAS 123R, we reclassified the unrecognized compensation cost, approximately $10.2 million, to additional paid-in capital.

Options and Stock Units: To date we have granted options and stock units only to members of our Board of Directors, who are required to receive at least 50% of their director’s fees in the form of a stock-based award in lieu of cash. Options granted to our Board of Directors are immediately exercisable and expire over varying terms not to exceed 10 years. We estimate and record the fair value of each option grant using the Black-Scholes option-pricing model. Each stock unit can be exchanged for a share of our common stock, has no vesting requirement and is recorded at fair value using the market price of our common stock at the date of grant. There were 48,000 options and 17,000 stock units outstanding at September 30, 2006. The number and financial impact of Director Options and units are considered immaterial for further disclosure.

Wilder Common Stock: We currently own approximately 75% of the outstanding common stock of Wilder Construction Company. All of the remaining non-Granite held common shares are redeemable by the holders upon retirement, voluntary termination, death or permanent disability. A portion of these shares are accounted for as stock-based compensation and are carried at fair value which is equivalent to the current redemption price. Changes in the redemption price are recorded as compensation expense and were not significant in either the three or nine month periods ended September 30, 2006 or 2005. Prior to our adoption of SFAS 123-R, the redemption value of these shares was included in minority interest. Upon adoption of SFAS 123-R, we reclassified the redemption value of these shares, approximately $8.6 million, to other long-term liabilities.

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Granite Construction Incorporated

NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)

10.

Weighted Average Shares Outstanding:

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


	Three Months Ended September 30,				Nine Months Ended September 30,
(in thousands)	2006		2005		2006		2005
Weighted average shares outstanding:
Weighted average common stock outstanding		41,840		41,708		41,789		41,672
Less: weighted average restricted stock outstanding		917		1,052		936		1,078
Total basic weighted average shares outstanding		40,923		40,656		40,853		40,594
Diluted weighted average shares outstanding:
Basic weighted average shares outstanding		40,923		40,656		40,853		40,594
Effect of dilutive securities:
Common stock options and units		46		76		46		67
Restricted stock		577		608		535		531
Total weighted average shares outstanding		41,546		41,340		41,434		41,192

Restricted stock representing approximately 154,000 shares for the three months ended September 30, 2006 and approximately 169,000 shares and 63,000 shares for the nine months ended September 30, 2006 and 2005, respectively, have been excluded from the calculation of diluted net income per share because their effects are anti-dilutive.

11.

Comprehensive Income:

The components of comprehensive income, net of tax, are as follows:


	Three Months Ended September 30,				Nine Months Ended September 30,
(in thousands)	2006		2005		2006		2005
Net income	$	45,725	$	40,651	$	77,592	$	47,338
Other comprehensive income:
Changes in net unrealized gains on investments		557		596		778		637
Total comprehensive income	$	46,282	$	41,247	$	78,370	$	47,975

12.	Provision for Income Taxes:

Our effective tax rate increased to 41.4% and 35.6% for the three and nine month periods ended September 30, 2006, respectively, from 29.7% and 29.2% for the corresponding periods in 2005. The increased effective tax rate is due primarily to an estimated loss in our minority partners' share of income in our consolidated construction joint ventures, since they are not subject to income taxes on a stand-alone basis. A discrete period tax benefit of approximately $3.5 million for a provision for a legal judgment was recorded in the second quarter of 2005 (see Note 13).

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Granite Construction Incorporated

NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)

13.	Legal Proceedings:

Eldredge

A $9.3 million judgment was entered in June 2005 against our wholly owned subsidiary Granite Construction Company (“GCCO”) by the District Court Clark County, Nevada, in an action entitled Eldredge vs. Las Vegas Valley Water District, GCCO, et al. The civil lawsuit was initially brought by a former employee of GCCO against the Las Vegas Water District in June 2000. The plaintiff subsequently filed an amended complaint on June 10, 2003, bringing GCCO into the action and seeking compensation in addition to the worker’s compensation payments the employee previously accepted for injuries sustained when a trench excavation collapsed. The jury issued a verdict finding against GCCO on two causes of action, assault and battery and intentional infliction of emotional distress. The judgment awarded damages for past and future lost wages, medical expenses and pain and suffering. Although no punitive damages were assessed, GCCO’s insurance carriers have denied coverage for this judgment.

We have filed an appeal of the judgment with the Supreme Court of Nevada. The Supreme Court of Nevada will establish a briefing and argument schedule that we anticipate will take up to a year to complete.

During the three months ended June 30, 2005, we recorded a provision of $9.3 million, which was estimated based on the amount of the judgment described above. The judgment will accrue interest until it is satisfied.

After the verdict was issued, the plaintiff filed a motion seeking monetary sanctions against GCCO in the amount of $26.8 million (a multiple of the jury verdict) based on allegations that GCCO and/or its trial counsel improperly withheld and/or attempted to influence testimony in respect to the case. GCCO’s opposition to the motion and the plaintiff’s reply have been filed with the Court. We believe that the plaintiff has failed to submit any meaningful proof to support these allegations, that the motion is without merit and that it is highly unlikely that the motion will be granted. The judge decided after the sanctions motion was heard in September 2005 to reserve any decision and calendared the motion for a status check in March 2007.

Silica

GCCO is one of approximately 100 to 300 defendants in ten active California Superior Court lawsuits. Of the ten lawsuits five were filed against GCCO in 2005 and two were filed against GCCO in previous quarters in 2006, in Alameda County (Riley vs. A-1 Aggregates, et al.; 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.; and Horne vs. Teichert & Son, Inc.). The remaining three of the ten lawsuits were filed against GCCO in the current quarter (Harris vs. A-1 Aggregates, et al.; 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, 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 fourteen other similar lawsuits. In addition, we have been apprised of three complaints that are based on similar allegations of exposure to silica containing products being filed, but not served, against GCCO and more than 100 other defendants in California Superior Court.

Other

We are a party to a number of other legal proceedings arising in the normal course of business which, from time to time, includes 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 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 these proceedings, 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.

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Granite Construction Incorporated

NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)

14.

Business Segment Information:

We have two reportable segments: the Branch Division and HCD. The Branch Division is composed of branch offices, including our majority owned subsidiary, Wilder Construction Company, that serve local markets, while HCD pursues major infrastructure projects throughout the nation. HCD focuses on building larger heavy-civil projects with contract durations that are frequently greater than two years, while the Branch Division projects are typically smaller in size and shorter in duration. HCD has been the primary participant in our construction joint ventures. Substantially all of our revenue from the sale of materials is from the Branch Division.

The accounting policies of the segments are the same as those described in the summary of significant accounting policies contained in our 2005 Annual Report on Form 10-K. Internally, 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.

Branch Division operating income for the nine months ended September 30, 2005 includes a $9.3 million provision for a legal judgment (see Note 13). During the nine months ended September 30, 2006, we also recorded revenue and operating income of $34.6 million and $18.2 million, respectively, primarily related to sales of certain real estate development assets by our Granite Land Company that are not included in either the Branch Division or HCD. Of the $18.2 million in Granite Land Company operating income, approximately $7.9 million is our minority partners' share.

Summarized segment information is as follows:


	Three Months Ended September 30,
(in thousands)	HCD			Branch		Total
2006
Revenue from external customers	$	296,193		$	644,566	$	940,759
Inter-segment revenue transfer		(9,489	)		9,489		-
Net revenue		286,704			654,055		940,759
Depreciation, depletion and amortization		3,838			12,657		16,495

Operating (loss) income		(35,187	)		104,819		69,632
2005
Revenue from external customers	$	300,334		$	561,651	$	861,985
Inter-segment revenue transfer		(9,166	)		9,166		-
Net revenue		291,168			570,817		861,985
Depreciation, depletion and amortization		3,775			11,765		15,540
Operating income		1,425			72,358		73,783

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Granite Construction Incorporated

NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)


	Nine Months Ended September 30,
(in thousands)	HCD			Branch		Total
2006
Revenue from external customers	$	863,415		$	1,351,670	$	2,215,085
Inter-segment revenue transfer		(24,780	)		24,780		-
Net revenue		838,635			1,376,450		2,215,085
Depreciation, depletion and amortization		11,026			37,405		48,431
Operating (loss) income		(66,152	)		185,146		118,994
Property and equipment		47,507			351,137		398,644
2005
Revenue from external customers	$	795,850		$	1,163,259	$	1,959,109
Inter-segment revenue transfer		(26,445	)		26,445		-
Net revenue		769,405			1,189,704		1,959,109
Depreciation, depletion and amortization		11,258			32,763		44,021
Operating income		8,130			101,835		109,965
Property and equipment		48,827			318,849		367,676

A reconciliation of segment operating income to consolidated totals is as follows:


	Three Months Ended September 30,						Nine Months Ended September 30,
(in thousands)	2006			2005			2006			2005
Total operating income for reportable segments	$	69,632		$	73,783		$	118,994		$	109,965
Other income		6,498			1,220			16,848			879
Gain on sales of property and equipment		1,230			2,441			9,517			4,656
Unallocated other corporate expense		(22,009	)		(14,954	)		(50,729	)		(35,226	)
Granite Land Company operating (loss) income excluding gain on sales of property and equipment		(251	)		723			15,261			(316	)
Income before provision for income taxes and minority interest	$	55,100		$	63,213		$	109,891		$	79,958

15.

Line of Credit:

On June 23, 2006, we entered into an agreement amending our $150.0 million bank revolving line of credit. The amendment extends the term of the revolving line of credit to allow for unsecured borrowings through June 24, 2011, with interest rate options. Interest on outstanding borrowings under the revolving line of credit is at our choice of selected LIBOR rates plus a margin that is recalculated quarterly. The margin was 0.70% at September 30, 2006. The unused and available portion of this line of credit was $133.6 million at September 30, 2006. Restrictive covenants under the terms of our debt agreements require the maintenance of certain financial ratios and the maintenance of tangible net worth (as defined). We were in compliance with these covenants at September 30, 2006.

16.

Reclassifications:

Certain financial statement items have been reclassified to conform to the current period's format. These reclassifications had no impact on previously reported results of operations, financial position or cash flows.

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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 the forward-looking statements. We wish to caution readers that forward-looking statements are subject to risks regarding future events and future results of Granite that are based on current expectations, estimates, forecasts, and projections as well as the beliefs and assumptions of Granite’s management. 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 that rely on a number of assumptions 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.

General

We are one of the largest heavy civil contractors in the United States and are engaged in the construction of highways, dams, airport infrastructure, mass transit facilities and other infrastructure-related projects. We have offices in Alaska, Arizona, California, Florida, Minnesota, Nevada, New York, Oregon, Texas, Utah and Washington. Our business involves two operating segments: the Branch Division and the Heavy Construction Division (“HCD”).

Our 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, 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.

The two primary economic drivers of our business are (1) federal, state and local public funding levels and (2) the overall health of the economy, both nationally and locally. The level of demand for our services will have a direct correlation to these drivers. For example, a weak economy will generally result in a reduced demand for construction in the private sector. This reduced demand increases competition for fewer private sector projects and may 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 revenue growth and/or increase pressure on gross profit margins. A weak economy also tends to produce less tax revenue, thereby decreasing the funds available for spending on public infrastructure improvements. There are funding sources that have been specifically earmarked for infrastructure spending, such as gasoline taxes, which are not necessarily directly impacted by a weak economy. However, even these funds can be temporarily at risk as state and local governments struggle to balance their budgets. Conversely, higher public funding and/or a robust economy will increase demand for our services and provide opportunities for revenue growth and profit improvement.

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Our general and administrative costs include salaries and related expenses, incentive compensation, discretionary profit sharing and other variable compensation, as well as other overhead costs to support our overall business. In general, these costs will increase in response to the growth and the related increased complexity of our business. These costs may also 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 moving 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 stock (generally five years). Depending on the mix of cash and restricted stock, these incentives can have the effect of increasing general and administrative expenses in very profitable years and decreasing expenses in less profitable years.

Results of Operations


Comparative Financial Summary	Three Months Ended September 30,				Nine Months Ended September 30,
(in thousands)	2006		2005		2006		2005
Revenue	$	941,672	$	864,162	$	2,249,677	$	1,961,800
Gross profit		105,932		109,701		239,277		213,348
General and administrative expenses		58,560		50,149		155,751		129,625
Provision for legal judgment		-		-		-		9,300
Gain on sales of property and equipment		1,230		2,441		9,517		4,656
Operating income		48,602		61,993		93,043		79,079
Net income		45,725		40,651		77,592		47,338

Our results of operations for the three and nine months ended September 30, 2006 reflect strong results from our Branch Division which realized higher revenue and gross profit on construction projects and higher gross profit on the sales of construction materials than in the corresponding periods in 2005. These improved results were partially offset by an operating loss in our Heavy Construction Division due primarily to additional costs recorded as a result of changes in the estimates of the cost to complete certain projects. Operating income for the nine months ended September 30, 2006 includes approximately $18.2 million related to sales of certain real estate development assets by our Granite Land Company subsidiary (approximately $10.3 million net of our minority partners’ share). Additionally, our net income for the three and nine months ended September 30, 2006 reflects an increase in non operating income of approximately $5.3 million and $16.0 million, respectively, due primarily to higher interest income in the 2006 periods.

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Total Revenue	Three Months Ended September 30,								Nine Months Ended September 30,
	2006				2005				2006				2005
(in thousands)	Amount		Percent		Amount		Percent		Amount		Percent		Amount		Percent
Revenue by Division:
Branch Division	$	654,055		69.5	$	570,817		66.1	$	1,376,450		61.2	$	1,189,704		60.6
Heavy Construction Division		286,704		30.4		291,168		33.7		838,635		37.3		769,405		39.2
Other		913		0.1		2,177		0.2		34,592		1.5		2,691		0.2
Total	$	941,672		100.0	$	864,162		100.0	$	2,249,677		100.0	$	1,961,800		100.0


Branch Division Revenue	Three Months Ended September 30,								Nine Months Ended September 30,
	2006				2005				2006				2005
(in thousands)	Amount		Percent		Amount		Percent		Amount		Percent		Amount		Percent
California:
Public sector	$	186,411		49.9	$	132,573		44.9	$	391,170		48.2	$	275,248		44.2
Private sector		102,372		27.4		94,931		32.2		223,373		27.5		197,762		31.8
Material sales		84,961		22.7		67,683		22.9		196,901		24.3		149,521		24.0
Total	$	373,744		100.0	$	295,187		100.0	$	811,444		100.0	$	622,531		100.0
West (excluding California):
Public sector	$	171,292		61.1	$	189,595		68.8	$	332,276		58.8	$	353,975		62.4
Private sector		60,605		21.6		45,991		16.7		126,175		22.3		124,345		21.9
Material sales		48,414		17.3		40,044		14.5		106,555		18.9		88,853		15.7
Total	$	280,311		100.0	$	275,630		100.0	$	565,006		100.0	$	567,173		100.0
Total Branch Division Revenue:
Public sector	$	357,703		54.7	$	322,168		56.4	$	723,446		52.6	$	629,223		52.9
Private sector		162,977		24.9		140,922		24.7		349,548		25.4		322,107		27.1
Material sales		133,375		20.4		107,727		18.9		303,456		22.0		238,374		20.0
Total	$	654,055		100.0	$	570,817		100.0	$	1,376,450		100.0	$	1,189,704		100.0

Branch Division Revenue: Revenue from our Branch Division for the three and nine month periods ended September 30, 2006 increased over the corresponding 2005 periods by approximately $83.2 million, or 14.6%, and approximately $186.7 million, or 15.7%, respectively. The increased revenue from both construction and the sale of materials was driven by higher levels of public spending, particularly in California. Revenue from the sale of materials reflects an increase in average selling prices in the 2006 periods. Although our private sector revenue remains strong, we are beginning to see a reduction in residential development opportunities (see “Outlook”).

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HCD Revenue	Three Months Ended September 30,								Nine Months Ended September 30,
	2006				2005				2006				2005
(in thousands)	Amount		Percent		Amount		Percent		Amount		Percent		Amount		Percent
Revenue by Geographic Area:
South	$	57,724		20.1	$	61,043		21.0	$	174,181		20.8	$	154,863		20.1
West		64,074		22.3		64,291		22.1		203,749		24.3		161,881		21.0
Southeast		71,453		24.9		46,686		16.0		178,948		21.3		133,207		17.3
Northeast		76,761		26.8		90,820		31.2		228,681		27.3		248,709		32.3
Other		16,692		5.9		28,328		9.7		53,076		6.3		70,745		9.3
Total	$	286,704		100.0	$	291,168		100.0	$	838,635		100.0	$	769,405		100.0
Revenue by Market Sector:
Public sector	$	277,307		96.7	$	283,556		97.4	$	818,584		97.6	$	746,318		97.0
Private sector		9,397		3.3		7,567		2.6		19,951		2.4		22,892		3.0
Material sales		-		-		45		-		100		-		195		-
Total	$	286,704		100.0	$	291,168		100.0	$	838,635		100.0	$	769,405		100.0
Revenue by Contract Type:
Fixed unit price	$	59,073		20.6	$	89,202		30.6	$	198,760		23.7	$	248,243		32.3
Fixed price, including design/build		227,631		79.4		199,407		68.5		639,756		76.3		518,420		67.4
Other		-		-		2,559		0.9		119		-		2,742		0.3
Total	$	286,704		100.0	$	291,168		100.0	$	838,635		100.0	$	769,405		100.0

HCD Revenue: Revenue from our Heavy Construction Division for the three and nine months ended September 30, 2006 decreased by approximately $4.5 million, or 1.5%, and increased by approximately $69.2 million, or 9.0%, over the corresponding 2005 periods, respectively. Our partners’ share of revenue from consolidated joint ventures increased by approximately $5.2 million and $29.7 million for the three and nine months ended September 30, 2006, respectively (see Note 7 of the condensed consolidated financial statements). Geographically, the increased revenue in the Southeast in the 2006 periods was due primarily to a large design/build project in Mississippi which was awarded in the first quarter of 2006. In the West, the increased revenues for the nine months ended September 30, 2006 was attributed to large design/build projects in California, Oregon and Utah. Decreases in revenue in the Northeast in the 2006 periods were due primarily to more projects in New York reaching substantial completion during 2006 than in 2005. Revenue from fixed price contracts increased in the 2006 periods due primarily to the growth in design/build projects in our backlog.

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Total Backlog	September 30, 2006				June 30, 2006				September 30, 2005
(in thousands)	Amount		Percent		Amount		Percent		Amount		Percent
Backlog by Division:
Branch Division	$	884,928		41.7	$	978,384		39.2	$	674,252		28.2
Heavy Construction Division		1,235,132		58.3		1,514,482		60.8		1,719,492		71.8
Total	$	2,120,060		100.0	$	2,492,866		100.0	$	2,393,744		100.0


Branch Division Backlog	September 30, 2006				June 30, 2006				September 30, 2005
(in thousands)	Amount		Percent		Amount		Percent		Amount		Percent
California:
Public sector	$	395,583		77.0	$	370,513		70.7	$	188,593		56.2
Private sector		118,410		23.0		153,735		29.3		146,884		43.8
Total	$	513,993		100.0	$	524,248		100.0	$	335,477		100.0
West (excluding California):
Public sector	$	283,571		76.4	$	338,417		74.5	$	271,689		80.2
Private sector		87,364		23.6		115,719		25.5		67,086		19.8
Total	$	370,935		100.0	$	454,136		100.0	$	338,775		100.0
Total Branch Division backlog:
Public sector	$	679,154		76.7	$	708,930		72.5	$	460,282		68.3
Private sector		205,774		23.3		269,454		27.5		213,970		31.7
Total	$	884,928		100.0	$	978,384		100.0	$	674,252		100.0

Branch Division Backlog: Branch Division backlog at September 30, 2006 was approximately $93.5 million, or 9.6%, lower than at June 30, 2006 and $210.7 million, or 31.2%, higher than at September 30, 2005. The decrease in backlog compared with June 30, 2006 reflects normal seasonal variation in the timing of awards and construction activity. The increase in backlog compared with September 30, 2005 reflects an increase in state agency awards, primarily in California, partially offset by a decrease in the private sector backlog in California. Although our private sector backlog remains strong, we are beginning to see a reduction in residential development opportunities (see “Outlook”). Additions to Branch Division backlog in the three months ended September 30, 2006 included a $30.5 million highway widening project in Northern California and a $23.0 million airport runway project in Alaska.

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HCD Backlog	September 30, 2006				June 30, 2006				September 30, 2005
(in thousands)	Amount		Percent		Amount		Percent		Amount		Percent
Backlog by Geographic Area:
South	$	254,486		20.6	$	322,458		21.3	$	397,445		23.1
West		333,980		27.0		399,573		26.4		360,010		20.9
Southeast		337,070		27.3		395,178		26.1		258,238		15.0
Northeast		280,273		22.7		351,736		23.2		609,460		35.4
Other		29,323		2.4		45,537		3.0		94,339		5.6
Total	$	1,235,132		100.0	$	1,514,482		100.0	$	1,719,492		100.0
Backlog by Market Sector:
Public sector	$	1,193,790		96.7	$	1,466,091		96.8	$	1,654,958		96.2
Private sector		41,342		3.3		48,391		3.2		64,534		3.8
Total	$	1,235,132		100.0	$	1,514,482		100.0	$	1,719,492		100.0
Backlog by Contract Type:
Fixed unit price	$	216,008		17.5	$	266,784		17.6	$	454,989		26.5
Fixed price including design/build		1,019,124		82.5		1,247,698		82.4		1,264,503		73.5
Total	$	1,235,132		100.0	$	1,514,482		100.0	$	1,719,492		100.0

HCD Backlog: Heavy Construction Division backlog of $1.2 billion at September 30, 2006 was $279.4 million, or 18.4%, lower than at June 30, 2006, and $484.4 million, or 28.2%, lower than at September 30, 2005. Decreases in HCD backlog reflect our strategy to improve the division’s overall profitability with successful execution of the existing backlog rather than adding backlog. HCD backlog includes approximately $1.3 million related to our 20% portion of a joint venture project to construct a transportation hub at the World Trade Center in New York. We currently expect the total revenue on that contract to be approximately $1.5 billion of which our share would be approximately $300.0 million. Additionally, HCD backlog at September 30, 2006 includes approximately $25.5 million from one federal government project for which the funding has not yet been fully allocated.

Approximately 40.0% of the HCD backlog at September 30, 2006 relates to projects that have forecasted a loss. The forecasted losses have been recognized in the period(s) they were identified. Assuming no further changes, either upward or downward, in the forecasted results for these projects, this backlog will earn zero profit going forward.