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, 2009

¨	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

Address of principal executive offices:

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 has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files). ¨Yes ¨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 the definitions 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 26, 2009.

Class		Outstanding
Common Stock, $0.01 par value		38,658,847 shares

Index


PART I. FINANCIAL INFORMATION
	Item 1.	Financial Statements
		Condensed Consolidated Balance Sheets as of September 30, 2009, December 31, 2008 and September 30, 2008
		Condensed Consolidated Statements of Income for the Three and Nine Months Ended September 30, 2009 and 2008
		Condensed Consolidated Statements of Cash Flows for the Nine Months Ended September 30, 2009 and 2008
		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 10.2
EXHIBIT 10.3
EXHIBIT 10.4
EXHIBIT 10.5
EXHIBIT 31.1
EXHIBIT 31.2
EXHIBIT 32

Table of Contents

PART I. FINANCIAL INFORMATION

Item 1. FINANCIAL STATEMENTS

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

	September 30,		December 31,			September 30,
	2009		2008			2008
ASSETS
Current assets
Cash and cash equivalents	$	371,434	$	460,843		$	281,046
Short-term marketable securities		27,798		38,320			101,112
Accounts receivable, net		382,572		314,733			480,315
Costs and estimated earnings in excess of billings		38,011		13,295			34,759
Inventories, net		51,972		55,223			61,342
Real estate held for development and sale		135,306		75,089			52,165
Deferred income taxes		43,356		43,637			46,233
Equity in construction joint ventures		58,450		44,681			45,219
Other current assets		41,185		56,742			65,182
Total current assets		1,150,084		1,102,563			1,167,373
Property and equipment, net		530,661		517,678			522,733
Long-term marketable securities		62,612		21,239			30,209
Investments in affiliates		21,309		19,996			27,518
Other noncurrent assets		80,233		81,979			73,696
Total assets	$	1,844,899	$	1,743,455		$	1,821,529
LIABILITIES AND EQUITY
Current liabilities
Current maturities of long-term debt	$	68,194	$	39,692		$	34,886
Accounts payable		211,670		174,626			234,126
Billings in excess of costs and estimated earnings		187,205		227,364			251,402
Accrued expenses and other current liabilities		209,806		184,939			227,611
Total current liabilities		676,875		626,621			748,025
Long-term debt		233,582		250,687			246,487
Other long-term liabilities		48,884		43,604			46,178
Deferred income taxes		17,917		18,261			18,733
Commitments and contingencies
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 38,669,447 shares as of September 30, 2009, 38,266,791 shares as of December 31, 2008 and 38,264,058 shares as of September 30, 2008		387		383			383
Additional paid-in capital		92,356		85,035			83,041
Retained earnings		724,621		682,237			655,287
Accumulated other comprehensive loss		-		(146	)		(3,334	)
Total Granite Construction Inc. shareholders’ equity		817,364		767,509			735,377
Noncontrolling interests		50,277		36,773			26,729
Total equity		867,641		804,282			762,106
Total liabilities and equity	$	1,844,899	$	1,743,455		$	1,821,529

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

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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,
		2009			2008					2009			2008
Revenue
Construction	$		647,776			$	771,941		$	1,368,111		$	1,755,457
Construction materials			71,527				124,478			158,688			283,321
Real estate			981				1,369			1,932			8,142
Total revenue			720,284				897,788			1,528,731			2,046,920
Cost of revenue
Construction			549,053				643,531			1,123,038			1,437,093
Construction materials			64,528				109,068			145,991			247,959
Real estate			1,531				887			3,272			9,846
Total cost of revenue			615,112				753,486			1,272,301			1,694,898
Gross profit			105,172				144,302			256,430			352,022
General and administrative expenses			60,465				71,933			169,766			198,344
Gain on sales of property and equipment			1,549				2,008			6,878			4,564
Operating income			46,256				74,377			93,542			158,242
Other income (expense)
Interest income			744				5,439			3,914			15,087
Interest expense			(4,245	)			(5,303	)		(10,586	)		(12,871	)
Equity in income (loss) of affiliates			4,021				(1,257	)		4,360			(1,436	)
Other income, net			3,062				549			8,278			9,196
Total other income (expense)			3,582				(572	)		5,966			9,976
Income before provision for income taxes			49,838				73,805			99,508			168,218
Provision for income taxes			13,300				21,473			26,316			46,681
Net income			36,538				52,332			73,192			121,537
Amount attributable to noncontrolling interests			(5,940	)			(594	)		(15,725	)		(31,058	)
Net income attributable to Granite Construction Inc.	$		30,598			$	51,738		$	57,467		$	90,479

Net income per share attributable to common shareholders (see Note 13)
Basic	$		0.79			$	1.35		$	1.49		$	2.35
Diluted	$		0.79			$	1.35		$	1.49		$	2.35

Weighted average shares of common stock
Basic			37,595				37,430			37,552			37,664
Diluted			37,709				37,557			37,670			37,760

Dividends per common share	$		0.13			$	0.13		$	0.39		$	0.39

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,	2009			2008
Operating activities
Net income	$	73,192		$	121,537
Adjustments to reconcile net income to net cash provided by operating activities:
Impairment of real estate held for development and sale		1,686			4,500
Depreciation, depletion and amortization		59,048			64,036
(Recovery of) provision for doubtful accounts, net		(3,844	)		8,914
Gain on sales of property and equipment		(6,878	)		(4,564	)
Change in deferred income taxes		(518	)		1,116
Stock-based compensation		7,869			5,135
Excess tax benefit on stock-based compensation		(670	)		(743	)
Gain from trading securities		(431	)		-
Equity in (income) loss of affiliates		(4,360	)		1,436
Acquisition of noncontrolling interest		-			(16,616	)
Changes in assets and liabilities, net of the effects of acquisition and consolidations:
Accounts receivable, net		(61,943	)		(85,557	)
Inventories, net		3,251			(4,083	)
Real estate held for development and sale		(13,359	)		(13,425	)
Equity in construction joint ventures		(13,769	)		(10,879	)
Other assets, net		13,630			34,698
Accounts payable		36,939			20,991
Accrued expenses and other liabilities, net		32,615			19,650
Billings in excess of costs and estimated earnings		(64,875	)		(41,249	)
Net cash provided by operating activities		57,583			104,897
Investing activities
Purchases of marketable securities		(61,974	)		(68,732	)
Maturities of marketable securities		32,610			64,090
Release of funds for acquisition of noncontrolling interest		-			28,332
Additions to property and equipment		(75,773	)		(76,098	)
Proceeds from sales of property and equipment		10,089			12,253
Acquisition of businesses		-			(14,022	)
Contributions to affiliates		(4,969	)		(5,345	)
Issuance of notes receivable		(4,270	)		-
Other investing activities		450			626
Net cash used in investing activities		(103,837	)		(58,896	)
Financing activities
Proceeds from long-term debt		8,384			2,660
Long-term debt principal payments		(18,139	)		(15,748	)
Cash dividends paid		(15,031	)		(15,081	)
Purchase of common stock		(2,840	)		(45,489	)
Contributions from noncontrolling partners		239			4,955
Distributions to noncontrolling partners		(16,490	)		(37,713	)
Acquisition of noncontrolling interest		-			(11,716	)
Excess tax benefit on stock-based compensation		670			743
Other financing		52			-
Net cash used in financing activities		(43,155	)		(117,389	)
Decrease in cash and cash equivalents		(89,409	)		(71,388	)
Cash and cash equivalents at beginning of period		460,843			352,434
Cash and cash equivalents at end of period	$	371,434		$	281,046

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 (continued)
(Unaudited - in thousands)

Nine Months Ended September 30,	2009		2008
Supplementary Information
Cash paid during the period for:
Interest	$	11,883	$	9,204
Income taxes		13,964		37,848
Non-cash investing and financing activities:
Restricted stock issued for services, net	$	19,164	$	6,934
Restricted stock units issued		47		3,208
Accrued cash dividends		5,027		4,974
Assets acquired through issuances of debt		-		2,660
Debt payments from sale of assets		-		2,652

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:

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 (“SEC”) and should be read in conjunction with our Annual Report on Form 10-K for the year ended December 31, 2008. Certain information and footnote disclosures normally included in financial statements prepared in accordance with accounting principles generally accepted in the United States of America (“U.S. GAAP”) 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, 2009 and 2008 and the results of our operations and cash flows for the periods presented. In preparing these financial statements, we have evaluated events and transactions for potential recognition or disclosure through October 29, 2009, the date the financial statements were issued. The December 31, 2008 condensed consolidated balance sheet data was derived from audited consolidated financial statements, but does not include all disclosures required by U.S. GAAP.

We prepared the accompanying condensed consolidated financial statements on the same basis as our annual consolidated financial statements except for the adoption, in the first quarter of 2009, of two new accounting standards. One of the standards clarified that noncontrolling interests, formerly characterized as minority interests, should be reported as equity on the condensed consolidated balance sheets and requires net income or loss attributable to both the parent and noncontrolling interests to be disclosed separately in the condensed consolidated statements of income. This standard became effective for us on January 1, 2009 and requires prior year amounts related to noncontrolling interests to be reclassified to conform to current year presentation. In addition, it requires a reconciliation of the carrying amount of equity attributable to Granite and the amount of equity attributable to the noncontrolling interests. The second new standard clarified that all outstanding unvested share-based payment awards which contain nonforfeitable rights to dividends, whether paid or unpaid, shall be included in the number of shares outstanding in our basic and diluted earnings per share (“EPS”) calculations (see Note 13).

Interim results are subject to significant seasonal variations and the results of operations for the three and nine months ended September 30, 2009 are not necessarily indicative of the results to be expected for the full year.

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GRANITE CONSTRUCTION INCORPORATED

NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

2.	Recently Issued Accounting Pronouncements:

Investments - Other-Than-Temporary Impairments on Debt and Equity Securities

In April 2009, the FASB issued new accounting standards to improve the presentation and disclosure of other-than-temporary impairments on debt and equity securities in the financial statements. The standards do not amend existing recognition and measurement guidance. We did not recognize any other-than-temporary impairment on our debt securities during the nine months ended September 30, 2009 and, therefore, the new standards did not affect our financial statements. If we recognize any other-than-temporary impairment on our debt securities in the future, these standards would provide guidance for footnote disclosures.

Fair Value of Financial Instruments

In April 2009, the FASB issued new accounting standards that require disclosures about fair value of financial instruments for interim and annual reporting periods. We adopted these standards in the second quarter of 2009 and additional disclosure about our financial instruments is included in Note 6.

Consolidation of Variable Interest Entities

In June 2009, the FASB issued a new standard requiring ongoing analysis to determine whether a company holds a controlling financial interest in a variable interest entity (“VIE”). The standard includes a new approach for determining who should consolidate a VIE, requiring a qualitative rather than a quantitative analysis. This standard also changes when it is necessary to reassess who should consolidate a VIE. Previously an enterprise was required to reconsider whether it was the primary beneficiary of a VIE only when specific events had occurred. The new standard requires continuous reassessment of an enterprise’s interest in the VIE to determine who is the primary beneficiary. This statement will be effective for us in 2010. We do not expect the adoption of this accounting standard to have a material impact on our consolidated financial statements.

Codification

In June 2009, the FASB issued a new standard, the “Codification”, which was effective September 15, 2009 and became the source of authoritative U.S. GAAP. Rules and interpretive releases of the SEC under authority of federal securities laws are also sources of authoritative U.S. GAAP for SEC registrants. Subsequent issuances of new standards will be in the form of Accounting Standards Updates that will be included in the Codification. Generally, the Codification is not expected to change U.S. GAAP. All other accounting literature excluded from the Codification will be considered nonauthoritative. We adopted this standard in the third quarter of 2009 and, accordingly, changed references to authoritative accounting literature included in our financial statements to be in accordance with the Codification.

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GRANITE CONSTRUCTION INCORPORATED

NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

3.	Change in Accounting Estimates:

Our profit recognition related to construction contracts in any reporting period is derived from estimates of project revenue and costs. Variations in project profitability due to the impact of estimating project uncertainties are a normal part of our business, and in some cases the effect of these variations on our profitability may be significant. Our gross profit for the three and nine months ended September 30, 2009 and 2008 includes the effects of significant changes in the estimates of the profitability of certain projects.

Granite West

The net impact of significant changes in the estimates of profitability on Granite West projects was to increase gross profit for the three and nine months ended September 30, 2009 and 2008 as follows:

	Three Months Ended September 30,							Nine Months Ended September 30,
(in millions)	2009			2008				2009			2008
Increase in gross profit	$	24.6		$	26.6		$	51.2		$	65.2
Reduction in gross profit		(10.8	)		(7.8	)		(11.1	)		(11.9	)
Net increase in gross profit	$	13.8		$	18.8		$	40.1		$	53.3

Changes in estimates of project profitability on Granite West projects that individually affected gross profit by $1.0 million or more are summarized as follows:

	Three Months Ended September 30,					Nine Months Ended September 30,
(dollars in millions)	2009		2008			2009		2008
Number of projects with upward estimate changes		4		6		18		11
Range of increase in gross profit from each project, net	$	1.4 - 3.8	$	1.5 - 5.1	$	1.0 - 3.8	$	1.2 - 18.4
Number of projects with downward estimate changes		1		2		1		2
Range of reduction in gross profit from each project, net	$	6.1	$	1.1 - 1.7	$	6.1	$	1.1 - 3.0

The increased profitability estimates during the three and nine months ended September 30, 2009 and 2008 were due to the resolution of certain project uncertainties, higher productivity than originally estimated and the settlement of outstanding issues with contract owners. The decreased profitability estimates during the three and nine months ended September 30, 2009 were due to unanticipated costs, disputed materials performance issues, and owner directed design and scope changes. The decreased profitability estimates during the three and nine months ended September 30, 2008 were due to lower production than originally estimated.

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GRANITE CONSTRUCTION INCORPORATED

NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

Granite East

The net impact of significant changes in the estimates of profitability on Granite East gross profit was to increase gross profit for the three and nine months ended September 30, 2009 and 2008 as follows:

	Three Months Ended September 30,							Nine Months Ended September 30,
(in millions)	2009			2008				2009			2008
Increase in gross profit	$	8.1		$	12.1		$	42.4		$	68.6
Reduction in gross profit		(4.7	)		(6.2	)		(8.0	)		(16.1	)
Net increase in gross profit	$	3.4		$	5.9		$	34.4		$	52.5

Changes in estimates of project profitability on Granite East projects that individually affected gross profit by $1.0 million or more are summarized as follows:

	Three Months Ended September 30,					Nine Months Ended September 30,
(dollars in millions)	2009		2008			2009		2008
Number of projects with upward estimate changes		1		4		7		6
Range of increase in gross profit from each project, net	$	2.2	$	1.1 - 2.8	$	1.5 - 18.0	$	1.2 - 32.2
Number of projects with downward estimate changes		1		2		3		3
Range of reduction in gross profit from each project, net	$	2.0	$	2.0 - 2.3	$	1.7 - 2.0	$	1.4 - 4.0

The increased profitability estimates during the three and nine months ended September 30, 2009 and 2008 included resolution of project uncertainties, the settlement of outstanding revenue issues with various contract owners and improved productivity on certain projects. Specifically included in gross profit for the nine months ended September 30, 2009 and 2008 are the results of negotiated claims settlements with contract owners of $16.0 million and $28.6 million, respectively. The decreased profitability estimates during the three and nine months ended September 30, 2009 and 2008 were due to issues with contract owners as well as job level productivity.

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GRANITE CONSTRUCTION INCORPORATED

NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

4.	Marketable Securities:

The amounts of marketable securities were as follows (in thousands):

September 30, 2009	Held to Maturity		Trading Securities			Available-for -Sale	Total
Municipal bonds	$	18,371	$	-	$	-	$	18,371
Mutual funds		-		9,427		-		9,427
Total short-term marketable securities		18,371		9,427		-		27,798

US Government and agency obligations		50,877		-		-		50,877
Municipal bonds		11,735		-		-		11,735
Total long-term marketable securities		62,612		-		-		62,612
Total marketable securities	$	80,983	$	9,427	$	-	$	90,410

December 31, 2008
US Government and agency obligations	$	20,194	$	-	$	-	$	20,194
Municipal bonds		17,090		-		-		17,090
Mutual funds		-		-		1,036		1,036
Total short-term marketable securities		37,284		-		1,036		38,320

US Government and agency obligations		43		-		-		43
Municipal bonds		21,196		-		-		21,196
Total long-term marketable securities		21,239		-		-		21,239
Total marketable securities	$	58,523	$	-	$	1,036	$	59,559

September 30, 2008
US Government and agency obligations	$	26,057	$	-	$	-	$	26,057
Municipal bonds		12,722		-		-		12,722
Commercial paper		33,892		-		-		33,892
Mutual funds		-		-		28,441		28,441
Total short-term marketable securities		72,671		-		28,441	$	101,112

US Government and agency obligations		7,573		-		-		7,573
Municipal bonds		22,636		-		-		22,636
Commercial paper		-		-		-		-
Total long-term marketable securities		30,209		-		-		30,209
Total marketable securities	$	102,880	$	-	$	28,441	$	131,321

Short-term investments on our condensed consolidated balance sheet are marketable securities for which we do not have the positive intent to hold to maturity have been designated as trading or available-for-sale securities. Trading securities are carried at fair value with unrealized gains and losses reported in other income, net. Available-for-sale securities are carried at fair value with the unrealized gains and losses, net of income taxes, reported as a separate component of other comprehensive income until realized. Held to maturity securities are carried at amortized cost, which approximates fair value.

At September 30, 2009, scheduled maturities of held-to-maturity investments were as follows (in thousands):

Due within one year	$	18,371
Due in one to five years		62,612
Total	$	80,983

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GRANITE CONSTRUCTION INCORPORATED

NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

5.	Fair Value Measurement:

The following tables summarize financial assets we measure at fair value on a recurring basis (in thousands):

		Fair Value Measurement at Reporting Date Using
September 30, 2009		Level 11	Level 22		Level 33		Total
Money market funds	$	214,312	$	-	$	-	$	214,312
Trading securities		9,427		-		-		9,427
Total	$	223,739	$	-	$	-	$	223,739

December 31, 2008		Level 11	Level 22		Level 33		Total
Money market funds	$	433,121	$	-	$	-	$	433,121
Available-for-sale securities		1,036		-		-		1,036
Total	$	434,157	$	-	$	-	$	434,157

September 30, 2008		Level 11	Level 22		Level 33		Total
Money market funds	$	192,490	$	-	$	-	$	192,490
Available-for-sale securities		28,441		-		-		28,441
Total	$	220,931	$	-	$	-	$	220,931

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

2Observable 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.

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

Money market funds are included in cash and cash equivalents on our condensed consolidated balance sheet.

Effective in the quarter ended March 31, 2009, we applied the new standard for financial instruments to nonfinancial assets and liabilities that are recognized and disclosed at fair value on a non-recurring basis. As of September 30, 2009, nonfinancial assets or liabilities measured at fair value consisted of our asset retirement obligations, which are initially measured at fair value using internal discounted cash flow calculations based upon our estimates of future retirement costs. The adoption of this standard did not impact our financial position or results of operations.

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GRANITE CONSTRUCTION INCORPORATED

NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

6.	Fair Value of Other Financial Instruments:

As of June 30, 2009, we adopted a new standard that requires quarterly fair value disclosures for financial instruments in addition to the annual disclosure. We believe the carrying value of receivables, other current assets, and other current liabilities approximate their fair values.

The carrying amount and estimated fair value of senior notes payable were:

	September 30,		December 31,
(in thousands)	2009		2008
Carrying amount:
Senior notes payable (including current maturities)	$	240,000	$	255,000

Fair value:
Senior notes payable (including current maturities)	$	254,423	$	200,851

The fair value of the senior notes payable was based on borrowing rates available to us for bank loans with similar terms, average maturities, and credit risk.

7.	Inventories:

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

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8.	Construction and Line Item Joint Ventures:

We participate in various construction joint venture partnerships. We also participate in various “line item” joint venture agreements under which each partner is responsible for performing certain discrete items within the total scope of contracted work.

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 stated ownership interest 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, 2009, approximately $984.2 million of work representing our partners’ share of unconsolidated construction joint ventures and line item joint venture contracts in progress had yet to be completed.

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 interests 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. We have no significant commitments beyond completion of the contract.

We have determined that certain of these joint ventures are VIEs as defined by FASB Accounting Standards Codification (“ASC”) Topic 810 Interpretation, Consolidation, and related standards. Under our contractual arrangements, we provide capital to these joint ventures and in return we receive an ownership interest in these entities. Under the “by design model,” as specified in ASC 810, these entities’ risks are designed to be passed along to the holders of variable interests. As we absorb these risks, our investments in these entities are exposed to potential losses. Typically, the determining factor in whether we are the primary beneficiary is the extent of our exposure to variability in the expected cash flows of the entity. Other important criteria that impact the outcome of the analysis are the relationship of activities of the VIE with each party; the significance of the VIE’s activity to each of the parties; and the amount of equity investment as a percentage of total capitalization.

If we have determined that we are the primary beneficiary, we have consolidated these joint ventures in our condensed consolidated financial statements. The construction joint ventures we have consolidated are engaged in two active projects with total contract values of $434.2 million and $466.5 million. Our proportionate share of these consolidated joint ventures is 52.5% and 57.3%.

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 condensed consolidated statements of income and as a single line item on the condensed consolidated balance sheets. The joint ventures in which we hold a significant interest but are not the primary beneficiary are engaged in six active construction projects with total contract values ranging from $109.1 million to $987.3 million. Our proportionate share of equity in these joint ventures ranges from 20.0% to 42.5%.

Each quarter, we evaluate whether certain “reconsideration events” have occurred which cause us to reevaluate our conclusions as to whether an entity is a VIE and whether we are the primary beneficiary. During the quarter ended September 30, 2009, there were no entities for which we became the primary beneficiary, and accordingly, there were no new entities consolidated in our condensed consolidated financial statements.

Line Item Joint Ventures

The revenue for each line item joint venture partner’s discrete items of work is defined in the contract with the project owner and each venture partner bearing the profitability risk associated with its own work. 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 project revenues and costs in our accounting system and include receivables and payables associated with our work in our condensed consolidated financial statements.

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9.	Real Estate Entities and Investments in Affiliates:

We are participants in real estate entities through our Granite Land Company (“GLC”) subsidiary. Generally, each entity is formed to accomplish a specific real estate development project. We have determined that substantially all of these entities are VIEs as defined by ASC Topic 810, and related standards. When we have determined we are the primary beneficiary of a VIE, as described in Note 8, we consolidate that entity in our condensed consolidated financial statements. We account for our share of the operating results of real estate entities in which we have determined we are not the primary beneficiary as investments in affiliates on our condensed consolidated balance sheets and in other income (expense) in our condensed consolidated statements of income.

As discussed in Note 8, each quarter, we evaluate whether certain “reconsideration events” have occurred which cause us to reevaluate our conclusions as to whether an entity is a VIE and whether we are the primary beneficiary. During the quarter ended September 30, 2009, there were no entities for which we became the primary beneficiary, and accordingly, there were no new real estate entities consolidated in our condensed consolidated financial statements.

GLC routinely assists its consolidated and equity-method real estate entities in securing debt financing from various sources. The amount of financial support to be provided by GLC to consolidated VIEs was increased by $8.2 million to date in 2009 and by $7.5 million in 2008 as a result of changes in the entities’ business plans. These amounts represent additional financial support in the form of current or future cash contributions to the consolidated entities, beyond what GLC had previously committed to provide. As of September 30, 2009, $8.5 million of the total increased commitment of $15.7 million had been contributed to the consolidated entities.

The carrying amounts of all real estate development assets are evaluated for recoverability in accordance with ASC Topic 360, Property, Plant, and Equipment. Based on our evaluations, we recognized a pre-tax, non-cash impairment charge on assets classified as real estate held for development and sale of $0.7 million and $1.7 million during the three and nine months ended September 30, 2009, respectively. We recorded the charge in cost of revenue in our condensed consolidated statements of income in our GLC segment. We recognized no impairment charge during the quarter ended September 30, 2008 and $4.5 million for the nine months ended September 30, 2008.

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 assume full financial and management responsibility for the project. For entities that are currently accounted for under the equity method, this may result in their consolidation in our financial statements.

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Consolidated Real Estate Entities

At September 30, 2009, the entities we have consolidated were engaged in residential and commercial development projects with total assets ranging from approximately $0.8 million to $45.3 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)	2009		2008		2008
Residential1	$	117,888	$	65,298	$	42,576
Commercial		17,418		9,791		9,589
Total	$	135,306	$	75,089	$	52,165

Washington	$	78,803	$	30,126	$	29,134
California		19,589		11,155		15,153
Texas		8,458		8,004		7,878
Oregon		28,456		25,804		-
Total	$	135,306	$	75,089	$	52,165

1The balances at September 30, 2009 and December 31, 2008 include $44.5 million and $25.8 million related to two entities that were consolidated during those respective periods.

Additionally, at September 30, 2009 we had $14.8 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 $150.1 million, approximately $143.7 million was pledged as collateral for the obligations of the real estate entities. The related debt totaled $61.5 million of which $53.2 million is included in current maturities of long-term debt and $8.3 million is included in long-term debt on our condensed consolidated balance sheet as of September 30, 2009. All outstanding debt of the real estate entities is recourse only to our real estate affiliates that incurred the debt, the limited partnership or limited liability company, of which we are a limited partner. Our proportionate share of the results of these entities varies depending on the ultimate profitability of the entities.

Investments in Affiliates

We account for entities where we have determined we are not the primary beneficiaries as investments in affiliates. At September 30, 2009, these entities were engaged in real estate development projects with total assets ranging from approximately $6.4 million to $50.1 million. Our proportionate share of the operating results of these entities varies depending on the ultimate profitability of the entities. At September 30, 2009 we had approximately $13.3 million recorded on our condensed consolidated balance sheet related to our investment in these real estate entities.

Additionally, we have non-real estate investments in affiliates that are accounted for using the equity method. The most significant of these investments is a 50% interest in a limited liability company which owns and operates an asphalt terminal in Nevada. Committed and outstanding advances to the asphalt terminal limited liability company totaled $4.9 million at September 30, 2009. We are not aware of any joint ventures where we would be obligated to perform our partner’s share of remaining work. However, future changes in the financial viability of our joint venture partners could require us to perform their work or make additional financial contributions to the joint venture entity.

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Our investments in affiliates balance consists of the following:

		September 30,		December 31,		September 30,
(in thousands)		2009		2008		2008
Equity method investments in real estate affiliates	$	13,343	$	16,308	$	19,797
Equity method investments in other affiliates		7,966		3,688		3,550
Total equity method investments		21,309		19,996		23,347
Cost method investments		-		-		4,171
Total investments in affiliates	$	21,309	$	19,996	$	27,518

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

	September 30,		December 31,		September 30,
(in thousands)	2009		2008		2008
Residential	$	8,779	$	11,648	$	15,162
Commercial		4,564		4,660		4,635
Total	$	13,343	$	16,308	$	19,797

Texas	$	13,343	$	12,283	$	12,169
Oregon		-		-		4,766
Washington		-		4,025		2,862
Total	$	13,343	$	16,308	$	19,797

The following table provides summarized balance sheet information for our affiliates on a combined 100% basis, which primarily relate to our real estate affiliates accounted for under the equity method:

	September 30,		December 31,		September 30,
(in thousands)	2009		2008		2008
Total assets	$	169,134	$	196,702	$	197,591
Net assets		78,572		90,867		91,985
Granite’s share of net assets		21,309		19,996		23,347

Substantially all the assets of these real estate entities in which we are participants through GLC are classified as real estate held for sale or use. All outstanding debt of these entities is non-recourse to Granite. However, there is recourse to our real estate affiliates that incurred the debt. Our real estate affiliates include a limited partnership or limited liability company of which we are a limited partner or shareholder.

10.	Property and Equipment, net:

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

	September 30,			December 31,			September 30,
(in thousands)	2009			2008			2008
Land and land improvements	$	134,389		$	119,576		$	115,389
Quarry property		146,529			141,638			140,917
Buildings and leasehold improvements		95,630			94,579			92,661
Equipment and vehicles		850,114			843,045			846,629
Office furniture and equipment		38,287			35,021			33,262
Property and equipment		1,264,949			1,233,859			1,228,858
Less: accumulated depreciation and depletion		(734,288	)		(716,181	)		(706,125	)
Property and equipment, net	$	530,661		$	517,678		$	522,733

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11.	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:

Unamortized intangible assets:

	September 30,		December 31,		September 30,
(in thousands)	2009		2008		2008
Goodwill	$	9,900	$	9,900	$	9,900
Use rights		2,954		2,954		2,954
Total unamortized intangible assets	$	12,854	$	12,854	$	12,854

Amortized intangible assets:

September 30, 2009			Accumulated
(in thousands)	Gross Value		Amortization			Net Value
Permits	$	36,070	$	(5,041	)	$	31,029
Trade names		158		(51	)		107
Covenants not to compete		1,588		(1,003	)		585
Customer lists and other		3,122		(1,636	)		1,486
Total amortized intangible assets	$	40,938	$	(7,731	)	$	33,207

December 31, 2008
(in thousands)
Permits	$	36,070	$	(3,698	)	$	32,372
Trade names		1,583		(1,352	)		231
Covenants not to compete		1,588		(695	)		893
Customer lists and other		3,725		(1,684	)		2,041
Total amortized intangible assets	$	42,966	$	(7,429	)	$	35,537

September 30, 2008
(in thousands)
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

Amortization expense related to intangible assets was approximately $0.7 million and $2.3 million for the three and nine months ended September 30, 2009, respectively, and approximately $0.9 million and $2.5 million for the three and nine months ended September 30, 2008, respectively. Amortization expense expected to be recorded in the future is as follows: $0.7 million for the balance of 2009, $2.5 million in 2010, $2.3 million in 2011, $2.2 million in 2012, $1.9 million in 2013 and $23.6 million thereafter.

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12.	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)	2009	2008	2009	2008
Weighted average shares outstanding:
Weighted average common stock outstanding	38,672	38,272	38,560	38,486
Less: weighted average unvested restricted stock outstanding	1,077	842	1,008	822
Total basic weighted average shares outstanding	37,595	37,430	37,552	37,664
Diluted weighted average shares outstanding:
Weighted average common stock outstanding, basic	37,595	37,430	37,552	37,664
Effect of dilutive securities:
Common stock options and units	114	127	118	96
Total weighted average shares outstanding assuming dilution	37,709	37,557	37,670	37,760

13.	Earnings Per Share:

The FASB issued a new standard that requires entities to apply the two-class method of computing basic and diluted EPS for awards that accrue cash dividends (whether paid or unpaid) and those dividends do not need to be returned to the entity if the employee forfeits the award. Awards of this nature are considered participating securities and are included in the computation of EPS. This new standard became effective for us on January 1, 2009 and requires retroactive application to all prior period EPS. Unvested restricted stock issued under the Amended and Restated 1999 Equity Incentive Plan carries nonforfeitable dividend rights.

EPS under the two-class method is calculated by dividing the sum of earnings allocated to common shareholders by the weighted average number of common shares outstanding during the period. In applying the two-class method, earnings are allocated to both common shares and unvested restricted stock, except when in a net loss position.

Diluted earnings per share is computed giving effect to all dilutive potential common shares that were outstanding during the period. Dilutive potential common shares consist of the incremental common shares issuable upon the exercise of stock options and conversion of stock units. Prior to the adoption of this new standard, unvested restricted stock units were included in the calculation of diluted net income per share using the treasury stock method.

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The following is a reconciliation of net income attributable to Granite and weighted average shares of common stock outstanding for calculating basic and diluted net income per share:

		Three Months Ended September 30,							Nine Months Ended September 30,
(in thousands, except per share amounts)			2009			2008			2009			2008

Basic
Numerator:
Net income attributable to Granite	$	30,598	$	51,738	$	57,467	$	90,479
Less: net income allocated to participating securities		849		1,135		1,487		1,918
Net income allocated to common shareholders for basic calculation	$	29,749	$	50,603	$	55,980	$	88,561

Denominator:
Weighted average common shares outstanding		37,595		37,430		37,552		37,664

Net income per share, basic	$	0.79	$	1.35	$	1.49	$	2.35

Diluted
Numerator:
Net income attributable to Granite	$	30,598	$	51,738	$	57,467	$	90,479
Less: net income allocated to participating securities		846		1,131		1,482		1,914
Net income allocated to common shareholders for diluted calculation	$	29,752	$	50,607	$	55,985	$	88,565

Denominator:
Weighted average common shares outstanding		37,709		37,557		37,670		37,760

Net income per share, diluted	$	0.79	$	1.35	$	1.49	$	2.35

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14.	Equity and Other Comprehensive Income (Loss):

The following tables summarize our equity activity for the periods presented, in accordance with the adoption of the new standard that requires a reconciliation of the carrying amount of equity attributable to Granite and the amount of equity attributable to the noncontrolling interests:

(in thousands)	Granite Construction Inc.				Noncontrolling Interests		Total Equity
Balance at December 31, 2008	$	767,509		$	36,773		$	804,282
Purchase of common stock1		(2,840	)		-			(2,840	)
Amortization of restricted stock and other		10,165			-			10,165
Transactions with noncontrolling interests, net		-			(2,221	)		(2,221	)
Comprehensive income:
Net income		57,467			15,725			73,192
Other comprehensive income		146			-			146
Total comprehensive income		57,613			15,725			73,338
Dividends on common stock		(15,083	)		-			(15,083	)
Balance at September 30, 2009	$	817,364		$	50,277		$	867,641

(in thousands)	Granite Construction Inc.				Noncontrolling Interests		Total Equity
Balance at December 31, 2007	$	700,199		$	23,471		$	723,670
Purchase of common stock2		(45,489	)		-			(45,489	)
Amortization of restricted stock and other		9,546			-			9,546
Transactions with noncontrolling interests, net		-			(27,800	)		(27,800	)
Comprehensive income:
Net income		90,479			31,058			121,537
Other comprehensive (loss)		(4,432	)		-			(4,432	)
Total comprehensive income		86,047			31,058			117,105
Dividends on common stock		(14,926	)		-			(14,926	)
Balance at September 30, 2008	$	735,377		$	26,729		$	762,106

1Represents 78,349 shares purchased in connection with employee tax withholding for shares vested.

2Includes 76,237 shares purchased in connection with employee tax withholding for shares vested and 1,364,370 shares purchased under our share repurchase program.

The components of other comprehensive income (loss) are as follows:

	Three Months Ended September 30,						Nine Months Ended September 30,
(in thousands)	2009			2008			2009			2008
Other comprehensive income (loss):
Changes in unrealized gain (loss) on investments	$	-	$	(3,931	)	$	238		$	(7,280	)
Tax (provision) benefit on unrealized gain (loss)		-		1,538			(92	)		2,848
Total other comprehensive income (loss)	$	-	$	(2,393	)	$	146		$	(4,432	)

The decreases in unrealized gains (losses) during the three and nine months ended September 30, 2009 were due to a reduction in the balance of our available-for-sale investments.

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15.	Legal Proceedings:

Silica Litigation

Our wholly-owned subsidiary Granite Construction Company (“GCCO”) is one of approximately 100 to 300 defendants in six active California Superior Court lawsuits. Of the six lawsuits, four were filed against GCCO in 2005 and two were filed against GCCO in 2006, in Alameda County (Dominguez vs. A-1 Aggregates, et al.; 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 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 eighteen 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 the 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 and on February 21, 2008, presented its detailed written responses to the initial determinations of the Agencies as well as the investigation by the USDOJ. A letter reply dated September 17, 2009 was received from the USDOJ, to which MnTC responded by letter dated September 25, 2009. MnTC and the USDOJ are continuing to engage in informal discussions in an attempt to resolve the matter. Such discussions, if successful, are expected to include resolution of issues with the USDOT and with the state agencies. 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.

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 YRC’s stormwater permit. In June 2009, YRC was informed that the USDOJ had assumed the criminal investigation that the Oregon Department of Justice had previously been conducting in connection with stormwater runoff from the project. YRC and its members are fully cooperating in the investigation, but we do not know whether criminal charges or civil lawsuits, if any, will be brought or against whom, as a result of the investigation. Therefore, we cannot estimate what if any criminal or civil penalty or conditional assessment may result from this investigation.

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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 (“the City”) 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. In December 2008, the City’s audit report was released with findings that, while some GCCO billings contained mistakes, rates paid to GCCO appear to be generally reasonable. GCCO has reimbursed the City the undisputed overbilled amount of less than $3,000. The former San Diego City Attorney, after conducting a separate investigation of GCCO’s work on the project, filed a civil lawsuit in California Superior Court, County of San Diego on October 17, 2008 against GCCO and the one other contractor that had been awarded a similar cleanup contract with the City. In the complaint, the City alleges that both contractors knowingly presented to the City false claims for payment in violation of the California False Claims Act. The City seeks trebled damages in an amount to be determined, and a civil penalty in the amount of $10,000 for each false claim made. After the November 2008 election in which a new City Attorney was elected, GCCO and the new City Attorney agreed to suspend the lawsuit to allow the City Attorney time to complete its investigation. GCCO believes the allegations in the City’s 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.

Grand Avenue Project DBE Issues

On March 6, 2009, the U.S. Department of Transportation, Office of Inspector General (“OIG”) served upon our wholly-owned subsidiary, Granite Construction Northeast, Inc., (“Granite Northeast”), a United States District Court Eastern District of New York subpoena to testify before a grand jury by producing documents. The subpoena seeks all documents pertaining to a Granite Northeast Disadvantaged Business Enterprise (“DBE”) subcontractor (“the Subcontractor”), and the Subcontractor’s non-DBE lower tier subcontractor/consultant, relating to the Subcontractor’s work on the Grand Avenue Bus Depot and Central Maintenance Facility for the Borough of Queens Project (the “Grand Avenue Project”). The subpoena also seeks all documents regarding Granite Northeast’s use of the Subcontractor as a DBE on the Grand Avenue Project and all documents related to the Subcontractor as a DBE on any other contract including public works construction. We have complied with the subpoena and are fully cooperating with the OIG’s investigation. To date, Granite Northeast has not been notified that it is either a subject or target of the OIG’s investigation. As a result, we do not know whether criminal charges or civil lawsuits, if any, will be brought or against whom, as a result of the investigation. Therefore, we cannot estimate what, if any, criminal or civil penalty or conditional assessment may result from this investigation.

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 also 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.

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NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

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16.	Business Segment Information:

Our three reportable business segments are Granite West, Granite East, and Granite Land Company.

Granite West has 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, bridges and airports as well as site preparation for housing and commercial development. Although most Granite West projects are started and completed within a year, the segment also has the capability of constructing larger projects and had five active projects at September 30, 2009, 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 out of three regional offices in the eastern portion of the United States. Its focus is on large, complex infrastructure projects, primarily east of the Rocky Mountains, and includes major highways, large dams, mass transit facilities, bridges, pipelines, canals, waterway locks and dams, and airport infrastructure. 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 2008 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 are principally comprised of corporate general and administrative expenses.

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GRANITE CONSTRUCTION INCORPORATED

NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

Summarized segment information is as follows:

	Three Months Ended September 30,
(in thousands)	Granite West		Granite East			Granite Land Company			Total
2009
Revenue from external customers	$	564,076	$	155,227		$	981			$	720,284
Intersegment revenue transfer		13		(13	)		-				-
Net revenue		564,089		155,214			981				720,284
Depreciation, depletion and amortization		15,219		1,185			68				16,472
Operating income (loss)		56,299		12,052			(1,221	)			67,130
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)		93,570		3,819			(191	)			97,198

	Nine Months Ended September 30,
(in thousands)	Granite West		Granite East			Granite Land Company			Total
2009
Revenue from external customers	$	1,109,402	$	417,397		$	1,932			$	1,528,731
Intersegment revenue transfer		40		(40	)		-				-
Net revenue		1,109,442		417,357			1,932				1,528,731
Depreciation, depletion and amortization		47,871		3,732			369				51,972
Operating income (loss)		98,073		55,136			(4,159	)			149,050
Segment assets		481,415		13,789			150,163				645,367
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)		154,684		67,196			(3,795	)			218,085
Segment assets		460,347		20,575			68,284				549,206

A reconciliation of segment operating income to consolidated income before provision for tax is as follows:

	Three Months Ended September 30,								Nine Months Ended September 30,
(in thousands)	2009				2008				2009				2008
Total operating income for reportable segments		$	67,130			$	97,198			$	149,050			$	218,085
Other income (expense), net			3,582				(572	)			5,966				9,976
Gain on sales of property and equipment			1,549				2,008				6,878				4,564
Unallocated other corporate expense			(22,423	)			(24,829	)			(62,386	)			(64,407	)
Income before provision for income taxes		$	49,838			$	73,805			$	99,508			$	168,218

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GRANITE CONSTRUCTION INCORPORATED

NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

17.	Acquisition:

In January 2008, we purchased certain assets and assumed certain liabilities of a construction materials supplier in Nevada for cash consideration of approximately $14.0 million. The results of the acquired business’s operations are included in our condensed consolidated statement of operations and cash flows from the date of acquisition and were not material. The fair value of the assets acquired approximated the purchase price; therefore, no goodwill was recorded.

18.	Share Purchase Authorization:

In 2007, our Board of Directors authorized a plan to purchase, at management’s discretion, up to $200.0 million of our common stock. We did not purchase shares under the share purchase program during the nine months ended September 30, 2009. During the nine months ended September 30, 2008, we purchased 1.4 million shares at an average price per share of $31.65 for a total of $43.2 million. From the inception of this plan in 2007 through September 30, 2009, a total of 3.8 million shares of our common stock were purchased for an aggregate cost of $135.9 million. All shares were retired upon acquisition. At September 30, 2009, $64.1 million of the $200.0 million authorization was available for additional share purchases.

19.	Subsequent Event:

On August 31, 2009, we announced a new organizational structure that will allow us to better leverage internal best practices and gain operational efficiencies in our overall cost structure. As part of the reorganization, we initiated a reduction in force on October 1, 2009 that affected approximately eight percent of our salaried workforce. We estimate that pre-tax charges of approximately $6.0 million in personnel-related costs will be incurred in the fourth quarter of 2009. The company expects to complete the reorganization by January 1, 2010.

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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 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. We 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. We produce construction materials 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 three operating segments: Granite West, Granite East and Granite Land Company (“GLC”). Our offices are located in Alaska, Arizona, California, Florida, Nevada, New York, Oregon, Texas, Utah and Washington.

Our contracts are obtained primarily through competitive bidding in response to advertisements by both public agencies and private parties and to a lesser extent on a negotiated basis as a result of direct solicitation by private parties. Our bidding activity is affected by such factors as contract backlog, available personnel, current utilization of equipment and other resources, our ability to obtain necessary surety bonds and competitive considerations. Bidding activity, contract backlog and revenue resulting from the award of new contracts may vary significantly from period to period.

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 with 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 dampening 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 (generally three to five years).

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Results of Operations:

Current Economic Environment

Market conditions remained challenging during the third quarter of 2009 with a highly competitive bidding environment and less work to bid. The economic downturn, the decline in the residential and commercial real estate markets, and various infrastructure funding related issues have continued to have a negative impact on our business.

Comparative Financial Summary		Three Months Ended September 30,						Nine Months Ended September 30,
(in thousands)		2009			2008			2009			2008
Total revenue	$	720,284		$	897,788		$	1,528,731		$	2,046,920
Gross profit		105,172			144,302			256,430			352,022
Operating income		46,256			74,377			93,542			158,242
Other income (expense)		3,582			(572	)		5,966			9,976
Provision for income taxes		13,300			21,473			26,316			46,681
Amount attributable to noncontrolling interests		(5,940	)		(594	)		(15,725	)		(31,058	)
Net income attributable to Granite		30,598			51,738			57,467			90,479

Total Revenue	Three Months Ended September 30,									Nine Months Ended September 30,
(in thousands)	2009				2008				2009				2008
Revenue by Segment:
Granite West	$	564,089	78.3	%	$	749,487	83.4	%	$	1,109,442	72.6	%	$	1,506,952	73.6	%
Granite East		155,214	21.5			146,932	16.4			417,357	27.3			531,826	26.0
Granite Land Company		981	0.2			1,369	0.2			1,932	0.1			8,142	0.4
Total	$	720,284	100.0	%	$	897,788	100.0	%	$	1,528,731	100.0	%	$	2,046,920	100.0	%

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Granite West Revenue	Three Months Ended September 30,									Nine Months Ended September 30,
(in thousands)	2009				2008				2009				2008
California:
Public sector	$	187,542	79.2	%	$	275,768	73.4	%	$	397,819	75.8	%	$	507,645	65.7	%
Private sector		8,908	3.8			26,930	7.2			29,991	5.7			86,047	11.1
Construction materials		40,477	17.0