Edgar Filing: GRANITE CONSTRUCTION INC

GVA 9.30.2012 10Q

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-Q



x	QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
	For the quarterly period ended September 30, 2012



o	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. xYes o 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). xYes o 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 x	Accelerated filer o	Non-accelerated filer o	Smaller reporting company o

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

Indicate the number of shares outstanding of each of the issuer’s classes of common stock, as of October 22, 2012.



Class		Outstanding
Common Stock, $0.01 par value		38,711,183 shares

Index



PART I. FINANCIAL INFORMATION
	Item 1.	Financial Statements
		Condensed Consolidated Balance Sheets as of September 30, 2012, December 31, 2011 and September 30, 2011
		Condensed Consolidated Statements of Income for the Three and Nine Months Ended September 30, 2012 and 2011
		Condensed Consolidated Statements of Cash Flows for the Nine Months Ended September 30, 2012 and 2011
		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.	Mine Safety Disclosures
	Item 5.	Other Information
	Item 6.	Exhibits
SIGNATURES
EXHIBIT 10.1
EXHIBIT 10.2
EXHIBIT 10.3
EXHIBIT 10.4
EXHIBIT 10.5
EXHIBIT 10.6
EXHIBIT 10.7
EXHIBIT 31.1
EXHIBIT 31.2
EXHIBIT 32
EXHIBIT 95
EXHIBIT 101.INS
EXHIBIT 101.SCH
EXHIBIT 101.CAL
EXHIBIT 101.DEF
EXHIBIT 101.LAB
EXHIBIT 101.PRE

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, 2012		December 31, 2011		September 30, 2011
ASSETS
Current assets
Cash and cash equivalents ($74,020, $75,122 and $65,350 related to consolidated construction joint ventures (“CCJV”))	$	287,322	$	256,990	$	193,099
Short-term marketable securities	47,185		70,408		77,389
Receivables, net ($31,028, $30,332 and $28,493 related to CCJVs)	363,455		251,838		357,807
Costs and estimated earnings in excess of billings	49,548		37,703		45,884
Inventories	63,999		50,975		57,987
Real estate held for development and sale	57,964		67,037		79,173
Deferred income taxes	38,571		38,571		52,714
Equity in construction joint ventures	97,890		101,029		97,415
Other current assets	13,974		35,171		29,526
Total current assets	1,019,908		909,722		990,994
Property and equipment, net ($6,661, $8,671 and $9,821 related to CCJVs)	432,293		447,140		453,822
Long-term marketable securities	37,802		79,250		59,509
Investments in affiliates	30,257		31,071		33,435
Other noncurrent assets	78,375		80,616		80,709
Total assets	$	1,598,635	$	1,547,799	$	1,618,469

LIABILITIES AND EQUITY
Current liabilities
Current maturities of long-term debt	$	8,352	$	9,102	$	8,351
Current maturities of non-recourse debt	16,712		23,071		16,690
Accounts payable ($30,975, $38,193 and $36,660 related to CCJVs)	209,683		158,660		216,600
Billings in excess of costs and estimated earnings ($13,955, $22,251 and $17,116 related to CCJVs)	91,348		90,845		89,505
Accrued expenses and other current liabilities ($3,495, $5,129 and $5,997 related to CCJVs)	167,166		166,790		185,624
Total current liabilities	493,261		448,468		516,770
Long-term debt	200,168		208,501		208,519
Long-term non-recourse debt	4,375		9,912		27,755
Other long-term liabilities	47,913		49,221		46,985
Deferred income taxes	3,644		4,034		10,330
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 38,706,966 shares as of September 30, 2012, 38,682,771 shares as of December 31, 2011 and 38,664,403 shares as of September 30, 2011	387		387		387
Additional paid-in capital	114,917		111,514		108,096
Retained earnings	699,277		687,296		673,626
Total Granite Construction Incorporated shareholders’ equity	814,581		799,197		782,109
Noncontrolling interests	34,693		28,466		26,001
Total equity	849,274		827,663		808,110
Total liabilities and equity	$	1,598,635	$	1,547,799	$	1,618,469

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

Table of Contents



GRANITE CONSTRUCTION INCORPORATED
CONDENSED CONSOLIDATED STATEMENTS OF INCOME
(Unaudited - in thousands, except per share data)
	Three Months Ended September 30,						Nine Months Ended September 30,
	2012			2011			2012			2011
Revenue
Construction	$	385,744		$	431,101		$	748,803		$	784,393
Large project construction	255,918			213,320			648,645			513,478
Construction materials	86,782			83,171			175,754			165,083
Real estate	38			986			5,055			7,029
Total revenue	728,482			728,578			1,578,257			1,469,983
Cost of revenue
Construction	352,471			372,561			688,989			696,911
Large project construction	198,104			187,763			540,343			443,965
Construction materials	76,798			73,617			166,720			154,329
Real estate	10			744			4,254			5,941
Total cost of revenue	627,383			634,685			1,400,306			1,301,146
Gross profit	101,099			93,893			177,951			168,837
Selling, general and administrative expenses	41,280			39,112			125,274			121,277
Gain on sales of property and equipment	1,622			5,598			6,493			11,572
Operating income	61,441			60,379			59,170			59,132
Other income (expense)
Interest income	485			476			2,140			2,295
Interest expense	(2,561		)	(3,418		)	(8,570		)	(7,653		)
Equity in income of affiliates	1,481			1,881			380			1,443
Other income (expense), net	2,013			(1,833		)	3,866			(1,951		)
Total other income (expense)	1,418			(2,894		)	(2,184		)	(5,866		)
Income before provision for income taxes	62,859			57,485			56,986			53,266
Provision for income taxes	17,113			15,109			15,440			11,973
Net income	45,746			42,376			41,546			41,293
Amount attributable to noncontrolling interests	(8,625		)	(5,908		)	(14,249		)	(8,886		)
Net income attributable to Granite Construction Incorporated	$	37,121		$	36,468		$	27,297		$	32,407

Net income per share attributable to common shareholders (see Note 14)
Basic	$	0.96		$	0.94		$	0.71		$	0.84
Diluted	$	0.94		$	0.93		$	0.70		$	0.83
Weighted average shares of common stock
Basic	38,518			38,172			38,418			38,092
Diluted	39,141			38,598			39,013			38,428
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.

Table of Contents



GRANITE CONSTRUCTION INCORPORATED
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited - in thousands)
Nine Months Ended September 30,	2012			2011
Operating activities
Net income	$	41,546		$	41,293
Adjustments to reconcile net income to net cash provided by operating activities:
Depreciation, depletion and amortization	43,651			45,691
Non-cash restructuring, net	(1,782		)	1,031
Other non-cash impairment charges	3,101			—
Gain on sales of property and equipment	(6,493		)	(11,572		)
Stock-based compensation	8,910			8,994
(Gain) loss on company owned life insurance	(1,829		)	639
Changes in assets and liabilities:
Receivables	(115,066		)	(112,790		)
Costs and estimated earnings in excess of billings, net	(11,342		)	(66,045		)
Inventories	(13,024		)	(6,969		)
Real estate held for development and sale	98			(2,756		)
Equity in construction joint ventures	3,139			(22,699		)
Other assets, net	20,312			9,359
Accounts payable	51,025			86,900
Accrued expenses and other current liabilities, net	(2,083		)	30,942
Net cash provided by operating activities	20,163			2,018
Investing activities
Purchases of marketable securities	(59,936		)	(115,146		)
Maturities of marketable securities	70,100			85,875
Proceeds from sale of marketable securities	55,000			33,268
Additions to property and equipment	(25,971		)	(34,748		)
Proceeds from sales of property and equipment	8,368			20,071
Other investing activities, net	1,165			2,313
Net cash provided by (used in) investing activities	48,726			(8,367		)
Financing activities
Long-term debt principal payments	(11,584		)	(17,293		)
Cash dividends paid	(15,078		)	(15,090		)
Purchases of common stock	(4,521		)	(3,840		)
Distributions to noncontrolling partners, net	(8,022		)	(17,489		)
Other financing activities	648			1,138
Net cash used in financing activities	(38,557		)	(52,574		)
Increase (decrease) in cash and cash equivalents	30,332			(58,923		)
Cash and cash equivalents at beginning of period	256,990			252,022
Cash and cash equivalents at end of period	$	287,322		$	193,099



Supplementary Information
Cash paid during the period for:
Interest	$	6,948	$	9,718
Income taxes	1,131		905
Non-cash investing and financing activities:
Restricted stock/units issued, net of forfeitures	$	11,532	$	6,896
Accrued cash dividends	5,032		5,026
Debt payments out of escrow from sale of assets	1,109		3,446
Debt extinguishment from joint venture interest transfer	9,115		—
Debt payment from refinancing	1,150		—

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,” “Company” 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, 2011. 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 state fairly our financial position at September 30, 2012 and 2011 and the results of our operations and cash flows for the periods presented. The December 31, 2011 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 of the following new accounting guidance in the first quarter of 2012:

•

Accounting Standards Update (“ASU”) No. 2011-05, Comprehensive Income (Topic 220): Presentation of Comprehensive Income, which eliminates the option to present the components of other comprehensive income as part of the statement of stockholders’ equity or as a footnote to the condensed consolidated financial statements, and provides the option of presenting comprehensive income in a continuous statement of comprehensive income. This guidance became effective for our quarter ended March 31, 2012 and requires prior year amounts to conform to current year presentation. For all periods presented comprehensive income was equal to net income; therefore, a separate or continuous statement of comprehensive income is not included in the accompanying condensed consolidated financial statements.

•

ASU No. 2011-04, Fair Value Measurement (Topic 820): Amendments to Achieve Common Fair Value Measurement and Disclosure Requirements in U.S. GAAP and International Financial Reporting Standards, which clarifies the application of certain existing fair value measurement guidance and expands the disclosure requirements for fair value measurements that are estimated using significant unobservable (Level 3) inputs and for assets and liabilities disclosed but not recorded at fair value. This guidance was effective for our quarter ended March 31, 2012. As a result of this new guidance, we disclosed the level of the fair value hierarchy within which the fair value measurements of assets and liabilities disclosed but not recorded at fair value were categorized (see Note 5). Other items in this new guidance had no impact to our condensed consolidated financial statements.

•

ASU No. 2011-08, Intangibles - Goodwill and Other (Topic 350): Testing Goodwill for Impairment, which gives companies the option to first assess qualitative factors to determine whether it is more likely than not that the fair value of a reporting unit is less than its carrying value when assessing goodwill for impairment. If it is determined that it is more likely than not that the fair value of a reporting unit exceeds its carrying value, further impairment analysis is not necessary. However, if it is concluded otherwise, we are required to perform step one of the goodwill impairment test. This guidance was effective as of January 1, 2012 and will be applied during our annual goodwill impairment tests to be performed during the fourth quarter of 2012, and earlier if fact and circumstances indicate that an impairment has occurred. This new guidance will have no impact to our condensed consolidated financial statements for our 2012 fiscal year.

Interim results are subject to significant seasonal variations and the results of operations for the three and nine months ended September 30, 2012 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

In December 2011, the Financial Accounting Standards Board (“FASB”) issued ASU No. 2011-11, Balance Sheet (Topic 210): Disclosures about Offsetting Assets and Liabilities. This ASU requires companies to disclose both gross and net information about financial instruments that have been offset on the consolidated balance sheet. This ASU will be effective commencing with our quarter ending March 31, 2013. We do not expect the adoption of this ASU to have an impact on our consolidated financial statements.

In July 2012, the FASB issued ASU No. 2012-02, Intangibles - Goodwill and Other (Topic 350): Testing Indefinite-Lived Intangible Assets for Impairment. This ASU gives companies the option to first assess qualitative factors to determine whether it is more likely than not that the indefinite-lived intangible asset is impaired. If it is determined that it is more likely than not the indefinite-lived intangible asset is impaired, a quantitative impairment test is required. However, if it is concluded otherwise, the quantitative test is not necessary. This ASU will be effective commencing with our quarter ending March 31, 2013. We do not expect the adoption of this ASU to have an impact on our consolidated financial statements.


3.	Revisions in Estimates

Our profit recognition related to construction contracts is based on estimates of costs to complete each project. These estimates can vary in the normal course of business as projects progress and uncertainties are resolved. We do not recognize revenue on contract change orders or claims until we have a signed agreement; however, we do recognize costs as incurred and revisions to estimated total costs as soon as the obligation to perform is determined. Approved change orders and claims, as well as changes in related estimates of costs to complete, are considered revisions in estimates. We use the cumulative catch-up method applicable to construction contract accounting to account for revisions in estimates. Under this option, revisions in estimates are accounted for in their entirety in the period of change. As of September 30, 2012, we had no revisions in estimates that are reasonably certain to impact future periods.

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GRANITE CONSTRUCTION INCORPORATED

NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

Construction

Increases



		Three Months Ended September 30,				Nine Months Ended September 30,
(dollars in millions)		2012		2011		2012		2011
Number of projects with upward estimate changes		1		2		4		4
Range of increase in gross profit from each project, net	$	1.6	$	1.3 - 1.4	$	1.0 - 3.0	$	1.1 - 2.9
Increase on project profitability	$	1.6	$	2.7	$	7.1	$	7.0

The increases during the three and nine months ended September 30, 2012 were due to lower than anticipated costs and settlement of outstanding issues with contract owners. The increases during the three and nine months ended September 30, 2011 were primarily due to improved salvage prices for excess material, the settlement of outstanding cost issues and owner directed scope changes.

Decreases



		Three Months Ended September 30,				Nine Months Ended September 30,
(dollars in millions)		2012		2011		2012		2011
Number of projects with downward estimate changes		4		2		6		3
Range of reduction in gross profit from each project, net	$	1.1 - 3.9	$	1.4 - 2.6	$	1.1 - 6.3	$	1.4 - 2.6
Decrease on project profitability	$	7.6	$	4.0	$	16.5	$	5.4

The decreases during the three and nine months ended September 30, 2012 were due to lower productivity than originally anticipated. The decreases during the three and nine months ended September 30, 2011 were due to lower productivity than anticipated and unanticipated rework costs.

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GRANITE CONSTRUCTION INCORPORATED

NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

Large Project Construction

The net changes in project profitability from revisions in estimates, both increases and decreases, that individually had an impact of $1.0 million or more on gross profit were net increases of $35.9 million and $48.9 million for the three and nine months ended September 30, 2012, respectively. The net changes for the three and nine months ended September 30, 2011 were net increases of $2.7 million and $7.9 million, respectively. Amounts attributable to noncontrolling interests were $5.7 million and $6.6 million of the net increases for the three and nine months ended September 30, 2012, respectively, and were $1.0 million and $0.6 million of the net increases for the three and nine months ended September 30, 2011, respectively. The projects are summarized as follows:

Increases



		Three Months Ended September 30,				Nine Months Ended September 30,
(dollars in millions)		2012		2011		2012		2011
Number of projects with upward estimate changes		8		5		8		6
Range of increase in gross profit from each project, net	$	1.1 - 12.6	$	1.0 - 2.6	$	1.1 - 16.3	$	1.4 - 4.2
Increase on project profitability	$	35.9	$	8.8	$	54.7	$	17.7

The increases during the three and nine months ended September 30, 2012 were due to owner directed scope changes and lower than anticipated construction costs. The increases during the three and nine months ended September 30, 2011 were due to the settlement of outstanding issues with a contract owner, owner directed scope change, lower than anticipated construction costs and the resolution of a project claim.

Decreases



		Three Months Ended September 30,				Nine Months Ended September 30,
(dollars in millions)		2012		2011		2012		2011
Number of projects with downward estimate changes		—		3		2		2
Range of reduction in gross profit from each project, net	$	—	$	1.7 - 2.4	$	1.7 - 4.1	$	4.2 - 5.6
Decrease on project profitability	$	—	$	6.1	$	5.8	$	9.8

There were no downward estimate changes during the three months ended September 30, 2012. The downward estimate changes during the nine months ended September 30, 2012 were due to lower productivity than anticipated. The downward estimate changes during the three and nine months ended September 30, 2011 were due to increased costs to resolve project uncertainties and lower productivity than anticipated.

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GRANITE CONSTRUCTION INCORPORATED

NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)


4.	Marketable Securities

All marketable securities were classified as held-to-maturity for the dates presented and the carrying amounts of held-to-maturity securities were as follows:



(in thousands)	September 30, 2012		December 31, 2011		September 30, 2011
U.S. Government and agency obligations	$	15,062	$	40,240	$	40,218
Commercial paper	19,976		24,980		29,978
Municipal bonds	7,082		2,057		4,036
Corporate bonds	5,065		3,131		3,157
Total short-term marketable securities	47,185		70,408		77,389
U.S. Government and agency obligations	36,103		65,109		45,268
Municipal bonds	1,699		8,909		8,952
Corporate bonds	—		5,232		5,289
Total long-term marketable securities	37,802		79,250		59,509
Total marketable securities	$	84,987	$	149,658	$	136,898

Scheduled maturities of held-to-maturity investments were as follows (in thousands):



September 30, 2012
Due within one year	$	47,185
Due in one to five years	37,802
Total	$	84,987

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GRANITE CONSTRUCTION INCORPORATED

NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)


5.	Fair Value Measurement

Effective in 2012, we adopted a new accounting standard that expands the disclosure of our assets and liabilities disclosed, but not recorded at fair value. As of September 30, 2012, December 31, 2011, and September 30, 2011, these assets and liabilities were our held-to-maturity marketable securities and senior notes payable. The following tables summarize each class of assets and liabilities measured at fair value on a recurring basis as well as assets and liabilities that are disclosed but not recorded at fair value:



September 30, 2012	Fair Value Measurement at Reporting Date Using
(in thousands)	Level 1¹		Level 2²		Level 3³		Total
Cash equivalents
Money market funds	$	185,586	$	—	$	—	$	185,586
Held-to-maturity commercial paper	14,495		—		—		14,495
Marketable securities
Held-to-maturity marketable securities	85,133		—		—		85,133
Total assets	$	285,214	$	—	$	—	$	285,214

Long-term debt (including current maturities)
Senior notes payable	$	—	$	—	$	243,219	$	243,219
Total liabilities	$	—	$	—	$	243,219	$	243,219



December 31, 2011	Fair Value Measurement at Reporting Date Using
(in thousands)	Level 1¹		Level 2²		Level 3³		Total
Cash equivalents
Money market funds	$	178,174	$	—	$	—	$	178,174
Held-to-maturity commercial paper	4,999		—		—		4,999
Marketable securities
Held-to-maturity marketable securities	149,979		—		—		149,979
Total assets	$	333,152	$	—	$	—	$	333,152

Long-term debt (including current maturities)
Senior notes payable	$	—	$	—	$	250,541	$	250,541
Total liabilities	$	—	$	—	$	250,541	$	250,541



September 30, 2011	Fair Value Measurement at Reporting Date Using
(in thousands)	Level 1¹		Level 2²		Level 3³		Total
Cash equivalents
Money market funds	$	149,966	$	—	$	—	$	149,966
Held-to-maturity commercial paper	4,997		—		—		4,997
Marketable securities
Held-to-maturity marketable securities	137,194		—		—		137,194
Total assets	$	292,157	$	—	$	—	$	292,157

Long-term debt (including current maturities)
Senior notes payable	$	—	$	—	$	242,698	$	242,698
Total liabilities	$	—	$	—	$	242,698	$	242,698

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.

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GRANITE CONSTRUCTION INCORPORATED

NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

A reconciliation of money market funds to consolidated cash and cash equivalents is as follows:



(in thousands)	September 30, 2012		December 31, 2011		September 30, 2011
Money market funds	$	185,586	$	178,174	$	149,966
Held-to-maturity commercial paper	14,495		4,999		4,997
Cash	87,241		73,817		38,136
Total cash and cash equivalents	$	287,322	$	256,990	$	193,099

The carrying values of receivables, other current assets, and accrued expenses and other current liabilities approximate their fair values because of the short-term nature of these instruments. In addition, the fair value measured using Level 3 inputs of non-recourse debt approximates its carrying value due to its relative short-term nature and competitive interest rates. The fair value of the senior notes payable was based on borrowing rates available to us for long-term loans with similar terms, average maturities, and credit risk. The carrying amount of senior notes payable, including current maturities, was $208.3 million, $216.7 million and $216.7 million as of September 30, 2012, December 31, 2011 and September 30, 2011, respectively. See Note 4 for the carrying amount of held-to-maturity marketable securities as of September 30, 2012, December 31, 2011 and September 30, 2011.

We measure certain nonfinancial assets and liabilities at fair value on a nonrecurring basis. During the nine months ended September 30, 2012, the only significant fair value adjustment was a $2.8 million non-cash impairment charge to write-off our cost method investment in the preferred stock of a corporation that designs and manufactures power generation equipment. The fair value was estimated based on Level 3 inputs using the expected future cash flows attributable to the asset and on other assumptions that market participants would use in determining fair value, such as liquidation preferences, market discount rates, transaction prices for other comparable assets, and other market data. No other significant fair value adjustments related to nonfinancial assets and liabilities measured at fair value on a nonrecurring basis were recorded during the three and nine months ended September 30, 2012 and 2011.


6.	Receivables, net



(in thousands)	September 30, 2012		December 31, 2011		September 30, 2011
Construction contracts:
Completed and in progress	$	228,865	$	122,987	$	223,292
Retentions	68,590		77,038		74,795
Total construction contracts	297,455		200,025		298,087
Construction material sales	59,396		30,356		52,157
Other	9,029		24,337		10,177
Total gross receivables	365,880		254,718		360,421
Less: allowance for doubtful accounts	2,425		2,880		2,614
Total net receivables	$	363,455	$	251,838	$	357,807

Receivables include amounts billed and billable for public and private contracts and do not bear interest. The balances billed but not paid by customers pursuant to retainage provisions in construction contracts generally become due upon completion and acceptance of the contract by the owners. Included in other receivables at September 30, 2012, December 31, 2011 and September 30, 2011 were items such as notes receivable, interest receivable, fuel tax refunds and income tax refunds. No such receivables individually exceeded 10% of total net receivables at any of these dates.

Financing receivables consisted of long-term notes receivable and retentions receivable. As of September 30, 2012, December 31, 2011 and September 30, 2011, long-term notes receivable outstanding were $1.9 million, $2.0 million, and $2.1 million, respectively, and primarily related to loans made to employees and were included in other noncurrent assets in our condensed consolidated balance sheets.

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NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

We segregate our retention receivables into two categories: escrow and non-escrow. The balances in each category were as follows:



(in thousands)	September 30, 2012		December 31, 2011		September 30, 2011
Escrow	$	42,297	$	43,378	$	38,517
Non-escrow	26,293		33,660		36,278
Total retention receivables	$	68,590	$	77,038	$	74,795

The escrow receivables include amounts due to Granite which have been deposited into an escrow account and bear interest. Typically, escrow retention receivables are held until work on a project is complete and has been accepted by the owner who then releases those funds, along with accrued interest, to us. There is minimal risk of not collecting on these amounts.

Non-escrow retention receivables are amounts that the project owner has contractually withheld that will be paid upon owner acceptance of contract completion. We evaluate our non-escrow retention receivables for collectability using certain customer information that includes the following:


•	Federal - includes federal agencies such as the Bureau of Reclamation, the Army Corp of Engineers, and the Bureau of Indian Affairs. The obligations of these agencies are backed by the federal government. Consequently, there is minimal risk of not collecting the amounts we are entitled to receive.


•	State - primarily state departments of transportation. The risk of not collecting on these accounts is small; however, we have experienced occasional delays in payment as states have struggled with budget issues.


•	Local - these customers include local agencies such as cities, counties and other local municipal agencies. The risk of not collecting on these accounts is small; however, we have experienced occasional delays in payment as some local agencies have struggled to deal with budget issues.

•

Private - includes individuals, developers and corporations. The majority of our collection risk is associated with these customers. We perform ongoing credit evaluations of our customers and generally do not require collateral, although the law provides us certain remedies, including, but not limited to, the ability to file mechanics’ liens on real property improved for private customers in the event of non-payment by such customers.

The following table summarizes the amount of our non-escrow retention receivables within each category:



(in thousands)	September 30, 2012		December 31, 2011		September 30, 2011
Federal	$	2,569	$	2,811	$	2,148
State	3,595		5,453		6,046
Local	12,003		14,708		17,666
Private	8,126		10,688		10,418
Total	$	26,293	$	33,660	$	36,278

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NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

We regularly review our accounts receivable, including past due amounts, to determine their probability of collection. If it is probable that an amount is uncollectible, it is charged to bad debt expense and a corresponding reserve is established in allowance for doubtful accounts. If it is deemed certain that an amount is uncollectible, the amount is written off. Based on contract terms, non-escrow retention receivables are typically due within 60 days of owner acceptance of contract completion. We consider retention amounts beyond 60 days of owner acceptance of contract completion to be past due. The following tables present the aging of our non-escrow retention receivables (in thousands):



September 30, 2012	Current		1 - 90 Days Past Due		Over 90 Days Past Due		Total
Federal	$	2,012	$	—	$	557	$	2,569
State	3,177		239		179		3,595
Local	11,141		555		307		12,003
Private	7,495		321		310		8,126
Total	$	23,825	$	1,115	$	1,353	$	26,293



December 31, 2011	Current		1 - 90 Days Past Due		Over 90 Days Past Due		Total
Federal	$	2,462	$	326	$	23	$	2,811
State	2,751		860		1,842		5,453
Local	12,313		1,326		1,069		14,708
Private	9,599		765		324		10,688
Total	$	27,125	$	3,277	$	3,258	$	33,660



September 30, 2011	Current		1 - 90 Days Past Due		Over 90 Days Past Due		Total
Federal	$	1,976	$	77	$	95	$	2,148
State	3,880		1,397		769		6,046
Local	13,801		1,465		2,400		17,666
Private	9,911		108		399		10,418
Total	$	29,568	$	3,047	$	3,663	$	36,278

Federal, state and local agencies generally require several approvals to release payments, and these approvals often take over 90 days past contractual due dates to obtain. Amounts past due from government agencies primarily result from delays caused by paperwork processing and obtaining proper agency approvals rather than lack of funds. As of September 30, 2012, December 31, 2011 and September 30, 2011, our allowance for doubtful accounts contained no material provision related to non-escrow retention receivables as we determined there were no significant collectibility issues.

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GRANITE CONSTRUCTION INCORPORATED

NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)


7.	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 of 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 pay for any losses it is responsible for under the joint venture agreement. Circumstances that could lead to a loss under our joint venture arrangements beyond our stated ownership interest include the failure of a partner 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 that it had committed to provide in the joint venture agreement. Due to the joint and several nature of the obligations under our joint venture arrangements, if one of our joint venture partners fails to perform, we and the remaining joint venture partners would be responsible for performance of the outstanding work.

At September 30, 2012, there was approximately $1.6 billion of construction revenue to be recognized on unconsolidated and line item construction joint venture contracts of which $0.6 billion represented our share and the remaining $1.0 billion represented our partners’ share. Due to the uncertainties associated with the nature of our work, we are not able to quantify our maximum exposure on the underlying arrangements and contracts that may be required beyond the remaining cost of the work to be performed. These costs could be offset by billings to the customer or by proceeds from our partners’ corporate and/or other guarantees.

Construction Joint Ventures

Generally, each construction joint venture is formed to complete a specific contract 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 resulting from the performance of the contracts are limited to our stated percentage interest in the project. We have no significant commitments beyond completion of the contracts. Under our contractual arrangements, we provide capital to these joint ventures in return for an ownership interest. In addition, partners dedicate resources to the ventures necessary to complete the contracts and are reimbursed for their cost. The operational risks of each construction joint venture are passed along to the joint venture partners. As we absorb our share of these risks, our investment in each venture is exposed to potential losses.

We have determined that certain of these joint ventures are variable interest entities (“VIEs”) as defined by Accounting Standards Codification (“ASC”) Topic 810, Consolidation, and related standards. To ascertain if we are required to consolidate the VIE, we continually evaluate whether we are the VIE’s primary beneficiary. The factors we consider in determining whether we are a VIE’s primary beneficiary include the decision authority of each partner, which partner manages the day-to-day operations of the project and the amount of our equity investment in relation to that of our partners.

Based on our initial primary beneficiary analysis, we determined that decision making responsibility is shared between the venture partners for one construction joint venture. Therefore, this joint venture did not have an identifiable primary beneficiary partner and we continue to report the pro rata results. All other joint ventures were assigned one primary beneficiary partner. Based on our primary beneficiary assessment during the nine months ended September 30, 2012, we determined no change was required to the accounting for existing construction joint ventures.

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GRANITE CONSTRUCTION INCORPORATED

NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

Consolidated Construction Joint Ventures

The carrying amounts and classification of assets and liabilities of construction joint ventures we are required to consolidate are included in our condensed consolidated financial statements as follows:



(in thousands)	September 30, 2012		December 31, 2011		September 30, 2011
Cash and cash equivalents¹	$	74,020	$	75,122	$	65,350
Other current assets	32,379		33,750		31,215
Total current assets	106,399		108,872		96,565
Noncurrent assets	6,661		8,671		9,821
Total assets²	$	113,060	$	117,543	$	106,386

Accounts payable	$	30,975	$	38,193	$	36,660
Billings in excess of costs and estimated earnings¹	13,955		22,251		17,116
Accrued expenses and other current liabilities	3,495		5,129		5,997
Total current liabilities	48,425		65,573		59,773
Noncurrent liabilities	—		4		33
Total liabilities²	$	48,425	$	65,577	$	59,806

¹The volume and stage of completion of contracts from our consolidated construction joint ventures may cause fluctuations in cash and cash equivalents, as well as billings in excess of costs and estimated earnings between periods.

²The assets and liabilities of each joint venture relate solely to that joint venture. The decision to distribute joint venture cash and cash equivalents and assets must generally be made jointly by all of the partners and, accordingly, these cash and cash equivalents and assets generally are not available for the working capital needs of Granite.

At September 30, 2012, we were engaged in two active consolidated construction joint venture projects with total contract values of $245.1 million and $334.3 million. Our proportionate share of the equity in these joint ventures was 45.0% and 60.0%, respectively. During the three and nine months ended September 30, 2012, total revenue of the consolidated construction joint ventures was $77.4 million and $174.0 million, respectively. During the three and nine months ended September 30, 2011, total revenue of the consolidated construction joint ventures was $73.9 million and $171.1 million, respectively. Total cash provided by consolidated construction joint venture operations was $16.1 million and $6.0 million during the nine months ended September 30, 2012 and 2011, respectively.

Unconsolidated Construction Joint Ventures

We account for our share of construction joint ventures that we are not required to consolidate on a pro rata basis in the condensed consolidated statements of income and as a single line item on the condensed consolidated balance sheets. As of September 30, 2012, these unconsolidated joint ventures were engaged in eight active construction projects with total contract values ranging from $59.4 million to $1.2 billion. Our proportionate share of the equity in these unconsolidated joint ventures ranged from 20.0% to 50.0%. As of September 30, 2012, our share of the revenue remaining to be recognized on these unconsolidated joint ventures ranged from $0.4 million to $186.6 million.

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NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

Following is summary financial information related to unconsolidated construction joint ventures:



(in thousands)	September 30, 2012		December 31, 2011		September 30, 2011
Assets:
Cash and cash equivalents¹	$	304,065	$	338,681	$	356,399
Other assets	273,848		264,901		265,549
Less partners’ interest	353,165		364,979		378,523
Granite’s interest	224,748		238,603		243,425
Liabilities:
Accounts payable	94,788		85,075		85,602
Billings in excess of costs and estimated earnings¹	243,578		280,650		302,039
Other liabilities	8,299		8,595		9,460
Less partners’ interest	219,807		236,746		251,091
Granite’s interest	126,858		137,574		146,010
Equity in construction joint ventures	$	97,890	$	101,029	$	97,415

¹The volume and stage of completion of contracts from our unconsolidated construction joint ventures may cause fluctuations in cash and cash equivalents, as well as billings in excess of costs and estimated earnings between periods.



	Three Months Ended September 30,				Nine Months Ended September 30,
(in thousands)	2012		2011		2012		2011
Revenue:
Total¹	$	286,308	$	243,654	$	776,235	$	667,920
Less partners’ interest^1,2	181,679		158,079		497,743		448,357
Granite’s interest	104,629		85,575		278,492		219,563
Cost of revenue:
Total¹	200,688		212,485		597,689		546,495
Less partners’ interest^1,2	129,840		140,506		389,171		370,865
Granite’s interest	70,848		71,979		208,518		175,630
Granite’s interest in gross profit	$	33,781	$	13,596	$	69,974	$	43,933

¹While Granite’s interest in revenue, cost of revenue and gross profit were correctly stated, total and partners’ interest for revenue and cost of revenue for the three and six month periods ended June 30, 2012 were inadvertently misstated in our Quarterly Report for the quarter ended June 30, 2012. Total revenue, partner’s interest in revenue, total cost of revenue and partners’ interest in cost of revenue reported was (in thousands): $663,536, $563,302, $544,838 and $467,540, respectively, for the three months ended June 30, 2012, and $869,368, $695,505, $714,450 and $576,780, respectively, for the six months ended June 30, 2012. Total revenue, partner’s interest in revenue, total cost of revenue and partners’ interest in cost of revenue should have been (in thousands): $284,095, $183,861, $227,389, and $150,091, respectively, for the three months ended June 30, 2012, and $489,926, $316,064, $397,001, and $259,331, respectively, for the six months ended June 30, 2012.

²Partners’ interest represents amounts to reconcile total revenue and total cost of revenue as reported by our partners to Granite’s interest, adjusted to reflect our accounting policies.

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 bears 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. As of September 30, 2012, we had five active line item joint venture construction projects with total contract values ranging from $42.0 million to $133.2 million of which our portions ranged from $21.9 million to $55.7 million. As of September 30, 2012, our share of revenue remaining to be recognized on these line item joint ventures ranged from $2.5 million to $29.0 million.

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NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)


8.	Real Estate Entities and Investments in Affiliates

The operations of our Real Estate segment are conducted through our wholly owned subsidiary, Granite Land Company (“GLC”). Generally, GLC participates with third-party partners in entities that are formed to accomplish specific real estate development projects. The agreements with GLC’s partners in these real estate entities define each partner’s management role and financial responsibility in the project. If one of GLC’s partners is unable to fulfill its management role or make its required financial contribution, GLC may assume full management or financial responsibility for the project. This may result in the consolidation of entities that are accounted for under the equity method in our consolidated financial statements. The amount of GLC’s exposure is limited to GLC’s equity investment in the real estate joint venture.

Substantially all the assets of these real estate entities in which we are participants through our GLC subsidiary are classified as real estate held for development and sale. 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 limited partnerships or limited liability companies of which we are a limited partner or member. In the fourth quarter of 2010, we publicly announced our work in progress on our Enterprise Improvement Plan which includes business plans to orderly divest of our real estate investment business by the end of 2013, subject to market conditions and our ability to negotiate sales of certain assets at prices acceptable to us. In 2011, development activities were curtailed for the majority of our real estate development projects as divestiture efforts increased. During the nine months ended September 30, 2012, we recorded amounts associated with the sale or other disposition of two real estate projects, the impact of which was not significant to our results of operations. Subsequent to the sale or other disposition of these projects, GLC had no significant continuing involvement with the associated entities.

GLC receives authorization to provide additional financial support for certain of its real estate entities in increments to address changes in business plans. During the nine months ended September 30, 2012, GLC was not authorized to increase its financial support to consolidated real estate entities and during the nine months ended September 30, 2011, GLC was authorized to increase its financial support to consolidated real estate entities by $12.0 million on three separate projects. As of September 30, 2012, $3.1 million of the total authorized investment had yet to be contributed to the consolidated entities.

We have determined that certain of the real estate joint ventures are VIEs as defined by ASC Topic 810, Consolidation, and related standards. To ascertain if we are required to consolidate the VIE, we continually evaluate whether we are the VIE’s primary beneficiary. The factors we consider in determining whether we are a VIE’s primary beneficiary include the decision authority of each partner, which partner manages the day-to-day operations of the project and the amount of our equity investment in relation to that of our partners. Based on our ongoing primary beneficiary assessments, there were no changes to our determinations of whether we are the VIE’s primary beneficiary for existing real estate entities during the nine months ended September 30, 2012 and 2011.

To determine if impairment charges should be recognized, the carrying amount of each consolidated real estate development project is reviewed on a quarterly basis in accordance with ASC Topic 360, Property, Plant, and Equipment, and each real estate development project accounted for under the equity method of accounting is reviewed in accordance with ASC Topic 323, Investments - Equity Method and Joint Ventures. The review of each project includes an evaluation of entitlement status, market conditions, existing offers to purchase, cost of construction, debt load, development schedule, status of joint venture partners and other factors specific to each project to determine if events or changes in circumstances indicate that a project’s carrying amount may not be recoverable. If events or changes in circumstances indicate that a consolidated project’s carrying amount may not be recoverable, the future undiscounted cash flows are estimated and compared to the project’s carrying amount. In the event that the project’s estimated future undiscounted cash flows are not sufficient to recover the carrying amounts, it is written down to its estimated fair value. The projects accounted for under the equity method are evaluated for impairment using the other-than-temporary impairment model, which requires an impairment charge to be recognized if the project’s carrying amount exceeds its fair value, and the decline in fair value is deemed to be other than temporary. In the event that the estimated fair value is not sufficient to recover the carrying amount of a project, it is written down to its estimated fair value.

Based on our quarterly evaluations of each project’s business plan and our review of each project, we recorded no significant impairment charges to our real estate development projects or investments during the three and nine months ended September 30, 2012 and 2011.

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NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

Consolidated Real Estate Entities

The carrying amounts and classification of assets and liabilities of real estate entities we are required to consolidate are included in our condensed consolidated balance sheets as follows:



(in thousands)	September 30, 2012		December 31, 2011		September 30, 2011
Real estate held for development and sale	$	57,964	$	67,037	$	79,173
Other current assets	1,946		4,715		2,801
Total assets	$	59,910	$	71,752	$	81,974

Current maturities of non-recourse debt	$	16,712	$	22,571	$	16,190
Other current liabilities	404		1,794		1,901
Total current liabilities	17,116		24,365		18,091
Long-term non-recourse debt	4,375		9,912		27,755
Other noncurrent liabilities	—		74		278
Total liabilities	$	21,491	$	34,351	$	46,124

Substantially all of the consolidated real estate entities’ real estate held for development and sale is pledged as collateral for the debt of the real estate entities. All outstanding debt of the real estate entities is recourse only to the real estate affiliate that incurred the debt (i.e. the limited partnership or limited liability company of which we are a limited partner or member). Our proportionate share of the profits and losses of these entities depends on the ultimate operating results of the entities.

Included in current assets on our condensed consolidated balance sheets is real estate held for development and sale. The breakdown by type and location of our real estate held for development and sale is summarized below:



	September 30, 2012			December 31, 2011			September 30, 2011
(dollars in thousands)	Amount		Number of Projects	Amount		Number of Projects	Amount		Number of Projects
Residential	$	48,527	3	$	54,610	4	$	55,672	5
Commercial	9,437		4	12,427		5	23,501		7
Total	$	57,964	7	$	67,037	9	$	79,173	12

Washington	$	48,122	2	$	47,600	2	$	47,109	2
California	2,609		4	4,006		5	16,382		8
Texas	7,233		1	8,859		1	8,859		1
Oregon	—		—	6,572		1	6,823		1
Total	$	57,964	7	$	67,037	9	$	79,173	12

Investments in Affiliates

We account for our share of unconsolidated real estate entities in which we have determined we are not the primary beneficiary in other income in the condensed consolidated statements of income and as a single line item on our condensed consolidated balance sheets as investments in affiliates. At September 30, 2012, these entities were engaged in real estate development projects with total assets ranging from approximately $2.7 million to $45.8 million. Our proportionate share of the profits and losses of these entities depends on the ultimate operating results of the entities.

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NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

Additionally, we have investments in non-real estate 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. During the three months ended June 30, 2012, it was determined that the carrying amount of our cost method investment in a power generation equipment manufacturer exceeded its fair value, which required us to recognize a non-cash impairment charge of $2.8 million.

Our investments in affiliates balance consists of the following:



(in thousands)	September 30, 2012		December 31, 2011		September 30, 2011
Equity method investments in real estate affiliates	$	18,873	$	16,478	$	15,856
Equity method investments in other affiliates	11,384		11,841		11,129
Total equity method investments	30,257		28,319		26,985
Cost method investments	—		2,752		6,450
Total investments in affiliates	$	30,257	$	31,071	$	33,435

The breakdown by type and location of our interests in real estate affiliates accounted for under the equity method is summarized below:



	September 30, 2012			December 31, 2011			September 30, 2011
(dollars in thousands)	Amount		Number of Projects	Amount		Number of Projects	Amount		Number of Projects
Residential	$	12,805	2	$	11,903	2	$	11,511	2
Commercial	6,068		3	4,575		3	4,345		3
Total	$	18,873	5	$	16,478	5	$	15,856	5

Texas	$	18,873	5	$	16,478	5	$	15,856	5
Total	$	18,873	5	$	16,478	5	$	15,856	5

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



(in thousands)	September 30, 2012		December 31, 2011		September 30, 2011
Total assets	$	156,992	$	157,771	$	157,054
Net assets	85,162		82,511		80,306
Granite’s share of net assets	30,257		28,319		26,985


9.	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:



(in thousands)	September 30, 2012		December 31, 2011		September 30, 2011
Land and land improvements	$	125,842	$	124,216	$	122,728