10-Q 1 form10-q.htm GRANITE CONSTRUCTION INCORPORATED FORM 10-Q 03/31/09 form10-q.htm


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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 March 31, 2009
 
OR
 
¨
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from ___________ to ___________
 
Commission File Number: 1-12911
 
GRANITE CONSTRUCTION INCORPORATED
 
State of Incorporation:
I.R.S. Employer Identification Number:
Delaware
77-0239383
 
Corporate Administration:
585 W. Beach Street
Watsonville, California 95076
(831) 724-1011
 
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.  Yes ý  No ¨
 
Indicate by check mark whether the registrant 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 definition of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act.
Large accelerated filer ý
 
Accelerated filer ¨
 
Non-accelerated filer ¨
 
Smaller reporting company ¨
 
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). ¨ Yes  ý No
 
Indicate the number of shares outstanding of each of the issuer’s classes of common stock, as of April 30, 2009.
 
Class
 
Outstanding
Common Stock, $0.01 par value
 
38,674,060 shares
 

 


 
Index
       
 
   
     
     
     
     
   
   
   
 
   
   
   
   
   
   
   
 
 
 
 
 
PART I. FINANCIAL INFORMATION
 
Item 1.   FINANCIAL STATEMENTS (unaudited)
 
 
GRANITE CONSTRUCTION INCORPORATED
 
CONDENSED CONSOLIDATED BALANCE SHEETS
 
(Unaudited - in thousands, except share and per share data)
 
   
   
March 31,
   
December 31,
   
March 31,
 
   
2009
   
2008
   
2008
 
ASSETS
                 
Current assets
                 
Cash and cash equivalents
  $ 390,483     $ 460,843     $ 266,427  
Short-term marketable securities
    22,276       38,320       79,997  
Accounts receivable, net
     233,867       314,733       320,526  
Costs and estimated earnings in excess of billings
     54,400       13,295       74,279  
Inventories, net
     59,254       55,223       61,432  
Real estate held for development and sale
     79,409       75,089       54,736  
Deferred income taxes
     43,484       43,637       44,728  
Equity in construction joint ventures
     44,423       44,681       39,893  
Other current assets
     52,488       56,742       62,559  
Total current assets
     980,084       1,102,563       1,004,577  
Property and equipment, net
     526,734       517,678       518,900  
Long-term marketable securities
     46,387       21,239       37,303  
Investments in affiliates
     21,768       19,996       25,713  
Other noncurrent assets
     79,534       81,979       72,149  
Total assets
  $  1,654,507     $ 1,743,455     $ 1,658,642  
LIABILITIES AND EQUITY
                       
Current liabilities
                       
Current maturities of long-term debt
  $  34,218     $ 39,692     $ 34,071  
Accounts payable
    141,783       174,626       195,651  
Billings in excess of costs and estimated earnings
     190,540       227,364       218,935  
Accrued expenses and other current liabilities
     159,323       184,939       166,774  
Total current liabilities
     525,864       626,621       615,431  
Long-term debt
     251,351       250,687       257,442  
Other long-term liabilities
     45,836       43,604       45,479  
Deferred income taxes
     17,917       18,261       18,228  
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 38,679,123 shares as of March 31, 2009, 38,266,791 shares as of December 31, 2008 and 38,274,800 shares as of March 31, 2008
    387       383       383  
Additional paid-in capital
    88,158       85,035       79,534  
Retained earnings
     686,129       682,237       587,881  
Accumulated other comprehensive loss
     -       (146 )     (693
Total Granite Construction Inc. shareholders’ equity
    774,674       767,509       667,105  
Noncontrolling interest
     38,865        36,773       54,957  
Total equity
     813,539       804,282       722,062  
Total liabilities and equity
  $  1,654,507     $ 1,743,455     $ 1,658,642  
 
The accompanying notes are an integral part of these condensed consolidated financial statements.
 
 
GRANITE CONSTRUCTION INCORPORATED
 
CONDENSED CONSOLIDATED STATEMENTS OF INCOME
 
(Unaudited - in thousands, except per share data)
 
         
Three Months Ended March 31,  
2009
   
2008
 
Revenue
           
Construction
  $ 317,109     $ 402,573  
Material sales
    29,846       51,554  
Real estate
     417       673  
Total revenue
     347,372       454,800  
Cost of revenue
               
Construction
     246,969       306,846  
Material sales
     32,183       49,056  
Real estate
     207       204  
Total cost of revenue
    279,359       356,106  
Gross profit
     68,013       98,694  
General and administrative expenses
    53,632       60,651  
Gain on sales of property and equipment
     2,521       401  
Operating income
     16,902       38,444  
Other income (expense)
               
Interest income
    2,061       6,055  
Interest expense
     (3,488     (4,510 )
Equity in loss of affiliates
     (444     (707
Other income, net
    3,785       8,463  
Total other income
     1,914       9,301  
Income before provision for income taxes
    18,816       47,745  
Provision for income taxes
    4,829       12,127  
Net income
    13,987       35,618  
Amount attributable to noncontrolling interest
    (5,067     (22,495 )
Net income attributable to Granite Construction Inc.
  $ 8,920     $ 13,123  
                 
Net income per share attributable to common shareholders (see Note 11)
               
Basic
  $ 0.23     $ 0.34  
Diluted
  $  0.23     $ 0.34  
                 
Weighted average shares of common stock
               
Basic
     37,476       38,139  
Diluted
    37,600       38,172  
                 
Dividends per common share
  $  0.13     $ 0.13  
 
The accompanying notes are an integral part of these condensed consolidated financial statements.
 
GRANITE CONSTRUCTION INCORPORATED
 
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
 
(Unaudited - in thousands)
 
             
Three Months Ended March 31,
 
2009
   
2008
 
Operating Activities
           
Net income
  $ 13,987     $ 35,618  
Adjustments to reconcile net income to net cash used in operating activities:
               
Depreciation, depletion and amortization
    20,623       21,172  
Gain on sales of property and equipment
     (2,521     (401 )
Change in deferred income taxes
    (283     419  
Stock-based compensation
     2,777       1,609  
Excess tax benefit on stock-based compensation
    (413     (746 )
Equity in loss of affiliates
    444       707  
Acquisition of noncontrolling interest
     -       (16,616
Changes in assets and liabilities, net of the effects of acquisitions:
               
Accounts receivable, net
     84,999       83,683  
Inventories, net
    (4,031     (4,400 )
Real estate held for development and sale
    (4,383     (3,048 )
Equity in construction joint ventures
    258       (5,553 )
Other assets, net
     5,040       36,622  
Accounts payable
     (32,843     (17,484 )
Accrued expenses and other current liabilities, net
     (20,120     (41,891 )
Billings in excess of costs and estimated earnings
     (77,929     (113,236 )
Net cash used in operating activities
    (14,395     (23,545 )
Investing Activities
               
Purchases of marketable securities
    (29,258 )     (9,179 )
Maturities of marketable securities
     15,610       21,500  
Release of funds for acquisition of noncontrolling interest
    -       28,332  
Additions to property and equipment
    (29,601     (30,735 )
Proceeds from sales of property and equipment
     3,741       3,517  
Acquisition of businesses
    -       (14,022 )
Contributions to affiliates
     (2,219     -  
Other investing activities,  net
    148       676  
Net cash (used in) provided by investing activities
    (41,579     89  
Financing Activities
               
Proceeds from long-term debt
    2,435       1,083  
Long-term debt principal payments
     (7,282     (6,683 )
Cash dividends paid
    (4,975     (5,129 )
Purchase of common stock
    (2,017     (45,468 )
Contributions from noncontrolling partners
    157       4,640  
Distributions to noncontrolling partners
     (3,153     (24 )
Acquisition of noncontrolling interest
     -       (11,716 )
Excess tax benefit on stock-based compensation
     413       746  
Other financing
    36       -  
Net cash used in financing activities
    (14,386     (62,551 )
Decrease in cash and cash equivalents
    (70,360     (86,007 )
Cash and cash equivalents at beginning of period
    460,843       352,434  
Cash and cash equivalents at end of period
  $  390,483     $ 266,427  

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

GRANITE CONSTRUCTION INCORPORATED
 
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (continued)
 
(Unaudited - in thousands)
 
             
Three Months Ended March 31,
 
2009
   
2008
 
Supplementary Information
           
Cash paid during the period for:
           
Interest
  $ 963     $ 920  
Income taxes
     2,687       6,097  
Non-cash investing and financing activity:
               
Restricted stock issued for services, net
  $ 18,675     $ 6,692  
Restricted stock units issued
    14       3,202  
Accrued cash dividends
     5,028       4,976  
 
The accompanying notes are an integral part of these condensed consolidated financial statements.
 
6

GRANITE CONSTRUCTION INCORPORATED
NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
 
1.
Basis of Presentation: 
 
The condensed consolidated financial statements included herein have been prepared by Granite Construction Incorporated (“we,” “us,” “our” or “Granite”) without audit, pursuant to the rules and regulations of the Securities and Exchange Commission and should be read in conjunction with our Annual Report on Form 10-K for the year ended December 31, 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 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 March 31, 2009 and 2008 and the results of our operations and cash flows for the periods presented. The December 31, 2008 condensed consolidated balance sheet data was derived from audited consolidated financial statements, but does not include all disclosures required by accounting principles generally accepted in the United States of America.
 
We prepared the accompanying condensed consolidated financial statements on the same basis as our annual consolidated financial statements except for the adoptions in the first quarter of 2009 of Statement of Financial Accounting Standards No. 160, Noncontrolling Interests in Consolidated Financial Statements (“SFAS 160”), and Financial Accounting Standards Board (“FASB”) Staff Position (“FSP”) Emerging Issues Task Force Issue (“EITF”) No. 03-6-1, Determining Whether Instruments Granted in Share-Based Payment Transactions Are Participating Securities (“FSP EITF 03-6-1”). SFAS 160 clarifies that a noncontrolling interest, formerly minority interest, should be reported as equity in the condensed consolidated balance sheets and requires net income or loss attributable to both the parent and noncontrolling interest be disclosed separately on the face of the condensed consolidated statements of income. SFAS 160 became effective for us on January 1, 2009 and requires prior year amounts related to noncontrolling interest to be reclassified to conform to current year presentation. In addition, SFAS 160 requires a reconciliation of the carrying amount of equity attributable to Granite and amount of equity attributable to the noncontrolling interest. FSP EITF 03-6-1 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 11).
 
Interim results are subject to significant seasonal variations and the results of operations for the three months ended March 31, 2009 are not necessarily indicative of the results to be expected for the full year.
 
2.
Recently Issued Accounting Pronouncements:
 
In April 2009, the FASB issued FSP 141(R)-1, Accounting for Assets Acquired and Liabilities Assumed in a Business Combination That Arise from Contingencies (“FSP 141(R)-1”).  FSP 141(R)-1 amends and clarifies FASB Statement No. 141 (revised 2007), Business Combinations, to address application issues related to initial recognition and measurement, subsequent measurement and accounting, and disclosure of assets and liabilities arising from contingencies in a business combination.  FSP 141(R)-1 is effective for us in the first quarter of 2009. We had no business combinations during the quarter ended March 31, 2009. The impact on the consolidated financial statements in future periods will be largely dependent upon the size and nature of any future business combinations that we may complete.
 
In April 2009, the FASB issued FSP 115-2 and 124-2, Recognition and Presentation of Other-Than-Temporary Impairments (“FSPs 115-2 and 124-2”), which are effective for us in the first quarter of 2009. The objectives of FSPs 115-2 and 124-2 are to improve the presentation and disclosure of other-than-temporary impairments on debt and equity securities in the financial statements. These FSPs do not amend existing recognition and measurement guidance. We did not recognize any other-than-temporary impairment on our equity securities during the first quarter of 2009 and, therefore, these FSPs did not impact our financial statements or related footnote disclosures. If we recognize any other-than-temporary impairment on our equity securities in the future, these FSPs would provide guidance for footnote disclosures.
 
In April 2009, the FASB issued FAS 107-1 and Accounting Principles Board (“APB”) 28-1, Interim Disclosures about Fair Value of Financial Instruments (“FSP 107-1 and APB 28-1”). FSP 107-1 and APB 28-1 amend FASB Statement No. 107, Disclosures about Fair Value of Financial Instruments, to require disclosures about fair value of financial instruments for interim and annual reporting periods of publicly traded companies. These FSPs also amend APB Opinion No. 28, Interim Financial Reporting, to require those disclosures in summarized financial information at interim reporting periods. FSP 107-1 and APB 28-1 will be effective for us in the second quarter of 2009 and will require additional disclosure about financial instruments.
 
7

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 months ended March 31, 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 months ended March 31, 2009 and 2008 as follows:
 
 
  Three Months Ended March 31,  
(dollars in millions)
 
2009
 
2008
 
Increase in gross profit
 
$
15.7
 
$
14.6
 
Reduction in gross profit
     (0.3    (1.9
Net increase in gross profit
  $  15.4   $  12.7  
 
Changes in estimates of project profitability on Granite West projects that individually had an impact of $1.0 million or greater on gross profit are summarized as follows:
 
 
  Three Months Ended March 31,  
(dollars in millions)
 
2009
 
2008
 
Number of projects with upward estimate changes
 
 
5
 
 
3
 
Range of increase in gross profit from each project, net
   $  1.0 - 3.3    $  1.2 - 3.1  
Number of projects with downward estimate changes
     -     1  
Range of reduction in gross profit from each project, net
   $  -    $ 1.3  
 
The increased profitability estimates during the three months ended March 31, 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.
 
 
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 months ended March 31, 2009 and 2008 as follows:
 
 
 
Three Months Ended March 31,
 
(dollars in millions)
 
2009
 
2008
 
Increase in gross profit
 
$
24.8  
$
44.5  
Reduction in gross profit
      (1.5     (6.5
Net increase in gross profit
  $   23.3     38.0  
 
Changes in estimates of project profitability on Granite East projects that individually had an impact of $1.0 million or greater on gross profit are summarized as follows:
 
   
Three Months Ended March 31,
 
(dollars in millions)
 
2009
 
2008
 
Number of projects with upward estimate changes
 
 
5  
 
4  
Range of increase in gross profit from each project, net
    1.0 - 17.3     1.6 - 28.6  
Number of projects with downward estimate changes
      -       2  
Range of reduction in gross profit from each project, net
    -     1.4 - 1.8  
 
The increased profitability estimates during the three months ended March 31, 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 in each of the first quarters of both 2009 and 2008 is the results of negotiated claims settlements with contract owners of $16.0 million and $28.6 million, respectively.  
 
9

GRANITE CONSTRUCTION INCORPORATED
NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
 
4.
Fair Value Measurement:
 
In 2008, we adopted Statement of Financial Accounting Standards 157, Fair Value Measurements (“SFAS 157”) for financial instruments valued on a recurring basis. Effective in the quarter ended March 31, 2009, we applied SFAS 157 for nonfinancial assets and liabilities. As of March 31, 2009, the only nonfinancial assets or liabilities we had were our asset retirement obligations, which are measured at fair value at initial measurement using internal discounted cash flow calculations based upon our estimates of future retirement costs. The adoption of SFAS 157 did not impact our financial position or results of operations.

The following tables summarize financial assets we measure at fair value on a recurring basis (in thousands):
 
   
Fair Value Measurement at Reporting Date Using
 
March 31, 2009
 
Level 11
 
Level 22
 
Level 33
 
Total
 
Money market funds
$
385,460
 
$
-
 
$
-
 
$
385,460
 
Available-for-sale securities   -     -     -     -  
Total
$ 385,460     -   $ -   $ 385,460  
 
   
Fair Value Measurement at Reporting Date Using
 
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  
 
   
Fair Value Measurement at Reporting Date Using
 
March 31, 2008
 
Level 11
 
Level 22
 
Level 33
 
Total
 
Money market funds  $ 226,419    $ -    $ -    $ 226,419  
Available-for-sale securities
 
31,495
 
 
-
 
 
-
 
 
31,495
 
Total
 $ 257,914    $ -    $ -    $ 257,914  
 
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 and available-for-sale securities are included in short-term investments on our condensed consolidated balance sheet.
 
5.  
Inventories:
 
Inventories consist primarily of quarry products valued at the lower of average cost or market.
 
10

GRANITE CONSTRUCTION INCORPORATED
NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
 
6.
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.
 
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 is 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 variable interest entities (“VIEs”) as defined by FASB Interpretation No. 46 (revised December 2003) Consolidation of Variable Interest Entities (“FIN 46(R)”), and related FSPs. 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 FIN 46(R), 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 returns and 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 consolidated financial statements. The construction joint ventures we have consolidated are engaged in five active projects with total contract values ranging from $17.6 million to $465.8 million. Our proportionate share of these consolidated joint ventures ranges from 52.5% to 99.0%.
 
Consistent with Emerging Issues Task Force Issue 00-01, Investor Balance Sheet and Income Statement Display under the Equity Method for Investments in Certain Partnerships and Other Ventures, we account for our share of the operations of construction joint ventures in which we have determined we are not the primary beneficiary on a pro rata basis in the consolidated statements of income and as a single line item in the consolidated balance sheets. The joint ventures in which we hold a significant interest but are not the primary beneficiary are engaged in four active construction projects with total contract values ranging from $171.5 million to $1.1 billion. Our proportionate share of equity in these joint ventures ranges from 20.0% to 25.0%.
 
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 consolidated financial statements.
 
At March 31, 2009, approximately $501.1 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.
 
GRANITE CONSTRUCTION INCORPORATED
NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
 
7.  
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 FIN 46(R) and related FSPs. When we have determined we are the primary beneficiary of a VIE, as described in Note 6, we consolidate that entity in our consolidated financial statements.
 
As of March 31, 2009, we also had significant interests in VIEs of which we were not the primary beneficiary. 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 in our consolidated balance sheets and in other income (expense) in our condensed consolidated statements of income.
 
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 March 31, 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 during the quarter ended March 31, 2009.
 
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 did not change in the quarter ended March 31, 2009. The amount of financial support to be provided by GLC to consolidated VIEs increased by $7.5 million in 2008 due to 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. Of the total $7.5 million of GLC’s additional financial support, $3.8 million has been contributed to the consolidated entities and $3.7 million remained to be contributed as of March 31, 2009.
 
The carrying amounts of all real estate development assets are evaluated for recoverability in accordance with Statement of Financial Accounting Standards No. 144, Accounting for the Impairment of Long-Lived Assets. Based on our evaluations, we have determined that no impairment occurred during the quarter ended March 31, 2009.
 
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.
 
12

GRANITE CONSTRUCTION INCORPORATED
NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
 
Consolidated Real Estate Entities
 
At March 31, 2009, the entities we have consolidated were engaged in residential and commercial development projects with total assets ranging from approximately $0.6 million to $29.2 million.
 
The breakdown by type and location of our real estate held for development and sale is summarized below:
 
   
March 31,
 
December 31,
   
March 31,
 
(in thousands)
 
2009
 
2008
   
2008
 
Residential
 
$
69,427  
$
65,298
   
$
41,001  
Commercial
      9,982    
9,791
       13,735  
Total
 
$
79,409  
$
75,089
   
$
  54,736  
                       
Washington
 
$
31,731  
$
30,126
   
$
26,860  
California 
    11,571    
11,155
        20,112  
Texas
      8,153    
8,004
        7,764  
Oregon
      27,954    
25,804
        -  
Total
 
$
  79,409  
$
75,089
   
$
  54,736  
 
Additionally, at March 31, 2009 we had $19.3 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 $98.7 million, approximately $93.1 million was pledged as collateral for the obligations of the real estate entities. This debt totaled $36.7 million at March 31, 2009. 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 beneficiary as investments in affiliates.  At March 31, 2009, these entities were engaged in real estate development projects with total assets ranging from approximately $6.3 million to $51.4 million. Our proportionate share of the operating results of these entities varies depending on the ultimate profitability of the entities. At March 31, 2009 we had approximately $18.5 million recorded on our 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. We have made advances to the asphalt terminal limited liability company of which $5.0 million remained committed and outstanding at March 31, 2009. 
 
13

GRANITE CONSTRUCTION INCORPORATED
NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
 
Our investments in affiliates is comprised of the following:
 
      March 31,       December 31,       March 31,  
(in thousands)
   
2009
     
2008
     
2008
 
Equity method investments in real estate affiliates
 
$
18,540
   
$
16,308
    $
 16,969
 
Equity method investments in other affiliates
   
3,228
     
3,688
     
 4,573
 
Total equity method investments
   
21,768
     
19,996
     
 21,542
 
Cost method investments
   
-
     
-
     
 4,171
 
Total investments in affiliates
 
$
21,768
   
$
19,996
   
$
 25,713
 
 
The breakdown by type and location of our interests in real estate ventures is summarized below:
 
   
March 31,
   
December 31,
   
March 31,
 
(in thousands)
 
2009
   
2008
   
2008
 
Residential
  $ 13,917     $ 11,648     $ 11,915  
Commercial
    4,623       4,660        5,054  
Total
  $ 18,540     $ 16,308     $  16,969  
                         
Texas
  $ 13,366     $ 12,283     $ 11,945  
Oregon
    -       -        5,024  
Washington
    5,174       4,025        -  
Total
  $ 18,540     $ 16,308     $  16,969  
 
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:
 
   
March 31,
   
December 31,
   
March 31,
 
(in thousands)
 
2009
   
2008
   
2008
 
Total assets
 
$
194,117
   
$
196,702
   
$
160,517
 
Net assets
   
90,439
     
90,867
     
77,623
 
Granites share of net assets
   
21,768
     
19,996
     
21,542
 
 
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, the Limited Partnership or Limited Liability Company, of which we are a limited partner or shareholder.
 
8.
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:
 
   
March 31,
   
December 31,
   
March 31,
 
(in thousands)
 
2009
   
2008
   
2008
 
Land and land improvements
  $ 121,662     $ 119,576     $ 105,136  
Quarry property
     142,744       141,638       142,067  
Buildings and leasehold improvements
     97,507       94,579       81,041  
Equipment and vehicles
     856,041       843,045       850,664  
Office furniture and equipment
     35,662       35,021       29,876  
Property and equipment
     1,253,616       1,233,859       1,208,784  
Less: accumulated depreciation and depletion
     (726,882     (716,181     (689,884
Property and equipment, net
  $  526,734     $ 517,678     $ 518,900  
 
14

GRANITE CONSTRUCTION INCORPORATED
NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
 
9.
Intangible Assets:
 
The balances of the following intangible assets from our Granite West segment are included in other noncurrent assets on our condensed consolidated balance sheets at carrying value:
 
   
March 31,
   
December 31,
   
March 31,
 
(in thousands)
 
2009
   
2008
   
2008
 
Unamortized intangible assets:
                 
Goodwill
  $ 9,900     $ 9,900     $ 9,900  
Use rights
    2,954       2,954       3,650  
Total unamortized intangible assets
  $ 12,854     $ 12,854     $ 13,550  
 

   
March 31, 2009
 
         
Accumulated
       
(in thousands)
 
Gross Value
   
Amortization
   
Net Value
 
Amortized intangible assets:
                 
Permits
  $ 36,070     $ (4,145 )   $ 31,925  
Trade names
     913        (788 )     125  
Covenants not to compete
     1,588        (798 )      790  
Customer lists and other
     3,725        (1,875 )      1,850  
Total amortized intangible assets
  $  42,296     $  (7,606 )   $  34,690  
 
 
December 31, 2008
 
(in thousands)
Gross Value
 
Accumulated Amortization
 
Net Value
 
Amortized intangible assets:
                 
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  
 
 
March 31, 2008
 
(in thousands)
Gross Value
 
Accumulated Amortization
 
Net Value
 
Amortized intangible assets:
                       
Permits
  $ 35,570     $ (2,366 )   $ 33,204  
Trade names
    1,425       (1,023 )     402  
Covenants not to compete
    1,503       (385 )     1,118  
Customer lists and other
    1,664       (797 )     867  
Total amortized intangible assets
  $ 40,162     $ (4,571 )   $ 35,591  
 
Amortization expense related to intangible assets was approximately $0.8 million and $0.7 million for the three months ended March 31, 2009 and 2008, respectively. Amortization expense expected to be recorded in the future is as follows: $2.2 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.    
 
15

GRANITE CONSTRUCTION INCORPORATED
NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
  
10.
Weighted Average Common Shares Outstanding:
 
A reconciliation of the weighted average shares outstanding used in calculating basic and diluted net income per share in the condensed consolidated statements of income is as follows:
 
 
Three Months Ended March 31,
 
(in thousands)
2009
2008
 
Weighted average shares outstanding:
     
Weighted average common stock outstanding
38,330
38,913
 
Less: weighted average unvested restricted stock outstanding
854
774
 
Total basic weighted average shares outstanding
37,476
38,139
 
Diluted weighted average shares outstanding:
     
Weighted average common stock outstanding, basic
37,476
38,139
 
Effect of dilutive securities:
     
Common stock options and units
124
33
 
Total weighted average shares outstanding assuming dilution
37,600
38,172
 
 
 
11.
Earnings Per Share:
 
In June 2008, the FASB issued FSP EITF 03-6-1, which requires entities to apply the two-class method of computing basic and diluted EPS for awards that accrue cash dividends (whether paid or unpaid) any time common shareholders receive dividends 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 included in the computation of EPS. FSP EITF 03-6-1 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 FSP EITF 03-6-1, unvested restricted stock units were included in the calculation of diluted net income per share using the treasury stock method. 
 
16

GRANITE CONSTRUCTION INCORPORATED
NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
 
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 March 31,
 
(in thousands, except per share amounts)
   
2009
   
2008
   
Basic                
Numerator:                
Net income attributable to Granite
   $
 8,920
   $ 13,123    
Less: net income allocated to participating securities
   
 193
    255    
Net income allocated to common shareholders for basic calculation
   $
8,727
   $  12,868    
 
Denominator:                
Weighted average common shares outstanding
   
 37,476
    38,139    
                 
Net income per share, basic
   $
 0.23
   $ 0.34    
 
Diluted                
Numerator:                
Net income attributable to Granite
   $
8,920
   $ 13,123    
Less: net income allocated to participating securities
   
 192
    255    
Net income allocated to common shareholders for diluted calculation
   $
 8,728
   $  12,868    
 
Denominator:                
Weighted average common shares outstanding
   
37,600
    38,172    
                 
Net income per share, diluted
   $
 0.23
   $ 0.34    
 
17

GRANITE CONSTRUCTION INCORPORATED
NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
 
12.
Equity:
 
 
The following tables summarize our equity activity for the periods presented, in accordance with the adoption of SFAS 160:
 
(in thousands)
 
Granite Construction Inc.
   
 Noncontrolling Interest
 
Total Equity
   
Balance at December 31, 2008
  $ 767,509   $ 36,773   $ 804,282    
Purchase of common stock                            
    (2,017  
 -
    (2,017  
Other transactions with shareholders
    5,144     -     5,144    
Transactions with noncontrolling interest, net
     -     (2,975   (2,975 )  
Comprehensive income:
                     
Net income
    8,920     5,067     13,987    
Other comprehensive income
    146     -     146    
Total comprehensive income
    9,066     5,067     14,133    
Dividends on common stock     (5,028   -     (5,028  
Balance at March 31, 2009
  $ 774,674   $ 38,865   $ 813,539    
 
 
(in thousands)
 
Granite Construction Inc.
   
 Noncontrolling Interest
 
Total Equity
   
Balance at December 31, 2007
 
$
700,199
  $
23,471
 
$
723,670
   
Purchase of common stock                            
   
(45,468
 
 -
   
(45,468
 
Other transactions with shareholders
   
6,018
   
-
   
6,018
   
Transactions with noncontrolling interest, net
   
 -
   
8,991
   
8,991
   
Comprehensive income:
                     
Net income
   
13,123
   
22,495
   
35,618
   
Other comprehensive loss
   
(1,791
 
-
   
(1,791
 
Total comprehensive income
   
11,332
   
22,495
   
33,827
   
Dividends on common stock
   
(4,976
 
-
   
(4,976
 
Balance at March 31, 2008
 
$
667,105
  $
54,957
 
$
722,062
   
 
 
 
The components of other comprehensive income (loss) are as follows:
 
   
Three Months Ended March 31,
   
(in thousands)
 
2009
   
2008
   
Other comprehensive income (loss):
                 
Changes in unrealized gain (loss) on investments
  $ 238     $ (2,942 )  
Tax (provision) benefit on unrealized gain (loss)
     (92     1,151    
Total other comprehensive income (loss)
  $  146     $ (1,791  
 
18

GRANITE CONSTRUCTION INCORPORATED
NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
 
13.
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 preliminary investigation revealed that we have not knowingly sold or distributed abrasive silica sand for sandblasting, and therefore, we believe the probability of these lawsuits resulting in an incurrence of a material liability is remote. We have been dismissed from 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, presented its detailed written response to the initial determinations of the Agencies as well as the investigation by the USDOJ.  We have yet to receive a formal reply from the Agencies or the USDOJ, those entities instead preferring to engage in informal discussions in an attempt to resolve the matter. We cannot, however, rule out the possibility of a civil or criminal actions being brought against MnTC or one or more of its members which could result in civil and criminal penalties.
 
US Highway 20 Project
GCCO and our wholly-owned subsidiary, Granite Northwest, Inc. are the members of a joint venture known as Yaquina River Constructors (“YRC”) which is currently constructing a new road alignment of US Highway 20 near Eddyville, Oregon under contract with the Oregon Department of Transportation (“ODOT”).  The project involves constructing seven miles of new road through steep and forested terrain in the Coast Range Mountains.  During the fall and winter of 2006, extraordinary rain events produced runoff that overwhelmed erosion control measures installed at the project and resulted in discharges to surface water in alleged violations of the stormwater permit.  Since spring 2007 the Oregon Department of Justice has been conducting a criminal investigation 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.
 
19

GRANITE CONSTRUCTION INCORPORATED
NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
 
City of San Diego Fire Debris Cleanup
In the aftermath of the 2007 San Diego County wildfires, GCCO bid for and was awarded a fixed unit price, variable quantity contract with the City of San Diego (“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 GCCO’s 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 (“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 are complying with the subpoena and 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, although the investigation has just begun. 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 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.
 
20

GRANITE CONSTRUCTION INCORPORATED
NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
 
14.
Business Segment Information:
 
Based on similar economic characteristics as defined in Statement of Financial Accounting Standards No. 131, Disclosures about Segments of an Enterprise and Related Information (“SFAS 131”), our three reportable segments are Granite West, Granite East, and Granite Land Company.
 
Granite West is comprised of decentralized branch offices in the western United States that perform various heavy civil construction projects with a large portion of the work focused on new construction and improvement of streets, roads, highways, 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 division also has the capability of constructing larger projects and at March 31, 2009 had six active projects, each with total contract revenue greater than $50.0 million. All of our revenue from the sale of construction materials is generated by Granite West which mines aggregates and operates plants that process aggregates into construction materials for internal use and for sale to others. These activities are vertically integrated into the Granite West business, providing both a source of profits and a competitive advantage to our construction business.
 
Granite East operates 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 principally comprise corporate general and administrative expenses.
 
Summarized segment information is as follows:
 
   
Three Months Ended March 31,
(in thousands)
 
Granite West
   
Granite East
   
Granite Land Company
Total
2009
                 
Revenue from external customers
  $ 197,032     $ 149,923     $ 417     $ 347,372  
Intersegment revenue transfer
    17       (17     -       -  
Net revenue
    197,049       149,906       417       347,372  
Depreciation, depletion and amortization
    16,921       1,358       176       18,455  
Operating income (loss)
    6,720       28,251       (698     34,273  
Segment assets
    465,029       17,753       98,768       581,550  
2008
                     
Revenue from external customers
  $ 237,970     $ 216,157     $ 673     $ 454,800  
Intersegment revenue transfer
    2,032       (2,032 )     -       -  
Net revenue
    240,002       214,125       673       454,800  
Depreciation, depletion and amortization
    17,797       2,171       11       19,979  
Operating income (loss)
    4,763       52,136       (450     56,449  
Segment assets
    462,486       24,912       60,930       548,328  
 
 
21

GRANITE CONSTRUCTION INCORPORATED
NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
 
A reconciliation of segment operating income to consolidated income before provision for tax is as follows:
 
 
Three Months Ended March 31,
   
(in thousands)
2009
 
2008
   
Total operating income for reportable segments
  $ 34,273     $ 56,449    
Other income, net
     1,914       9,301    
Gain on sales of property and equipment
    2,521       401    
Unallocated other corporate expense
    (19,892     (18,406 )  
Income before provision for income taxes
  $ 18,816     $ 47,745    
 
15.
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.
 
16.
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 during the three months ended March 31, 2009. During the three months ended March 31, 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 March 31, 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 March 31, 2009, $64.1 million of the $200.0 million authorization was available for additional share purchases.
 
 
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 offices 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. We have three operating segments: Granite West, Granite East and Granite Land Company.
 
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). Depending on the mix of cash and restricted stock, these incentives can have the effect of materially altering general and administrative expenses from year to year.
 
Results of Operations:
 
Comparative Financial Summary
 
Three Months Ended March 31,
   
(in thousands)
 
2009
   
2008
   
Total revenue
  $ 347,372     $ 454,800    
Gross profit
    68,013       98,694    
Operating income
     16,902       38,444    
Other income, net 
    1,914       9,301    
Provision for income taxes     4,829       12,127    
Amount attributable to noncontrolling interest
    (5,067 )     (22,495 )  
Net income attributable to Granite
    8,920       13,123    
 
 
Total Revenue
Three Months Ended March 31,
   
(in thousands)
2009
 
2008
   
Revenue by Division:
                         
Granite West
  $ 197,049     56.7 %   $ 240,002     52.8 %  
Granite East
    149,906     43.2       214,125     47.1    
Granite Land Company
    417     0.1       673     0.1    
Total
  $ 347,372     100.0 %   $ 454,800     100.0 %  
 
 
Granite West Revenue  
Three Months Ended March 31,
   
(in thousands)
 
2009
   
2008
   
California:
                         
Public sector
  $ 75,426     71.0 %   $ 72,670     52.6
%
 
Private sector
     10,257     9.7       29,964     21.7    
Material sales
     20,563        19.3       35,439     25.7    
Total
  $   106,246     100.0 %   $ 138,073     100.0
%
 
West (excluding California):
                             
Public sector
  $  76,739     84.5 %   $ 71,170     69.8 %  
Private sector
     4,781     5.3       14,644     14.4    
Material sales
     9,283     10.2       16,115     15.8    
Total
  $  90,803     100.0 %   $ 101,929     100.0 %  
Total Revenue:
                             
Public sector
  $ 152,165     77.3 %   $ 143,840     59.9 %  
Private sector
     15,038      7.6       44,608     18.6    
Material sales
     29,846       15.1       51,554     21.5    
Total
  $  197,049     100.0 %   $ 240,002     100.0 %  
 
Granite West Revenue: Revenue from Granite West for the three months ended March 31, 2009 decreased by $43.0 million, or 17.9%, compared with the first quarter of 2008. The decrease was primarily attributable to the ongoing contraction of residential construction and credit markets which had a direct impact on private sector revenue and the sale of construction materials.
 
Granite East Revenue
 
Three Months Ended March 31,
   
(in thousands)
 
2009
   
2008
   
Revenue by Geographic Area:
                             
Midwest
 
$
32,894
   
22.0
%  
$
40,357
   
18.8
%  
Northeast
   
38,425
   
25.6
     
36,419
   
17.0
   
South
   
41,025
   
27.4
     
29,585
   
13.8
   
Southeast
   
37,242
   
24.8
     
71,009
   
33.2
   
West
   
320
   
0.2
     
36,755
   
17.2
   
Total
 
$
149,906
   
100.0
%  
$
214,125
   
100.0
%  
Revenue by Market Sector:                              
Public sector
  $
 148,466
   
 99.0
  $
 209,262
   
 97.7
%  
Private sector
   
 1,440
   
 1.0
     
 4,863
   
 2.3
   
Total
  $
 149,906
   
 100.0
%   $
 214,125
   
 100.0
%  
 
Granite East Revenue: Revenue from Granite East for the three months ended March 31, 2009 decreased by $64.2 million, or 30.0% compared with the first quarter of 2008. This decrease was due to our continued focus on improved execution and profitability, and large projects nearing completion. This was partially offset by the recognition of settlements related to outstanding issues on two separate projects, one in the first quarter of 2009 in the Northeast, and the other in the first quarter of 2008 in the West.  
 
 
The following table provides information about revenue from our large projects for the three months ended March 31, 2009 and 2008:
 
Large Project Revenue
             
Three months ended March 31,
 
2009
 
2008
   
(dollars in thousands)
               
Granite West
 
$
32,361
 
$
30,146
   
Number of projects*
   
5
   
5
   
Granite East
 
$
120,342
 
$
204,619
   
Number of projects*
   
12
   
17
   
Total
 
$
152,703
 
$
234,765
   
Number of projects*
   
17
   
22
   
 
* Includes only projects with a total contract value greater than $50.0 million and over $1.0 million of revenue in the respective periods.
 
Granite Land Company Revenue: Revenue from GLC for the three months ended March 31, 2009 decreased by $0.3 million compared with the first quarter of 2008. GLC’s revenue is dependent on the timing of real estate sales transactions, which are relatively few in number and can cause variability in the timing of revenue and profit recognition. The current real estate downturn and associated tightening of credit markets has had a direct impact on the anticipated timing of several GLC development projects.
 
 
The following tables illustrate our contract backlog as of the respective dates:
 
Total Contract Backlog
       
 
   
 
   
(in thousands)
 
   March 31, 2009
     
December 31, 2008
   
March 31, 2008
   
Contract Backlog by Division:
                                     
Granite West
  $ 743,219     47.3 %     $ 788,872     46.4 %     $ 868,530     44.7  
Granite East
     826,855     52.7         910,524     53.6         1,074,659     55.3    
Total
  $ 1,570,074     100.0     $ 1,699,396     100.0 %     $ 1,943,189     100.0  
 
 
Granite West Contract Backlog
 
 
     
 
     
 
   
(in thousands)
 
March 31, 2009
     
December 31, 2008
     
March 31, 2008
   
California:
                                         
Public sector
  $ 395,608     95.3 %     $ 430,421     94.8 %     $ 380,358     87.6  
Private sector
     19,579     4.7         23,841     5.2         53,957     12.4    
Total
  $  415,187     100.0     $ 454,262     100.0 %     $ 434,315     100.0  
West (excluding California):
                                               
Public sector
  $  320,065     97.6 %     $ 319,271     95.4 %     $ 398,542     91.8  
Private sector
     7,967     2.4         15,339     4.6         35,673     8.2    
Total
  $  328,032       100.0 %     $ 334,610     100.0 %     $ 434,215     100.0  
Total Contract Backlog:
                                               
Public sector
  $  715,673     96.3 %     $ 749,692     95.0 %     $ 778,900     89.7  
Private sector
     27,546      3.7         39,180     5.0         89,630     10.3    
Total
  $  743,219     100.0 %     $ 788,872     100.0 %     $ 868,530     100.0  
 
Granite West Contract Backlog: Granite West contract backlog of $743.2 million at March 31, 2009 was $45.7 million, or 5.8%, lower than at December 31, 2008 and $125.3 million, or 14.4%, lower than at March 31, 2008. The decrease from March 31, 2008 was primarily driven by projects nearing completion in the quarter and the continued weak demand for residential construction. Additionally, there was an indirect impact on public sector contract backlog in California, as competitors migrated from the increasingly scarce private sector work, creating more competition for bidders on public sector projects. The decrease in contract backlog from December 31, 2008 to March 31, 2009 was primarily attributable to a lower volume of public sector work as certain states withheld awards due to budgetary issues and clarity on stimulus funding. Pending final resolution of the distribution and regulation of stimulus funds, governmental agencies are adjusting the anticipated start dates of certain projects. The delay in start dates of projects will push award notifications to later in the year.
 
 
Granite East Contract Backlog
 
 
   
 
         
(in thousands)
 
March 31, 2009
   
December 31, 2008
   
March 31, 2008
   
Contract Backlog by Geographic Area:
                                     
Midwest
  $ 131,896       15.9 %   $ 163,795       18.0   $ 287,488       26.7 %  
Northeast
    254,297        30.8       250,232       27.5       104,896       9.8    
South
     71,698        8.7       91,720       10.0       126,593       11.8    
Southeast
     366,568        44.3       402,062       44.2       544,595       50.7    
West
      2,396         0.3       2,715       0.3       11,087       1.0    
Total
  $ 826,855       100.0    $ 910,524       100.0 %   $ 1,074,659       100.0 %  
Contract Backlog by Market Sector:                                                  
Public sector
  $ 823,859       99.6 %   $ 906,470       99.6   $ 1,062,473       98.9 %  
Private sector
     2,996        0.4        4,054        0.4        12,186       1.1    
Total
  $  826,855        100.0 %   $  910,524        100.0 %   $  1,074,659        100.0 %  
 
Granite East Contract Backlog: Granite East contract backlog of $826.9 million at March 31, 2009 was $83.7 million, or 9.2%, lower than at December 31, 2008, and $247.8 million, or 23.1%, lower than at March 31, 2008. The decrease reflects progress on large construction projects.  New awards for the quarter included our $24.6 million share of additional work order packages related to the World Trade Center Transportation Hub project in New York.
 
In April 2009 we reached an agreement and executed a contract with Houston Metro for the expansion of the city’s light rail system. The total contract value is $1.3 billion, of which our portion is 34%. The associated award will be added to contract backlog as Notices to Proceed are received.
 
The following tables provide information about our large project contract backlog at March 31, 2009 and 2008:
 
Large Project Contract Backlog
                 
(dollars in thousands)
March 31, 2009
     
December 31, 2008
 
March 31, 2008
   
Granite West
 
$
219,489
     $
243,818
   
$
236,522
   
Number of projects*
   
5
     
6
     
5
   
Granite East
 
$
796,347
     $
868,638
   
$
1,034,496
   
Number of projects*
   
14
     
14
     
16
   
Total
 
$
1,015,836
     $
 1,112,456
   
$
1,271,018
   
Number of projects*
   
19
     
 20
     
21
   
 
*Includes only projects with total contract value greater than $50.0 million and remaining contract backlog over $1.0 million at the respective dates.
 
 
28

 
The following table presents gross profit by business segment for the respective periods:
 
Gross Profit
 
Three Months Ended March 31,
     
(in thousands)
 
2009
   
2008
     
Granite West
 
$
32,939
   
$
39,629
     
Percent of division revenue
   
16.7
%
   
16.5
%
   
Granite East
 
$
34,864
   
$
58,596
     
Percent of division revenue
   
23.3
%
   
27.4
%
   
Granite Land Company
 
$
210
   
$
469
     
Percent of division revenue
   
50.4
%
   
69.7
%
   
Total gross profit
 
$
68,013
   
$
98,694
     
Percent of total revenue
      19.6
%
   
21.7
%
   
 
Gross Profit: We recognize revenue only equal to cost, deferring profit recognition, until a project reaches 25% completion. In the case of large, complex design/build projects, we may continue to defer profit recognition beyond the point of 25% completion until such time as we believe we have enough information to make a reasonably dependable estimate of contract revenue and cost. Because we have a large number of projects at various stages of completion in Granite West, this policy generally has a lesser impact on Granite West’s gross profit on a quarterly or annual basis. However, Granite East has fewer projects in process at any given time and those projects tend to be much larger than Granite West projects. As a result, Granite East gross profit as a percent of revenue can vary significantly in periods where one or several very large projects reach our percentage of completion threshold and the deferred profit is recognized or, conversely, in periods where contract backlog is growing rapidly and a higher percentage of projects are in their early stages with no associated gross profit recognition.
 
Revenue from projects that have not yet reached our profit recognition threshold is as follows:
 
Revenue from Contracts with Deferred Profit
Three Months Ended March 31,
   
(in thousands)
2009
 
2008
   
Granite West
  $ 18,104     $ 16,673    
Granite East
    4,651       23,194    
Total revenue from contracts with deferred profit
  $ 22,755     $ 39,867    
 
We do not recognize revenue from contract claims until we have a signed settlement agreement and payment is assured and we do not recognize revenue from contract change orders until the contract owner has agreed to the change order in writing. However, we do recognize the costs related to any contract claims or pending change orders in our forecasts when we are contractually obligated. As a result, our gross profit as a percent of revenue can vary depending on the magnitude and timing of settlement claims and change orders.
 
 
Granite West gross profit as a percent of revenue remained relatively unchanged for the three months ended March 31, 2009 at 16.7% compared to 16.5% for the three months ended March 31, 2008. Construction gross profit as a percent of construction revenue for the three months ended 2009 increased to 21.1% from 19.7% for the same period in 2008.  This increase was primarily the result of the recognition of deferred profit on a large design/build project that reached the point of profit recognition during the quarter. Additionally, the positive effect of project forecast changes during the three months ended March 31, 2009 contributed to the increased construction margins.  Increases in gross profit from forecast changes were approximately $15.4 million and $12.7 million for the three months ended March 31, 2009 and 2008, respectively (see Note 3 of the “Notes to the Condensed Consolidated Financial Statements”). The increases in gross margin as a percent of revenue were partially offset by significantly lower gross profit margins on the sale of construction materials. Profit margins on our construction materials sales have been negatively impacted by lower demand from the private sector for our higher margin products and decreased production volume which resulted in increased cost per unit.
 
Granite East gross profit as a percent of revenue for the three months ended March 31, 2009 decreased to 23.3% from 27.4% for the three months ended March 31, 2008. In the first quarter of both 2009 and 2008 the results were partially due to the net impact of negotiated settlements of our claims with contract owners.  For 2009, the settlement on a project in the Northeast added $16.0 million to gross profit. The first quarter of 2008 included $28.6 million related to the settlement of a project in Southern California. Both of these projects had recognized significant margin deterioration in prior years. Additionally, gross profits in the first quarter of both 2009 and 2008 were partially impacted by improved productivity and the resolution of project uncertainties.
 
When we experience significant contract forecast changes, we undergo a process that includes reviewing the nature of the changes to ensure that there are no material amounts that should have been recorded in a prior period rather than as a change in estimate for the current period. In our review of these changes, we did not identify any material amounts that should have been recorded in a prior period.
 
Granite Land Company recorded a gross profit of $0.2 million for the three months ended March 31, 2009 compared to $0.5 million in the first quarter of 2008. Gross profit in both periods was adversely affected by the real estate downturn and the stages of development of our project portfolio, which led to very limited sales activity in 2009 and 2008.  (See Note 7 of the “Notes to the Condensed Consolidated Financial Statements”).
 
The following table presents the components of general and administrative expenses for the respective periods:
 
General and Administrative Expenses
 
Three Months Ended March 31,
   
(in thousands)
 
2009
   
2008
   
Salaries and related expenses
  $ 34,277     $ 35,423    
Incentive compensation, discretionary profit sharing and other variable compensation
     5,523       5,375    
Other general and administrative expenses
     13,832       19,853    
Total
  $ 53,632     $ 60,651    
Percent of revenue
     15.4 %     13.3 %  
 
General and Administrative Expenses: Our general and administrative expenses for the three months ended March 31, 2009 decreased $7.0 million, or 11.6% compared with the 2008 quarter. The decrease of $1.1 million in salary and related expenses for the three months ended March 31, 2009 was due to a reduction in force efforts in Granite West. The reduction of $6.0 million in other general and administrative expenses was due to a recovery of approximately $2.9 million of previously reserved doubtful accounts, a $1.3 million decrease in travel and entertainment and a $1.0 million decrease in relocation costs in Granite West. 
 
 
The following table presents the components of other income (expense) for the respective periods:
 
Other Income (Expense) 
 
Three Months Ended March 31,
   
(in thousands)
 
2009
   
2008
   
Interest income
  $ 2,061     $ 6,055    
Interest expense
     (3,488     (4,510 )  
Equity in loss of affiliates
     (444     (707  
Other income, net
    3,785       8,463    
Total other income
  $   1,914       $ 9,301    
 
Other Income (Expense): Interest income decreased in the three months ended March 31, 2009, compared with the 2008 quarter, primarily due to a decrease in investment interest income as we moved our marketable securities to more conservative investment instruments in the fourth quarter of 2008. Interest expense decreased due to a decrease in the associated notes payable as we paid down balances. The decrease in other income, net during the three months ended March 31, 2009 was primarily due to a gain of approximately $9.3 million recognized in the first quarter of 2008 on the sale of gold, a by-product of one of our aggregate extraction operations, compared with a gain of $4.4 million in the first quarter of 2009.
 
The following table presents the components of the provision for income taxes for the respective periods:
 
Provision for Income Taxes
Three Months Ended March 31,
   
(in thousands)
2009
   
2008
   
Provision for income taxes
  $ 4,829       $ 12,127    
Effective tax rate
    25.7 %       25.4  %  
 
Provision for Income Taxes: Our effective tax rate increased to 25.7% for the three months ended March 31, 2009 from 25.4% for the corresponding period in 2008. The change in our effective tax rate was primarily due to the assessment of certain deferred tax items, resulting in a net tax benefit of $0.5 million which is discrete to the first quarter of 2009, and by the decrease in estimated income attributable to noncontrolling interest which are not subject to income taxes on a stand alone basis.  We expect our 2009 effective tax rate to be approximately 28.0% for the year.
 
The following table presents the amount attributable to noncontrolling interest in consolidated subsidiaries for the respective periods:
 
Amount Attributable To Noncontrolling Interest
 
Three Months Ended March 31,
   
(in thousands)
 
2009
   
2008
   
Amount attributable to noncontrolling interest
  $ (5,067   $ (22,495 )  
 
Amount Attributable To Noncontrolling Interest: The amount attributable to noncontrolling interest represents the noncontrolling owners’ share of the income of our consolidated construction joint ventures and real estate development entities. The decrease in the amount due to noncontrolling interest for the three months ended March 31, 2009 compared to the same period of the prior year was largely attributable to $17.6 million we received in the first quarter of 2008 as a settlement related to the resolution of revenue issues on a large project in Southern California.  
 
 
Outlook
 
We continue to anticipate that 2009 will be a challenging year as a product of the current economic situation and its impact on many of our customers.  However, we expect the diversity and resiliency of our business model will continue to be valuable as we confront these challenging times.
 
We are experiencing an increase in the amount of work to bid in the West partly due to the availability of stimulus funds and partly due to pent up demand in states like Utah and California which had previously put many projects on hold.  Because competition remains strong, particularly for smaller projects, our focus will be on targeting projects where we have a competitive advantage with our operational and financial strength.  We believe we are well positioned in our markets with versatile construction capabilities, aggregate reserves, key plant facilities and most importantly teams, of experienced and dedicated people.
 
The outlook for our Granite East business continues to be positive. We will be pursuing a number of large projects this year.  Funding for these projects is coming from various sources. Our strategy for this business has not changed and we will be very selective with regard to the projects we bid. We will continue to focus only on projects where we can utilize our construction expertise, mitigate risk and deliver acceptable margins.
 
On the political front, we are starting to see stimulus-funded work become available for bid. We expect to begin bidding on a substantial amount of this work during the balance of 2009, which will be either fully or partially funded by The American Recovery and Reinvestment Act. The legislation requires state transportation departments to obligate 50 percent of their highway funding to projects by the end of June 2009, and all transportation funds being allocated by March of 2010. 
 
In the past two months, California has sold approximately $13 billion in general obligation bonds, which should provide necessary funding to not only complete proposition 1-B projects that were underway, but to put additional proposition 1-B and other public works projects out to bid.  These bond sales exceeded the states expectations which is positive for California and California’s construction industry.
 
With regard to Granite Land Company, our strategy in 2009 is to be flexible and patient in managing our investments.  Several of our development projects have long lead times, which afford us the ability to stage the timing of sales transactions. We will continue to work on entitlements and construct improvements. The expected profitability for certain development activities could continue to deteriorate to a point that could cause us to recognize impairments if there is a continued decline in the residential and commercial real estate markets in which we are operating.
 
In summary, while we are encouraged by the recent developments in both Federal and State funding, it is too early for us to know to what degree these will impact our business. Although we are cautious about our outlook for 2009, we have a positive long-term view of our markets. Our Granite West business is poised to take advantage of its vertically integrated business model in 2009 while our Granite East business is expected to continue to deliver positive results. We continue to focus on cost cutting and improvement initiatives to develop more efficient business processes.  Lastly, we are confident that our continued strategic investment in our construction materials business and the development of our people is important to increasing long-term shareholder value.
 
 
Liquidity and Capital Resources
 
We believe our cash and cash equivalents, short-term investments, cash generated from operations and amounts available under our existing committed credit facility will be sufficient to meet our expected working capital needs, capital expenditures, financial commitments, cash dividend payments, and other liquidity requirements associated with our existing operations through the next twelve months. If we experience a significant change in our business operating results or make a significant acquisition, we may need to seek additional sources of financing, which, if available, may be limited by the terms of our existing debt covenants, or may require the amendment of our existing debt agreements.
 
Cash and Marketable Securities (in thousands)
 
March 31,
   
 
 
2009
   
2008
   
Cash and cash equivalents excluding consolidated joint ventures
  $ 269,740     $ 112,311    
Consolidated joint venture cash and cash equivalents
     120,743       154,116    
Total consolidated cash and cash equivalents 
     390,483       266,427    
Short-term and long-term marketable securities 
    68,663       117,300    
Total cash, cash equivalents and marketable securities
  $  459,146     $ 383,727    
 
Our primary sources of liquidity are cash and cash equivalents and short-term investments. Our cash and cash equivalents are comprised of deposits and money market funds held with established national banks, and fixed income securities having remaining maturities of three months or less from the date of purchase.  Cash and cash equivalents held by our consolidated joint ventures is for the working capital needs of each joint venture’s project. The decision to distribute cash must generally be made jointly by all of the partners and therefore these funds are not available for the working capital needs of Granite.  Our marketable securities include United States government obligations and agencies and municipal bonds. Primarily in response to volatile credit markets, we have generally not reinvested the proceeds of maturing securities and have retained these funds in cash and cash equivalents.
 
 
Cash Flows (in thousands)
 
Three Months Ended
March 31,
   
 
 
2009
   
2008
   
Net cash (used in) provided by:
             
Operating activities
  $ (14,395   $ (23,545  
Investing activities
     (41,579     89    
Financing activities
     (14,386     (62,551  
Capital expenditures      29,601       30,735    
 
Cash used in operating activities of $14.4 million for the three months ended March 31, 2009, represents a $9.2 million decrease from use of funds compared to the same quarter in the prior year. Uses of cash during the three months ended March 31, 2009 were due to decreases in other assets, net, and accounts payable offset by decreases in billings in excess of costs and estimated earnings, net and other accrued expenses.  Decreases in billings in excess of cost and estimated earnings, net reduced due to progress on projects that received large payments.
 
Cash used in investing activities of $41.6 million for the three months ended March 31, 2009 represents a $41.7 million decrease from the amount provided in the same quarter in the prior year. The change was primarily due to an increase in purchases of marketable securities of $20.0 million and a reduction in cash from the release of funds for acquisition of noncontrolling interest of $28.0 million.
 
Cash used in financing activities was $14.4 million for the three months ended March 31, 2009, representing a $48.2 million decrease in the amount used in the same quarter in the prior year. The decrease in use of funds was primarily attributable to a $43.5 reduction in the purchase of shares of our common stock.  In addition, during the three months ended March 31, 2008, $11.7 million was used in the acquisition of noncontrolling interest and no similar transaction occurred during the three months ended March 31, 2009.
 
Capital Expenditures
 
During the three months ended March 31, 2009, we had capital expenditures of $29.6 million compared to $30.7 million during the three months ended March 31, 2008. We currently anticipate spending between $65.0 million and $140.0 million for capital expenditures in 2009, which includes amounts for construction equipment, aggregate and asphalt production facilities, buildings, leasehold improvements, development of real estate projects, and aggregate reserves. The timing and amount of such expenditures can vary based on the progress of planned capital projects, the type and size of construction projects, changes in business outlook, and other factors.
 
 
Debt and Capital
       
We have a $150.0 million bank revolving line of credit (“LOC”), which allows for unsecured borrowings through June 24, 2011. Borrowings under the LOC bear interest at LIBOR plus an applicable margin determined based upon certain financial ratios calculated quarterly. The margin was 0.70% at March 31, 2009. The unused and available portion of the LOC was $145.8 million at March 31, 2009.
 
We had standby letters of credit (“Letters”) totaling approximately $4.2 million outstanding at March 31, 2009, which will expire between October 2009 and March 2010. We are generally required by the beneficiaries of these Letters to replace them upon expiration. Additionally, we are generally required to provide various types of surety bonds that provide an additional measure of security under certain public and private sector contracts. At March 31, 2009, approximately $1.5 billion of our contract backlog was bonded. Approximately $9.1 billion in performance bonds were outstanding as of March 31, 2009, which includes bonds for construction projects, both in process and completed contract awaiting final acceptance by the owner. Generally, performance bonds do not have stated expiration dates; rather, we are generally released from the bonds when each contract is accepted by the owner. The ability to maintain bonding capacity to support our current and future level of contracting requires that we maintain cash and working capital balances satisfactory to our sureties.
 
Covenants contained in our debt agreements require the maintenance of certain financial ratios and the maintenance of tangible net worth (as defined by the debt agreements). Our debt agreements define certain events of default such as the failure to observe certain covenants or the failure by us or one of our subsidiaries, which may include a real estate affiliate of GLC over which we exercise control, to pay its debts as they become due. As of March 31, 2009, we were in compliance with these covenants and no event of default has occurred. Should we fail to comply with these covenants or should another event of default occur, our lenders could cause the amounts due under the debt agreements to become immediately payable and terminate their obligation to make further credit available.
 
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 shares. During the three months ended March 31, 2009, we did not purchase shares under the purchase plan. From the inception of this plan in 2007 through March 31, 2009, we have purchased a total of 3.8 million common shares for an aggregate cost of $135.9 million. All common shares were retired upon acquisition.  At March 31, 2009, $64.1 million of the $200.0 million authorization was available for common share purchases.
 
Acquisitions
 
In December 2007, we deposited $28.3 million with an exchange agent in connection with our purchase of the remaining minority shares of Wilder Construction Incorporated. In January 2008, the amount was paid to the Wilder minority shareholders.  This amount was reflected as an increase in cash from investing activities and a corresponding $16.6 million decrease in cash from operating activities and an $11.7 million decrease in cash from financing activities for the estimated amounts attributable to return on investment and return of investment, respectively.
 
In January 2008, we acquired certain assets and assumed certain liabilities of a construction materials supplier in Nevada for a purchase price of approximately $14.0 million in cash. The effect of the operating results of the acquired business on our consolidated operating results was not material. The estimated fair value of the assets acquired approximated the purchase price; therefore, no goodwill was recorded.
 
Recent Accounting Pronouncements
 
See Note 2 of the “Notes to the Condensed Consolidated Financial Statements” for a description of recent accounting pronouncements, including the expected dates of adoption and effects on our condensed consolidated balance sheets, statements of income and statements of cash flows. 
 
Website Access
 
Our website address is www.graniteconstruction.com. On our website we make available, free of charge, our annual report on Form 10-K, quarterly reports on Form 10-Q, current reports on Form 8-K, and all amendments to those reports as soon as reasonably practicable after such material is electronically filed with or furnished to the Securities and Exchange Commission. The information on our website is not incorporated into, and is not part of, this report. These reports, and any amendments to them, are also available at the website of the Securities and Exchange Commission, www.sec.gov.
 
 
 
Item 3.
QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
 
There was no significant change in our exposure to market risk in our investment controls and procedures during the three months ended March 31, 2009.
 
Item 4.
CONTROLS AND PROCEDURES
 
We carried out an evaluation, under the supervision of and with the participation of management, including our Chief Executive Officer and our Chief Financial Officer, of the effectiveness of our disclosure controls and procedures (as defined in Rules 13a-15(e) and 15d-15(e) under the Securities Exchange Act of 1934, as amended). Based on this evaluation, our Chief Executive Officer and Chief Financial Officer concluded that, as of March 31, 2009, our disclosure controls and procedures were effective.
 
During the first quarter of 2009, there were no changes in our internal controls over financial reporting that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.
 
 
 
 
PART II. OTHER INFORMATION
 
 
 
Item 1.
LEGAL PROCEEDINGS
  
See Part I, Item 1. Financial Statements, Note 13 - Legal Proceedings.
 
Item 1A.
RISK FACTORS
 
There have been no material changes in the risk factors previously disclosed in “Item 1A. Risk Factors” in our Annual Report on Form 10-K for the fiscal year ended December 31, 2008.
 
Item 2.
UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS
 
None.
 
Item 3.
DEFAULTS UPON SENIOR SECURITIES
 
None
 
Item 4.
SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
 
None
 
Item 5.
OTHER INFORMATION
None
 
Item 6.
 
31.1
Certification of Principal Executive Officer
31.2 
Certification of Principal Financial Officer
32
††
Certification of Chief Executive Officer and Chief Financial Officer Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002
     
     
 
† 
Filed herewith 
 
†† 
Furnished herewith 
 
 
 
 
Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.
 
       
GRANITE CONSTRUCTION INCORPORATED
 
           
           
Date:
  May 5, 2009
 
By:
/s/ LeAnne M. Stewart
 
       
LeAnne M. Stewart
 
       
Senior Vice President and Chief Financial Officer
 
 
 
 

 
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