GRANITE LOGO





UNITED
STATES


SECURITIES
AND EXCHANGE COMMISSION


Washington,
D.C. 20549




FORM
10-K




x


For the fiscal year ended December 31, 2009


OR




o


For the transition period from _____ to _____




Commission
file number 1-12911


Granite
Construction Incorporated


(Exact
name of registrant as specified in its charter)


Delaware
            77-0239383(State
      or other jurisdiction of incorporation or organization)
            (I.R.S.
      Employer Identification Number)585
      West Beach StreetWatsonville,
      California
            95076(Address
      of principal executive offices)
            (Zip
      Code)




Registrant’s telephone
number, including area code: (831)
724-1011




Securities
registered pursuant to Section 12(b) of the Act:


Title
      of each class
              Name
      of each exchange on which
      registeredCommon
      Stock, $0.01 par value
              New
      York Stock Exchange




Securities registered
pursuant to Section 12(g) of the Act: None




Indicate by check mark if
the registrant is a well-known seasoned issuer, as defined in Rule 405 of the
Securities Act. Yes xNo o




Indicate by check mark if
the registrant is not required to file reports pursuant to Section 13 or Section
15(d) of the Act. Yes oNo x




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 xNo o




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 o No
o


Indicate by check mark if
disclosure of delinquent filers pursuant to Item 405 of Regulation S-K (§ 229.405 of this
chapter)is not contained herein, and will not be contained, to
the best of registrant’s knowledge, in definitive proxy or information
statements incorporated by reference in Part III of this Form 10-K or any
amendment to this Form 10-K. o




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




Indicate by check mark
whether the registrant is a shell company (as defined in Rule 12b-2 of the Act).
Yes oNo x




The
aggregate market value of voting and non-voting common equity held by
non-affiliates of the registrant was approximately $1.3 billion as
of June 30, 2009, based upon the average of the bid and asked prices per share
of the registrant’s Common Stock as reported on the New York Stock Exchange on
such date. Shares of Common Stock held by each executive officer and director
and by each person who owns 5% or more of the outstanding Common Stock have been
excluded in that such persons may be deemed to be affiliates. This determination
of affiliate status is not necessarily a conclusive determination for other
purposes.




At
February 12, 2010, 38,629,378shares of Common Stock, par value $0.01, of the
registrant were outstanding.




DOCUMENTS
INCORPORATED BY REFERENCE




Certain
information called for by Part III is incorporated by reference to the
definitive Proxy Statement for the Annual Meeting of Shareholders of Granite
Construction Incorporated to be held on May 7, 2010, which
will be filed with the Securities and Exchange Commission not later than 120
days after December 31, 2009.














Index




PART I


Item
      1.
            BUSINESSItem
      1A.
            RISK
      FACTORSItem
      1B.
            UNRESOLVED
      STAFF COMMENTSItem
      2.
            PROPERTIESItem
      3.
            LEGAL
      PROCEEDINGSItem
      4.
            SUBMISSION
      OF MATTERS TO A VOTE OF SECURITY HOLDERS




PART
II


Item
      5.
            MARKET
      FOR REGISTRANT’S COMMON EQUITY, RELATED STOCKHOLDER MATTERS AND ISSUER
      PURCHASES OF EQUITY SECURITIESItem
      6.
            SELECTED FINANCIAL
      DATAItem
      7.
            MANAGEMENT’S
      DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
      OPERATION SItem
      7A.
            QUANTITATIVE
      AND QUALITATIVE DISCLOSURES ABOUT MARKET RISKItem
      8.
            FINANCIAL
      STATEMENTS AND SUPPLEMENTARY DATAItem
      9.
            CHANGES
      IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL
      DISCLOSUREItem
      9A.
            CONTROLS
      AND PROCEDURESItem
      9B.
            OTHER
      INFORMATION




PART
III


Item
      10.
            DIRECTORS, EXECUTIVE
      OFFICERS AND CORPORATE GOVERNANCEItem
      11.
            EXECUTIVE
      COMPENSATIONItem
      12.
            SECURITY
      OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND RELATED
      STOCKHOLDER MATTERSItem
      13.
            CERTAIN
      RELATIONSHIPS AND RELATED TRANSACTIONS, AND DIRECTOR
      INDEPENDENCEItem
      14.
            PRINCIPAL
      ACCOUNTANT FEES AND SERVICES




PART
IV


Item
      15.
                  EXHIBITS
      AND FINANCIAL STATEMENT SCHEDULESEXHIBIT 3.2.cEXHIBIT 10.2.aEXHIBIT
      21EXHIBIT
      23.1EXHIBIT
      31.1EXHIBIT
      31.2EXHIBIT
      32





1
 Table of Contents




DISCLOSURE
REGARDING FORWARD-LOOKING STATEMENTS




This
Annual Report on Form 10-K contains statements 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
these forward-looking statements. These forward-looking statements are estimates
reflecting the best judgment of our 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 risks described in this
Report under “Item 1A. Risk Factors.” Except as required by law, we undertake no
obligation to revise or update any forward-looking statements for any reason. As
a result, the reader is cautioned not to place undue reliance on these
forward-looking statements, which speak only as of the date of this
Report.


PART I




Item 1. BUSINESS




Introduction




Granite
Construction Company was originally incorporated in 1922. In 1990, Granite
Construction Incorporated was formed as the holding company for Granite
Construction Company and its wholly owned subsidiaries and was incorporated in
Delaware. Unless otherwise indicated, the terms “we,”  “us,” 
“our,”  “Company” and “Granite” refer to Granite Construction Incorporated
and its consolidated subsidiaries.




We are
one of the largest heavy civil construction contractors in the United States. We
operate nationwide, serving both public and private sector clients. Within the
public sector, we primarily concentrate on heavy-civil infrastructure projects,
including the construction of roads, highways, mass transit facilities, airport
infrastructure, bridges, dams and canals. Within the private sector, we
perform site preparation and infrastructure services for residential
development, commercial and industrial buildings, and other facilities.




We own
and lease substantial aggregate reserves and own a number of construction
materials processing plants. We also have one of the largest contractor-owned
heavy construction equipment fleets in the United States. We believe that the
ownership of these assets enables us to compete more effectively by ensuring
availability of these resources at a favorable cost.




In 2000, we diversified into real estate investment and
development, investing our own capital in carefully selected real estate
projects throughout the western United States and Texas.





Operating
Structure
 Our
construction business has been organized into two geographic segments, Granite
West and Granite East.  Included in our Granite West segment is our
vertically integrated construction materials business. The Company also has
a real estate investment and development business, Granite Land Company (“GLC”).
Our results of operations discussed herein have been reported with the segment
structure that was in place during 2009.  See Note 20 of “Notes to the
Consolidated Financial Statements” for additional information about our
operating segments.
  On August
31, 2009, we announced changes to our organizational structure designed to
improve operating efficiencies and position the Company for long-term
growth. In
conjunction with the reorganization we are changing our reportable segments to
reflect our business product lines. Beginning in fiscal 2010, the Company’s new
reportable segments are: Construction, Large Project Construction, Construction
Materials and Real Estate. The Real Estate segment will contain what was
previously known as Granite Land Company. We will continue to
provide geographic information within the new segment structure.


2
 Table of Contents




Granite
West: In 2009
and 2008, Granite West contract revenue and sales of construction materials
was $1.4 billion and $2.0 billion (71.9% and 73.7% of our total revenue),
respectively. Granite West revenue is derived from both public and private
sector clients. Typical public sector projects include both new
construction and improvement of roads, highways, airport infrastructure and
bridges. Major private sector contracts typically include site preparation for
housing and commercial development, including excavation, grading and street
paving and installation of curbs, gutters, sidewalks and underground
utilities. 
 Granite
West’s decentralized operating structure includes 14 branch offices in the
western United States, several with additional satellite operations. In
2009, individual branch revenues ranged from $47.0 million
to $210.1 million. Although most Granite West projects are started and
completed within a year, the division also has the capability of constructing
larger projects and, as of December 31, 2009, had four active large
projects, each with total contract revenue greater than $50.0
million.
 
 The
Company mines aggregates and/or operates plants that process aggregates into
construction materials for internal use and for sale to third parties. These
activities are vertically integrated into Granite West and provide both a source
of profits and a competitive advantage to our construction business through the
readily available supply of materials. We have significant aggregate reserves
that we have acquired by ownership in fee or through long-term leases.
 
 Aggregate
products used in our construction projects represented approximately 54.9%
of our aggregate sales during 2009 and ranged from 42.3% to 54.9% over the
last five years. The remainder is sold to third parties.
 
 Granite East: In 2009,
revenue from Granite East was $550.2 million (28.0% of our total
revenue), compared with $695.0 million (26.0% of our total revenue) in
2008. Granite East’s focus is on large, complex infrastructure projects and
included major highways, mass transit facilities, bridges, tunnels,
waterway locks and dams, pipelines, canals, and airport
infrastructure. It also performs activities such as demolition, clearing,
large-scale earthwork and grading, dewatering, drainage improvements, structural
concrete, rail signalization, and concrete and asphalt paving. Granite
East also has the ability to process locally sourced aggregates into
construction materials using owned or rented portable crushing, concrete and
asphalt processing plants.
 
 Granite
East operates out of three regional offices that provide management and
administrative support and are the primary hubs for estimating efforts. Granite
East construction contracts are typically greater than two years in duration
with contract values ranging from $12.0 million to $466.5 million
at December 31, 2009.
 
 3
 Table of Contents
  Joint Ventures and Design/Build
Projects: We participate in joint ventures with other
construction companies. Joint ventures are used for large, technically complex
projects, including design/build projects, where it is desirable to share risk
and resources. Joint venture partners typically provide independently prepared
estimates, shared financing and equipment and often bring local
knowledge and expertise (see “Joint Ventures; Off-Balance-Sheet
Arrangements” under “Item 7. Management’s Discussion and Analysis of
Financial Condition and Results of Operations”).
 
 We also
utilize the design/build method of project delivery. Unlike
traditional projects where owners first hire a design firm or design a project
themselves and then put the project out to bid for construction, design/build
projects provide the owner with a single point of responsibility and a single
contact for both final design and construction. Revenue from design/build
projects represented 64.0% and 66.4% of Granite East revenue in 2009
and 2008, respectively, and 10.1% and 14.1% of Granite West
revenue in 2009 and 2008, respectively. Although these projects
carry additional risk as compared to traditional bid/build projects, the
profit potential can also be higher.
 
 Granite Land Company: GLC is
an investor in a diversified portfolio of land assets and 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. The range of our
involvement in an individual project may vary from passive investment to
management of land rights or entitlement (use of land authorized by government
agency), development, construction, leasing and eventual sale of the project.
GLC projects have long lead times affording us the flexibility to stage our land
entitlement and construction activities to meet market demand. Our strategy is
to remain flexible, and to evaluate opportunities to sell any of our
investments at any stage of the development process.
 
 Generally,
we team with partners who have local knowledge and expertise in the development
of each property. Each of these developments is affected by such factors as
changes in general economic conditions, bank-lending practices, interest rate
fluctuations, and demand for real estate. In addition, each project is subject
to issues unique to that property such as environmental conditions, local
entitlement policies and market conditions.
 
 Our
current investments are located in Washington, Oregon, California
and Texas. In 2009, revenue from GLC was $2.3 million (0.1% of our
total revenue), compared with $9.0 million (0.3% of our total revenue) in
2008.




4
 Table of Contents




Business
Strategy




Our
fundamental objective is to increase long-term shareholder value as
measured by the appreciation of the value of our common stock over a period of
time as well as dividend yields. A specific measure of our financial
success is the achievement of a return on net assets greater than the cost of
capital, creating “Granite Value Added.” The following are key factors in our
ability to achieve these objectives:




Controlled Growth -We intend
to grow our business by working on many types of infrastructure projects as well
as by expanding into new geographic areas. In addition, we are focusing our
efforts on larger projects wherein our financial strength and project experience
provide us with a competitive
advantage.




Decentralized Profit
Centers -Each of
our operating groups is established as an individual profit center which
encourages entrepreneurial activity while allowing the offices to benefit from
centralized administrative and
support functions.




Diversification -
To mitigate the risks inherent in the
construction business as the result of general economic factors, we pursue
projects: (i) in both the public and private sectors, (ii) for a wide range of
customers within each sector (from the federal government to small
municipalities and from large corporations to individual homeowners), (iii) in
diverse geographic markets, (iv) that are design/build, lump sum and fixed unit
price and (v) of various sizes, durations and
complexity.




Employee
Development - We believe that our employees are key to the successful
implementation of our business strategies. Significant resources are employed to
attract, develop and retain extraordinary talent and fully promote each
employee’s capabilities.




Infrastructure
Construction Focus - We concentrate our core competencies on this
segment of the construction industry, which includes the building of roads,
highways, bridges, dams, tunnels, mass transit facilities, railroad
infrastructure and underground utilities as well as site preparation. This
focus allows us to most effectively utilize our specialized strengths,
which include grading, paving and concrete
structures.




Aggregate
Materials - We own and lease aggregate reserves
and own processing plants that are vertically integrated into our construction
operations. By ensuring availability of these resources and providing quality
products, we believe we have a competitive advantage in many of our
markets as well as a source of revenue and income from the sale of construction
materials to third parties.





Ownership
of Construction Equipment - We own a large fleet of well maintained
heavy construction equipment. We
believe that ownership of construction equipment enables us to compete more
effectively by ensuring availability of the equipment at a favorable
cost.




Profit-based
Incentives - Profit
center managers are incentivized with cash compensation and restricted stock,
payable upon the attainment of pre-established annual financial and
non-financial metrics.


Selective
Bidding - We focus our resources on bidding jobs that meet our
selective bidding criteria, which include analyzing the risk of a potential job
relative to: (i) available personnel to estimate and prepare the
proposal, (ii) available personnel to effectively manage and build the project,
(iii) the competitive environment, (iv) our experience with the type
of work, (v) our experience with the owner, (vi) local resources and
partnerships, (vii) equipment resources, (viii) the size and
complexity of the job and (ix) profitability.




Our operating
principles include:




Accident
Prevention - We believe accident prevention is a moral
obligation as well as good business. By identifying and concentrating
resources to address jobsite hazards, we continually strive to reduce our
incident rates and the costs associated with
accidents.




Environmental
Responsibility - We believe in environmentally responsible
operations. We are committed to protecting the environment, maintaining good
community relations and ensuring compliance with government agency
requirements.




Quality
and High Ethical Standards - We believe in the importance
of performing high quality work and maintaining high ethical standards through
an established code of conduct and an effective corporate compliance
program.




5
 Table of Contents




Raw
Materials
 
 We
purchase raw materials consisting of aggregate products, cement, diesel fuel,
liquid asphalt, natural gas, propane and steel from numerous sources. Our
aggregate reserves supply a portion of the raw materials needed in our
construction projects. The price and availability of raw materials may vary from
year to year due to market conditions and production capacities. We do not
foresee the lack of availability of any raw materials.
 
 Seasonality
 
 The first
and fourth quarter of our fiscal year are typically affected by weather
conditions, primarily in the West, which may alter our construction schedules
and can create variability in our revenues, profitability and the required
number of employees.





Customers




We have
customers in both the public and private sectors. Our largest volume
customer is the California Department of Transportation (“Caltrans”).
Contracts with Caltrans represented 11.9% and 9.6% of our total
revenue and 16.6% and 13.1% of our Granite West revenue in 2009 and 2008,
respectively. Public sector revenue in California represented 28.1% and 27.7% of
our total revenue in 2009 and 2008, respectively. Other Granite
West customers include certain federal agencies, departments of
transportation of other states, county and city public works departments, school
districts and developers and owners of industrial, commercial and residential
sites. Granite East’s customers are predominantly in the public sector and
currently include various state departments of transportation, local
transit authorities, and federal agencies.
 Contract
Backlog




Our
contract backlog is comprised of the unearned portion of revenue on awarded
contracts that have not been completed, including 100% of the unearned revenue
of our consolidated joint ventures and our proportionate share of unconsolidated
joint venture contracts. We include a construction project in our contract
backlog at the time a contract is awarded and funding is in place, with the
exception of certain federal government contracts for which funding is
appropriated on a periodic basis. Substantially all of the contracts in our
contract backlog may be canceled or modified at the election of the customer;
however, we have not been materially adversely affected by contract
cancellations or modifications in the past (see “Contract Provisions and
Subcontracting”). Most Granite West projects are added and completed within each
year and therefore are not reflected in our year-end contract backlog. Contract
backlog by segment is presented in “Contract Backlog” under “Item 7.
Management’s Discussion and Analysis of Financial Condition and Results of
Operations.” Our contract backlog was approximately $1.4 billion and $1.7
billion at December 31, 2009 and 2008, respectively.
Approximately $931.2 million of the December 31, 2009 contract backlog is
expected to be completed during 2010.





Equipment




At
December 31, 2009 and 2008, we owned the following construction equipment and
vehicles:




December
      31,
                  
                  
                  2009
                  
                  
                  2008Heavy
      construction equipment
                  
                  
                  2,362
                  
                  
                  2,775Trucks,
      truck-tractors, trailers and vehicles
                  
                  
                  5,254
                  
                  
                  5,812




Our
portfolio of equipment includes loaders, bulldozers, excavators, rollers, motor
graders, pavers, scrapers,
cranes, trucks, backhoes and barges.We believe that ownership of equipment is generally preferable to leasing
because it ensures the equipment is available as needed and normally results in
lower costs. We pool certain equipment for use by both Granite West and
Granite East to maximize utilization. On a short-term basis, we lease or
rent equipment to supplement existing equipment in response to construction
activity peaks. In 2009 and 2008, we spent approximately $17.6 million and
$36.5 million, respectively, on purchases of construction equipment and
vehicles.




6
 Table of Contents




Employees
  On
December 31, 2009, we employed approximately 1,800 salaried employees,
who work in management, estimating and clerical capacities, plus
approximately 600 hourly employees. The total number of hourly personnel we
employ is subject to the volume of construction in progress and is seasonal.
During 2009, the number of hourly employees ranged from approximately
600 to 3,600 and averaged approximately 2,700. Two of our wholly owned
subsidiaries - Granite Construction Company and Granite Construction
Northeast, Inc. - are parties to craft collective bargaining agreements in
many areas in which they work.
  We
believe our employees are our most valuable resource and that our workforce
possesses a strong dedication to and pride in our company. Among salaried and
non-union hourly employees, this dedication is reinforced by a 14.6% equity
ownership at December 31, 2009 through our Employee Stock Ownership Plan, our
Profit Sharing and 401(k) Plan and performance-based incentive compensation
arrangements. Our managerial and supervisory personnel have an average of
approximately 11years
of service with us.





Competition




Granite
West competitors range from small local construction companies to large
regional, national and global construction companies. While the market areas of
these competitors overlap with several of the markets served by our branches,
few compete in all of our market areas. Many of our Granite West competitors
have the ability to perform work in either the private or public sectors. When
opportunities for work in one sector are reduced, competitors tend to look for
opportunities in the other sector. This migration has the potential to
reduce revenue growth and/or increase pressure on gross profit margins. In
addition, we own and/or have long-term leases on aggregate resources that
provide an extra measure of competitive advantage in certain markets.
Granite East normally competes with large regional, national and global
construction companies.





Factors
influencing our competitiveness include price, estimating abilities, knowledge
of local markets and conditions, project management, financial strength,
reputation for quality, the availability of aggregate materials, and
machinery and equipment. Although some of our competitors are larger than us and
may possess greater resources, we believe that we compete favorably on the basis
of the foregoing factors. Historically, the construction business has not
required large amounts of capital, particularly for the smaller size
construction work pursued by Granite West, which can result in relative ease of
market entry for companies possessing acceptable qualifications. Although the
construction business is highly competitive, we believe we are well positioned
to compete effectively in the markets in which we operate.




7
 Table of Contents





Contract
Provisions and Subcontracting




Our contracts
with our customers are primarily “fixed unit price” or “fixed price.” Under
fixed unit price contracts, we are committed to providing materials or services
at fixed unit prices (for example, dollars per cubic yard of concrete poured or
cubic yard of earth excavated). While the fixed unit price contract shifts the
risk of estimating the quantity of units required for a particular project to
the customer, any increase in our unit cost over the expected unit cost in the
bid, whether due to inflation, inefficiency, errors in our estimates or other
factors, is borne by us unless otherwise provided in the contract. Fixed price
contracts are priced on a lump-sum basis under which we bear the risk of
performing all the work for the specified amount. The percentage of fixed
price contracts in our contract backlog increased to approximately 75.1% at
December 31, 2009 compared with approximately 68.7% at December 31,
2008.





Our
contracts are generally obtained through competitive bidding in response to
advertisements by federal, state and local government agencies and private
parties. Less frequently, contracts may be obtained through direct negotiations
with private owners. Our contract review process includes identifying risks and
opportunities during the bidding process and managing these risks through
mitigation efforts such as insurance and pricing. Contracts fitting certain
criteria of size and complexity are reviewed by various levels of
management and, in some cases, by the Executive Committee of our Board of
Directors.




There are
a number of factors that can create variability in contract performance and
results as compared to a project’s original bid. The most significant of these
include the completeness and accuracy of the original bid, costs associated
with added scope changes, extended overhead due to owner, weather and
other delays, subcontractor performance issues, changes in productivity
expectations, site conditions that differ from those assumed in the original bid
(to the extent contract remedies are unavailable), the availability and skill
level of workers in the geographic location of the project and a change in the
availability and proximity of equipment or materials. All of these factors
can impose inefficiencies on contract performance, which can increase costs and
lower profits. Conversely, positive variations in any of these or other
factors can decrease costs and improve profitability. However, the ability to
realize improvements on project profitability is often
more limited than the risk of lower profitability.
Design/build projects typically incur additional costs such as right-of-way and
permit acquisition costs and carry additional risks such as design
error risk and the risk associated with estimating quantities and
prices before the project design is completed. These unknown factors
may cause higher than anticipated construction costs and additional
liability to the contract owner. We manage this additional risk by adding
contingencies to our bid amounts, obtaining errors and omissions insurance and
obtaining indemnifications from our design consultants where possible.
However, there is no guarantee that these risk management strategies will
always be successful.




Most of
our contracts, including those with the government, provide for termination at
the convenience of the contract owner, with provisions to pay us for work
performed through the date of termination. We have not been
materially adversely affected by these provisions in the past. Many
of our contracts contain provisions that require us to pay liquidated damages if
specified completion schedule requirements are not met and these amounts could
be significant.




We act as
prime contractor on most of our construction projects. We complete the
majority of our projects with our own resources and subcontract specialized
activities such as electrical and mechanical work. As prime contractor, we are
responsible for the performance of the entire contract, including subcontract
work. Thus, we may be subject to increased costs associated with the
failure of one or more subcontractors to perform as anticipated. Based on our
analysis of their construction and financial capabilities, among other criteria,
we determine whether to require the subcontractor to furnish a bond or other
type of security to guarantee their performance. Disadvantaged business
enterprise regulations require us to use our best efforts to subcontract a
specified portion of contract work done for governmental agencies to certain
types of disadvantaged subcontractors. As with all of
our subcontractors, some may not be able to obtain surety bonds or
other types of performance security.




8
 Table of Contents




Insurance
and Bonding




We
maintain general and excess liability, construction equipment and workers’
compensation insurance; all in amounts consistent with industry
practices.




In
connection with our business, we generally are required to provide various types
of surety bonds that provide an additional measure of security for our
performance under certain public and private sector contracts. Our ability to
obtain surety bonds depends upon our capitalization, working capital, past
performance, management expertise and external factors, including the capacity
of the overall surety market. Surety companies consider such factors in light of
the amount of our contract backlog that we have currently bonded and their
current underwriting standards, which may change from time to time. The capacity
of the surety market is subject to market-based fluctuations driven primarily by
the level of surety industry losses and the degree of surety market
consolidation. When the surety market capacity shrinks it results in higher
premiums and increased difficulty obtaining bonding, in particular for larger,
more complex projects throughout the market. In order to help mitigate this
risk, we employ a co-surety structure involving three sureties. Although we
do not believe that fluctuations in surety market capacity have
significantly affected our ability to grow our business, there is no
assurance that it will not significantly affect our ability to obtain new
contracts in the future (see “Item 1A. Risk Factors”).




Environmental
Regulations




Our
operations are subject to various federal, state and local laws and regulations
relating to the environment, including those relating to discharges to air,
water and land, the handling and disposal of solid and hazardous waste, the
handling of underground storage tanks and the cleanup of properties affected by
hazardous substances. Certain environmental laws impose substantial penalties
for non-compliance and others, such as the federal Comprehensive Environmental
Response, Compensation and Liability Act, impose strict, retroactive, joint and
several liability upon persons responsible for releases of hazardous substances.
We continually evaluate whether we must take additional steps at our locations
to ensure compliance with environmental laws. While compliance with applicable
regulatory requirements has not materially adversely affected our operations in
the past, there can be no assurance that these requirements will not change and
that compliance will not adversely affect our operations in the future. In
addition, our aggregate materials operations require operating permits granted
by governmental agencies. We believe that tighter regulations for the protection
of the environment and other factors will make it increasingly difficult to
obtain new permits and renewal of existing permits may be subject to more
restrictive conditions than currently exist.


In July
2007, the California Air Resources Board (“CARB”) approved a regulation that
will require California equipment owners/operators to reduce diesel particulate
and nitrogen oxide emissions from in-use off-road diesel equipment and to
meet progressively more restrictive emission targets proposed for each year from
2010 to 2020. In December 2008, CARB approved a similar regulation for in-use
on-road diesel equipment that includes more restrictive emission targets from
2010 to 2022. The emission targets will require California off-road and
on-road diesel equipment owners to retrofit equipment with diesel emission
control devices or replace equipment with new engine technology as it becomes
available, which will result in higher equipment
related expenses. To date, costs to prepare the Company for
compliance have been minimal. However, it is too early to determine what the
full cost of compliance will be.




As is the
case with other companies in our industry, some of our aggregate products
contain varying amounts of crystalline silica, a common mineral. Also, some of
our construction and material processing operations release, as dust,
crystalline silica that is in the materials being handled. Excessive, prolonged
inhalation of very small-sized particles of crystalline silica has allegedly
been associated with respiratory disease (including silicosis). The Mine Safety
and Health Administration and the Occupational Safety and Health Administration
have established occupational thresholds for crystalline silica exposure as
respirable dust. We have implemented dust control procedures to measure
compliance with requisite thresholds and to verify that respiratory protective
equipment is made available as necessary. We also communicate, through
safety information sheets and other means, what we believe to be appropriate
warnings and cautions to employees and customers about the risks associated with
excessive, prolonged inhalation of mineral dust in general and crystalline
silica in particular.




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 (“SEC”). 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
SEC, www.sec.gov.




9
 Table of Contents




Item 1A. RISK FACTORS




Set forth
below and elsewhere in this Report and in other documents we file with the SEC
are various risks and uncertainties that could cause our actual results to
differ materially from the results contemplated by the forward-looking
statements contained in this Report or otherwise adversely affect our
business.




·
            Reductions
      in governmental infrastructure spending could have a negative impact on
      our business. A
      significant portion of our revenue is generated from infrastructure work
      funded by various government entities, including state departments of
      transportation such as Caltrans. Infrastructure spending by
      government entities could be negatively affected by the overall
      condition of the economy and declining tax revenues. Our ability to obtain
      future public sector work at reasonable margins is highly dependent on the
      amount of work that is available to bid. It may also affect our
      customer base, subcontractors and suppliers and could materially affect
      our contract backlog, operating results, cash flows and our ability to
      implement our strategic plan.


·
              We work in
      a highly competitive marketplace.We
      have multiple competitors in all of the areas in which we work. During
      economic down cycles or times of lower government funding for public works
      projects, competition for the fewer available public projects
      intensifies and this increased competition may result in a decrease in new
      awards at acceptable profit margins. In addition, downturns in residential
      and commercial construction activity increases the competition for
      available public sector work, further impacting our revenue, contract
      backlog and profit
margins.


·
                  Accounting
      for our revenues and costs involves significant estimates. As
      further described in “Critical Accounting Estimates” under “Item 7.
      Management’s Discussion and Analysis of Financial Condition and Results of
      Operations,” accounting for our contract related revenues and costs, as
      well as other expenses, requires management to make a variety of
      significant estimates and assumptions. Although we believe we have
      sufficient experience and processes to enable us to formulate appropriate
      assumptions and produce reasonably dependable estimates, these assumptions
      and estimates may change significantly in the future and could result
      in the reversal of previously recognized revenue and profit. Such
      changes could have a material adverse effect on our financial position,
      results of operations, and cash
  flows.


·
            Our success
      depends on attracting and retaining qualified personnel in a competitive
      environment.Thesingle largest factor affecting our ability to
      profitably execute our work is our ability to attract, develop and retain
      qualified personnel. Our success in attracting qualified people is
      dependent on the resources available in individual geographic areas and
      changes in the labor supply as a result of general economic conditions, as
      well as our ability to provide compensation packages and a work
      environment that are
  competitive.







·
            Fixed price
      and fixed unit price contracts subject us to the risk of increased project
      cost.As more
      fully described under “Contract Provisions and Subcontracting” above, the
      profitability of our fixed price and fixed unit price contracts can be
      adversely affected by a number of factors that can cause our actual costs
      to materially exceed the costs estimated at the time of our original
      bid.




·
            Many of our
      contracts have penalties for late completion.In some instances,
      including many of our fixed price contracts, we guarantee that we will
      complete a project by a certain date. If we subsequently fail to complete
      the project as scheduled we may be held responsible for costs resulting
      from the delay, generally in the form of contractually agreed-upon
      liquidated damages. To the extent these events occur, the total cost of
      the project could exceed our original estimate and we could experience
      reduced profits or, in some cases, a loss on that
      project.




·
              Weather can
      significantly affect our quarterly revenues and profitability.Our ability
      to perform work is significantly affected by weather conditions such as
      precipitation and temperature. Changes in weather conditions can cause
      delays and otherwise significantly affect our project costs. The impact of
      weather conditions can result in variability in our quarterly revenues and
      profitability, particularly in the first and fourth quarters of the
      year.


·
                Design/build
      contracts subject us to the risk of design errors and omissions.
      Design/build is
      increasingly being used as a method of project delivery as it provides the
      owner with a single point of responsibility for both design and
      construction. We generally subcontract design responsibility to
      architectural and engineering firms. However, in the event of a design
      error or omission causing damages, there is risk that the subcontractor or
      their errors and omissions insurance would not be able to absorb the
      liability. In this case we may be responsible, resulting in a
      potentially material adverse effect on our financial position, results of
      operations and cash
flows.





10
 Table of Contents
 ·
                                Failure of
      our subcontractors to perform as anticipated could have a negative effect
      on our results.As further described under
      “Contract Provisions and Subcontracting” above, we subcontract portions of
      many of our contracts to specialty subcontractors, but we are ultimately
      responsible for the successful completion of their work. Although we seek
      to require bonding or other forms of guarantees, we are not always
      successful in obtaining those bonds or guarantees from our higher risk
      subcontractors. In this case we may be responsible, resulting in
      a potentially adverse effect on our financial position, results of
      operations and cash
flows.
 ·
                        We may be
      unable to identify qualified Disadvantaged Business
      Enterprise (“DBE”) contractors to perform as subcontractors.Certain of
      our government agency projects contain minimum DBE participation clauses.
      If we subsequently fail to complete these projects with the minimum DBE
      participation, we may be held responsible for breach of contract damages
      which may include restrictions on our ability to bid on future projects as
      well as monetary damages. To the extent we are responsible for monetary
      damages, the total costs of the project could exceed our original
      estimates and we could experience reduced profits or, in some cases, a
      loss for that project.


·
                Government
      contracts generally have strict regulatory requirements.Approximately 86.0% of our
      consolidated revenue in 2009 was derived from contracts funded by federal,
      state and local government agencies and authorities. Government contracts
      are subject to specific procurement regulations, contract provisions and a
      variety of socioeconomic requirements relating to their formation,
      administration, performance and accounting and often include express or
      implied certifications of compliance. Claims for civil or criminal fraud
      may be brought for violations of regulations, requirements or statutes. We
      may also be subject to qui tam (“Whistle Blower”) litigation brought by
      private individuals on behalf of the government under the Federal Civil
      False Claims Act, which could include claims for up to treble damages.
      Further, if we fail to comply with any of the regulations, requirements or
      statutes, our existing government contracts could be terminated
      and we could be suspended from government contracting or
      subcontracting, including federally funded projects at the state level.
      Should one of these events occur, it could have a material adverse
      effect on our financial position, results of operations, and cash
      flows.


·
            We are
      subject to environmental and other regulation.As more fully described
      under “Environmental Regulations” above, we are subject to a number of
      federal, state and local laws and regulations relating to the
      environment, workplace safety and a variety of socioeconomic
      requirements, the noncompliance with which can result in
      substantial penalties, termination or suspension of government
      contracts as well as civil and criminal liability. While compliance
      with these laws and regulations has not materially adversely affected our
      operations in the past, there can be no assurance that these requirements
      will not change and that compliance will not adversely affect our
      operations in the
future.





·
            Strikes or
      work stoppages could have a negative effect on our operations and results.We are party
      to collective bargaining agreements covering a portion of our craft
      workforce. Although our results and operations have not been significantly
      affected by strikes or work stoppages in the past, such labor actions
      could have a significant effect on our operations if they occur in the
      future.




·
            Unavailability
      of insurance coverage could have a negative effect on our operations and
      results.We
      maintain insurance coverage as part of our overall risk management
      strategy and pursuant to requirements to maintain specific coverage
      that are contained in our financing agreements and in most of our
      construction contracts. Although we have been able to obtain reasonably
      priced insurance coverage to meet our requirements in the past, there is
      no assurance that we will be able to do so in the future, and our
      inability to obtain such coverage could materially affect our
      financial position, results of operations and cash
      flows.




·
            An
      inability to obtain bonding would have a negative effect on our operations
      and results.As more fully described in
      “Insurance and Bonding” above, we generally are required to provide surety
      bonds securing our performance under the majority of our public and
      private sector contracts. Our inability to obtain reasonably priced surety
      bonds in the future could significantly affect our ability to be awarded
      new contracts, which would have a material adverse effect on our financial
      position, results of operations and cash
    flows.




·
                Our joint
      venture contracts with project owners subject us to joint and several
      liability. As further described in
      “Joint Ventures; Off-Balance Sheet Arrangements” under “Item 7.
      Management’s Discussion and Analysis of Financial Condition and Results of
      Operations,” if a joint venture partner fails to perform we could be
      liable for completion of the entire contract. If the contract were
      unprofitable, this could result in a material adverse effect on our
      financial position, results of operations and cash
      flows.
  ·
                Our
      contract backlog is subject to unexpected adjustments and cancellations
      and could be an uncertain indicator of our future earnings. We cannot guarantee that
      the revenues projected in our contract backlog will be realized or, if
      realized, will be profitable. Projects reflected in our contract backlog
      may be affected by project cancellations, scope adjustments, time
      extensions or other changes. Such changes may adversely affect the revenue
      and profit we ultimately realize on these
      projects.





11
 Table of
Contents


·
              We
      use certain commodity products that are subject to significant price
      fluctuations.Diesel
      fuel, liquid asphalt and other petroleum-based products are used
      to fuel and lubricate our equipment and fire our asphalt
      concrete processing plants.  In addition, they constitute a
      significant part of the asphalt paving materials that are used in many of
      our construction projects and are sold to third parties. Although
      we are partially protected by asphalt or fuel price escalation
      clauses in some of our contracts, many contracts provide no such
      protection. We
      also use steel and other commodities in our construction projects that can
      be subject to significant price fluctuations. We enter into supply
      agreements or pre-purchase commodities to secure pricing.  We
      have not been significantly adversely affected by price fluctuations in
      the past; however, there is no guarantee that we will not be in the
      future.
 ·
                An
      inability to secure and permit aggregate reserves could negatively affect
      our future operations and results.Tighter regulations for the
      protection of the environment and the finite nature of property containing
      suitable aggregate reserves are making it increasingly challenging and
      costly to secure and permit aggregate reserves. Although we have thus far
      been able to secure and permit reserves to support our business, our
      operating results and financial conditions may be adversely affected by an
      increasingly difficult permitting
    process.
  ·
                  Private
      sector work can be affected by economic downturns. The availability of
      private sector work can be adversely affected by economic downturns in the
      residential housing market, demand for commercial property or the
      availability of credit. To the extent these events occur, our operating
      results will be adversely
affected.


·
              Granite
      Land Company is greatly affected by the strength of the real estate
      industry.Our
      real estate development activities are subject to numerous factors beyond
      our control including local real estate market conditions; substantial
      existing and potential competition; general national, regional and local
      economic conditions; fluctuations in interest rates and mortgage
      availability and changes in demographic conditions. If our outlook
      for a project’s forecasted profitability deteriorates, we may find it
      necessary to curtail our development activities and evaluate our real
      estate assets for possible impairment.  Our evaluation includes
      a variety of estimates and assumptions and future changes in these
      estimates and assumptions could affect future impairment analyses. If our
      real estate assets are determined to be impaired, the impairment
      would result in a charge to income from operations in the year of the
      impairment.
  ·
                Our real
      estate investments may require additional funding. Granite Land Company’s
      real estate investments generally utilize short-term debt financing for
      their development activities. Due to the tightening of the credit markets,
      banks have required lower loan-to-value ratios often resulting in the need
      to pay a portion of the debt when short-term financing is
      renegotiated. If our real estate investment partners are unable to make
      their proportional share of a required repayment, GLC may be required to
      provide the additional funding which could materially affect our financial
      position and cash flows. Also, if we assume full financial management
      responsibility, additional real estate investments may need to be
      consolidated in our financial
  statements.


·
            Our
      long-term debt and credit arrangements contain restrictive covenants, and
      failure to meet these covenants could significantly harm our financial
      condition.Our long-term debt and
      credit arrangements and related restrictive covenants are more fully
      described in Note 11 of “Notes to the Consolidated Financial Statements”
      included in this report. In most cases, failure to meet the restrictive
      covenants would result in the acceleration of outstanding indebtedness
      requiring immediate repayment of all amounts due and cancellation of
      open lines of credit. Additionally, failure to meet restrictive covenants
      related to our debt and credit agreements could trigger cross-default
      provisions that would cause us to also be in default of our surety
      agreements. Although we have not had difficulty meeting these covenants in
      the past, failure to do so in the future could have a material adverse
      effect on our business and financial
    condition.


·
              As a part
      of our growth strategy we may make future acquisitions and acquisitions
      involve many risks.These risks include
      difficulties integrating the operations and personnel of the acquired
      companies, diversion of management’s attention from ongoing operations,
      potential difficulties and increased costs associated with completion of
      any assumed construction projects, insufficient revenues to offset
      increased expenses associated with acquisitions and the potential loss of
      key employees or customers of the acquired companies. Acquisitions may
      also cause us to increase our liabilities, record goodwill or other
      non-amortizable intangible assets that will be subject to subsequent
      impairment testing and potential impairment charges, as well as
      amortization expenses related to certain other intangible assets. Failure
      to manage and successfully integrate acquisitions could harm our financial
      position, results of operations and cash
    flows.




The
foregoing list is not all-inclusive. There can be no assurance that we have
correctly identified and appropriately assessed all factors affecting our
business or that the publicly available and other
information with respect to these matters is complete and correct.
Additional risks and uncertainties not presently known to us or that we
currently believe to be immaterial also may adversely affect us. These
developments could have material adverse effects on our business, financial
condition and results of operations. For these reasons, the reader is cautioned
not to place undue reliance on our forward-looking
statements.




12
 Table of Contents





Item
1B.UNRESOLVED
STAFF COMMENTS
 
 None.





Item 2. PROPERTIES


Quarry Properties


We have
53 active and 37 inactive quarry properties available for the
extraction of sand and gravel and hard rock, all of which are located in
the western United States. All of our quarries are open-pit and are primarily
accessible by road. We process aggregates into construction materials for
internal use and for sale to third parties. The following map shows the
approximate locations of our permitted quarry properties as of December 31,
2009.


QUARRY PROPERTIES


We estimate our permitted
proven1and probable2aggregate reserves to be
752 million tons with an average permitted life of approximately
38 years at present operating levels. Present operating levels are
determined based on a three-year annual average aggregate production rate
of 15.9 million tons. Reserve estimates were made by our geologists
and engineers based primarily on drilling studies. Our plant equipment is
powered mostly by electricity provided by local utility
companies.


1Proven
reserves are determined through the testing of samples obtained from closely
spaced subsurface drilling and/or exposed pit faces. Proven reserves are
sufficiently understood so that quantity, quality, and engineering conditions
are known with sufficient accuracy to be mined without the need for any further
subsurface work. Actual required spacing is based on geologic judgment about the
predictability and continuity of each deposit.
 
 2Probable
reserves are determined through the testing of samples obtained from subsurface
drilling but the sample points are too widely spaced to allow detailed
prediction of quantity, quality, and engineering conditions. Additional
subsurface work may be needed prior to mining the
reserve.


13
 Table of Contents
 
 The
following tables present information about our quarry properties as of December
31, 2009:





Type
              
              Permitted
              
              Unpermitted
              
              Three-Year Annual
      AverageQuarry
      Properties
              Sand
      & Gravel
              Hard
      Rock
              
              Aggregate
      Reserves (tons)
              
              Aggregate
      Reserves (tons)
              
              Production
      Rate (tons)
              
              Average
      Reserve LifeOwned
      quarry properties
              31
              8
              
              416.0 million
              
              540.0 million
              
              8.0 million
              
              47 yearsLeased
      quarry properties1
              35
              16
              
              336.3 million
              
              644.0 million
              
              7.9 million
              
              33 years


1Our leases have expiration dates which range from 5 to 50 years
with most including an option to renew.
 
 
 Permitted
      Reserves
                    for
      Each Product Type (tons)
                  
                  
                  Percentage
      of Permitted Reserves Owned and LeasedState
                  
                  Number
      of Properties
                  
                  
                  Sand
      & Gravel
                  
                  
                  Hard
      Rock
                  
                  
                  Owned
                  
                  
                  LeasedCalifornia
                  
                  
                  49
                  
                  
                  
                  210.6
      million
                  
                  
                  
                  264.2
      million
                  
                  
                  
                  51
                  %
                  
                  
                  49
                  %Non-California
                  
                  
                  41
                  
                  
                  
                  184.2 million
                  
                  
                  
                  93.3 million
                  
                  
                  
                  63
                  %
                  
                  
                  37
                  %
 
 Plant
Properties
 
 We
operate plants at our quarry sites to process aggregates into construction
materials. Some of our quarry sites may have more than one crushing, concrete or
asphalt processing plant. At December 31, 2009 and
2008, we owned the following plants:
  December
      31,
                        
                        
                        2009
                        
                        
                        2008Aggregate
      crushing plants
                        
                        
                        52
                        
                        
                        54Asphalt
      concrete plants
                        
                        
                        69
                        
                        
                        68Portland
      cement concrete batch plants
                        
                        
                        22
                        
                        
                        24Asphalt
      rubber plants
                        
                        
                        5
                        
                        
                        5Lime
      slurry plants
                        
                        
                        9
                        
                        
                        9
 Other Properties
 
 The
following table provides our estimate of certain information about other
properties as of December 31, 2009:
  Land
      Area (acres)
                              Building
      Square FeetOffice
      and shop space (owned and leased)
                              1,200
                              1,100,000Real
      estate held for development and sale and use
                              3,600
                              108,000
  Granite
West uses approximately 86% of our office and shop space with the
remainder being primarily utilized by Granite East.


14
 Table of Contents




Item 3.
LEGAL PROCEEDINGS




Silica
Litigation


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


Hiawatha
Project DBE Issues


The
Hiawatha Light Rail Transit (“HLRT”) project was performed by Minnesota Transit
Constructors (“MnTC”), a joint venture that consisted of GCCO and other
unrelated companies. GCCO was the managing partner of the joint venture,
with a 56.5% interest. The Minnesota Department of Transportation (“MnDOT”)
is the contracting agency for this federally funded project. The
Metropolitan Council is the local agency conduit for providing federal funds to
MnDOT for the HLRT project. MnDOT and the U.S. Department of Transportation
Office of Inspector General (“OIG”) each conducted a review of the Disadvantaged
Business Enterprise (“DBE”) program maintained by MnTC for the HLRT
project. In addition, the U.S. Department of Justice (“USDOJ”) is
conducting an investigation into compliance issues with respect to MnTC’s DBE
Program for the HLRT project. MnDOT and the OIG (collectively, the
“Agencies”) have initially identified certain compliance issues in connection
with MnTC’s DBE Program and, as a result, have determined that MnTC failed to
meet the DBE utilization criteria as represented by MnTC. Although there
has been no formal administrative subpoena issued, nor has a civil complaint
been filed in connection with the administrative reviews or the investigation,
MnDOT has proposed a monetary sanction of $4.3 million against MnTC and
specified DBE training for personnel from the members of the MnTC joint venture
as a condition of awarding future projects to joint venture members of MnTC on
MnDOT and Metropolitan Council work. MnTC is fully cooperating with the
Agencies and the USDOJ and has presented its detailed written responses to
the initial determinations of the Agencies as well as the investigation by the
USDOJ. On September 17, 2009, the USDOJ replied to MnTC’s
responses. MnTC and the USDOJ are continuing to engage in informal
discussions in an attempt to resolve this matter. Such discussions, if
successful, are expected to include resolution of issues with the USDOT and with
the state agencies. We cannot, however, rule out the possibility of civil
or criminal actions being brought against MnTC or one or more of its members
which could result in civil and criminal penalties.


US
Highway 20 Project


GCCO and
our wholly-owned subsidiary, Granite Northwest, Inc. are the members of a joint
venture known as Yaquina River Constructors (“YRC”) which is currently
constructing a new road alignment of US Highway 20 near Eddyville, Oregon under
contract with the Oregon Department of Transportation (“ODOT”). The project
involves constructing seven miles of new road through steep and forested terrain
in the Coast Range Mountains. During the fall and winter of 2006,
extraordinary rain events produced runoff that overwhelmed erosion control
measures installed at the project and resulted in discharges to surface water in
alleged violations of YRC’s stormwater permit. In June 2009, YRC was
informed that the USDOJ had assumed the criminal investigation that
the Oregon Department of Justice had previously been conducting in connection
with stormwater runoff from the project. YRC and its members are fully
cooperating in the investigation.  We do not know whether any criminal
charges or civil lawsuits 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.




15
 Table of Contents




City
of San Diego Fire Debris Cleanup


In the
aftermath of the 2007 San Diego County wildfires, GCCO bid for and was awarded a
fixed unit price, variable quantity contract with the City of San Diego (the
“City”) to perform specified debris cleanup work. GCCO began work in
November 2007 and completed the work in April 2008. In August 2008, the City
announced that it would conduct an independent audit of the project. In
December 2008, the City’s audit report was released with findings that, while
some GCCO billings contained mistakes, rates paid to GCCO appear to be generally
reasonable. GCCO has reimbursed the City for 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 another 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 City Attorney agreed to stay the
lawsuit in order to allow the City Attorney time to complete its investigation.
The stay expired in January 2010, and the parties have agreed to jointly request
a further stay. GCCO believes the allegations in the City’s complaint to be
without factual or legal basis and, therefore, the City’s entitlement to relief
sought under the California False Claims Act is remote.
  Grand
Avenue Project DBE Issues


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




Other
Legal Proceedings/Government Inquiries


We are a
party to a number of other legal proceedings arising in the normal course of
business. From time to time, we also receive inquiries from public agencies
seeking information concerning our compliance with government construction
contracting requirements and related laws and regulations. We believe that the
nature and number of these proceedings and compliance inquiries are typical for
a construction firm of our size and scope. Our litigation typically involves
claims regarding public liability or contract related issues. While management
currently believes, after consultation with counsel, that the ultimate outcome
of pending proceedings and compliance inquiries, individually and in the
aggregate, will not have a material adverse affect 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 affect on our 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 be resolved through settlement is neither predictable nor
guaranteed.


16
 Table of Contents





Item 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY
HOLDERS




During
the fourth quarter of 2009, no matter was submitted to a vote of security
holders through the solicitation of proxies or otherwise.




Executive
Officers of the Registrant




Our
current executive officers are as follows:




Name
                  Age
                  PositionWilliam
      G. Dorey
                  65
                  President,
      Chief Executive Officer and DirectorJames
      H. Roberts
                  53
                  Executive
      Vice President and Chief Operating OfficerLeAnne
      M. Stewart
                  45
                  Senior
      Vice President and Chief Financial OfficerMichael
      F. Donnino
                  55
                  Senior
      Vice President and GroupManagerJohn
      A. Franich
                  53
                  Vice
      President and Group ManagerThomas
      S. Case
                  47
                  Vice
      President and Group
Manager




Granite
Construction Incorporated was incorporated in Delaware in January 1990 as the
holding company for Granite Construction Company, which was incorporated in
California in 1922. All dates of service for our executive officers include the
periods in which they served for Granite Construction Company.




Mr. Dorey
has been an employee of Granite since 1968 and has served in various capacities,
including Chief Executive Officer since January 2004 and President since
February 2003. He also served as Chief Operating Officer from May 1998 to
January 2004, Executive Vice President from November 1998 to February 2003,
Senior Vice President from 1990 to 1998, Branch Division Manager from 1987 to
1998, and Vice President and Branch Division Assistant Manager from 1983 to
1987. Mr. Dorey has also served as a member of our Board of Directors since
January 2004. He received a B.S. degree in Construction Engineering from Arizona
State University in 1967.


Mr. Roberts
joined Granite in 1981 and has served in various capacities, including Executive
Vice President and Chief Operating Officer since September 2009, Senior Vice
President from May 2004 to September 2009, Granite West Manager from February
2007 to September 2009, Branch Division Manager from May 2004 to February 2007,
Vice President and Assistant Branch Division Manager from 1999 to 2004, and
Regional Manager of Nevada and Utah Operations from 1995 to 1999. He received a
B.S.C.E. in 1979 and an M.S.C.E. in 1980 from the University of California,
Berkeley, and an M.B.A. from the University of Southern California in 1981. He
also completed the Stanford Executive Program in 2009.
  Ms.
Stewart has been a Senior Vice President of Granite since February 2008. In June
2008, she was appointed Chief Financial Officer. Prior to joining Granite, Ms.
Stewart was employed by Nash Finch Company as Senior Vice President
and Chief Financial Officer from October 2004 to January 2007 and as Vice
President andCorporate Controller from April 2000 to October 2004. She has served on
the Board of Trustees of the College of St. Benedict since 1995. Ms. Stewart
became a Certified Public Accountant in 1987, received a B.A. in Accounting from
the College of St. Benedict in 1987 and an M.B.A. from the Wharton School at the
University of Pennsylvania in 1997.
  Mr.
Donnino joined Granite in 1977 and has served as Senior Vice President and Group
Manager since January 2010, Senior Vice President since January 2005, Manager of
Granite East since February 2007, and Heavy Construction Division Manager from
January 2005 to February 2007. He served as Vice President and Heavy
Construction Division Assistant Manager during 2004, Texas Regional Manager from
2000 to 2003 and Dallas Estimating Office Area Manager from 1991 to 2000. Mr.
Donnino received a B.S.C.E. in Structural, Water and Soils Engineering from the
University of Minnesota in 1976.


Mr.
Franich joined Granite in 2005 and has served as Vice President and Group
Manager since January 2010, Vice President and Granite West Manager of
Construction from February 2007 to December 2009, and Vice President, Branch
Division Construction Manager from January 2005 through January 2007. Prior to
joining Granite in 2005, Mr. Franich has held various positions in the
construction industry since 1979 and was formerly the President of Associated
General Contractors of California. Mr. Franich received a B.S. in Business
Administration (Finance) from California State University, Chico in
1979.
 
 Mr. Case
has been an employee of Granite since 1987 and has been Vice President and Group
Manager since January 2010. He also served as Southwest Operating Group Manager
from March 2007 to December 2009, Utah Operations Branch Manager
from August 2001 through March 2007, Utah Operations Construction
Manager during 2001, Utah Operations Materials Manager between 1996 and 2000,
and in various positions at Granite’s Nevada and Santa Barbara, California
operations between 1986 and 1996. Mr. Case received a B.S. degree in
Construction Management from California Polytechnic State University in
1986.


17
 Table of Contents




PART II




Item 5. MARKET FOR REGISTRANT’S COMMON EQUITY, RELATED STOCKHOLDER
MATTERS AND ISSUER PURCHASES OF EQUITY SECURITIES




Our
common stock trades on the New York Stock Exchange under the ticker symbol GVA.


As of
February 12, 2010, there were 38,629,378shares of our common stock outstanding held
by 1,529 shareholders of record.




We have
paid quarterly cash dividends since the second quarter of 1990, and
we expect to continue to do so. However, declaration and payment of
dividends is within the sole discretion of our Board of Directors, subject to
limitations imposed by Delaware law and compliance with our credit agreements,
and will depend on our earnings, capital requirements, financial condition and
such other factors as the Board of Directors deems relevant.




Market
      Price and Dividends of Common Stock2009
      Quarters Ended
                                                                                                                                                
                                                                                                                                                December
      31,
                                                                                                                                                
                                                                                                                                                
                                                                                                                                                September
      30,
                                                                                                                                                
                                                                                                                                                
                                                                                                                                                June 30,
                                                                                                                                                
                                                                                                                                                
                                                                                                                                                March 31,High
                                                                                                                                                
                                                                                                                                                $
                                                                                                                                                34.58
                                                                                                                                                
                                                                                                                                                
                                                                                                                                                $
                                                                                                                                                36.39
                                                                                                                                                
                                                                                                                                                
                                                                                                                                                $
                                                                                                                                                45.94
                                                                                                                                                
                                                                                                                                                
                                                                                                                                                $
                                                                                                                                                45.82Low
                                                                                                                                                
                                                                                                                                                $
                                                                                                                                                27.14
                                                                                                                                                
                                                                                                                                                
                                                                                                                                                $
                                                                                                                                                29.41
                                                                                                                                                
                                                                                                                                                
                                                                                                                                                $
                                                                                                                                                32.29
                                                                                                                                                
                                                                                                                                                
                                                                                                                                                $
                                                                                                                                                30.14Dividends
      per share
                                                                                                                                                
                                                                                                                                                $
                                                                                                                                                0.13
                                                                                                                                                
                                                                                                                                                
                                                                                                                                                $
                                                                                                                                                0.13
                                                                                                                                                
                                                                                                                                                
                                                                                                                                                $
                                                                                                                                                0.13
                                                                                                                                                
                                                                                                                                                
                                                                                                                                                $
                                                                                                                                                0.132008
      Quarters Ended
                                                                                                                                                
                                                                                                                                                December
      31,
                                                                                                                                                
                                                                                                                                                September
      30,
                                                                                                                                                
                                                                                                                                                
                                                                                                                                                
                                                                                                                                                June
      30,
                                                                                                                                                
                                                                                                                                                
                                                                                                                                                
                                                                                                                                                March
      31,High
                                                                                                                                                
                                                                                                                                                $
                                                                                                                                                50.00
                                                                                                                                                
                                                                                                                                                
                                                                                                                                                $
                                                                                                                                                42.24
                                                                                                                                                
                                                                                                                                                
                                                                                                                                                $
                                                                                                                                                37.79
                                                                                                                                                
                                                                                                                                                
                                                                                                                                                $
                                                                                                                                                39.84Low
                                                                                                                                                
                                                                                                                                                $
                                                                                                                                                21.20
                                                                                                                                                
                                                                                                                                                
                                                                                                                                                $
                                                                                                                                                30.22
                                                                                                                                                
                                                                                                                                                
                                                                                                                                                $
                                                                                                                                                29.19
                                                                                                                                                
                                                                                                                                                
                                                                                                                                                $
                                                                                                                                                26.64Dividends
      per share
                                                                                                                                                
                                                                                                                                                $
                                                                                                                                                0.13
                                                                                                                                                
                                                                                                                                                
                                                                                                                                                $
                                                                                                                                                0.13
                                                                                                                                                
                                                                                                                                                
                                                                                                                                                $
                                                                                                                                                0.13
                                                                                                                                                
                                                                                                                                                
                                                                                                                                                $
                                                                                                                                                0.13
  During
the three months ended December 31, 2009, we did not sell any of our equity
securities that were not registered under the Securities Act of 1933, as
amended. The following table sets forth information regarding the repurchase of
shares of our common stock during the three months ended December 31,
2009:
  Period
                                                                    
                                                                    Total Number
      of Shares Purchased1
                                                                    
                                                                    
                                                                    Average
      Price Paid per Share
                                                                    
                                                                    
                                                                    Total Number of Shares Purchased as Part of
      PubliclyAnnounced Plans or
      Programs
                                                                    
                                                                    
                                                                    Approximate
      Dollar Value of Shares that May yet be PurchasedUnder the Plans or Programs2October
      1 through October 31, 2009
                                                                    
                                                                    
                                                                    479
                                                                    
                                                                    
                                                                    $
                                                                    29.52
                                                                    
                                                                    
                                                                    
                                                                    -
                                                                    
                                                                    
                                                                    $
                                                                    64,065,401November
      1 through November 30, 2009
                                                                    
                                                                    
                                                                    89
                                                                    
                                                                    
                                                                    $
                                                                    31.35
                                                                    
                                                                    
                                                                    
                                                                    -
                                                                    
                                                                    
                                                                    $
                                                                    64,065,401December 1 through
      December 31, 2009
                                                                    
                                                                    
                                                                    14,846
                                                                    
                                                                    
                                                                    $
                                                                    29.97
                                                                    
                                                                    
                                                                    
                                                                    -
                                                                    
                                                                    
                                                                    $
                                                                    64,065,401Total
                                                                    
                                                                    
                                                                    15,414
                                                                    
                                                                    
                                                                    $
                                                                    29.97
                                                                    
                                                                    
                                                                    
                                                                    -
 1The
number of shares purchased is in connection with employee tax withholding
for shares granted under our Amended and Restated 1999 Equity Incentive
Plan.
 2 In October 2007, our Board
of Directors authorized us to repurchase, at management’s discretion, up to
$200.0 million of our common stock. Under this repurchase program, the Company may
repurchase shares from time to time on the open market or in private
transactions. The specific timing and amount of repurchases will vary based on
market conditions, securities law limitations and other factors. The share
repurchase program may be
suspended or
discontinued at any time without prior notice


18
 Table of Contents




Performance
Graph




The graph
below compares Granite Construction Incorporated’s cumulative 5-year total
shareholder return on common stock with the cumulative total returns of the
S&P 500 index and the Dow Jones U.S. Heavy Construction index. The Dow Jones
U.S. Heavy Construction index includes the following companies: EMCOR Group
Inc., Fluor Corp., Foster Wheeler Ltd., Granite Construction Inc., Insituform
Technologies Inc., Jacobs Engineering Group Inc., KBR Inc., McDermott
International Inc., Quanta Services Inc. and Shaw Group Inc. The graph tracks
the performance of a $100
investment in our common stock and in each of the indexes (with reinvestment of
all dividends) from December 31, 2004 to December 31,
2009.








2004
                        
                        
                        2005
                        
                        
                        2006
                        
                        
                        2007
                        
                        
                        2008
                        
                        
                        2009Granite
      Construction Incorporated
                        
                        $
                        100.00
                        
                        
                        $
                        136.76
                        
                        
                        $
                        193.23
                        
                        
                        $
                        140.14
                        
                        
                        $
                        172.69
                        
                        
                        $
                        134.32S&P
      500
                        
                        
                        100.00
                        
                        
                        
                        104.91
                        
                        
                        
                        121.48
                        
                        
                        
                        128.16
                        
                        
                        
                        80.74
                        
                        
                        
                        102.11Dow
      Jones U.S. Heavy Construction
                        
                        
                        100.00
                        
                        
                        
                        144.50
                        
                        
                        
                        180.25
                        
                        
                        
                        342.40
                        
                        
                        
                        153.66
                        
                        
                        
                        175.65


19
 Table of Contents





Item 6. SELECTED FINANCIAL DATA




The
selected consolidated operations data for 2009, 2008 and 2007 and consolidated
balance sheet data as of December 31, 2009 and 2008 set forth below have
been derived from our audited consolidated financial statements included herein,
and are qualified by reference to those consolidated financial statements. The
selected consolidated operations data for 2006 and 2005 and the
consolidated balance sheet data as of December 31, 2007, 2006 and 2005 have
been derived from our audited consolidated financial statements not included
herein. These historical results are not necessarily indicative of the results
of operations to be expected for any future period.




Selected
      Consolidated Financial DataYears
      Ended December 31,
                                            
                                            2009
                                            
                                            
                                            2008
                                            
                                            
                                            2007
                                            
                                            
                                            2006
                                            
                                            
                                            
                                            2005Operating
      Summary
                                            (Dollars
      In Thousands, Except Per Share Data)Revenue
                                            
                                            $
                                            1,963,479
                                            
                                            
                                            $
                                            2,674,244
                                            
                                            
                                            $
                                            2,737,914
                                            
                                            
                                            $
                                            2,969,604
                                            
                                            
                                            $
                                            2,641,352Gross
      profit
                                            
                                            
                                            346,373
                                            
                                            
                                            
                                            468,720
                                            
                                            
                                            
                                            410,744
                                            
                                            
                                            
                                            295,720
                                            
                                            
                                            
                                            319,372As
      a percent of revenue
                                            
                                            
                                            17.6
                                            %
                                            
                                            
                                            17.5
                                            %
                                            
                                            
                                            15.0
                                            %
                                            
                                            
                                            10.0
                                            %
                                            
                                            
                                            12.1
                                            %General
      and administrative expenses
                                            
                                            
                                            224,910
                                            
                                            
                                            
                                            257,532
                                            
                                            
                                            
                                            246,202
                                            
                                            
                                            
                                            199,481
                                            
                                            
                                            
                                            192,692As
      a percent of revenue
                                            
                                            
                                            11.5
                                            %
                                            
                                            
                                            9.6
                                            %
                                            
                                            
                                            9.0
                                            %
                                            
                                            
                                            6.7
                                            %
                                            
                                            
                                            7.3
                                            %Restructuring
      charges1
                                            
                                            
                                            9,453
                                            
                                            
                                            
                                            -
                                            
                                            
                                            
                                            -
                                            
                                            
                                            
                                            -
                                            
                                            
                                            
                                            -Goodwill
      impairment charge2
                                            
                                            
                                            -
                                            
                                            
                                            
                                            -
                                            
                                            
                                            
                                            -
                                            
                                            
                                            
                                            18,011
                                            
                                            
                                            
                                            -Net
      income
                                            
                                            
                                            100,201
                                            
                                            
                                            
                                            165,738
                                            
                                            
                                            
                                            132,924
                                            
                                            
                                            
                                            74,339
                                            
                                            
                                            
                                            100,898Amount
      attributable to noncontrolling interests3
                                            
                                            
                                            (26,701
                                            )
                                            
                                            
                                            (43,334
                                            )
                                            
                                            
                                            (20,859
                                            )
                                            
                                            
                                            6,170
                                            
                                            
                                            
                                            (17,748
                                            )Net
      income attributable to Granite
                                            
                                            
                                            73,500
                                            
                                            
                                            
                                            122,404
                                            
                                            
                                            
                                            112,065
                                            
                                            
                                            
                                            80,509
                                            
                                            
                                            
                                            83,150As
      a percent of revenue
                                            
                                            
                                            3.7
                                            %
                                            
                                            
                                            4.6
                                            %
                                            
                                            
                                            4.1
                                            %
                                            
                                            
                                            2.7
                                            %
                                            
                                            
                                            3.1
                                            %Net
      income per share attributable to common
                                                shareholders4:Basic
                                            
                                            $
                                            1.91
                                            
                                            
                                            $
                                            3.19
                                            
                                            
                                            $
                                            2.69
                                            
                                            
                                            $
                                            1.93
                                            
                                            
                                            $
                                            2.00Diluted
                                            
                                            
                                            1.90
                                            
                                            
                                            
                                            3.18
                                            
                                            
                                            
                                            2.68
                                            
                                            
                                            
                                            1.92
                                            
                                            
                                            
                                            1.99Weighted
      average shares of common stock:Basic
                                            
                                            
                                            37,566
                                            
                                            
                                            
                                            37,606
                                            
                                            
                                            
                                            40,866
                                            
                                            
                                            
                                            40,874
                                            
                                            
                                            
                                            40,614Diluted
                                            
                                            
                                            37,683
                                            
                                            
                                            
                                            37,709
                                            
                                            
                                            
                                            40,909
                                            
                                            
                                            
                                            40,920
                                            
                                            
                                            
                                            40,684Consolidated
      Balance SheetTotal
      assets
                                            
                                            $
                                            1,709,575
                                            
                                            
                                            $
                                            1,743,455
                                            
                                            
                                            $
                                            1,786,418
                                            
                                            
                                            $
                                            1,632,838
                                            
                                            
                                            $
                                            1,472,230Cash,
      cash equivalents and marketable securities
                                            
                                            
                                            458,341
                                            
                                            
                                            
                                            520,402
                                            
                                            
                                            
                                            485,348
                                            
                                            
                                            
                                            394,878
                                            
                                            
                                            
                                            301,381Working
      capital
                                            
                                            
                                            500,605
                                            
                                            
                                            
                                            475,942
                                            
                                            
                                            
                                            397,568
                                            
                                            
                                            
                                            319,762
                                            
                                            
                                            
                                            367,801Current
      maturities of long-term debt
                                            
                                            
                                            58,978
                                            
                                            
                                            
                                            39,692
                                            
                                            
                                            
                                            28,696
                                            
                                            
                                            
                                            28,660
                                            
                                            
                                            
                                            26,888Long-term
      debt
                                            
                                            
                                            244,688
                                            
                                            
                                            
                                            250,687
                                            
                                            
                                            
                                            268,417
                                            
                                            
                                            
                                            78,576
                                            
                                            
                                            
                                            124,415Other
      long-term liabilities
                                            
                                            
                                            48,998
                                            
                                            
                                            
                                            43,604
                                            
                                            
                                            
                                            46,441
                                            
                                            
                                            
                                            58,419
                                            
                                            
                                            
                                            46,556Granite
      shareholders’ equity
                                            
                                            
                                            830,651
                                            
                                            
                                            
                                            767,509
                                            
                                            
                                            
                                            700,199
                                            
                                            
                                            
                                            694,544
                                            
                                            
                                            
                                            621,560Book
      value per share
                                            
                                            
                                            21.50
                                            
                                            
                                            
                                            20.06
                                            
                                            
                                            
                                            17.75
                                            
                                            
                                            
                                            16.60
                                            
                                            
                                            
                                            14.91Dividends
      per share
                                            
                                            
                                            0.52
                                            
                                            
                                            
                                            0.52
                                            
                                            
                                            
                                            0.43
                                            
                                            
                                            
                                            0.40
                                            
                                            
                                            
                                            0.40Common
      shares outstanding
                                            
                                            
                                            38,635
                                            
                                            
                                            
                                            38,267
                                            
                                            
                                            
                                            39,451
                                            
                                            
                                            
                                            41,834
                                            
                                            
                                            
                                            41,682Contract
      backlog
                                            
                                            $
                                            1,401,988
                                            
                                            
                                            $
                                            1,699,396
                                            
                                            
                                            $
                                            2,084,545
                                            
                                            
                                            $
                                            2,256,587
                                            
                                            
                                            $
                                            2,331,540




1During 2009, we recorded restructuring charges of
approximately $9.5 million as part of our
reorganization.


2In 2006, we recorded a goodwill impairment charge of
approximately $18.0 million related to our Granite Northeast operation in New
York.


3Effective January 1, 2009, we adopted a new accounting standard
requiring net income attributable to both the parent and noncontrolling
interests to be disclosed separately as well as the components of equity
attributable to the parent and noncontrolling interests. Prior years have
been adjusted to conform to this new
standard.


4Computed using the two-class method required by accounting
standards adopted January 1, 2009, which requires prior period per share data to
be restated retrospectively for comparability.




20
 Table of Contents




Item
7.MANAGEMENT’S
DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS




General




We are
one of the largest heavy civil contractors in the United States engaged in the
construction and improvement of streets, roads, highways, mass transit
facilities, airport infrastructure, bridges, dams and other
infrastructure-related projects. We produce construction materials through
the use of our aggregate reserves and plant facilities. We also operate a real
estate investment and development company on a significantly smaller scale. We
have three operating segments: Granite West, Granite East and Granite
Land Company (“GLC”). Our
offices are located in Alaska, Arizona, California, Florida, Nevada, New
York, Oregon, Texas, Utah and Washington.




Our
construction business has been organized into two geographic segments, Granite
West and Granite East. Included in our Granite West segment is our
vertically integrated construction materials business. The Company also has
a real estate investment and development business, Granite Land Company (“GLC”).
Our results of operations discussed herein have been reported with the segment
structure that was in place during 2009.  See Note 20 of “Notes to the
Consolidated Financial Statements” for additional information about our
operating segments.
  On August
31, 2009, we announced changes to our organizational structure designed to
improve operating efficiencies and position the Company for long-term
growth. In
conjunction with the reorganization we are changing our reportable segments to
reflect our business product lines. Beginning in fiscal 2010, the Company’s new
reportable segments are: Construction, Large Project Construction, Construction
Materials and Real Estate. The Real Estate segment will contain what was
previously known as Granite Land Company. We will continue to
provide geographic information within the new segment
structure.




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




The three
primary economic drivers of our business are (1) the overall health of the
economy, (2) federal, state and local public funding levels and (3) population
growth with the resulting private development. For example, a stagnant or
declining economy will generally result in 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 affect 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. Some funding sources that have been specifically
earmarked for infrastructure spending, such as diesel and gasoline taxes, are
not as directly affected by a stagnant or declining economy. However,
even these 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,
increased levels of 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 expenses 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 re-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).




21
 Table of Contents




Critical
Accounting Policies and Estimates




The
financial statements included in “Item 8. Financial Statements and Supplementary
Data” have been prepared in accordance with accounting principles generally
accepted in the United States of America (“U.S. GAAP”).  The
preparation of these financial statements requires management to make estimates
and assumptions that affect the reported amounts of assets and liabilities,
revenue and expenses, and related disclosure of contingent assets and
liabilities. Our estimates, judgments and assumptions are continually evaluated
based on available information and experiences; however, actual amounts could
differ from those estimates.
 
 Certain
of our accounting policies and estimates require higher degrees of judgment in
their application. These include the recognition of revenue and earnings from
construction contracts, the valuation of real estate held for
development and sale and insurance estimates. The Audit and Compliance
Committee of our Board of Directors has reviewed our
disclosure of critical accounting estimates.




Revenue
Recognition for Construction Contracts




Revenue
and earnings on construction contracts, including construction joint ventures,
are recognized under the percentage of completion method using the
ratio of costs incurred to estimated total costs. Revenue in an amount equal to
cost incurred is recognized prior to contracts reaching 25% completion,
thus deferring the related profit. It is our judgment that until a project
reaches 25% completion, there is insufficient information to determine the
estimated profit on the project with a reasonable level of certainty. In
the case of large, complex design/build projects we may defer profit recognition
beyond the point of 25% completion based on an evaluation of specific project
risks. The factors considered in this evaluation include the stage of design
completion, the stage of construction completion, status of outstanding purchase
orders and subcontracts, certainty of quantities of labor and materials,
and certainty of schedule and the relationship with the owner.




Revenue
from contract claims is recognized when we have a signed agreement and payment
is assured. Revenue from contract change orders, which occur in most large
projects, is recognized when the owner has agreed to the change order in
writing. Provisions are recognized in the consolidated statements of income
for the full amount of estimated losses on uncompleted contracts whenever
evidence indicates that the estimated total cost of a contract exceeds its
estimated total revenue. All contract costs,
including those associated with claims and change orders, are recorded
as incurred and revisions to estimated total costs are reflected as
soon as the obligation to perform is determined. Contract cost consists of
direct costs on contracts, including labor and materials, amounts payable to
subcontractors, direct overhead costs and equipment expense (primarily
depreciation, fuel, maintenance and repairs).




The
accuracy of our revenue and profit recognition in a given period is dependent on
the accuracy of our estimates of the cost to complete each project. Cost
estimates for all of our significant projects use a highly detailed “bottom up”
approach and we believe our experience allows us to provide materially reliable
estimates. There are a number of factors that can contribute to changes in
estimates of contract cost and profitability. The most significant of these
include:





·
              the completeness and
      accuracy of the original
bid;
 ·
                costs associated
      with added scope changes;
 ·
                  extended overhead
      due to owner, weather and other delays;
 ·
                    subcontractor
      performance issues;
 ·
                    changes in
      productivity expectations;
 ·
                    site conditions that
      differ from those assumed in the original bid (to the extent contract
      remedies are unavailable);
 ·
                    the availability and
      skill level of workers in the geographic location of the project; and
 ·
                    a change in the
      availability and proximity of equipment and
    materials.
 
 The foregoing factors as
well as the stage of completion of contracts in process and the mix of contracts
at different margins may cause fluctuations in gross profit between periods.
Substantial changes in cost estimates, particularly in our larger, more
complex projects have had, and can in future periods have, a significant
effect on our profitability.




Our
contracts with our customers are primarily either “fixed unit price” or “fixed
price.” Under fixed unit price contracts, we are committed to provide materials
or services required by a project at fixed unit prices (for example, dollars per
cubic yard of concrete poured or cubic yards of earth excavated). While the
fixed unit price contract shifts the risk of estimating the quantity of units
required for a particular project to the customer, any increase in our unit cost
over the expected unit cost in the bid, whether due to inflation, inefficiency,
faulty estimates or other factors, is borne by us unless otherwise provided in
the contract. Fixed price contracts are priced on a lump-sum basis under which
we bear the risk that we may not be able to perform all the work profitably for
the specified contract amount. The percentage of fixed price contracts in our
contract backlog increased from approximately 68.7% at December 31,
2008 to approximately 75.1% at December 31, 2009. All state and federal
government contracts and many of our other contracts provide for termination of
the contract at the convenience of the party contracting with us, with
provisions to pay us for work performed through the date of
termination.





22
 Table of Contents




Valuation of Real
Estate Held for Development andSale




We assess impairment of
our real estate held for development and sale at least annually or whenever
events or changes in circumstances indicate that carrying values of these
assets may not be recoverable. Events or changes in circumstances, which
could trigger an impairment review include, but are not limited
to:
 
 ·
              significant
      decreases in the market price of the
  asset;
 ·
                significant adverse
      changes in legal factors or the business
  climate;
 ·
                  accumulation of
      costs significantly in excess of the amount originally expected for the
      acquisition, development or construction of the asset;
      and
 ·
                    current period cash
      flow or operating losses combined with a history of losses, or a forecast
      of continuing losses associated with the use of the
      asset.
 
 If events and changes in
circumstances indicate that the carrying amounts of the real estate held for
development and sale might not be fully recoverable, we compare projected
undiscounted net cash flows associated with the related asset or group of assets
against their respective carrying amounts. Future undiscounted cash flows are
estimated based on entitlement status, market conditions, cost of construction,
debt load, development schedules, status of joint venture partners and other
factors applicable to the specific project. In the event that the
projected undiscounted cash flows are not sufficient to recover the carrying
value of the assets, the assets are written down to their estimated fair values.
Fair value is estimated based on the expected future cash flows
attributable to the asset or group of assets and on other assumptions
that market participants would use in determining fair value, such as market
discount rates, transaction prices for other comparable assets, and other market
data. Our
estimates of cash flows may differ from actual cash flows due to, among other
things, fluctuations in interest rates, decisions made by jurisdictional
agencies, economic conditions, or changes to our business
operations.
 
 In 2009 and 2008, we
recorded impairment charges of $1.7 million and $4.5 million,
respectively. The impairments were due to changes in sales and pricing
projections for three of our residential real estate investments that
reduced the estimated fair value of the assets below the carrying amounts. Given
the current economic environment surrounding real estate, we regularly evaluate
the recoverability of our real estate held for development and sale and have
determined that no further impairment loss was required.
A
continued decline in the residential and/or commercial real estate markets may
decrease the expected profitability for certain development activities to the
point we would be required to recognize additional impairments in the
future.
 Insurance
Estimates
  We carry
insurance policies to cover various risks, primarily general liability and
workers compensation, under which we are liable to reimburse the insurance
company for a portion of each claim paid. Payment for claim
amounts generally range from the first $0.5
million to $1.0 million per occurrence. We accrue for the
estimated ultimate liability for incurred losses, both reported and unreported,
using actuarial methods based on historic trends, modified, if necessary, by
recent events. Changes in our loss assumptions caused by changes in actual
experience would affect our assessment of
the ultimate liability and could have a material effect on our operating results
and financial position.
  23
 Table of Contents
  Current Economic Environment and
Outlook for 2010
 Challenging
market conditions negatively affected our overall revenue and contract backlog
in 2009. The continued weak residential and commercial development
markets significantly reduced demand for our construction materials and created
a highly competitive bidding environment for available public sector work. In
addition, the slow pace of the economic recovery has affected the financial
health of state and local agencies and ultimately the amount of work available
to bid.
  We
currently expect 2010 to be a challenging year for our business due to the
ongoing competitive climate and uncertainty surrounding both federal and state
funding. Despite an increase in contract backlog in Granite East, our contract
backlog in Granite West is substantially lower and includes projects with lower
projected gross profit margins than recent years. In response, we have reduced
our planned capital spending from recent levels and will continue to focus on
reducing our costs.
  Results of
Operations
 Comparative
      Financial SummaryYears
      Ended December 31,
                              
                              2009
                              
                              2008
                              
                              2007(in
      thousands)Total
      revenue
                              
                              $
                              1,963,479
                              
                              $
                              2,674,244
                              
                              $
                              2,737,914Gross
      profit
                              
                              
                              346,373
                              
                              
                              468,720
                              
                              
                              410,744Restructuring
      charges
                              
                              
                              9,453
                              
                              
                              -
                              
                              
                              -Operating
      income
                              
                              
                              129,179
                              
                              
                              216,691
                              
                              
                              174,885Other
      income
                              
                              
                              9,672
                              
                              
                              16,739
                              
                              
                              23,509Provision
      for income taxes
                              
                              
                              38,650
                              
                              
                              67,692
                              
                              
                              65,470Amount
      attributable to noncontrolling interests
                              
                              
                              (26,701
                              )
                              
                              (43,334
                              )
                              
                              (20,859
                              )Net
      income attributable to Granite
                              
                              
                              73,500
                              
                              
                              122,404
                              
                              
                              112,065
  Revenue
  Total
      RevenueYears
      Ended December 31,
                          
                          2009
                          
                          2008
                          
                          2007(in
      thousands)
                          
                          Amount
                          
                          Percent
                          
                          Amount
                          
                          Percent
                          
                          Amount
                          
                          PercentRevenue
      by Segment:Granite
      West
                          
                          $
                          1,411,016
                          
                          
                          71.9
                          
                          $
                          1,970,196
                          
                          
                          73.7
                          
                          $
                          1,928,751
                          
                          
                          70.4Granite
      East
                          
                          
                          550,189
                          
                          
                          28.0
                          
                          
                          695,035
                          
                          
                          26.0
                          
                          
                          768,451
                          
                          
                          28.1Granite
      Land Company
                          
                          
                          2,274
                          
                          
                          0.1
                          
                          
                          9,013
                          
                          
                          0.3
                          
                          
                          40,712
                          
                          
                          1.5Total
                          
                          $
                          1,963,479
                          
                          
                          100.0
                          
                          $
                          2,674,244
                          
                          
                          100.0
                          
                          $
                          2,737,914
                          
                          
                          100.0
 
 24
 Table of Contents
 
 Granite
      West RevenueYears
      Ended December 31,
                          
                          2009
                          
                          2008
                          
                          2007(in
      thousands)
                          
                          Amount
                          
                          Percent
                          
                          Amount
                          
                          Percent
                          
                          Amount
                          
                          PercentCalifornia:Public
      sector
                          
                          $
                          512,111
                          
                          
                          75.7
                          
                          $
                          697,551
                          
                          
                          67.8
                          
                          $
                          595,733
                          
                          
                          56.7Private
      sector
                          
                          
                          36,499
                          
                          
                          5.4
                          
                          
                          106,489
                          
                          
                          10.4
                          
                          
                          215,770
                          
                          
                          20.5Construction
      materials
                          
                          
                          127,649
                          
                          
                          18.9
                          
                          
                          224,736
                          
                          
                          21.8
                          
                          
                          239,660
                          
                          
                          22.8Total
                          
                          $
                          676,259
                          
                          
                          100.0
                          
                          $
                          1,028,776
                          
                          
                          100.0
                          
                          $
                          1,051,163
                          
                          
                          100.0West
      (excluding California):Public
      sector
                          
                          $
                          624,517
                          
                          
                          85.0
                          
                          $
                          721,922
                          
                          
                          76.7
                          
                          $
                          563,392
                          
                          
                          64.2Private
      sector
                          
                          
                          31,944
                          
                          
                          4.3
                          
                          
                          91,119
                          
                          
                          9.7
                          
                          
                          178,156
                          
                          
                          20.3Construction
      materials
                          
                          
                          78,296
                          
                          
                          10.7
                          
                          
                          128,379
                          
                          
                          13.6
                          
                          
                          136,040
                          
                          
                          15.5Total
                          
                          $
                          734,757
                          
                          
                          100.0
                          
                          $
                          941,420
                          
                          
                          100.0
                          
                          $
                          877,588
                          
                          
                          100.0Total
      Granite West:Public
      sector
                          
                          $
                          1,136,628
                          
                          
                          80.5
                          
                          $
                          1,419,473
                          
                          
                          72.0
                          
                          $
                          1,159,125
                          
                          
                          60.1Private
      sector
                          
                          
                          68,443
                          
                          
                          4.9
                          
                          
                          197,608
                          
                          
                          10.0
                          
                          
                          393,926
                          
                          
                          20.4Construction
      materials
                          
                          
                          205,945
                          
                          
                          14.6
                          
                          
                          353,115
                          
                          
                          18.0
                          
                          
                          375,700
                          
                          
                          19.5Total
                          
                          $
                          1,411,016
                          
                          
                          100.0
                          
                          $
                          1,970,196
                          
                          
                          100.0
                          
                          $
                          1,928,751
                          
                          
                          100.0
  Granite
West Revenue:Revenue
from Granite West for the year ended December 31, 2009 decreased by $559.2
million, or 28.4%, compared to the year ended December 31, 2008 as a result of
the economic downturn and decline in residential development in the
West. The decrease in revenue affected all sectors of our Granite West
segment. With less private work available, competition has
migrated into the public sector. In addition, lack of available private
sector work has reduced the demand for construction materials. There is
also less work available for bid in the public sector as a result of reduced
state and local government budgets.
 25
 Table of Contents
 
 Granite
      East RevenueYears
      Ended December 31,
                        
                        2009
                        
                        2008
                        
                        2007(in
      thousands)
                        
                        Amount
                        
                        Percent
                        
                        Amount
                        
                        Percent
                        
                        Amount
                        
                        PercentRevenue
      by Geographic Area:Midwest
                        
                        $
                        157,338
                        
                        
                        28.6
                        
                        $
                        175,763
                        
                        
                        25.3
                        
                        $
                        93,896
                        
                        
                        12.2Northeast
                        
                        
                        117,783
                        
                        
                        21.4
                        
                        
                        125,024
                        
                        
                        18.0
                        
                        
                        196,653
                        
                        
                        25.6South
                        
                        
                        95,612
                        
                        
                        17.4
                        
                        
                        128,454
                        
                        
                        18.5
                        
                        
                        125,164
                        
                        
                        16.3Southeast
                        
                        
                        178,467
                        
                        
                        32.4
                        
                        
                        221,167
                        
                        
                        31.8
                        
                        
                        299,084
                        
                        
                        38.9West
                        
                        
                        989
                        
                        
                        0.2
                        
                        
                        44,627
                        
                        
                        6.4
                        
                        
                        53,654
                        
                        
                        7.0Total
                        
                        $
                        550,189
                        
                        
                        100.0
                        
                        $
                        695,035
                        
                        
                        100.0
                        
                        $
                        768,451
                        
                        
                        100.0Revenue
      by Market Sector:Public
      sector
                        
                        $
                        544,719
                        
                        
                        99.0
                        
                        $
                        675,188
                        
                        
                        97.1
                        
                        $
                        747,580
                        
                        
                        97.3Private
      sector
                        
                        
                        5,470
                        
                        
                        1.0
                        
                        
                        19,847
                        
                        
                        2.9
                        
                        
                        20,871
                        
                        
                        2.7Total
                        
                        $
                        550,189
                        
                        
                        100.0
                        
                        $
                        695,035
                        
                        
                        100.0
                        
                        $
                        768,451
                        
                        
                        100.0
  Granite
East Revenue: Revenue
from Granite East for the year ended December 31, 2009 decreased
by $144.8 million, or 20.8%, compared to the year ended December 31,
2008. This
decrease was the result of an increased number of large projects nearing
completion in 2009 compared to 2008, the stage of a large project when
revenue recognition typically slows. Additionally, in
2009, delays in notices to proceed on three awarded projects
contributed to lower revenue. Included in Granite East revenue for the years
ended 2009 and 2008, were settlements of negotiated claims with contract owners
in the amounts of $16.0 million and $39.3 million, respectively, both of
which improved revenue.
  The
following table provides information about revenue from our large projects
for the years ended December 31, 2009, 2008 and 2007:
  Large
      Project RevenueYears
      Ended December 31,
                                                  
                                                  2009
                                                  
                                                  2008
                                                  
                                                  2007(dollars
      in thousands)Granite
      West
                                                  
                                                  $
                                                  142,555
                                                  
                                                  $
                                                  245,514
                                                  
                                                  $
                                                  160,232Number
      of projects1
                                                  
                                                  
                                                  6
                                                  
                                                  
                                                  8
                                                  
                                                  
                                                  6Granite
      East
                                                  
                                                  $
                                                  496,561
                                                  
                                                  $
                                                  621,215
                                                  
                                                  $
                                                  732,086Number
      of projects1
                                                  
                                                  
                                                  19
                                                  
                                                  
                                                  19
                                                  
                                                  
                                                  31Total
                                                  
                                                  $
                                                  639,116
                                                  
                                                  $
                                                  866,729
                                                  
                                                  $
                                                  892,318Number
      of projects1
                                                  
                                                  
                                                  25
                                                  
                                                  
                                                  27
                                                  
                                                  
                                                  37
 
 1Includes 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 year
ended December 31, 2009 decreased by $6.7 million, or 74.8%,
compared to the year ended December 31, 2008.GLC’s
revenues have been negatively impacted by the downturn in the real estate
market.
 26
 Table of Contents
 
 Contract
Backlog
  Our contract backlog is comprised of
the unearned revenue on awarded contracts that have not been completed,
including 100% of our consolidated joint ventures and our proportionate share of
unconsolidated joint venture contracts. We include a construction project in
our contract backlog at such time as a contract is awarded and funding is in
place, with the exception of certain federal government contracts for which
funding is appropriated on a periodic basis. Substantially all of the contracts
in our contract backlog may be canceled or modified at the election of the
customer; however, we have not been materially adversely affected by contract
cancellations or modifications in the past.
 
 The
following tables illustrate our contract backlog as of the respective
dates:
 Total
      Contract BacklogDecember
      31,
                        
                        2009
                        
                        2008(in
      thousands)
                        
                        Amount
                        
                        Percent
                        
                        Amount
                        
                        PercentContract
      Backlog by Segment:Granite
      West
                        
                        $
                        439,155
                        
                        
                        31.3
                        
                        $
                        788,872
                        
                        
                        46.4Granite
      East
                        
                        
                        962,833
                        
                        
                        68.7
                        
                        
                        910,524
                        
                        
                        53.6Total
                        
                        $
                        1,401,988
                        
                        
                        100.0
                        
                        $
                        1,699,396
                        
                        
                        100.0
  Granite
      West Contract BacklogDecember
      31,
                            
                            2009
                            
                            2008(in thousands)
                            
                            Amount
                            
                            Percent
                            
                            Amount
                            
                            PercentCalifornia:Public
      sector
                            
                            $
                            218,701
                            
                            
                            96.6
                            
                            $
                            430,421
                            
                            
                            94.8Private
      sector
                            
                            
                            7,608
                            
                            
                            3.4
                            
                            
                            23,841
                            
                            
                            5.2Total
                            
                            $
                            226,309
                            
                            
                            100.0
                            
                            $
                            454,262
                            
                            
                            100.0West
      (excluding California):Public
      sector
                            
                            $
                            208,215
                            
                            
                            97.8
                            
                            $
                            319,271
                            
                            
                            95.4Private
      sector
                            
                            
                            4,631
                            
                            
                            2.2
                            
                            
                            15,339
                            
                            
                            4.6Total
                            
                            $
                            212,846
                            
                            
                            100.0
                            
                            $
                            334,610
                            
                            
                            100.0Total
      Contract Backlog:Public
      sector
                            
                            $
                            426,916
                            
                            
                            97.2
                            
                            $
                            749,692
                            
                            
                            95.0Private
      sector
                            
                            
                            12,239
                            
                            
                            2.8
                            
                            
                            39,180
                            
                            
                            5.0Total
                            
                            $
                            439,155
                            
                            
                            100.0
                            
                            $
                            788,872
                            
                            
                            100.0
  Granite
WestContractBacklog:Granite West contract backlog of $439.2 million at December 31,
2009 was $349.7 million, or 44.3%, lower
than at December 31, 2008. The
decrease in contract backlog was due to a number of projects being completed
or nearing completion in 2009. Additionally, the current economic
climate and increased competition significantly reduced new awards in
contract backlog at December 31, 2009 relative to
2008.
 27
 Table of Contents
 Granite
      East Contract BacklogDecember
      31,
                          
                          2009
                          
                          2008(in
      thousands)
                          
                          Amount
                          
                          Percent
                          
                          Amount
                          
                          PercentContract
      Backlog by Geographic Area:Midwest
                          
                          $
                          13,604
                          
                          
                          1.4
                          
                          $
                          163,795
                          
                          
                          18.0Northeast
                          
                          
                          434,873
                          
                          
                          45.2
                          
                          
                          250,232
                          
                          
                          27.5South
                          
                          
                          78,285
                          
                          
                          8.1
                          
                          
                          91,720
                          
                          
                          10.0Southeast
                          
                          
                          434,343
                          
                          
                          45.1
                          
                          
                          402,062
                          
                          
                          44.2West
                          
                          
                          1,728
                          
                          
                          0.2
                          
                          
                          2,715
                          
                          
                          0.3Total
                          
                          $
                          962,833
                          
                          
                          100.0
                          
                          $
                          910,524
                          
                          
                          100.0
 Contract
      Backlog by Market Sector:Public
      sector
                                          
                                          $
                                          960,926
                                          
                                          
                                          99.8
                                          
                                          $
                                          906,470
                                          
                                          
                                          99.6Private
      sector
                                          
                                          
                                          1,907
                                          
                                          
                                          0.2
                                          
                                          
                                          4,054
                                          
                                          
                                          0.4Total
                                          
                                          $
                                          962,833
                                          
                                          
                                          100.0
                                          
                                          $
                                          910,524
                                          
                                          
                                          100.0
 Granite EastContractBacklog:Granite East contract backlog of $962.8 million at December 31,
2009 was $52.3 million, or 5.7%, higher than at December 31,
2008. The increase reflects new
projects awarded in 2009, including our portion of the work for the
expansion of Houston’s light rail project, as well as our participation in joint
ventures for a tunnel in New York City and a highway reconstruction project in
North Carolina. The decrease in contract backlog in the Midwest was due to the
substantial completion of a large design/build project in St. Louis, Missouri.
Not included in contract backlog is approximately $400.0
million associated with the Houston light rail project that will be booked
into contract backlog as additional notices to proceed are
received.
  28
 Table of Contents
  The following
tables provide additional information about our large project contract
backlog at December 31, 2009 and 2008:
  Large
      Project Contract BacklogDecember
      31,
                                        2009
                                        2008(dollars
      in thousands)Granite
      West
                                        
                                        $
                                        113,543
                                        
                                        $
                                        243,818Number of projects1
                                        
                                        
                                        4
                                        
                                        
                                        6Granite
      East
                                        
                                        $
                                        932,917
                                        
                                        $
                                        868,638Number
      of projects1
                                        
                                        
                                        15
                                        
                                        
                                        14Total
                                        
                                        $
                                        1,046,460
                                        
                                        $
                                        1,112,456Number
      of projects1
                                        
                                        
                                        19
                                        
                                        
                                        20
 
 Large
      Project Contract Backlog by Expected Profitability (dollars
      in thousands)December
      31, 2009
                                            
                                            Number
      of  Projects1
                                            Average
      Percent Complete
                                            
                                            Remaining
      Contract Backlog
                                            
                                            PercentProjects with
      Forecasted Loss:Granite
      West
                                            
                                            1
                                            
                                            68%
                                            
                                            
                                            $
                                            62,013
                                            
                                            5.9%Granite
      East
                                            
                                            5
                                            
                                            97%
                                            
                                            
                                            
                                            32,347
                                            
                                            3.1%Total
                                            
                                            6
                                            
                                            93%
                                            
                                            
                                            
                                            94,360
                                            
                                            9.0%Projects with
      Forecasted Profit:Granite
      West
                                            
                                            3
                                            
                                            90%
                                            
                                            
                                            
                                            51,531
                                            
                                            4.9%Granite
      East
                                            
                                            10
                                            
                                            66%
                                            
                                            
                                            
                                            900,569
                                            
                                            86.1%Total
                                            
                                            13
                                            
                                            70%
                                            
                                            
                                            
                                            952,100
                                            
                                            91.0%Total
                                            
                                            19
                                            
                                            
                                            
                                            
                                            $
                                            1,046,460
                                            
                                            100.0%
  December 31, 2008Projects with
      Forecasted Loss:Granite
      West
                                              
                                              1
                                              
                                              44%
                                              
                                              
                                              $
                                              104,428
                                              
                                              9.4%Granite
      East
                                              
                                              6
                                              
                                              95%
                                              
                                              
                                              
                                              66,670
                                              
                                              6.0%Total
                                              
                                              7
                                              
                                              89%
                                              
                                              
                                              
                                              171,098
                                              
                                              15.4%Projects with
      Forecasted Profit:Granite
      West
                                              
                                              5
                                              
                                              78%
                                              
                                              
                                              
                                              139,390
                                              
                                              12.5%Granite
      East
                                              
                                              8
                                              
                                              67%
                                              
                                              
                                              
                                              801,968
                                              
                                              72.1%Total
                                              
                                              13
                                              
                                              69%
                                              
                                              
                                              
                                              941,358
                                              
                                              84.6%Total
                                              
                                              20
                                              
                                              
                                              
                                              
                                              $
                                              1,112,456
                                              
                                              100.0%
  1 Includes only projects with total contract value
greater than $50.0 million and remaining contract backlog over $1.0 million.
  29
 Table of Contents
  Gross
Profit (Loss)
  The
following table presents gross profit (loss) by operating segment for the
respective periods:
  Gross
      Profit (Loss)Years
      Ended December 31,
                                                
                                                2009
                                                
                                                
                                                2008
                                                
                                                
                                                2007(in
      thousands)Granite
      West
                                                
                                                $
                                                236,868
                                                
                                                
                                                $
                                                348,818
                                                
                                                
                                                $
                                                369,080Percent
      of segment revenue
                                                
                                                
                                                16.8
                                                
                                                %
                                                
                                                17.7
                                                
                                                %
                                                
                                                19.1
                                                
                                                %Granite
      East
                                                
                                                $
                                                110,823
                                                
                                                
                                                $
                                                121,425
                                                
                                                
                                                $
                                                25,824Percent
      of segment revenue
                                                
                                                
                                                20.1
                                                
                                                %
                                                
                                                17.5
                                                
                                                %
                                                
                                                3.4
                                                
                                                %Granite
      Land Company
                                                
                                                $
                                                (1,318
                                                )
                                                
                                                $
                                                (1,523
                                                )
                                                
                                                $
                                                15,840Percent
      of segment revenue
                                                
                                                
                                                (58.0
                                                )
                                                %
                                                
                                                (16.9
                                                )
                                                %
                                                
                                                38.9
                                                
                                                %Total
                                                
                                                $
                                                346,373
                                                
                                                
                                                $
                                                468,720
                                                
                                                
                                                $
                                                410,744Percent
      of total revenue
                                                
                                                
                                                17.6
                                                
                                                %
                                                
                                                17.5
                                                
                                                %
                                                
                                                15.0
                                                
                                                %
  Gross
Profit (Loss): We defer profit recognition until a project reaches
25% completion. In the case of large, complex design/build projects, we may
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 smaller projects
at various stages of completion in Granite West, this policy generally has a
lesser affect 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 from period to period 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 ProfitYears
      Ended December 31,
                                                  
                                                  2009
                                                  
                                                  
                                                  2008
                                                  
                                                  
                                                  2007(in
      thousands)Granite
      West
                                                  
                                                  $
                                                  5,664
                                                  
                                                  
                                                  $
                                                  24,148
                                                  
                                                  
                                                  $
                                                  43,590Granite
      East
                                                  
                                                  
                                                  63,098
                                                  
                                                  
                                                  
                                                  1,674
                                                  
                                                  
                                                  
                                                  131,694Total
      revenue from contracts with deferred profit
                                                  
                                                  $
                                                  68,762
                                                  
                                                  
                                                  $
                                                  25,822
                                                  
                                                  
                                                  $
                                                  175,284
  We do not
recognize revenue from contract claims until we have a signed agreement and
payment is assured, nor do we 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 costs are incurred and revisions to
estimated total costs are reflected as soon as the obligation to
perform is determined. 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.
  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.
 
 30
 Table of
Contents
  Granite West Gross
Profit:Granite West gross profit
in 2009 decreased
to $236.9 million, or 16.8%, from $348.8 million, or 17.7%, in
2008. Construction
gross profit as a percent of construction revenue remained relatively unchanged
at 18.5% and 18.9% for 2009 and 2008, respectively. Construction gross
profit marginswere
negatively affected by lower gross profit margins on projects bid in a more
competitive environment, offset by the positive effect of significant project
forecast changes of $44.6million for the year ended December 31, 2009 compared
with $44.5million
for the year ended December 31, 2008. These positive forecast changes were
due to change orders, resolution of issues with owners, projects nearing
completion and production efficiencies (see Note 2 of “Notes to
the Consolidated Financial Statements”).
  Construction
materials gross profit as a percent of material sales in 2009 decreased to 7.0%
from 11.9% in 2008.  Fixed plant costs together with
decreased sales contributed to lower gross
profit.
  Granite East Gross Profit:Granite East
gross profit in 2009 decreased to $110.8 million from $121.4 million in 2008.
Gross profit as a percent of revenue increased
to 20.1% in 2009 from 17.5% in 2008 as a result of improved margins. The increase was primarily
related to the resolution of project uncertainties on projects nearing
completion as well as improved project productivity. Gross profits in 2009 and
2008 were favorably affected by negotiated claims settlements with contract
owners for $18.3 million and $32.2 million, respectively. T he
positive effectof significant project
forecast changes was $59.5million for the year ended December 31, 2009 compared to $50.5million
for the year ended December 31, 2008. These positive forecast changes were due
to the resolution of project uncertainties, the settlement of outstanding
issues with various contract owners and improved productivity
on certain projects (see Note 2 of “Notes to the Consolidated
Financial Statements”).
  GLC Gross Loss: GLC recorded gross losses of $1.3
million and $1.5 million for the years ended December 31, 2009 and 2008,
respectively. These gross
losses included amounts attributable to noncontrolling interests of $2.5 million
in 2009 and $0.6 million in 2008.
  During 2009 and 2008, we recorded
impairment charges related to our real estate held for development and sale
of $1.7 million and $4.5 million, respectively. A
continued decline in the residential and/or commercial real estate markets may
decrease the expected profitability of certain development activities to the
point that we would be required to recognize additional valuation impairments in
the future.
  31
 Table of
Contents
 
 General
and Administrative Expenses
  The
following table presents the components of general and administrative
expenses for the respective periods:
  Years
      ended December 31,
                                      
                                      2009
                                      
                                      2008
                                      
                                      2007(in
      thousands)Salaries
      and related expenses
                                      
                                      $
                                      125,381
                                      
                                      $
                                      131,811
                                      
                                      $
                                      124,804Incentive
      compensation, discretionary profit sharing and other variable
      compensation
                                      
                                      
                                      34,602
                                      
                                      
                                      37,707
                                      
                                      
                                      37,745(Recovery
      of) provision for doubtful accounts, net
                                      
                                      
                                      (4,404
                                      )
                                      
                                      10,958
                                      
                                      
                                      3,894Other
      general and administrative expenses
                                      
                                      
                                      69,331
                                      
                                      
                                      77,056
                                      
                                      
                                      79,759Total
                                      
                                      $
                                      224,910
                                      
                                      $
                                      257,532
                                      
                                      $
                                      246,202Percent
      of revenue
                                      
                                      
                                      11.5
                                      %
                                      
                                      9.6
                                      %
                                      
                                      9.0
                                      %
  General
and administrative expenses for 2009 decreased $32.6 million, or
12.7%, compared to 2008 as we continue to reduce our overall cost
structure. Salaries and incentive compensation declined by $9.5 million, or
5.6%, compared to 2008 as a result of reduced headcount and lower incentive
compensation associated with lower profits in 2009. For 2009, our
provision for doubtful accounts was offset by the recovery of $4.6 million related
to one account with a real estate developer that had been reserved for in 2008.
  Other
general and administrative expenses include information technology, occupancy,
office supplies, depreciation, travel and entertainment, outside services,
marketing, training and other miscellaneous expenses, none of which individually
exceeded 10% of total general and administrative expenses. Approximately $5.3
million of the decrease in other general and administrative expenses in
2009 was due
to lower travel expenses, and a reduction in relocation and occupancy
costs.
 32
 Table of Contents
  Restructuring
Charges
  Years
      Ended December 31,
                                
                                2009
                                
                                2008
                                
                                2007(in
      thousands)Restructuring
      charges
                                
                                $
                                9,453
                                
                                $
                                -
                                
                                $
                                -
  During
2009, we recorded restructuring charges of approximately $9.5 million as part of
our reorganization .
Included in this amount was $7.0 million associated with a reduction
in force announced on October 1, 2009 and an impairment of $2.5 million
related to selected plant facilities in the Pacific Northwest. Of the total
charges, $3.0 million remains outstanding as of December 31, 2009. We estimate
annualized pre-tax savings associated with the personnel reduction to be
approximately $11.0 million.


Other
Income (Expense)
  The
following table presents the components of other income (expense) for the
respective periods:
  Years
      Ended December 31,
                              
                              2009
                              
                              2008
                              
                              2007(in
      thousands)Interest
      income
                              
                              $
                              5,049
                              
                              $
                              18,445
                              
                              $
                              26,925Interest
      expense
                              
                              
                              (15,756
                              )
                              
                              (16,001
                              )
                              
                              (6,367
                              )Acquisition
      expense
                              
                              
                              -
                              
                              
                              -
                              
                              
                              (7,752
                              )Equity
      in income (loss) of affiliates
                              
                              
                              7,696
                              
                              
                              (1,058
                              )
                              
                              5,205Other
      income, net
                              
                              
                              12,683
                              
                              
                              15,353
                              
                              
                              5,498Total
                              
                              $
                              9,672
                              
                              $
                              16,739
                              
                              $
                              23,509
  Interest income decreased $13.4
million, or 72.6%, in 2009 compared to 2008 as investment interest yields
on marketable securities were lower in 2009. The change in equity in income
(loss) of affiliates during 2009 was primarily due to an increase in income
earned on our investment in an entity that owns and operates an asphalt terminal
in Nevada, which is accounted for under the equity method. In 2009, other
income, net included a gain on the sale of gold, a by-product of our
aggregate mining operations, of $10.2 million and a gain on
assets held in the Rabbi Trust related to our Non-Qualified Deferred
Compensation Plan of $2.2 million. Other income, net, in 2008
included a $10.9 million loss on the sale of available-for-sale securities, a
$9.3 million gain on the sale of gold and a $14.4 million gain on the
sale of an investment in an affiliate.
 
   33
 Table of Contents
  Provision
for Income Taxes
  The
following table presents the provision for income taxes for the
respective periods:
  Years
      Ended December 31,
                        
                        2009
                        
                        2008
                        
                        2007(in
      thousands)Provision
      for income taxes
                        
                        $
                        38,650
                        
                        $
                        67,692
                        
                        $
                        65,470Effective
      tax rate
                        
                        
                        27.8
                        %
                        
                        29.0
                        %
                        
                        33.0
                        %
  Our effective tax rate
decreased to 27.8% in 2009 from 29.0% in 2008. The decrease was primarilydue to lower estimated state taxes in 2009, an increased benefit of
percentage depletion in 2009, and higher nontaxable gains from investments in
our company owned life insurance compared to the prior year.  The tax
benefit related to company owned life insurance is included in “Other” in the
reconciliation of the statutory-to-effective tax rate (See Note 17 of “Notes to
the Consolidated Financial Statements”). Our tax rate is also affected by
discrete items that may occur in any given year, but are not consistent from
year to year.  Noncontrolling interests are generally not subject to
income taxes on a stand-alone basis and are deducted from income before
provision for income taxes in arriving at our effective tax rate for the
year.
 Amount
Attributable to Noncontrolling Interests
  The
following table presents the amount attributable to noncontrolling
interests in consolidated subsidiaries for the respective
periods:
  Years
      Ended December 31,
                          
                          2009
                          
                          2008
                          
                          2007(in
      thousands)Amount
      attributable to noncontrolling interests
                          
                          $
                          (26,701
                          )
                          $
                          (43,334
                          )
                          $
                          (20,859
                          )
  The
amount attributable to the noncontrolling interests in consolidated subsidiaries
represents the noncontrolling owners’ share of the income or loss of our
consolidated construction joint ventures and real estate development
entities. Included
in amounts attributable to noncontrolling interests for the years ended
2009 and 2008 are noncontrolling owners’ share of settlements of claims with two
contract owners in the amounts of $1.0 million and $17.7 million,
respectively.
  34
 Table of Contents
 Prior
Years
  Revenue:Revenue
from Granite West for the year ended December 31, 2008 increased by $41.4
million, or 2.1%, compared with the year ended December 31, 2007. This increase
was due to an increase in public sector revenue of $260.3 million, or 22.5%,
offset by a decrease of $218.9 million, or 28.4%, in private sector and
materials revenues. The increase in public sector revenue was primarily
attributable to profitable progress toward completion of federally funded
security projects and the positive effect of the resolution of significant
uncertainties on certain projects. The decreases in private sector and materials
revenue were driven by the ongoing contraction of credit markets and residential
construction in all geographic areas in which Granite West operates.
  Revenue
from Granite East for the year ended December 31, 2008 decreased by $73.4
million, or 9.6%, compared with the year ended December 31, 2007. This
decrease was reflective, in part, of our plan to slow revenue growth in the
division over the last several years to focus on execution and improved
profitability. Geographically, the largest decreases were experienced in the
Southeast and Northeast due primarily to certain large projects nearing
completion. Increases in the Midwest and South resulted from revenue
contributions from progress on a large design/build project in St. Louis,
Missouri and project productivity on a bridge project in Mississippi,
respectively.
  Revenue
from GLC for the year ended December 31, 2008 decreased by $31.7 million, or
77.9%, compared to the year ended December 31, 2007. 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 had a direct affect on the anticipated timing of several GLC
development projects.
 Contract
Backlog:Granite
West contract backlog of $788.9 million at December 31, 2008 was $65.3 million,
or 7.6%, lower than at December 31, 2007. The reduction in contract backlog was
primarily a result of the ongoing contraction of residential construction and
credit markets. The reduced residential demand increased competition on public
sector work, as competitors migrated from the increasingly scarce private sector
work. Granite West project awards in the fourth quarter 2008 included a $44.0
million highway rehabilitation project in California and a $42.7 million highway
reconstruction project near the California-Nevada
border.
  Granite
East contract backlog of $910.5 million at December 31, 2008 was $319.9 million,
or 26.0%, lower than at December 31, 2007. The decrease reflected progress on
construction projects. Project awards during the year ended December 31,
2008 included a $33.8 million freeway project in Texas and a $161.4 million
transit project in New York. We received $37.9 million in awards from Houston
Metro for preliminary work and received $67.8 million in additional awards
related to our 20% share of a joint venture project to construct a
transportation hub at the World Trade Center in New York.
  35
 Table of Contents
  Gross
Profit (Loss):Granite
West gross profit as a percent of revenue for 2008 decreased to 17.7% from 19.1%
for 2007. The decrease was primarily due to significantly lower gross profit
margins on the sale of construction materials. Construction materials gross
profit as a percent of materials sales for 2008 decreased to 11.9% from 20.1%
for 2007. Construction materials margins were negatively affected by lower
demand from the private sector for our higher margin products, higher costs of
certain raw materials such as diesel fuel and liquid asphalt, and a write-down
of inventory due to production in excess of estimated foreseeable use.
Additionally, margins were negatively affected by the fixed costs of our plants
running at less than normal capacity. These decreases were partially offset by
the positive effect of significant project forecast changes of $44.5 million for
2008 compared with $7.8 million for 2007 (see Note 2 of “Notes to the
Consolidated Financial Statements”).
  Granite
East gross profit as a percent of revenue for 2008 increased to 17.5% from 3.4%
for 2007. The improved gross profit margin in 2008 was driven by favorable
project forecast changes, projects reaching the state of completion allowing
profit recognition, and the settlement of a significant claim associated with a
large design/build project nearing completion in southern California. The
positive effect of significant project forecast changes was $50.5 million for
the year ended December 31, 2008 compared with $0.4 million for the year ended
December 31, 2007 (see Note 2 of “Notes to the Consolidated Financial
Statements”).
  Included
in GLC’s cost of revenue for 2008 and 2007 were impairment charges of $4.5
million and $3.0 million, respectively, on residential development projects in
California. GLC’s gross loss in 2008 of $1.5 million and gross profit in 2007 of
$15.8 million included approximately $0.6 million and $8.8 million,
respectively, of amounts attributable to
noncontrolling partners.
  General
and Administrative Expenses:General
and administrative expenses increased by $11.3 million, or 4.6%, to $257.5
million in 2008 from $246.2 million in 2007. The change was due to
an increased allowance for doubtful accounts for Granite West,
approximately $3.0 million in severance costs associated with our voluntary
opt-out program and other reductions in force, as well as the full year effect
of, and integration costs associated with, businesses acquired in 2007. Other
general and administrative expenses include information technology, occupancy,
office supplies, depreciation, travel and entertainment, outside services,
marketing, training and other miscellaneous expenses, none of which individually
exceeded 10% of total general and administrative
expenses.
  Gain
on Sales of Property and Equipment:Gain on
sales of property and equipment decreased by $4.8 million, or 46.8%, for the
year ended December 31, 2008 compared with 2007.
  Other
Income (Expense):Interest
income decreased $8.5 million, or 31.5%, in 2008 compared with 2007 due to the
decline in short term interest rates on our invested balances. Interest expense
increased in 2008 compared to 2007 due primarily to an increase in the average
debt outstanding during the period. Acquisition expense in 2007 was associated
with the purchase of all remaining shares of Wilder Construction Company
(“Wilder”). We recorded equity in the loss of affiliates of $1.1 million during
2008 due primarily to losses associated with our investment in an asphalt
terminal in Nevada. In 2007, we recorded a gain of approximately $3.9 million on
the sale of a building by a partnership in which we had an equity method
investment. The increase in other income, net during 2008 was primarily related
to a gain of $14.4 million on the sale of an investment in an affiliate,
gains on the sale of gold of $9.3 million, and a gain of $1.2 million related to
a GLC extinguishment of debt. This increase was partially offset by a $10.9
million loss on the sale of available-for-sale securities. We sold these
securities as a result of changes in our investment policy and to maximize the
associated tax benefit.
  Provision
for Income Taxes:Our
effective tax rate decreased to 29.0% in 2008 from 33.0% in 2007. The decrease
was primarily due to increases in the estimated income attributable
to noncontrolling interests in our consolidated construction joint
ventures and other entities which are not subject to income taxes on a stand
alone basis.
 Amount
Attributable to Noncontrolling Interests:The
increase in noncontrolling interests in our consolidated subsidiaries for
the year ended December 31, 2008 compared to the prior year was largely
attributable to the continued progression and the effect of changes in estimates
related to certain consolidated joint venture projects for Granite East,
including $17.7 million for settlement of revenue issues on a large project
in southern California. In addition, the increase reflects the increased
profitability of joint venture work, an increase in the volume of joint venture
contracts and the size of our joint venture
projects.
 
 36
 Table of Contents
  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 acquire
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.
  December
      31,
                                                                                            
                                                                                            2009
                                                                                            
                                                                                            2008(in
      thousands)Cash
      and cash equivalents excluding consolidated joint
      ventures
                                                                                            
                                                                                            $
                                                                                            216,518
                                                                                            
                                                                                            $
                                                                                            339,842Consolidated
      joint venture cash and cash equivalents
                                                                                            
                                                                                            
                                                                                            122,438
                                                                                            
                                                                                            
                                                                                            121,001Total
      consolidated cash and cash equivalents
                                                                                            
                                                                                            
                                                                                            338,956
                                                                                            
                                                                                            
                                                                                            460,843Short-term
      and long-term marketable securities1
                                                                                            
                                                                                            
                                                                                            119,385
                                                                                            
                                                                                            
                                                                                            59,559Total
      cash, cash equivalents and marketable securities
                                                                                            
                                                                                            $
                                                                                            458,341
                                                                                            
                                                                                            $
                                                                                            520,402Working
      capital
                                                                                            
                                                                                            $
                                                                                            500,605
                                                                                            
                                                                                            $
                                                                                            475,942
  1See Note 3 of
“Notes to the Consolidated Financial Statements” for the composition of our
marketable securities.
  Our
primary sources of liquidity are cash and cash equivalents and short-term
marketable securities. Our cash and cash equivalents are comprised of
deposits held with established national financial institutions and money
market funds. Short-term marketable securities consist of municipal bonds,
commercial paper, and U.S. government and agency obligations. We also hold
long-term marketable securities consisting of municipal bonds and U.S.
government and agency obligations. Cash and cash equivalents held by our
consolidated joint ventures represents 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.
  37
 Table of Contents
  Cash
Flows
  Years
      Ended December 31,
                                                      
                                                      2009
                                                      
                                                      2008
                                                      
                                                      
                                                      2007(in
      thousands)Net
      cash provided by (used in):Operating
      activities
                                                      
                                                      $
                                                      64,301
                                                      
                                                      $
                                                      257,336
                                                      
                                                      $
                                                      234,788Investing
      activities
                                                      
                                                      
                                                      (129,879
                                                      )
                                                      
                                                      (18,257
                                                      )
                                                      
                                                      (166,744
                                                      )Financing
      activities
                                                      
                                                      
                                                      (56,309
                                                      )
                                                      
                                                      (130,670
                                                      )
                                                      
                                                      79,497Capital
      expenditures
                                                      
                                                      
                                                      87,645
                                                      
                                                      
                                                      94,135
                                                      
                                                      
                                                      118,612
 Cash
provided by operating activities decreased $193.0 million in 2009 compared to
2008. The decrease was primarily due to reduced revenues and the associated
negative effect on net income of $65.5 million. Receivables were $64.8
million lower consistent with the decline in revenues. Cash used for equity
in construction joint ventures increased $12.7 million due
to contributions to newly formed joint ventures associated with
2009 project awards. The $24.8 million increase in the use of
cash for billings in excess of cost was due to project progression.
  Cash used
in investing activities was $111.6 million higher in 2009 than in
2008. This change was primarily due to reduced proceeds
and increased purchases of marketable securities as we
moved from cash and cash equivalents to longer term investments in
2009.
 Cash used
in financing activities was $74.4 million lower than in 2008. The primary
driver of this change was a reduction in the purchase of our common stock
of $42.1 million. Additionally, distributions to
noncontrolling partners were $19.9 million lower.
 Capital
Expenditures
  During 2009, we had
capital expenditures of $87.6 million compared to $94.1 million during
2008. Major c apital expenditures are
typically for aggregate and asphalt production facilities, aggregate reserves,
construction equipment, buildings and leasehold improvements, and upgrades
to our information technology systems. 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. We currently anticipate
investing approximately $50.0 million in
2010.
 38
 Table of Contents
  Debt
and Contractual Obligations
  The
following table summarizes our significant obligations outstanding as of
December 31, 2009:
  Payments
      Due by Period(in
      thousands)
                                                
                                                Total
                                                
                                                Less
      than 1 year
                                                
                                                1-3
      years
                                                
                                                3-5
      years
                                                
                                                More
      than 5 yearsLong-term
      debt - principal
                                                
                                                $
                                                303,666
                                                
                                                $
                                                58,978
                                                
                                                $
                                                27,394
                                                
                                                $
                                                8,778
                                                
                                                $
                                                208,516Long-term
      debt - interest1
                                                
                                                
                                                108,978
                                                
                                                
                                                16,721
                                                
                                                
                                                28,204
                                                
                                                
                                                25,832
                                                
                                                
                                                38,221Operating
      leases2
                                                
                                                
                                                43,776
                                                
                                                
                                                9,225
                                                
                                                
                                                11,005
                                                
                                                
                                                6,189
                                                
                                                
                                                17,357Other
      purchase obligations3
                                                
                                                
                                                22,113
                                                
                                                
                                                11,340
                                                
                                                
                                                7,593
                                                
                                                
                                                3,180
                                                
                                                
                                                -Deferred
      compensation obligations4
                                                
                                                
                                                28,532
                                                
                                                
                                                3,938
                                                
                                                
                                                4,362
                                                
                                                
                                                3,026
                                                
                                                
                                                17,206Total
                                                
                                                $
                                                507,065
                                                
                                                $
                                                100,202
                                                
                                                $
                                                78,558
                                                
                                                $
                                                47,005
                                                
                                                $
                                                281,300
  1Included in the total is $6.4 million related to mortgages,
the terms of which include variable interest rates that range from 3.75% to
9.5%. The future payments were calculated using rates in effect as of December
31, 2009 and may differ from actual results.
 2These obligations
represent the minimum rental commitments and minimum royalty requirements under
all noncancellable operating leases. See Note 18 of “Notes to the
Consolidated Financial Statements”.
 3These
obligations represent firm purchase commitments for equipment and other goods
and services not connected with our construction contract backlog which are
individually greater than $10,000.
 4The timing
of expected payment of deferred compensation is based on estimated dates of
retirement. Actual dates of retirement could be different and would cause
the timing of payments to change.
 In
addition to the above, as of December 31, 2009, the
following obligations were excluded from the foregoing table:
 
 ·
                  approximately
      $5.9million
      associated with uncertain tax positions filed on our tax returns were
      excluded because we cannot estimate the timing of potential payments
      relative to such reserves;
 ·
                    asset retirement
      obligations of $19.7 million associated with our owned and leased quarry
      properties were excluded because they are performance
      obligations (see Note 8 of “Notes to the Consolidated Financial
      Statements”); and
 ·
                      purchase commitments
      for purchases of materials and subcontract services in the ordinary course
      of business related to our current contract backlog were excluded as
      they are generally settled in less than one year.
 39
 Table of Contents
 
 Bank
and Surety Credit Facilities
  We have a
$150.0 million bank revolving line of credit, which allows for unsecured
borrowings through June 24, 2011. Borrowings under the line of credit bear
interest at LIBOR plus an applicable margin based upon certain financial ratios
calculated quarterly. The margin was 0.80% at December 31, 2009. The unused and
available portion of this line of credit was $145.8 million at December 31,
2009. We had
standby letters of credit (“Letters”) totaling approximately $4.2 million
outstanding at December 31, 2009, all of which will expire
between March
2010 and October 2010. These Letters will be replaced 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 December 31, 2009, approximately $1.4 billion of our contract
backlog was bonded. Performance bonds do not have stated expiration dates;
rather, we are generally released from the bonds when the owner accepts the
contract. 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.
 
 A significant portion of
our real estate held for development and sale is secured by mortgages. These
mortgages are typically renegotiated to reflect the evolving nature of the real
estate projects as they progress through acquisition, entitlement and
development. Modification of mortgage terms may include changes in
loan-to-value ratios requiring GLC’s real estate entities to repay portions
of the debt. During 2009, we provided additional funding of $4.6 million to our
real estate investments to facilitate mortgage refinancing. As of
December 31, 2009, GLC mortgages were $63.5
million of which $44.0 million is included in current maturities of
long-term debt and $19.5 million is included in long-term debt on our
consolidated balance sheet.
 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
consolidated 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 December
31, 2009, we were in compliance with our debt covenants and our affiliates and
consolidated subsidiaries were current with their debt agreements. We are not
aware of any debt agreement non-compliance by our unconsolidated
entities as of December 31, 2009. Should we, our affiliates, consolidated
subsidiaries, or unconsolidated entities fail to comply with these covenants, or
should any other event of default occur, the 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 Program
  In 2007,
our Board of Directors authorized us to purchase, at management’s discretion, up
to $200.0 million of our common stock. During the year ended December
31, 2009, we did not purchase shares under the share purchase
program. From the inception of this program in 2007
through December 31, 2009, we have purchased a total of 3.8
million shares of our common stock for an aggregate price of $135.9
million. All shares were retired upon acquisition. At December
31, 2009, $64.1 million of the $200.0 million authorization was available for
additional share purchases.
 
 40
 Table of Contents
  Joint
Ventures; Off-Balance-Sheet Arrangements
  We
participate in various construction joint venture partnerships in order to share
expertise, risk and resources for certain highly complex projects. Generally,
each construction joint venture is formed to accomplish a specific project
and is jointly controlled by the joint venture partners. We select our
joint venture partners based on our analysis of their construction and financial
capabilities, expertise in the type of work to be performed and past working
relationships, among other criteria. The joint venture agreements typically
provide that our interests in any profits and assets, and our respective share
in any losses and liabilities that may result from the performance of the
contract are limited to our stated percentage interest in the
project.
  Under
each joint venture agreement, one partner is designated as the sponsor. The
sponsoring partner typically provides all administrative, accounting and most of
the project management support for the project and generally receives a fee from
the joint venture for these services. We have been designated as the sponsoring
partner in certain of our current joint venture projects and are a
non-sponsoring partner in others.
  We also
participate in various “line item” joint venture agreements under which each
partner is responsible for performing certain discrete items of the total scope
of contracted work. The revenue for these discrete items is defined in the
contract with the project owner and each venture partner bears the profitability
risk associated with its own work. 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.
  The
venture’s contract with the project owner typically requires joint and several
liability among the joint venture partners. Although our agreements with our
joint venture partners for both construction joint ventures and line item joint
ventures provide that each party will assume and fund its share of any losses
resulting from a project, if one of our partners was 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 these guarantee arrangements include a partner’s
inability to contribute additional funds to the venture in the event that the
project incurred a loss or additional costs that we could incur should the
partner fail to provide the services and resources toward project completion
that had been committed to in the joint venture agreement.
  At December 31, 2009,
we had approximately $1.5 billion of construction work to be completed on
unconsolidated construction joint venture contracts of which $562.2 million
represented our portion and the remaining $915.4 million
represented our partners’ proportionate share. Due to the joint and several
liability under our joint venture arrangements, if one of our many joint
venture partners fails to perform, we and the remaining joint venture partners,
would be responsible for completion of the outstanding work. As of December 31, 2009,
we are not aware of situations that would require us to fulfill responsibilities
of our joint venture partners pursuant to the joint and several liability under
our contracts.
  Recently
Issued Accounting Pronouncements
  Consolidation
of Variable Interest Entities
 In June
2009, the Financial Accounting Standards Board (“FASB”) issued a new standard
requiring ongoing analysis to determine whether a company holds a controlling
financial interest in a variable interest entity (“VIE”). The standard includes
a new approach for determining who should consolidate a VIE, requiring a
qualitative rather than a quantitative analysis. This standard also changes when
it is necessary to reassess who should consolidate a VIE. Previously an
enterprise was required to reconsider whether it was the primary beneficiary of
a VIE only when specific events had occurred. The new standard requires
continuous reassessment of an enterprise’s interest in the VIE to determine who
is the primary beneficiary. This statement will be effective for us in 2010. We
do not expect the adoption of this accounting standard to have a material effect
on our consolidated financial statements.
 Disclosures
about Fair Value Measurements
 In
January 2010, the FASB issued a new accounting standard update (“ASU”) which
clarifies
and provides additional disclosure requirements on the transfers of assets and
liabilities between Level 1 (quoted prices in active market for identical assets
or liabilities) and Level 2 (significant other observable inputs) of the fair
value measurement hierarchy, including the reasons for and the timing of the
transfers. Additionally, the guidance requires a roll forward of activities on
purchases, sales, issuance, and settlements of the assets and liabilities
measured using significant unobservable inputs (Level 3 fair value
measurements). This ASU is effective for us in 2010, except for the
requirements to provide Level 3 activity which will become effective us in 2011.
We do not expect the adoption of this ASU to have a material effect on our
consolidated financial statements.
 41
 Table of Contents
  Item 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET
RISK
  We
maintain an investment portfolio of various holdings, types and maturities. We
place our cash investments in instruments that meet high credit quality
standards, as specified in our investment policy. This
policy prohibits investments in auction rate and asset-backed
securities. It also limits the amount of credit exposure to any one
issue, issuer or type of instrument. The portfolio is limited to an average
maturity of no more than one year from date of purchase. On an ongoing basis we
monitor credit ratings, financial condition and other factors that could affect
the carrying amount of our investment portfolio.
 
 Marketable
securities, consisting of U.S. government obligations, agencies and
municipal bonds, are generally classified as held-to-maturity and are stated at
cost, adjusted for amortization of premiums and discounts to
maturity.
  We are
exposed to financial market risks due largely to changes in interest rates,
which we have managed primarily by managing the maturities in our investment
portfolio. We do not have any business transactions in foreign
currencies.
  We are exposed to various
commodity price risks, including, but not limited to, diesel fuel, natural gas,
propane, steel, cement and liquid asphalt arising from transactions that are
entered into in the normal course of business. In order to manage or reduce
commodity price risk, we monitor the costs of these commodities at the time of
bid and price them into our contracts accordingly. Additionally, some of our
contracts include commodity price escalation clauses which partially protect us
from increasing prices. At times we enter into supply agreements or pre-purchase
commodities to secure pricing and are reviewing the use of financial contracts
to further manage price risk. At this time, we have no such financial
contracts in place.
  The fair
value of our short-term held-to-maturity investment portfolio and related income
would not be significantly affected by changes in interest rates since the
investment maturities are short and the interest rates are primarily fixed. The
fair value of our long-term held-to-maturity investment portfolio may be
affected by changes in interest rates.
  Given the
short-term nature of certain investments, our investment income is subject to
the general level of interest rates in the United States at the time of maturity
and reinvestment.
 
 We had
outstanding senior notes payable, which carry a fixed interest rate per annum,
as follows (in millions):
  December 31,
                            
                            
                            2009Principal
      payments due in nine equal installmentsthat
      began in 2002, 6.54%
                            
                            $
                            6.7Principal
      payments due in nine equal installmentsthat
      began in 2005, 6.96%
                            
                            
                            33.3Principal
      payments due in five equal installmentsbeginning
      in 2015, 6.11%
                            
                            
                            200.0Total
                            
                            $
                            240.0
 The table
below presents principal amounts due by year and related weighted average
interest rates for our cash and cash equivalents, held-to-maturity investments
and significant debt obligations as of December 31, 2009 (in
thousands):
  2010
                        
                        2011
                        
                        2012
                        
                        2013
                        
                        2014
                        
                        Thereafter
                        
                        TotalAssetsCash,
      cash equivalents, held-to-maturity and trading
      investments
                        
                        $
                        381,404
                        
                        $
                        40,872
                        
                        $
                        36,065
                        
                        $
                        -
                        
                        $
                        -
                        
                        $
                        -
                        
                        $
                        458,341Weighted
      average interest rate
                        
                        
                        0.65
                        %
                        
                        1.47
                        %
                        
                        1.27
                        %
                        
                        -
                        %
                        
                        -
                        %
                        
                        -
                        %
                        
                        0.77
                        %LiabilitiesFixed rate debtSenior notes payable
                        
                        $
                        15,000
                        
                        $
                        8,333
                        
                        $
                        8,333
                        
                        $
                        8,334
                        
                        $
                        -
                        
                        $
                        200,000
                        
                        $
                        240,000Weighted average interest rate
                        
                        
                        6.77
                        %
                        
                        6.96
                        %
                        
                        6.96
                        %
                        
                        6.96
                        %
                        
                        -
                        %
                        
                        6.11
                        %
                        
                        6.24
                        %
  The
estimated fair value of our cash, cash equivalents and short-term
held-to-maturity investments approximates the principal amounts reflected above
based on the generally short maturities of these financial instruments. The
estimated fair value of our long-term held-to-maturity investments approximates
the principal amounts above due to the relatively minor difference between the
effective yields of these investments and rates currently available on similar
instruments. Rates currently available to us for debt with similar terms and
remaining maturities are used to estimate fair value of existing debt. Based on
the fixed borrowing rates currently available to us for bank loans with similar
terms and average maturities, the fair value of the senior notes payable was
approximately $249.2 million as of December 31, 2009 and $200.9
million as of December 31, 2008.
  42
 Table of Contents
  Item 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
  The
following consolidated financial statements of Granite and the independent
registered public accounting firm’s report are incorporated by reference from
Part IV, Item 15(1) and (2):
  Report of
Independent Registered Public Accounting Firm
  Consolidated
Balance Sheets - At December 31, 2009 and 2008
  Consolidated
Statements of Income - Years Ended December 31, 2009, 2008 and 2007
  Consolidated
Statements of Shareholders’ Equity and Comprehensive Income - Years Ended
December 31, 2009, 2008 and 2007
  Consolidated
Statements of Cash Flows - Years Ended December 31, 2009, 2008 and
2007
  Notes to
the Consolidated Financial Statements
  Quarterly Financial Data (unaudited)
  Schedule
II - Schedule of Valuation and Qualifying Accounts
   Item 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING
AND FINANCIAL DISCLOSURE
  Not
applicable.
  Item 9A. CONTROLS AND PROCEDURES
  Evaluation
of Disclosure 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 design and
operation 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
(the “Exchange Act”)). Based on that evaluation, our Chief Executive Officer and
Chief Financial Officer concluded that, as of December 31, 2009, our disclosure
controls and procedures were
effective.
  Changes
in Internal Control Over Financial Reporting: During the fourth quarter
of 2009, there were no changes in our internal control over financial reporting
that have materially affected, or are reasonably likely to materially affect,
our internal control over financial
reporting.
  Management’s
Report on Internal Control Over Financial Reporting: Our management
is responsible for establishing and maintaining adequate internal control over
financial reporting, as such term is defined in Exchange Act Rules 13a-15(f) and
15d -15(f). Under the supervision and with the participation of our management,
including our Chief Executive Officer and Chief Financial Officer, we
conducted an evaluation of the effectiveness of our internal control over
financial reporting based on the framework in “Internal Control—Integrated
Framework” issued by the Committee of Sponsoring Organizations of the Treadway
Commission. Based on that evaluation our management concluded that our internal
control over financial reporting was effective as of December 31,
2009.
  Independent
Registered Public Accounting Firm Attestation Report:PricewaterhouseCoopers LLP, the independent registered public accounting
firm that audited our consolidated financial statements included in this Annual
Report on Form 10-K, has issued an attestation report on the Company’s internal
control over financial reporting as of December 31, 2009. The report, which
expresses an unqualified opinion on the effectiveness of the Company’s internal
control over financial reporting as of December 31, 2009, is included
in Item 15 under the heading “Report of Independent Registered Public
Accounting
Firm.”
  Item 9B. OTHER INFORMATION
  Not
applicable.
  43
 Table of Contents
  PART III
  Certain
information required by Part III is omitted from this report. We will file our
definitive proxy statement for our Annual Meeting of Shareholders to be held on
May
7, 2010 (the “Proxy Statement”) pursuant to Regulation 14A not later than
120 days after the end of the fiscal year covered by this report, and certain
information included therein is incorporated herein by reference.
 
 Item 10. DIRECTORS, EXECUTIVE OFFICERS AND CORPORATE
GOVERNANCE
  For
information regarding our Directors and compliance with Section 16(a) of the
Securities Exchange Act of 1934, we direct you to the subsections entitled
“Election of Directors” and “Section 16(a) Beneficial Ownership Reporting
Compliance,” respectively, in the Proxy Statement. For information regarding our
Audit and Compliance Committee’s financial expert and our Committees of the
Board, we direct you to the subsection captioned “Committees of the Board” in
the Proxy Statement. For information regarding our Nomination Policy, we direct
you to the subsection captioned “Board of Directors’ Nomination Policy” in the
Proxy Statement. For information regarding our Code of Conduct, we direct you to
the subsection captioned “Code of Conduct” in the Proxy Statement. This
information is incorporated herein by reference. Information regarding our
executive officers is contained in the section entitled “Executive Officers of
the Registrant,” in Part I of this report.
  Item 11. EXECUTIVE COMPENSATION
  For
information regarding our Executive Compensation, we direct you to the section
captioned “Executive and Director Compensation and Other Matters” in the
Proxy Statement. This information is incorporated herein by
reference.
  Item 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND
MANAGEMENT AND RELATED STOCKHOLDER MATTERS
  This
information is located in the subsections captioned “Stock Ownership
of Beneficial Owners and Certain Management” and “Equity Compensation Plan
Information” in the Proxy Statement. This information is incorporated
herein by reference.
  Item 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS, AND
DIRECTOR INDEPENDENCE
  You will
find this information in the sections captioned “Transactions with Related
Persons” in the Proxy Statement. This information is incorporated herein by
reference.
  Item 14. PRINCIPAL ACCOUNTANT FEES AND SERVICES
  You will
find this information in the subsection captioned “Principal Accountant Fees and
Services” in the Proxy Statement. This information is incorporated herein by
reference.
 
 44
 Table of Contents
  PART IV
  Item 15. EXHIBITS AND FINANCIAL STATEMENT
SCHEDULES
  The
following documents are filed as part of this report:
  1.Financial
Statements. The following consolidated financial statements and related
documents are filed as part of this report:
  Financial
      Statements
                        PageReport
      of Independent Registered Public Accounting Firm
                        F-1Consolidated
      Balance Sheets at December 31, 2009 and 2008
                        F-2Consolidated
      Statements of Income for the Years Ended December 31, 2009, 2008 and
      2007
                        F-3Consolidated
      Statements of Shareholders’ Equity and Comprehensive Income for the Years
      Ended December 31, 2009, 2008 and 2007
                        F-4Consolidated
      Statements of Cash Flows for the Years Ended December 31, 2009, 2008 and
      2007
                        F-5 to
      F-6Notes
      to the Consolidated Financial Statements
                        F-7
      to F-40Quarterly
      Financial Data
                        F-41
  2.Financial
Statement Schedule. The following financial statement schedule of Granite
for the years ended December 31, 2009, 2008 and 2007 is filed as part of this
report and should be read in conjunction with the consolidated financial
statements of Granite.
  Schedule
                      PageSchedule
      II - Schedule of Valuation and Qualifying Accounts
                      S-1
  Schedules
not listed above have been omitted because the required information is either
not material, not applicable or is shown in the consolidated financial
statements or notes thereto.
  3.Exhibits.
The Exhibits listed in the accompanying Exhibit Index are filed or incorporated
by reference as part of this report.
 
 45
 Table of Contents
 
 REPORT
OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
  To the
Shareholders and Board of Directors of
 Granite
Construction Incorporated:
 
 In our
opinion, the consolidated financial statements listed in the index appearing
under Item 15(1) present fairly, in all material respects, the financial
position of Granite Construction Incorporated and its subsidiaries at December
31, 2009 and December 31, 2008, and the results of their operations and their
cash flows for each of the three years in the period ended December 31, 2009 in
conformity with accounting principles generally accepted in the United States of
America.  In addition, in our opinion, the financial statement
schedule listed in the index appearing under Item 15(2)presents
fairly, in all material respects, the information set forth therein when read in
conjunction with the related consolidated financial statements.  Also
in our opinion, the Company maintained, in all material respects, effective
internal control over financial reporting as of December 31, 2009, based on
criteria established in Internal Control - Integrated
Framework issued by the Committee of Sponsoring Organizations of the
Treadway Commission (COSO).  The Company's management is responsible
for these financial statements and financial statement schedule, for maintaining
effective internal control over financial reporting and for its assessment of
the effectiveness of internal control over financial reporting, included in
Management's Report on Internal Control over Financial Reporting appearing under
Item 9A.  Our responsibility is to express opinions on these financial
statements, on the financial statement schedule, and on the Company's internal
control over financial reporting based on our integrated audits.  We
conducted our audits in accordance with the standards of the Public Company
Accounting Oversight Board (United States).  Those standards require
that we plan and perform the audits to obtain reasonable assurance about whether
the financial statements are free of material misstatement and whether effective
internal control over financial reporting was maintained in all material
respects.  Our audits of the financial statements included examining,
on a test basis, evidence supporting the amounts and disclosures in the
financial statements, assessing the accounting principles used and significant
estimates made by management, and evaluating the overall financial statement
presentation.  Our audit of internal control over financial reporting
included obtaining an understanding of internal control over financial
reporting, assessing the risk that a material weakness exists, and testing and
evaluating the design and operating effectiveness of internal control based on
the assessed risk.  Our audits also included performing such other
procedures as we considered necessary in the circumstances. We believe that our
audits provide a reasonable basis for our opinions.
 
 As
discussed in Note 1 of “Notes
to the Consolidated Financial Statements”, the Company changed the manner
in which it accounts for noncontrolling interests in 2009.
 
 A
company’s internal control over financial reporting is a process designed to
provide reasonable assurance regarding the reliability of financial reporting
and the preparation of financial statements for external purposes in accordance
with generally accepted accounting principles.  A company’s internal
control over financial reporting includes those policies and procedures that
(i) pertain to the maintenance of records that, in reasonable detail,
accurately and fairly reflect the transactions and dispositions of the assets of
the company; (ii) provide reasonable assurance that transactions are
recorded as necessary to permit preparation of financial statements in
accordance with generally accepted accounting principles, and that receipts and
expenditures of the company are being made only in accordance with
authorizations of management and directors of the company; and
(iii) provide reasonable assurance regarding prevention or timely detection
of unauthorized acquisition, use, or disposition of the company’s assets that
could have a material effect on the financial statements.
 
 Because
of its inherent limitations, internal control over financial reporting may not
prevent or detect misstatements.  Also, projections of any evaluation
of effectiveness to future periods are subject to the risk that controls may
become inadequate because of changes in conditions, or that the degree of
compliance with the policies or procedures may deteriorate.
 
 /s/PricewaterhouseCoopers
LLP
 San
Francisco, California
 February
25, 2010
 
 F-1
 Table of Contents
  GRANITE
      CONSTRUCTION INCORPORATEDCONSOLIDATED
      BALANCE SHEETS(in
      thousands, except share and per share data)December
      31,
                  
                  2009
                  
                  2008ASSETSCurrent
      assetsCash
      and cash equivalents
                  
                  $
                  338,956
                  
                  $
                  460,843Short-term
      marketable securities
                  
                  
                  42,448
                  
                  
                  38,320Receivables,
      net
                  
                  
                  280,252
                  
                  
                  314,733Costs
      and estimated earnings in excess of billings
                  
                  
                  10,619
                  
                  
                  13,295Inventories
                  
                  
                  45,800
                  
                  
                  55,223Real estate held for development and sale
                  
                  
                  139,449
                  
                  
                  75,089Deferred
      income taxes
                  
                  
                  31,034
                  
                  
                  43,637Equity
      in construction joint ventures
                  
                  
                  67,693
                  
                  
                  44,681Other
      current assets
                  
                  
                  50,467
                  
                  
                  56,742Total
      current assets
                  
                  
                  1,006,718
                  
                  
                  1,102,563Property
      and equipment, net
                  
                  
                  520,778
                  
                  
                  517,678Long-term
      marketable securities
                  
                  
                  76,937
                  
                  
                  21,239Investments
      in affiliates
                  
                  
                  24,644
                  
                  
                  19,996Other
      noncurrent assets
                  
                  
                  80,498
                  
                  
                  81,979Total
      assets
                  
                  $
                  1,709,575
                  
                  $
                  1,743,455LIABILITIES
      AND EQUITYCurrent
      liabilitiesCurrent
      maturities of long-term debt
                  
                  $
                  58,978
                  
                  $
                  39,692Accounts
      payable
                  
                  
                  131,251
                  
                  
                  174,626Billings
      in excess of costs and estimated earnings
                  
                  
                  156,041
                  
                  
                  227,364Accrued
      expenses and other current liabilities
                  
                  
                  159,843
                  
                  
                  184,939Total
      current liabilities
                  
                  
                  506,113
                  
                  
                  626,621Long-term
      debt
                  
                  
                  244,688
                  
                  
                  250,687Other
      long-term liabilities
                  
                  
                  48,998
                  
                  
                  43,604Deferred
      income taxes
                  
                  
                  27,220
                  
                  
                  18,261Commitments
      and contingenciesEquityPreferred
      stock, $0.01 par value, authorized 3,000,000 shares, none
      outstanding
                  
                  
                  -
                  
                  
                  -Common
      stock, $0.01 par value, authorized 150,000,000 shares in 2009
      and 2008; issued and outstanding 38,635,021
      shares as of December 31, 2009 and 38,266,791 shares as of December
      31, 2008
                  
                  
                  386
                  
                  
                  383Additional
      paid-in capital
                  
                  
                  94,633
                  
                  
                  85,035Retained
      earnings
                  
                  
                  735,632
                  
                  
                  682,237Accumulated
      other comprehensive loss
                  
                  
                  -
                  
                  
                  (146
                  )Total
      Granite Construction Inc. shareholders’ equity
                  
                  
                  830,651
                  
                  
                  767,509Noncontrolling interests
                  
                  
                  51,905
                  
                  
                  36,773Total equity
                  
                  
                  882,556
                  
                  
                  804,282Total
      liabilities and equity
                  
                  $
                  1,709,575
                  
                  $
                  1,743,455
  The
accompanying notes are an integral part of these consolidated financial
statements.
 
 F-2
 Table of Contents
 
 GRANITE
      CONSTRUCTION INCORPORATEDCONSOLIDATED
      STATEMENTS OF INCOME(in
      thousands, except per share data)Years
      Ended December 31,
                                              
                                              2009
                                              
                                              
                                              2008
                                              
                                              
                                              2007RevenueConstruction
                                              
                                              $
                                              1,755,260
                                              
                                              
                                              $
                                              2,312,116
                                              
                                              
                                              $
                                              2,321,502Construction
      materials
                                              
                                              
                                              205,945
                                              
                                              
                                              
                                              353,115
                                              
                                              
                                              
                                              375,700Real
      estate
                                              
                                              
                                              2,274
                                              
                                              
                                              
                                              9,013
                                              
                                              
                                              
                                              40,712Total
      revenue
                                              
                                              
                                              1,963,479
                                              
                                              
                                              
                                              2,674,244
                                              
                                              
                                              
                                              2,737,914Cost
      of revenueConstruction
                                              
                                              
                                              1,421,969
                                              
                                              
                                              
                                              1,883,742
                                              
                                              
                                              
                                              2,002,064Construction
      materials
                                              
                                              
                                              191,545
                                              
                                              
                                              
                                              311,246
                                              
                                              
                                              
                                              300,234Real
      estate
                                              
                                              
                                              3,592
                                              
                                              
                                              
                                              10,536
                                              
                                              
                                              
                                              24,872Total
      cost of revenue
                                              
                                              
                                              1,617,106
                                              
                                              
                                              
                                              2,205,524
                                              
                                              
                                              
                                              2,327,170Gross
      profit
                                              
                                              
                                              346,373
                                              
                                              
                                              
                                              468,720
                                              
                                              
                                              
                                              410,744General
      and administrative expenses
                                              
                                              
                                              224,910
                                              
                                              
                                              
                                              257,532
                                              
                                              
                                              
                                              246,202Restructuring
      charges
                                              
                                              
                                              9,453
                                              
                                              
                                              
                                              -
                                              
                                              
                                              
                                              -Gain
      on sales of property and equipment
                                              
                                              
                                              17,169
                                              
                                              
                                              
                                              5,503
                                              
                                              
                                              
                                              10,343Operating
      income
                                              
                                              
                                              129,179
                                              
                                              
                                              
                                              216,691
                                              
                                              
                                              
                                              174,885Other
      income (expense)Interest
      income
                                              
                                              
                                              5,049
                                              
                                              
                                              
                                              18,445
                                              
                                              
                                              
                                              26,925Interest
      expense
                                              
                                              
                                              (15,756
                                              )
                                              
                                              
                                              (16,001
                                              )
                                              
                                              
                                              (6,367
                                              )Acquisition
      expense
                                              
                                              
                                              -
                                              
                                              
                                              
                                              -
                                              
                                              
                                              
                                              (7,752
                                              )Equity
      in income (loss) of affiliates
                                              
                                              
                                              7,696
                                              
                                              
                                              
                                              (1,058
                                              )
                                              
                                              
                                              5,205Other
      income, net
                                              
                                              
                                              12,683
                                              
                                              
                                              
                                              15,353
                                              
                                              
                                              
                                              5,498Total
      other income
                                              
                                              
                                              9,672
                                              
                                              
                                              
                                              16,739
                                              
                                              
                                              
                                              23,509Income
      before provision for income taxes
                                              
                                              
                                              138,851
                                              
                                              
                                              
                                              233,430
                                              
                                              
                                              
                                              198,394Provision
      for income taxes
                                              
                                              
                                              38,650
                                              
                                              
                                              
                                              67,692
                                              
                                              
                                              
                                              65,470Net
      income
                                              
                                              
                                              100,201
                                              
                                              
                                              
                                              165,738
                                              
                                              
                                              
                                              132,924Amount
      attributable to noncontrolling interests
                                              
                                              
                                              (26,701
                                              )
                                              
                                              
                                              (43,334
                                              )
                                              
                                              
                                              (20,859
                                              )Net
      income attributable to Granite Construction Inc.
                                              
                                              $
                                              73,500
                                              
                                              
                                              $
                                              122,404
                                              
                                              
                                              $
                                              112,065Net
      income per share attributable to common shareholders (see Note 15)Basic
                                              
                                              $
                                              1.91
                                              
                                              
                                              $
                                              3.19
                                              
                                              
                                              $
                                              2.69Diluted
                                              
                                              $
                                              1.90
                                              
                                              
                                              $
                                              3.18
                                              
                                              
                                              $
                                              2.68Weighted
      average shares of common stockBasic
                                              
                                              
                                              37,566
                                              
                                              
                                              
                                              37,606
                                              
                                              
                                              
                                              40,866Diluted
                                              
                                              
                                              37,683
                                              
                                              
                                              
                                              37,709
                                              
                                              
                                              
                                              40,909Dividends
      per common share
                                              
                                              $
                                              0.52
                                              
                                              
                                              $
                                              0.52
                                              
                                              
                                              $
                                              0.43
  The
accompanying notes are an integral part of these consolidated financial
statements.
 F-3
 GRANITE
      CONSTRUCTION INCORPORATEDCONSOLIDATED
      STATEMENTS OF SHAREHOLDERS’ EQUITY AND COMPREHENSIVE
INCOME(in
      thousands, except share data)Outstanding
      Shares
                                                                                              
                                                                                              Common
      Stock
                                                                                              
                                                                                              Additional
      Paid-in Capital
                                                                                              
                                                                                              Retained
      Earnings
                                                                                              
                                                                                              Accumulated
      Other Comprehensive Income (Loss)
                                                                                              
                                                                                              Total
      Granite Shareholders’ Equity
                                                                                              
                                                                                              Noncontrolling Interests
                                                                                              
                                                                                              Total
      EquityBalances
      at December 31, 2006
                                                                                              
                                                                                              41,833,559
                                                                                              
                                                                                              $
                                                                                              418
                                                                                              
                                                                                              $
                                                                                              78,620
                                                                                              
                                                                                              $
                                                                                              612,875
                                                                                              
                                                                                              $
                                                                                              2,631
                                                                                              
                                                                                              $
                                                                                              694,544
                                                                                              
                                                                                              $
                                                                                              15,532
                                                                                              
                                                                                              $
                                                                                              710,076Comprehensive
      income (see Note 16):Net
      income
                                                                                              
                                                                                              -
                                                                                              
                                                                                              
                                                                                              -
                                                                                              
                                                                                              
                                                                                              -
                                                                                              
                                                                                              
                                                                                              112,065
                                                                                              
                                                                                              
                                                                                              -
                                                                                              
                                                                                              
                                                                                              112,065
                                                                                              
                                                                                              
                                                                                              20,859Changes
      in net unrealized gains (losses) on investments
                                                                                              
                                                                                              -
                                                                                              
                                                                                              
                                                                                              -
                                                                                              
                                                                                              
                                                                                              -
                                                                                              
                                                                                              
                                                                                              -
                                                                                              
                                                                                              
                                                                                              (1,533
                                                                                              )
                                                                                              
                                                                                              (1,533
                                                                                              )
                                                                                              
                                                                                              -Total
      comprehensive income
                                                                                              
                                                                                              
                                                                                              
                                                                                              
                                                                                              
                                                                                              
                                                                                              
                                                                                              
                                                                                              
                                                                                              
                                                                                              
                                                                                              
                                                                                              
                                                                                              
                                                                                              
                                                                                              
                                                                                              
                                                                                              
                                                                                              
                                                                                              
                                                                                              
                                                                                              
                                                                                              131,391Restricted
      stock issued
                                                                                              
                                                                                              149,409
                                                                                              
                                                                                              
                                                                                              2
                                                                                              
                                                                                              
                                                                                              (2
                                                                                              )
                                                                                              
                                                                                              -
                                                                                              
                                                                                              
                                                                                              -
                                                                                              
                                                                                              
                                                                                              -
                                                                                              
                                                                                              
                                                                                              -
                                                                                              
                                                                                              
                                                                                              -Stock
      issued for services
                                                                                              
                                                                                              19,712
                                                                                              
                                                                                              
                                                                                              -
                                                                                              
                                                                                              
                                                                                              1,134
                                                                                              
                                                                                              
                                                                                              -
                                                                                              
                                                                                              
                                                                                              -
                                                                                              
                                                                                              
                                                                                              1,134
                                                                                              
                                                                                              
                                                                                              -
                                                                                              
                                                                                              
                                                                                              1,134Amortized
      restricted stock
                                                                                              
                                                                                              -
                                                                                              
                                                                                              
                                                                                              -
                                                                                              
                                                                                              
                                                                                              6,208
                                                                                              
                                                                                              
                                                                                              -
                                                                                              
                                                                                              
                                                                                              -
                                                                                              
                                                                                              
                                                                                              6,208
                                                                                              
                                                                                              
                                                                                              -
                                                                                              
                                                                                              
                                                                                              6,208Repurchase
      of common stock
                                                                                              
                                                                                              (2,558,726
                                                                                              )
                                                                                              
                                                                                              (25
                                                                                              )
                                                                                              
                                                                                              (11,092
                                                                                              )
                                                                                              
                                                                                              (86,897
                                                                                              )
                                                                                              
                                                                                              -
                                                                                              
                                                                                              
                                                                                              (98,014
                                                                                              )
                                                                                              
                                                                                              -
                                                                                              
                                                                                              
                                                                                              (98,014
                                                                                              )Cash
      dividends on common stock
                                                                                              
                                                                                              -
                                                                                              
                                                                                              
                                                                                              -
                                                                                              
                                                                                              
                                                                                              -
                                                                                              
                                                                                              
                                                                                              (17,710
                                                                                              )
                                                                                              
                                                                                              -
                                                                                              
                                                                                              
                                                                                              (17,710
                                                                                              )
                                                                                              
                                                                                              -
                                                                                              
                                                                                              
                                                                                              (17,710
                                                                                              )Net tax
      benefit on stock-based compensation
                                                                                              
                                                                                              -
                                                                                              
                                                                                              
                                                                                              -
                                                                                              
                                                                                              
                                                                                              3,659
                                                                                              
                                                                                              
                                                                                              -
                                                                                              
                                                                                              
                                                                                              -
                                                                                              
                                                                                              
                                                                                              3,659
                                                                                              
                                                                                              
                                                                                              -
                                                                                              
                                                                                              
                                                                                              3,659Cumulative
      effect of adopting accounting standard for uncertain tax
      provisions
                                                                                              
                                                                                              -
                                                                                              
                                                                                              
                                                                                              -
                                                                                              
                                                                                              
                                                                                              -
                                                                                              
                                                                                              
                                                                                              (634
                                                                                              )
                                                                                              
                                                                                              -
                                                                                              
                                                                                              
                                                                                              (634
                                                                                              )
                                                                                              
                                                                                              -
                                                                                              
                                                                                              
                                                                                              (634
                                                                                              )Transactions
      with noncontrolling interests, net
                                                                                              
                                                                                              -
                                                                                              
                                                                                              
                                                                                              -
                                                                                              
                                                                                              
                                                                                              -
                                                                                              
                                                                                              
                                                                                              -
                                                                                              
                                                                                              
                                                                                              -
                                                                                              
                                                                                              
                                                                                              -
                                                                                              
                                                                                              
                                                                                              (12,920
                                                                                              )
                                                                                              
                                                                                              (12,920
                                                                                              )Stock
      options exercised and other
                                                                                              
                                                                                              6,969
                                                                                              
                                                                                              
                                                                                              -
                                                                                              
                                                                                              
                                                                                              480
                                                                                              
                                                                                              
                                                                                              -
                                                                                              
                                                                                              
                                                                                              -
                                                                                              
                                                                                              
                                                                                              480
                                                                                              
                                                                                              
                                                                                              -
                                                                                              
                                                                                              
                                                                                              480Balances
      at December 31, 2007
                                                                                              
                                                                                              39,450,923
                                                                                              
                                                                                              
                                                                                              395
                                                                                              
                                                                                              
                                                                                              79,007
                                                                                              
                                                                                              
                                                                                              619,699
                                                                                              
                                                                                              
                                                                                              1,098
                                                                                              
                                                                                              
                                                                                              700,199
                                                                                              
                                                                                              
                                                                                              23,471
                                                                                              
                                                                                              
                                                                                              723,670Comprehensive
      income:Net
      income
                                                                                              
                                                                                              -
                                                                                              
                                                                                              
                                                                                              -
                                                                                              
                                                                                              
                                                                                              -
                                                                                              
                                                                                              
                                                                                              122,404
                                                                                              
                                                                                              
                                                                                              -
                                                                                              
                                                                                              
                                                                                              122,404
                                                                                              
                                                                                              
                                                                                              43,334Changes
      in net unrealized gains (losses) on
      investments
                                                                                              
                                                                                              -
                                                                                              
                                                                                              
                                                                                              -
                                                                                              
                                                                                              
                                                                                              -
                                                                                              
                                                                                              
                                                                                              -
                                                                                              
                                                                                              
                                                                                              (1,244
                                                                                              )
                                                                                              
                                                                                              (1,244
                                                                                              )
                                                                                              
                                                                                              -Total
      comprehensive income
                                                                                              
                                                                                              
                                                                                              
                                                                                              
                                                                                              
                                                                                              
                                                                                              
                                                                                              
                                                                                              
                                                                                              
                                                                                              
                                                                                              
                                                                                              
                                                                                              
                                                                                              
                                                                                              
                                                                                              
                                                                                              
                                                                                              
                                                                                              
                                                                                              
                                                                                              
                                                                                              164,494Restricted
      stock issued
                                                                                              
                                                                                              232,096
                                                                                              
                                                                                              
                                                                                              2
                                                                                              
                                                                                              
                                                                                              (2
                                                                                              )
                                                                                              
                                                                                              -
                                                                                              
                                                                                              
                                                                                              -
                                                                                              
                                                                                              
                                                                                              -
                                                                                              
                                                                                              
                                                                                              -
                                                                                              
                                                                                              
                                                                                              -Stock
      issued for services
                                                                                              
                                                                                              14,998
                                                                                              
                                                                                              
                                                                                              -
                                                                                              
                                                                                              
                                                                                              461
                                                                                              
                                                                                              
                                                                                              -
                                                                                              
                                                                                              
                                                                                              -
                                                                                              
                                                                                              
                                                                                              461
                                                                                              
                                                                                              
                                                                                              -
                                                                                              
                                                                                              
                                                                                              461Amortized
      restricted stock
                                                                                              
                                                                                              -
                                                                                              
                                                                                              
                                                                                              -
                                                                                              
                                                                                              
                                                                                              7,002
                                                                                              
                                                                                              
                                                                                              -
                                                                                              
                                                                                              
                                                                                              -
                                                                                              
                                                                                              
                                                                                              7,002
                                                                                              
                                                                                              
                                                                                              -
                                                                                              
                                                                                              
                                                                                              7,002Repurchase
      of common stock
                                                                                              
                                                                                              (1,440,869
                                                                                              )
                                                                                              
                                                                                              (14
                                                                                              )
                                                                                              
                                                                                              (5,561
                                                                                              )
                                                                                              
                                                                                              (39,965
                                                                                              )
                                                                                              
                                                                                              -
                                                                                              
                                                                                              
                                                                                              (45,540
                                                                                              )
                                                                                              
                                                                                              -
                                                                                              
                                                                                              
                                                                                              (45,540
                                                                                              )Cash
      dividends on common stock
                                                                                              
                                                                                              -
                                                                                              
                                                                                              
                                                                                              -
                                                                                              
                                                                                              
                                                                                              -
                                                                                              
                                                                                              
                                                                                              (19,901
                                                                                              )
                                                                                              
                                                                                              -
                                                                                              
                                                                                              
                                                                                              (19,901
                                                                                              )
                                                                                              
                                                                                              -
                                                                                              
                                                                                              
                                                                                              (19,901
                                                                                              )Net tax
      benefit on stock-based compensation
                                                                                              
                                                                                              -
                                                                                              
                                                                                              
                                                                                              -
                                                                                              
                                                                                              
                                                                                              851
                                                                                              
                                                                                              
                                                                                              -
                                                                                              
                                                                                              
                                                                                              -
                                                                                              
                                                                                              
                                                                                              851
                                                                                              
                                                                                              
                                                                                              -
                                                                                              
                                                                                              
                                                                                              851Non-qualified
      deferred compensation plan stock units
                                                                                              
                                                                                              -
                                                                                              
                                                                                              
                                                                                              -
                                                                                              
                                                                                              
                                                                                              3,237
                                                                                              
                                                                                              
                                                                                              -
                                                                                              
                                                                                              
                                                                                              -
                                                                                              
                                                                                              
                                                                                              3,237
                                                                                              
                                                                                              
                                                                                              -
                                                                                              
                                                                                              
                                                                                              3,237Transactions
      with noncontrolling
                                                                                                interests, net
                                                                                              
                                                                                              -
                                                                                              
                                                                                              
                                                                                              -
                                                                                              
                                                                                              
                                                                                              -
                                                                                              
                                                                                              
                                                                                              -
                                                                                              
                                                                                              
                                                                                              -
                                                                                              
                                                                                              
                                                                                              -
                                                                                              
                                                                                              
                                                                                              (30,032
                                                                                              )
                                                                                              
                                                                                              (30,032
                                                                                              )Stock
      options exercised and other
                                                                                              
                                                                                              9,643
                                                                                              
                                                                                              
                                                                                              -
                                                                                              
                                                                                              
                                                                                              40
                                                                                              
                                                                                              
                                                                                              -
                                                                                              
                                                                                              
                                                                                              -
                                                                                              
                                                                                              
                                                                                              40
                                                                                              
                                                                                              
                                                                                              -
                                                                                              
                                                                                              
                                                                                              40Balances
      at December 31, 2008
                                                                                              
                                                                                              38,266,791
                                                                                              
                                                                                              
                                                                                              383
                                                                                              
                                                                                              
                                                                                              85,035
                                                                                              
                                                                                              
                                                                                              682,237
                                                                                              
                                                                                              
                                                                                              (146
                                                                                              )
                                                                                              
                                                                                              767,509
                                                                                              
                                                                                              
                                                                                              36,773
                                                                                              
                                                                                              
                                                                                              804,282Comprehensive
      income:Net
      income
                                                                                              
                                                                                              -
                                                                                              
                                                                                              
                                                                                              -
                                                                                              
                                                                                              
                                                                                              -
                                                                                              
                                                                                              
                                                                                              73,500
                                                                                              
                                                                                              
                                                                                              -
                                                                                              
                                                                                              
                                                                                              73,500
                                                                                              
                                                                                              
                                                                                              26,701Changes
      in net unrealized gains on investments
                                                                                              
                                                                                              -
                                                                                              
                                                                                              
                                                                                              -
                                                                                              
                                                                                              
                                                                                              -
                                                                                              
                                                                                              
                                                                                              -
                                                                                              
                                                                                              
                                                                                              146
                                                                                              
                                                                                              
                                                                                              146
                                                                                              
                                                                                              
                                                                                              -Total
      comprehensive income
                                                                                              
                                                                                              
                                                                                              
                                                                                              
                                                                                              
                                                                                              
                                                                                              
                                                                                              
                                                                                              
                                                                                              
                                                                                              
                                                                                              
                                                                                              
                                                                                              
                                                                                              
                                                                                              
                                                                                              
                                                                                              
                                                                                              
                                                                                              
                                                                                              
                                                                                              
                                                                                              100,347Restricted
      stock issued
                                                                                              
                                                                                              390,468
                                                                                              
                                                                                              
                                                                                              4
                                                                                              
                                                                                              
                                                                                              (4
                                                                                              )
                                                                                              
                                                                                              -
                                                                                              
                                                                                              
                                                                                              -
                                                                                              
                                                                                              
                                                                                              -
                                                                                              
                                                                                              
                                                                                              -
                                                                                              
                                                                                              
                                                                                              -Stock
      issued for services
                                                                                              
                                                                                              47,126
                                                                                              
                                                                                              
                                                                                              -
                                                                                              
                                                                                              
                                                                                              1,904
                                                                                              
                                                                                              
                                                                                              -
                                                                                              
                                                                                              
                                                                                              -
                                                                                              
                                                                                              
                                                                                              1,904
                                                                                              
                                                                                              
                                                                                              -
                                                                                              
                                                                                              
                                                                                              1,904Amortized
      restricted stock
                                                                                              
                                                                                              -
                                                                                              
                                                                                              
                                                                                              -
                                                                                              
                                                                                              
                                                                                              10,765
                                                                                              
                                                                                              
                                                                                              -
                                                                                              
                                                                                              
                                                                                              -
                                                                                              
                                                                                              
                                                                                              10,765
                                                                                              
                                                                                              
                                                                                              -
                                                                                              
                                                                                              
                                                                                              10,765Repurchase
      of common stock
                                                                                              
                                                                                              (93,763
                                                                                              )
                                                                                              
                                                                                              (1
                                                                                              )
                                                                                              
                                                                                              (3,430
                                                                                              )
                                                                                              
                                                                                              -
                                                                                              
                                                                                              
                                                                                              -
                                                                                              
                                                                                              
                                                                                              (3,431
                                                                                              )
                                                                                              
                                                                                              -
                                                                                              
                                                                                              
                                                                                              (3,431
                                                                                              )Cash
      dividends on common stock
                                                                                              
                                                                                              -
                                                                                              
                                                                                              
                                                                                              -
                                                                                              
                                                                                              
                                                                                              -
                                                                                              
                                                                                              
                                                                                              (20,105
                                                                                              )
                                                                                              
                                                                                              -
                                                                                              
                                                                                              
                                                                                              (20,105
                                                                                              )
                                                                                              
                                                                                              -
                                                                                              
                                                                                              
                                                                                              (20,105
                                                                                              )Net tax
      benefit on stock-based compensation
                                                                                              
                                                                                              -
                                                                                              
                                                                                              
                                                                                              -
                                                                                              
                                                                                              
                                                                                              632
                                                                                              
                                                                                              
                                                                                              -
                                                                                              
                                                                                              
                                                                                              -
                                                                                              
                                                                                              
                                                                                              632
                                                                                              
                                                                                              
                                                                                              -
                                                                                              
                                                                                              
                                                                                              632Transactions
      with noncontrolling
                                                                                                interests, net
                                                                                              
                                                                                              -
                                                                                              
                                                                                              
                                                                                              -
                                                                                              
                                                                                              
                                                                                              -
                                                                                              
                                                                                              
                                                                                              -
                                                                                              
                                                                                              
                                                                                              -
                                                                                              
                                                                                              
                                                                                              -
                                                                                              
                                                                                              
                                                                                              (11,569
                                                                                              )
                                                                                              
                                                                                              (11,569
                                                                                              )Stock
      options exercised and other
                                                                                              
                                                                                              24,399
                                                                                              
                                                                                              
                                                                                              -
                                                                                              
                                                                                              
                                                                                              (269
                                                                                              )
                                                                                              
                                                                                              -
                                                                                              
                                                                                              
                                                                                              -
                                                                                              
                                                                                              
                                                                                              (269
                                                                                              )
                                                                                              
                                                                                              -
                                                                                              
                                                                                              
                                                                                              (269
                                                                                              )Balances
      at December 31, 2009
                                                                                              
                                                                                              38,635,021
                                                                                              
                                                                                              $
                                                                                              386
                                                                                              
                                                                                              $
                                                                                              94,633
                                                                                              
                                                                                              $
                                                                                              735,632
                                                                                              
                                                                                              $
                                                                                              -
                                                                                              
                                                                                              $
                                                                                              830,651
                                                                                              
                                                                                              $
                                                                                              51,905
                                                                                              
                                                                                              $
                                                                                              882,556
  The
accompanying notes are an integral part of these consolidated financial
statements.
 F-4
 Table of Contents
 GRANITE
      CONSTRUCTION INCORPORATEDCONSOLIDATED
      STATEMENTS OF CASH FLOWS(in
      thousands)
 Years
      Ended December 31,
                                                                                                                  
                                                                                                                  2009
                                                                                                                  
                                                                                                                  2008
                                                                                                                  
                                                                                                                  2007Operating
      activitiesNet
      income
                                                                                                                  
                                                                                                                  $
                                                                                                                  100,201
                                                                                                                  
                                                                                                                  $
                                                                                                                  165,738
                                                                                                                  
                                                                                                                  $
                                                                                                                  132,924Adjustments
      to reconcile net income to net cash provided by operating
      activities:Impairment
      of real estate held for development and sale
                                                                                                                  
                                                                                                                  
                                                                                                                  1,686
                                                                                                                  
                                                                                                                  
                                                                                                                  4,500
                                                                                                                  
                                                                                                                  
                                                                                                                  3,000Intangible
      impairment charge
                                                                                                                  
                                                                                                                  
                                                                                                                  3,873
                                                                                                                  
                                                                                                                  
                                                                                                                  -
                                                                                                                  
                                                                                                                  
                                                                                                                  -Inventory
      written down
                                                                                                                  
                                                                                                                  
                                                                                                                  3,097
                                                                                                                  
                                                                                                                  
                                                                                                                  12,848
                                                                                                                  
                                                                                                                  
                                                                                                                  478Depreciation,
      depletion and amortization
                                                                                                                  
                                                                                                                  
                                                                                                                  80,195
                                                                                                                  
                                                                                                                  
                                                                                                                  87,311
                                                                                                                  
                                                                                                                  
                                                                                                                  82,157(Recovery
      of ) provision for doubtful accounts
                                                                                                                  
                                                                                                                  
                                                                                                                  (4,404
                                                                                                                  )
                                                                                                                  
                                                                                                                  10,958
                                                                                                                  
                                                                                                                  
                                                                                                                  3,894Gain
      on sales of property and equipment
                                                                                                                  
                                                                                                                  
                                                                                                                  (17,169
                                                                                                                  )
                                                                                                                  
                                                                                                                  (5,503
                                                                                                                  )
                                                                                                                  
                                                                                                                  (10,343
                                                                                                                  )Change
      in deferred income taxes
                                                                                                                  
                                                                                                                  
                                                                                                                  21,107
                                                                                                                  
                                                                                                                  
                                                                                                                  1,190
                                                                                                                  
                                                                                                                  
                                                                                                                  (7,822
                                                                                                                  )Stock-based compensation
                                                                                                                  
                                                                                                                  
                                                                                                                  10,765
                                                                                                                  
                                                                                                                  
                                                                                                                  7,463
                                                                                                                  
                                                                                                                  
                                                                                                                  7,342Excess
      tax benefit on stock-based compensation
                                                                                                                  
                                                                                                                  
                                                                                                                  (828
                                                                                                                  )
                                                                                                                  
                                                                                                                  (851
                                                                                                                  )
                                                                                                                  
                                                                                                                  (3,659
                                                                                                                  )Acquisition
      expense
                                                                                                                  
                                                                                                                  
                                                                                                                  -
                                                                                                                  
                                                                                                                  
                                                                                                                  -
                                                                                                                  
                                                                                                                  
                                                                                                                  7,752(Gain) loss
      from marketable securities
                                                                                                                  
                                                                                                                  
                                                                                                                  (485
                                                                                                                  )
                                                                                                                  
                                                                                                                  10,939
                                                                                                                  
                                                                                                                  
                                                                                                                  -Equity
      in (income) loss of affiliates
                                                                                                                  
                                                                                                                  
                                                                                                                  (7,696
                                                                                                                  )
                                                                                                                  
                                                                                                                  1,058
                                                                                                                  
                                                                                                                  
                                                                                                                  (5,205
                                                                                                                  )Acquisition
      of noncontrolling interest
                                                                                                                  
                                                                                                                  
                                                                                                                  -
                                                                                                                  
                                                                                                                  
                                                                                                                  (16,617
                                                                                                                  )
                                                                                                                  
                                                                                                                  -Gain
      on sale of investment in affiliate
                                                                                                                  
                                                                                                                  
                                                                                                                  -
                                                                                                                  
                                                                                                                  
                                                                                                                  (14,416
                                                                                                                  )
                                                                                                                  
                                                                                                                  -Gain
      on early extinguishment of debt
                                                                                                                  
                                                                                                                  
                                                                                                                  -
                                                                                                                  
                                                                                                                  
                                                                                                                  (1,150
                                                                                                                  )
                                                                                                                  
                                                                                                                  -Changes
      in assets and liabilities, net of the effects of acquisition and
      consolidations:Receivables
                                                                                                                  
                                                                                                                  
                                                                                                                  35,706
                                                                                                                  
                                                                                                                  
                                                                                                                  100,533
                                                                                                                  
                                                                                                                  
                                                                                                                  102,992Inventories
                                                                                                                  
                                                                                                                  
                                                                                                                  6,326
                                                                                                                  
                                                                                                                  
                                                                                                                  (10,812
                                                                                                                  )
                                                                                                                  
                                                                                                                  (10,391
                                                                                                                  )Real
      estate held for development and sale
                                                                                                                  
                                                                                                                  
                                                                                                                  (17,263
                                                                                                                  )
                                                                                                                  
                                                                                                                  (15,225
                                                                                                                  )
                                                                                                                  
                                                                                                                  2,179Equity
      in construction joint ventures
                                                                                                                  
                                                                                                                  
                                                                                                                  (23,012
                                                                                                                  )
                                                                                                                  
                                                                                                                  (10,341
                                                                                                                  )
                                                                                                                  
                                                                                                                  (2,428
                                                                                                                  )Other
      assets, net
                                                                                                                  
                                                                                                                  
                                                                                                                  2,590
                                                                                                                  
                                                                                                                  
                                                                                                                  40,870
                                                                                                                  
                                                                                                                  
                                                                                                                  (12,624
                                                                                                                  )Accounts
      payable
                                                                                                                  
                                                                                                                  
                                                                                                                  (43,480
                                                                                                                  )
                                                                                                                  
                                                                                                                  (38,956
                                                                                                                  )
                                                                                                                  
                                                                                                                  (44,502
                                                                                                                  )Accrued
      expenses and other liabilities, net
                                                                                                                  
                                                                                                                  
                                                                                                                  (18,261
                                                                                                                  )
                                                                                                                  
                                                                                                                  (28,378
                                                                                                                  )
                                                                                                                  
                                                                                                                  3,198Billings
      in excess of costs and estimated earnings, net
                                                                                                                  
                                                                                                                  
                                                                                                                  (68,647
                                                                                                                  )
                                                                                                                  
                                                                                                                  (43,823
                                                                                                                  )
                                                                                                                  
                                                                                                                  (14,154
                                                                                                                  )Net
      cash provided by operating activities
                                                                                                                  
                                                                                                                  
                                                                                                                  64,301
                                                                                                                  
                                                                                                                  
                                                                                                                  257,336
                                                                                                                  
                                                                                                                  
                                                                                                                  234,788Investing
      activitiesPurchases
      of marketable securities
                                                                                                                  
                                                                                                                  
                                                                                                                  (99,011
                                                                                                                  )
                                                                                                                  
                                                                                                                  (71,630
                                                                                                                  )
                                                                                                                  
                                                                                                                  (152,954
                                                                                                                  )Maturities of
      marketable securities
                                                                                                                  
                                                                                                                  
                                                                                                                  36,970
                                                                                                                  
                                                                                                                  
                                                                                                                  108,090
                                                                                                                  
                                                                                                                  
                                                                                                                  195,313Proceeds
      from sale of marketable securities
                                                                                                                  
                                                                                                                  
                                                                                                                  7,966
                                                                                                                  
                                                                                                                  
                                                                                                                  22,499
                                                                                                                  
                                                                                                                  
                                                                                                                  -Purchase
      of company owned life insurance
                                                                                                                  
                                                                                                                  
                                                                                                                  (8,000
                                                                                                                  )
                                                                                                                  
                                                                                                                  (8,000
                                                                                                                  )
                                                                                                                  
                                                                                                                  -Release
      of funds for acquisition of noncontrolling interest
                                                                                                                  
                                                                                                                  
                                                                                                                  -
                                                                                                                  
                                                                                                                  
                                                                                                                  28,332
                                                                                                                  
                                                                                                                  
                                                                                                                  -Additions
      to property and equipment
                                                                                                                  
                                                                                                                  
                                                                                                                  (87,645
                                                                                                                  )
                                                                                                                  
                                                                                                                  (94,135
                                                                                                                  )
                                                                                                                  
                                                                                                                  (118,612
                                                                                                                  )Proceeds
      from sales of property and equipment
                                                                                                                  
                                                                                                                  
                                                                                                                  23,020
                                                                                                                  
                                                                                                                  
                                                                                                                  14,539
                                                                                                                  
                                                                                                                  
                                                                                                                  17,777Acquisition
      of businesses
                                                                                                                  
                                                                                                                  
                                                                                                                  -
                                                                                                                  
                                                                                                                  
                                                                                                                  (14,022
                                                                                                                  )
                                                                                                                  
                                                                                                                  (76,427
                                                                                                                  )Contributions
      to affiliates
                                                                                                                  
                                                                                                                  
                                                                                                                  (4,969
                                                                                                                  )
                                                                                                                  
                                                                                                                  (8,053
                                                                                                                  )
                                                                                                                  
                                                                                                                  (6,805
                                                                                                                  )Distributions
      from affiliates
                                                                                                                  
                                                                                                                  
                                                                                                                  -
                                                                                                                  
                                                                                                                  
                                                                                                                  3,895
                                                                                                                  
                                                                                                                  
                                                                                                                  -Acquisition
      of noncontrolling interest
                                                                                                                  
                                                                                                                  
                                                                                                                  -
                                                                                                                  
                                                                                                                  
                                                                                                                  -
                                                                                                                  
                                                                                                                  
                                                                                                                  (28,495
                                                                                                                  )Issuance
      of notes receivable
                                                                                                                  
                                                                                                                  
                                                                                                                  (11,314
                                                                                                                  )
                                                                                                                  
                                                                                                                  -
                                                                                                                  
                                                                                                                  
                                                                                                                  -Collection
      of notes receivable
                                                                                                                  
                                                                                                                  
                                                                                                                  13,104
                                                                                                                  
                                                                                                                  
                                                                                                                  728
                                                                                                                  
                                                                                                                  
                                                                                                                  3,683Other
      investing activities, net
                                                                                                                  
                                                                                                                  
                                                                                                                  -
                                                                                                                  
                                                                                                                  
                                                                                                                  (500
                                                                                                                  )
                                                                                                                  
                                                                                                                  (224
                                                                                                                  )Net
      cash used in investing activities
                                                                                                                  
                                                                                                                  
                                                                                                                  (129,879
                                                                                                                  )
                                                                                                                  
                                                                                                                  (18,257
                                                                                                                  )
                                                                                                                  
                                                                                                                  (166,744
                                                                                                                  )Financing
      activitiesProceeds
      from long-term debt
                                                                                                                  
                                                                                                                  
                                                                                                                  10,750
                                                                                                                  
                                                                                                                  
                                                                                                                  3,725
                                                                                                                  
                                                                                                                  
                                                                                                                  330,260Long-term
      debt principal payments
                                                                                                                  
                                                                                                                  
                                                                                                                  (18,856
                                                                                                                  )
                                                                                                                  
                                                                                                                  (17,092
                                                                                                                  )
                                                                                                                  
                                                                                                                  (139,598
                                                                                                                  )Purchase
      of common stock
                                                                                                                  
                                                                                                                  
                                                                                                                  (3,431
                                                                                                                  )
                                                                                                                  
                                                                                                                  (45,540
                                                                                                                  )
                                                                                                                  
                                                                                                                  (98,014
                                                                                                                  )Cash
      dividends paid
                                                                                                                  
                                                                                                                  
                                                                                                                  (20,057
                                                                                                                  )
                                                                                                                  
                                                                                                                  (20,055
                                                                                                                  )
                                                                                                                  
                                                                                                                  (16,764
                                                                                                                  )Contributions
      from noncontrolling partners
                                                                                                                  
                                                                                                                  
                                                                                                                  420
                                                                                                                  
                                                                                                                  
                                                                                                                  5,026
                                                                                                                  
                                                                                                                  
                                                                                                                  33,287Distributions
      to noncontrolling partners
                                                                                                                  
                                                                                                                  
                                                                                                                  (26,019
                                                                                                                  )
                                                                                                                  
                                                                                                                  (45,909
                                                                                                                  )
                                                                                                                  
                                                                                                                  (33,813
                                                                                                                  )Acquisition
      of noncontrolling interest
                                                                                                                  
                                                                                                                  
                                                                                                                  -
                                                                                                                  
                                                                                                                  
                                                                                                                  (11,716
                                                                                                                  )
                                                                                                                  
                                                                                                                  -Excess
      tax benefit on stock-based compensation
                                                                                                                  
                                                                                                                  
                                                                                                                  828
                                                                                                                  
                                                                                                                  
                                                                                                                  851
                                                                                                                  
                                                                                                                  
                                                                                                                  3,659Other
      financing activities
                                                                                                                  
                                                                                                                  
                                                                                                                  56
                                                                                                                  
                                                                                                                  
                                                                                                                  40
                                                                                                                  
                                                                                                                  
                                                                                                                  480Net
      cash (used in) provided by financing activities
                                                                                                                  
                                                                                                                  
                                                                                                                  (56,309
                                                                                                                  )
                                                                                                                  
                                                                                                                  (130,670
                                                                                                                  )
                                                                                                                  
                                                                                                                  79,497(Decrease)
      increase in cash and cash equivalents
                                                                                                                  
                                                                                                                  $
                                                                                                                  (121,887
                                                                                                                  )
                                                                                                                  $
                                                                                                                  108,409
                                                                                                                  
                                                                                                                  $
                                                                                                                  147,541Cash
      and cash equivalents at beginning of year
                                                                                                                  
                                                                                                                  
                                                                                                                  460,843
                                                                                                                  
                                                                                                                  
                                                                                                                  352,434
                                                                                                                  
                                                                                                                  
                                                                                                                  204,893Cash
      and cash equivalents at end of year
                                                                                                                  
                                                                                                                  $
                                                                                                                  338,956
                                                                                                                  
                                                                                                                  $
                                                                                                                  460,843
                                                                                                                  
                                                                                                                  $
                                                                                                                  352,434
  The
accompanying notes are an integral part of these consolidated financial
statements.
 F-5
 Table of Contents
 GRANITE
      CONSTRUCTION INCORPORATEDCONSOLIDATED
      STATEMENTS OF CASH FLOWS - (Continued)(in
      thousands)
   Years Ended December 31,
                
                
                2009
                
                
                2008
                
                
                2007Supplementary
      InformationCash
      paid during the period for:Interest
                
                $
                22,783
                
                $
                12,700
                
                $
                6,508Income
      taxes
                
                
                54,082
                
                
                68,492
                
                
                66,503Non-cash
      investing and financing activities:Restricted
      stock issued for services, net
                
                $
                18,405
                
                $
                6,961
                
                $
                11,190Restricted
      stock units issued
                
                
                52
                
                
                3,237
                
                
                -Accrued cash dividends
                
                
                5,023
                
                
                4,975
                
                
                5,129Assets
      acquired through issuances of debt
                
                
                -
                
                
                -
                
                
                3,202Debt
      payments from sale of assets
                
                
                -
                
                
                2,652
                
                
                9,237Settlement
      of debt from release of assets
                
                
                -
                
                
                5,250
                
                
                -
  The
accompanying notes are an integral part of these consolidated financial
statements.
  F-6
 Table of Contents
  GRANITE
CONSTRUCTION INCORPORATED
 NOTES
TO THE CONSOLIDATED FINANCIAL STATEMENTS
  1.
Summary of Significant Accounting Policies
  Description
of Business: Granite
Construction Incorporated is a heavy civil contractor and a construction
materials producer. We are engaged in the construction of roads, highways, mass
transit facilities, airport infrastructure, bridges, dams and canals. We are
also diversified into real estate investment and development. We have offices in
Alaska, Arizona, California, Florida, Nevada, New York, Oregon, Texas, Utah and
Washington. Unless otherwise indicated, the terms “we”, “us”, “our”, “Company”
and “Granite” refer to Granite Construction Incorporated and its consolidated
subsidiaries.
 Principles
of Consolidation: The consolidated financial statements include the
accounts of Granite Construction Incorporated and its wholly owned and majority
owned subsidiaries. All material inter-company transactions and accounts have
been eliminated. We use the equity method of accounting for affiliated companies
where we have the ability to exercise significant influence, but not control.
Additionally, we participate in joint ventures with other construction companies
and various real estate ventures. We have consolidated these ventures where we
have determined that through our participation we have a variable interest and
are the primary beneficiary as defined by Financial Accounting Standards Board
(“FASB”) Accounting Standards Codification (“ASC”) Topic 810, Consolidation, and related standards. We
account for our share of the operations of jointly controlled construction joint
ventures on a pro rata basis in the consolidated statements of income and as a
single line item in the consolidated balance sheets. Real
estate entities are accounted for under the equity method of accounting, as a
single line item in both the consolidated statements of income and in the
consolidated balance sheets where we have determined we are not the primary
beneficiary but do exercise significant influence. Effective
January 1, 2009, we adopted a new accounting standard that required
noncontrolling interests, formerly known as minority interest, to be
separately presented in both the consolidated balance sheets and consolidated
statements of income. Prior years have been adjusted to conform to this new
standard.
  Subsequent Events: In
preparing these financial statements, we have evaluated events and transactions
for potential recognition or disclosure through the date the financial
statements were issued.
  Use
of Estimates in the Preparation of Financial Statements: The
financial statements have been prepared in accordance with accounting principles
generally accepted in the United States of America (“U.S. GAAP”).  The
preparation of these financial statements requires management to make estimates
and assumptions that affect the reported amounts of assets and liabilities,
revenue and expenses, and related disclosure of contingent assets and
liabilities. Our estimates, judgments and assumptions are continually evaluated
based on available information and experiences; however, actual amounts could
differ from those estimates.
  Revenue
Recognition - Construction: Revenue
and earnings on construction contracts, including construction joint ventures,
are recognized under the percentage of completion method using the
ratio of costs incurred to estimated total costs. Revenue in an amount equal to
cost incurred is recognized prior to contracts reaching 25% completion,
thus deferring the related profit. It is our judgment that until a project
reaches 25% completion, there is insufficient information to determine the
estimated profit on the project with a reasonable level of certainty. In
the case of large, complex design/build projects we may defer profit recognition
beyond the point of 25% completion based on an evaluation of specific project
risks. The factors considered in this evaluation include the stage of design
completion, the stage of construction completion, status of outstanding purchase
orders and subcontracts, certainty of quantities of labor and materials,
certainty of schedule and the relationship with the
owner. 
 Revenue
from contract claims is recognized when we have a signed agreement and payment
is assured. Revenue from contract change orders, which occur in most large
projects, is recognized when the owner has agreed to the change order in
writing. Provisions are recognized in the consolidated statements of income
for the full amount of estimated losses on uncompleted contracts whenever
evidence indicates that the estimated total cost of a contract exceeds its
estimated total revenue. All contract costs,
including those associated with claims and change orders, are recorded
as incurred and revisions to estimated total costs are reflected as
soon as the obligation to perform is determined. Contract cost consists of
direct costs on contracts, including labor and materials, amounts payable to
subcontractors, direct overhead costs and equipment expense (primarily
depreciation, fuel, maintenance and repairs).
 
 F-7
 Table of Contents
 GRANITE
CONSTRUCTION INCORPORATED
 NOTES
TO THE CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
 The
accuracy of our revenue and profit recognition in a given period is dependent on
the accuracy of our estimates of the cost to complete each project. Cost
estimates for all of our significant projects use a highly detailed “bottom up”
approach and we believe our experience allows us to provide materially reliable
estimates. There are a number of factors that can contribute to changes in
estimates of contract cost and profitability. The most significant of these
include:
 ·
                    the completeness and
      accuracy of the original
bid;
 ·
                      costs associated
      with added scope changes;
 ·
                        extended overhead
      due to owner, weather and other delays;
 ·
                          subcontractor
      performance issues;
 ·
                          changes in
      productivity expectations;
 ·
                          site conditions that
      differ from those assumed in the original bid (to the extent contract
      remedies are unavailable);
 ·
                          the availability and
      skill level of workers in the geographic location of the project; and
 ·
                          a change in the
      availability and proximity of equipment and
    materials.
 The
foregoing factors as well as the stage of completion of contracts in process and
the mix of contracts at different margins may cause fluctuations in gross profit
between periods. Substantial changes in cost estimates, particularly in our
larger, more complex projects have had, and can in future periods have, a
significant effect on our profitability.
 Revenue Recognition -
Materials:Revenue from the sale of materials is recognized when
delivery occurs and risk of ownership passes to the customer.
  Revenue Recognition - Real Estate:Revenue
from the sale of real estate is recognized when title passes to the new owner,
receipt of funds is reasonably assured and we do not have substantial continuing
obligations on the property. If the criteria for recognition of a sale are
not met, we account for the continuing operations of the property by applying
the deposit, finance, installment or cost recovery methods, as
appropriate. We use estimates and forecasts to determine total costs at
completion of the development project to calculate cost of revenue related to
sales transactions.
  Balance
Sheet Classifications:Amounts receivable and payable under construction
contracts (principally retentions) that may extend beyond one year are included
in current assets and liabilities. Additionally, the cost of property
purchased for development and sale is included in current assets. A
one-year time period is used as the basis for classifying all other current
assets and liabilities.
  Cash
and Cash Equivalents: Cash equivalents are securities having remaining
maturities of three months or less from the date of
purchase.
  Marketable
Securities: We determine the classification of our marketable securities
at the time of purchase and re-evaluate these determinations at each balance
sheet date. Debt securities are classified as held-to-maturity when we have the
positive intent and ability to hold the securities to maturity. Held-to-maturity
investments are stated at amortized cost. Amortized
cost of debt securities is adjusted for amortization of premiums and accretion
of discounts to maturity, and is included in interest income. Realized gains and
losses are included in other income, net. The cost of securities sold is based
on the specific identification method.
 
 Debt securities which we
do not have the positive intent or ability to hold to maturity are classified as
available-for-sale, along with any investments in equity securities. Securities
available-for-sale are carried at fair value with the unrealized gains and
losses, net of income taxes, reported as a separate component of other
comprehensive income/loss until realized. Short-term marketable
securities include trading securities and are carried at fair value
with realized gains and losses reported in other income,
net.
  Financial
Instruments: The carrying value of marketable securities approximates
their fair value as determined by market quotes. Rates currently available to us
for debt with similar terms and remaining maturities are used to estimate the
fair value of existing debt. The carrying value of receivables and other amounts
arising out of normal contract activities, including retentions, which may be
settled beyond one year, is estimated to approximate fair value.  F-8
 Table of Contents
 GRANITE
CONSTRUCTION INCORPORATED
 NOTES
TO THE CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
 Fair Value of Financial Assets and
Liabilities: We measure and disclose certain financial assets
and liabilities at fair value. ASC Topic
820 defines fair value as the exchange price that would be received for an asset
or paid to transfer a liability (an exit price) in the principal or most
advantageous market for the asset or liability in an orderly transaction between
market participants on the measurement date. ASC Topic 820 also establishes a
fair value hierarchy which requires an entity to maximize the use of observable
inputs and minimize the use of unobservable inputs when measuring fair value. The
standard describes three levels of inputs that may be used to measure fair
value:
 Level 1 -
Quoted prices in active markets for identical assets or
liabilities.
  Level 2 -
Observable inputs other than Level 1 prices such as quoted prices for similar
assets or liabilities; quoted prices in markets that are not active; or other
inputs that are observable or can be corroborated by observable market data for
substantially the full term of the assets or liabilities.
  Level 3 -
Unobservable inputs that are supported by little or no market activity and that
are significant to the fair value of the assets or liabilities.
  We
utilize the active market approach to measure fair value for our financial
assets and liabilities.
 Concentrations of Credit Risk and
Other Risks:Financial instruments,
which potentially subject us to concentrations of credit risk, consist primarily
of cash and cash equivalents, short-term and long-term marketable securities,
and accounts receivable. We maintain our cash and cash equivalents and our
marketable securities with several financial institutions. We invest with high
credit quality financial institutions and, by policy, limit the amount of credit
exposure to any one financial institution.
 
 Our
receivables are from customers concentrated in the United States and we
have no foreign operations. We perform ongoing credit evaluations of our
customers and generally do not require collateral, although the law provides us
the ability to file mechanics’ liens on real property improved for private
customers in the event of non-payment by such customers. We maintain an
allowance for doubtful accounts which has been within management’s
expectations.
 
 A
significant portion of our labor force is subject to collective bargaining
agreements.
 Inventories:
Inventories consist primarily of quarry products valued at the lower of average
cost or market. We write down the inventories based on
estimated quantities of materials on hand in excess of estimated
foreseeable use.
 F-9
 Table of Contents
 
 GRANITE
CONSTRUCTION INCORPORATED
 NOTES
TO THE CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
  Property
and Equipment: Property and equipment are stated at cost. Depreciation
for construction and other equipment is primarily provided using accelerated
methods over lives ranging from three to seven years, and the straight-line
method over lives from three to twenty years for the remaining depreciable
assets. We believe that accelerated methods best approximate the service
provided by the construction and other equipment. Depletion of quarry property
is based on the usage of depletable reserves. We frequently sell property and
equipment that has reached the end of its useful life or no longer meets our
needs, including depleted quarry property. Such property is held in property and
equipment until sold. The cost and accumulated depreciation or depletion of
property sold or retired is removed from the accounts and gains or losses, if
any, are reflected in earnings for the period. Maintenance and repairs are
charged to operations as incurred.
 
 Long-lived
assets: We
review property and equipment, and amortizable intangible assets for
impairment whenever events or changes in circumstances indicate the carrying
amount of an asset may not be recoverable. Recoverability of these assets is
measured by comparison of their carrying amounts to future undiscounted cash
flows the assets are expected to generate. If the assets are considered to be
impaired, an impairment charge will be recognized equal to the
amount by which the carrying value of the asset exceeds its fair
value.
 
 Amortizable
intangible assets include covenants not to compete, permits, trade names and
customer lists which are being amortized on a straight-line basis over terms
from three to thirty years.
 
 Real
Estate Held forDevelopmentandSale:
We
assess impairment of our real estate held for development and sale at least
annually or whenever events or changes in circumstances indicate
that carrying values of these assets may not be recoverable. Events or
changes in circumstances, which could trigger an impairment review include, but
are not limited
to:
 ·
                significant
      decreases in the market price of the
  asset;
 ·
                  significant adverse
      changes in legal factors or the business
  climate;
 ·
                    accumulation of
      costs significantly in excess of the amount originally expected for the
      acquisition, development or construction of the asset;
      and
 ·
                      current period cash
      flow or operating losses combined with a history of losses, or a forecast
      of continuing losses associated with the use of the
      asset.
 
 If events and changes in
circumstances indicate that the carrying amounts of the real estate held for
development and sale might not be fully recoverable, we compare projected
undiscounted net cash flows associated with the related asset or group of assets
against their respective carrying amounts. Future undiscounted cash flows are
estimated based on entitlement status, market conditions, cost of construction,
debt load, development schedules, status of joint venture partners and other
factors applicable to the specific project. In the event that the
projected undiscounted cash flows are not sufficient to recover the carrying
value of the assets, the assets are written down to their estimated fair values.
Fair value is estimated based on the expected future cash flows
attributable to the asset or group of assets and on other assumptions
that market participants would use in determining fair value, such as market
discount rates, transaction prices for other comparable assets, and other market
driven data. Our estimates of cash
flows may differ from actual cash flows due to, among other things, fluctuations
in interest rates, decisions made by jurisdictional agencies, economic
conditions, or changes to our business
operations.
 F-10
 Table of Contents
 GRANITE
CONSTRUCTION INCORPORATED
 NOTES
TO THE CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
 Goodwill and Indefinite-Lived
Intangible Assets:We perform impairment
tests annually during the fourth quarter and more frequently when events and
circumstances occur that indicate a possible impairment of goodwill and
indefinite-lived intangible assets.
  In
determining whether there is an impairment of goodwill, we calculate the
estimated fair value of the reporting unit in which the goodwill is recorded
using a discounted future cash flow method.  We then compare the
resulting fair value to the net book value of the reporting unit, including
goodwill. If the net book value of a reporting unit exceeds its fair value, we
measure and record the amount of the impairment loss by comparing the implied
fair value of the reporting unit’s goodwill with the carrying amount of that
goodwill. Our assessment of goodwill impairment during the fourth quarter of
2009 indicated that the fair value of the reporting unit substantially
exceeded its net book value and therefore goodwill was not
impaired.
  In
determining whether there is an impairment of indefinite-lived intangible
assets, we compare the fair value of the asset to the carrying value. We use
internal discounted cash flow estimates, quoted market prices when available and
independent appraisals, as appropriate, to determine fair value. If the carrying
value exceeds the fair value, an impairment charge is recognized equal to the
amount by which the carrying value of the asset exceeds its fair value. During
2009, we recognized an impairment charge of $1.7 million related to water use
rights in Nevada.
 Reclamation
Costs: We account for the costs related to legal obligations to reclaim
aggregate mining sites and other facilities by recording our estimated
reclamation liability when incurred, capitalizing the estimated liability as
part of the related asset’s carrying amount and allocating it to expense over
the asset’s useful life.
  Warranties:
Many
of our construction contracts contain warranty provisions covering defects in
equipment, materials, design or workmanship that generally run from six months
to one year after our customer accepts the contract. Because of the nature of
our projects, including contract owner inspections of the work both during
construction and prior to acceptance, we have not experienced material warranty
costs for these short-term warranties and therefore, do not believe an accrual
for these costs is necessary. Certain construction contracts carry longer
warranty periods, ranging from two to ten years for which we have accrued an
estimate of warranty cost. The warranty cost is estimated based on our
experience with the type of work and any known risks relative to the project