GRANITE CONSTRUCTION INC - 10-Q Quarterly Report

UNITED STATES
SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-Q


(Mark one)
[X]		Quarterly Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934

For the Quarter ended September 30, 2003


[ ]		Transition Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934
		For the transition period from ______________________________to ___________________

Commission File No. 1-12911

GRANITE CONSTRUCTION INCORPORATED


State of Incorporation:		I.R.S. Employer Identification Number:
Delaware		77-0239383

Corporate Administration:

585 W. Beach Street
Watsonville, California 95076
(831) 724-1011

Indicate by checkmark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.
Yes [X] No [ ]

Indicate by checkmark whether the registrant is an accelerated filer (as defined in Rule 12b-2 of the Exchange Act). Yes [X] No [ ]

Indicate the number of shares outstanding of each of the issuer’s classes of common stock, as of November 5, 2003.


Class		Outstanding

Common Stock, $0.01 par value		41, 533,436 shares

TABLE OF CONTENTS


PART I. FINANCIAL INFORMATION
	Item 1. FINANCIAL STATEMENTS
		CONDENSED CONSOLIDATED BALANCE SHEETS
		CONDENSED CONSOLIDATED STATEMENTS OF INCOME
		CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
		NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
	Item 2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
	Item 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
	Item 4. CONTROLS AND PROCEDURES
PART II. OTHER INFORMATION
	Item 1. LEGAL PROCEEDINGS
	Item 2. CHANGES IN SECURITIES AND USE OF PROCEEDS
	Item 3. DEFAULTS UPON SENIOR SECURITIES
	Item 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
	Item 5. OTHER INFORMATION
	Item 6. EXHIBITS AND REPORTS ON FORM 8-K
SIGNATURES
Exhibit 10.1
Exhibit 31.1
Exhibit 31.2
Exhibit 32.1
Exhibit 32.2

Index


			Page

PART I. FINANCIAL INFORMATION				3
	Item 1.	Financial Statements (unaudited)
		Condensed Consolidated Balance Sheets as of September 30, 2003 and December 31, 2002		4
		Condensed Consolidated Statements of Income for the Three Months and Nine Months Ended September 30, 2003 and 2002		5
		Condensed Consolidated Statements of Cash Flows for the Nine Months Ended September 30, 2003 and 2002		6
		Notes to the Condensed Consolidated Financial Statements		7
	Item 2.	Management’s Discussion and Analysis of Financial Condition and Results of Operations		13
	Item 3.	Quantitative and Qualitative Disclosures About Market Risk		23
	Item 4.	Controls and Procedures		23
PART II.OTHER INFORMATION				24
	Item 1.	Legal Proceedings		25
	Item 2.	Changes in Securities and Use of Proceeds		25
	Item 3.	Defaults Upon Senior Securities		25
	Item 4.	Submission of Matters to a Vote of Security Holders		25
	Item 5.	Other Information		25
	Item 6.	Exhibits and Reports on Form 8-K		25

PART I. FINANCIAL INFORMATION

Item 1. FINANCIAL STATEMENTS (unaudited)

Granite Construction Incorporated
CONDENSED CONSOLIDATED BALANCE SHEETS
(In thousands, except share and per share data)


			September 30,			December 31,
			2003			2002

			(Unaudited)
Assets
Current assets
	Cash and cash equivalents		$	73,383		$	52,032
	Short-term marketable securities			96,992			96,900
	Accounts receivable, net			326,757			265,896
	Costs and estimated earnings in excess of billings			42,170			42,966
	Inventories			31,557			29,984
	Deferred income taxes			22,602			23,056
	Equity in construction joint ventures			35,750			24,329
	Other current assets			10,149			12,732

		Total current assets		639,360			547,895

Property and equipment, net				351,447			347,963

Long-term marketable securities				43,023			33,762

Investments in affiliates				19,218			18,970

Other assets				41,746			35,229

			$	1,094,794		$	983,819

Liabilities and Stockholders’ Equity
Current liabilities
	Current maturities of long-term debt		$	10,161		$	8,640
	Accounts payable			152,282			118,813
	Billings in excess of costs and estimated earnings			108,670			105,725
	Accrued expenses and other current liabilities			130,089			94,321

		Total current liabilities		401,202			327,499

Long-term debt				127,473			132,380

Other long-term liabilities				23,217			13,742

Deferred income taxes				40,011			40,011

Commitments and contingencies
Minority interest in consolidated subsidiaries				9,867			15,318

Stockholders’ equity
	Preferred stock, $0.01 par value, authorized 3,000,000 shares, none outstanding			—			—
	Common stock, $0.01 par value, authorized 100,000,000 shares; issued and outstanding 41,533,436 shares in 2003 and 41,257,015 in 2002			415			413
	Additional paid-in capital			73,673			69,390
	Retained earnings			432,567			398,383
	Accumulated other comprehensive loss			(592	)		(1,402	)

				506,063			466,784
	Unearned compensation			(13,039	)		(11,915	)

				493,024			454,869

			$	1,094,794		$	983,819

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

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


				Three Months Ended September 30,						Nine Months Ended September 30,

				2003			2002			2003			2002

Revenue:
	Construction			$	496,669		$	508,441		$	1,162,534		$	1,143,629
	Material sales				83,531			75,287			189,231			168,254

		Total revenue			580,200			583,728			1,351,765			1,311,883

Cost of revenue:
	Construction				433,198			446,098			1,029,898			1,005,799
	Material sales				64,943			60,409			153,608			138,092

		Total cost of revenue			498,141			506,507			1,183,506			1,143,891

			Gross Profit		82,059			77,221			168,259			167,992
General and administrative expenses					42,533			40,182			115,478			106,168

			Operating income		39,526			37,039			52,781			61,824

Other income (expense):
	Interest income				1,145			2,122			4,633			6,014
	Interest expense				(1,939	)		(2,527	)		(6,577	)		(6,703	)
	Gain on sales of property and equipment				3,018			939			3,546			1,570
	Equity in income (loss) of affiliates				(37	)		466			18,088			2,419
	Other, net				86			652			2,364			(1,342	)

					2,273			1,652			22,054			1,958

	Income before provision for income taxes and minority interest				41,799			38,691			74,835			63,782
Provision for income taxes					15,131			13,695			27,090			23,104
Minority interest in consolidated subsidiaries					(834	)		(1,927	)		(1,099	)		(2,694	)

			Net income	$	25,834		$	23,069		$	46,646		$	37,984

Net income per share:
	Basic			$	0.64		$	0.57		$	1.16		$	0.95
	Diluted			$	0.63		$	0.57		$	1.14		$	0.94
Weighted average shares of common stock Basic					40,217			40,188			40,160			40,039
	Diluted				40,908			40,788			40,741			40,615
Dividends per share				$	0.10		$	0.08		$	0.30		$	0.24

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

Granite Construction Incorporated
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited - in thousands)


Nine Months Ended September 30,				2003			2002

Operating Activities
	Net income			$	46,646		$	37,984
	Adjustments to reconcile net income to net cash provided by operating activities:
		Depreciation, depletion and amortization			51,371			40,024
		Gain on sales of property and equipment			(3,546	)		(1,570	)
		Change in deferred income taxes			—			1,456
		Amortization of unearned compensation			4,496			4,745
		Common stock contributed to ESOP			—			3,989
		Minority interest in income of consolidated subsidiaries			1,099			2,694
		Equity in income of affiliates			(18,088	)		(2,419	)
		Gain on sale of equity investment			(1,853	)		—
	Changes in assets and liabilities, net of the effects of acquisitions:
		Accounts and notes receivable			(60,861	)		(81,725	)
		Inventories			(1,573	)		(1,492	)
		Equity in construction joint ventures			(11,421	)		(500	)
		Other assets			3,801			1,998
		Accounts payable			33,469			14,335
		Billings in excess of costs and estimated earnings, net			3,741			3,043
		Accrued expenses and other liabilities			34,725			34,121

			Net cash provided by operating activities		82,006			56,683

Investing Activities
	Purchases of marketable securities				(149,243	)		(454,196	)
	Maturities of marketable securities				141,153			387,301
	Additions to property and equipment				(54,435	)		(43,804	)
	Proceeds from sales of property and equipment				6,423			4,621
	Proceeds from sale of equity investment				6,033			13,051
	Distributions from affiliates, net				13,660			75
	Acquisitions of businesses, net of cash received				—			(22,100	)
	Other investing activities				(3,632	)		607

			Net cash used in investing activities		(40,041	)		(114,445	)

Financing Activities
	Additions of long-term debt				20,480			21,625
	Repayments of long-term debt				(28,767	)		(35,999	)
	Dividends paid				(11,610	)		(9,894	)
	Proceeds from exercise of warrants				—			2,878
	Repurchase of common stock and other				(717	)		(10,655	)

			Net cash used in financing activities		(20,614	)		(32,045	)

Increase (decrease) in cash and cash equivalents					21,351			(89,807	)
Cash and cash equivalents at beginning of period					52,032			125,174

Cash and cash equivalents at end of period				$	73,383		$	35,367

Supplementary Information
	Cash paid during the period for:
		Interest		$	7,204		$	6,376
		Income taxes			8,819			5,664
	Non-cash investing and financing activity:
		Restricted stock issued for services		$	5,908		$	7,041
		Dividends accrued but not paid			4,153			3,311
		Financed acquisition of long-term asset			4,004			—
		Subsidiary preferred stock exchanged for subsidiary common stock			—			3,299

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

Granite Construction Incorporated
NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

1. Basis of Presentation:

The condensed consolidated financial statements included herein have been prepared by Granite Construction Incorporated (“we”, “us”, “our” or “Granite”) without audit, pursuant to the rules and regulations of the Securities and Exchange Commission and should be read in conjunction with our Annual Report on Form 10-K for the year ended December 31, 2002. Certain information and footnote disclosures normally included in financial statements prepared in accordance with accounting principles generally accepted in the United States of America have been condensed or omitted, although we believe the disclosures which are made are adequate to make the information presented not misleading. Further, the condensed consolidated financial statements reflect, in the opinion of management, all normal recurring adjustments necessary to present fairly our financial position at September 30, 2003 and the results of our operations and cash flows for the periods presented. The December 31, 2002 condensed consolidated balance sheet data was derived from audited consolidated financial statements, but does not include all disclosures required by accounting principles generally accepted in the United States of America.

Interim results are subject to significant seasonal variations and the results of operations for the three and nine months ended September 30, 2003 are not necessarily indicative of the results to be expected for the full year.

2. Newly Effective and Recently Issued Accounting Pronouncements:

FIN 46

In January 2003, the Financial Accounting Standards Board (“FASB”) issued Interpretation No. 46 (“FIN 46”), “Consolidation of Variable Interest Entities - an Interpretation of ARB No. 51.” FIN 46 addresses consolidation accounting for certain entities in which equity investors do not have the characteristics of a controlling financial interest or do not have sufficient equity at risk for the entity to finance its activities without additional subordinated financial support from other parties. FIN 46 was effective immediately for all Variable Interest Entities created or acquired after January 31, 2003. For Variable Interest Entities created or acquired prior to February 1, 2003, the provisions of FIN 46 must be applied at the end of the first interim or annual period ending after December 15, 2003. As more fully described in our Annual Report on Form 10-K under the section entitled “Critical Accounting Policies,” we participate in various construction joint ventures in order to share expertise, risk and resources for certain highly complex projects. We are currently evaluating whether certain of these jointly controlled entities meet the definition of a Variable Interest Entity in FIN 46. If all of the entities being evaluated met the definition and we were required to consolidate them, the effect on our financial position would be an increase in assets (primarily current assets) of approximately $110.0 million and an increase in current liabilities of approximately $85.0 million. Additionally, consolidation of these entities would increase our revenue and cost of revenue, but there would be no impact on net income.

SFAS 150

In May 2003, the FASB issued Statement of Financial Accounting Standards No. 150 (“SFAS 150”), “Accounting for Certain Financial Instruments with Characteristics of Both Liabilities and Equity.” SFAS 150 establishes standards for how an issuer classifies and measures certain financial instruments with characteristics of both liabilities and equity. It requires that an issuer classify a financial instrument that is within its scope as a liability (or an asset in some circumstances). It was effective for financial instruments entered into or modified after May 31, 2003, and otherwise was effective at the beginning of the first interim period beginning after June

Granite Construction Incorporated
NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

15, 2003, except for mandatorily redeemable financial instruments of nonpublic entities. On November 7, 2003 the FASB issued FASB Staff Position No. 150-3 (“FSP 150-3”) “Effective Date, Disclosures, and Transition for Mandatorily Redeemable Financial Instruments of Certain Nonpublic Entities and Certain Mandatorily Redeemable Noncontrolling Interests under FASB Statement No. 150, Accounting for Certain Financial Instruments with Characteristics of Both Liabilities and Equity.” FSP 150-3 requires that implementation of certain provisions of SFAS 150 be deferred indefinitely, including those provisions that pertain to mandatorily redeemable financial instruments of nonpublic entities and the measurement provisions (but not the classification provisions) for certain mandatorily redeemable noncontrolling interests.

Substantially all of the non-Granite held common shares of our majority-owned subsidiary, Wilder Construction Company (“Wilder”) are redeemable by the holder upon retirement, voluntary termination, death or permanent disability. Approximately 60% of these shares are outside the scope of APB Opinion No. 25, “Accounting for Stock Issued to Employees” and are therefore subject to the provisions of SFAS 150. Wilder generally has up to eight years to pay the redemption price following a redemption event, as defined in its shareholder agreements, and the redemption price is adjusted each year, primarily for the Wilder net income attributable to the shares. Pursuant to FSP 150-3, we have adopted the classification provisions of SFAS 150 by reclassifying the carrying amount of these Wilder shares from minority interest in consolidated subsidiaries to other long-term liabilities on our balance sheet. If all of these Wilder shares had been redeemed at the September 30, 2003 redemption price, a payment of approximately $13.0 million would have been required.

3. Inventories:

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

4. Property and Equipment:


	September 30, 2003
in thousands	(Unaudited)		December 31, 2002

Land	$	51,183	$	50,697
Quarry property		75,830		75,459
Buildings and leasehold improvements		61,951		59,229
Equipment and vehicles		694,215		656,857
Office furniture and equipment		13,363		11,782

		896,542		854,024
Less accumulated depreciation, depletion and amortization		545,095		506,061

	$	351,447	$	347,963

Granite Construction Incorporated
NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

5. Intangible Assets:

The following intangible assets are included in other assets on our condensed consolidated balance sheet:


		September 30, 2003 (Unaudited)

		Gross		Accumulated			Net
in thousands		Value		Amortization			Value

Amortized intangible assets:
	Covenants not to compete	$	1,249	$	(612	)	$	637
	Permits		2,000		(328	)		1,672
	Trade names		1,602		(962	)		640
	Acquired contracts		900		(900	)		—
	Other		622		(167	)		455

	Total amortized intangible assets		6,373		(2,969	)		3,404
Goodwill			19,067		—			19,067

		$	25,440	$	(2,969	)	$	22,471


		December 31, 2002

		Gross		Accumulated			Net
in thousands		Value		Amortization			Value

Amortized intangible assets:
	Covenants not to compete	$	2,249	$	(1,424	)	$	825
	Permits		2,000		(228	)		1,772
	Trade names		1,602		(660	)		942
	Acquired contracts		900		(656	)		244
	Other		622		(104	)		518

	Total amortized intangible assets		7,373		(3,072	)		4,301
Goodwill			19,067		—			19,067

		$	26,440	$	(3,072	)	$	23,368

Goodwill at September 30, 2003 and December 31, 2002 relates primarily to the HCD operating segment.

Additionally, purchased lease rights related to certain aggregate reserves of our Branch Division operating segment with a net book value of $16,361,000 at September 30, 2003 and $15,796,000 at December 31, 2002, are included in property and equipment. These assets are amortized based on the usage of the related reserves.

Aggregate amortization expense related to intangible assets was $316,000 and $383,000 for the three months ended September 30, 2003 and 2002, respectively, and $1,019,000 and $1,092,000 for the nine months ended September 30, 2003 and 2002, respectively.

Granite Construction Incorporated
NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

6. Earnings Per Share:

A reconciliation of shares used in calculating basic and diluted earnings per share in the accompanying condensed consolidated statements of income is as follows:


					Three Months Ended				Nine Months Ended
					September 30,				September 30,

in thousands					2003		2002		2003		2002

Basic weighted average shares outstanding
	Weighted average common stock outstanding					41,533		41,460		41,443		41,300
	Less weighted average restricted stock outstanding					1,316		1,272		1,283		1,261

			Total			40,217		40,188		40,160		40,039

Diluted weighted average shares outstanding
	Basic weighted shares outstanding					40,217		40,188		40,160		40,039
	Effect of dilutive securities:
		Common stock options				36		21		25		21
		Restricted stock				655		579		556		555

				Total		40,908		40,788		40,741		40,615

Common stock options, warrants and common stock equivalents representing 30 shares and 24 shares for the three months ended September 30, 2003 and 2002, respectively and 67 shares and 8 shares for the nine months ended September 30, 2003 and 2002, respectively, have been excluded from the calculation of diluted earnings per share because their effects are anti-dilutive.

7. Comprehensive Income:

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


		Three Months Ended					Nine Months Ended
		September 30,					September 30,

in thousands		2003		2002			2003		2002

Net income		$	25,834	$	23,069		$	46,646	$	37,984
Other comprehensive income (loss):
	Changes in net unrealized losses on investments		196		(807	)		810		(1,207	)

Total comprehensive income		$	26,030	$	22,262		$	47,456	$	36,777

8. Commitments and Contingencies:

We are a party to a number of legal proceedings and believe that the nature and number of these proceedings are typical for a construction firm of our size and scope. Our litigation typically involves claims regarding public liability or contract related issues. While management currently believes that the ultimate outcome of these proceedings, individually and in the aggregate, will not have a material adverse effect on our financial position or overall trends in results of operations, litigation is subject to inherent uncertainties. Were an unanticipated unfavorable ruling to occur, there exists the possibility of a material adverse impact on the results of operations for the period in which the ruling occurs.

9. Business Segment Information:

We have two reportable segments: the Branch Division and the Heavy Construction Division (“HCD”). The Branch Division is comprised of branch offices, including our majority owned subsidiary, Wilder Construction Company, that serve local markets, while HCD pursues major

Granite Construction Incorporated
NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

infrastructure projects throughout the nation. HCD focuses on building larger heavy-civil projects with contract durations that are frequently greater than two years, while the Branch Division projects are typically smaller in size and shorter in duration. HCD has been the primary participant in our construction joint ventures.

The accounting policies of the segments are the same as those described in the summary of significant accounting policies contained in our 2002 Annual Report on Form 10-K. We evaluate performance based on operating profit or loss, which does not include income taxes, interest income, interest expense or other income (expense).

Information about Profit and Assets (in thousands):


Three Months Ended September 30,		HCD			Branch		Total

2003
	Revenue from external customers	$	185,124		$	395,076	$	580,200
	Inter-segment revenue transfer		(1,784	)		1,784		—

	Net revenue		183,340			396,860		580,200
	Depreciation, depletion and amortization		4,522			11,041		15,563
	Operating profit	$	4,877		$	48,046	$	52,923

2002
	Revenue from external customers	$	156,782		$	426,946	$	583,728
	Inter-segment revenue transfer		(3,758	)		3,758		—

	Net revenue		153,024			430,704		583,728
	Depreciation, depletion and amortization		3,510			10,784		14,294
	Operating profit	$	6,730		$	42,778	$	49,508


Nine Months Ended September 30,		HCD			Branch		Total

2003
	Revenue from external customers	$	510,494		$	841,271	$	1,351,765
	Inter-segment revenue transfer		(7,218	)		7,218		—

	Net revenue		503,276			848,489		1,351,765
	Depreciation, depletion and amortization		11,259			33,756		45,015
	Operating profit		18,914			64,419		83,333
	Property and equipment	$	43,600		$	288,099	$	331,699

2002
	Revenue from external customers	$	437,306		$	874,577	$	1,311,883
	Inter-segment revenue transfer		(14,915	)		14,915		—

	Net revenue		422,391			889,492		1,311,883
	Depreciation, depletion and amortization		8,771			29,556		38,327
	Operating profit		16,495			77,414		93,909
	Property and equipment	$	39,939		$	271,106	$	311,045

Reconciliation of Segment Profit to Consolidated Totals (in thousands):


	Three Months Ended						Nine Months Ended
	September 30,						September 30,

	2003			2002			2003			2002

Profit:
Total profit for reportable segments	$	52,923		$	49,508		$	83,333		$	93,909
Other income (expense)		2,273			1,652			22,054			1,958
Unallocated other corporate expenses		(13,397	)		(12,469	)		(30,552	)		(32,085	)

Income before provision for income taxes and minority interest	$	41,799		$	38,691		$	74,835		$	63,782

Granite Construction Incorporated
NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

10. Investments in Affiliates:

On January 3, 2003, the California Private Transportation Company, LP (“CPTC”), of which we are a 22.2% limited partner, closed the sale of the State Route 91 Toll Road Franchise to the Orange County Transportation Authority for $72.5 million in cash and the assumption of $135.0 million in long-term debt. We completed construction of the $60.4 million project in 1995 and have maintained an equity interest in the partnership since its inception. Included in other income (expense) for the nine months ended September 30, 2003 is $18.4 million related to this sale by CPTC.

In June 2003, T.I.C. Holdings, Inc. (“TIC”) repurchased 0.3 million shares of the TIC shares held by us for a cash payment of $6.0 million. We account for our investment in TIC using the cost method. This transaction reduced our ownership interest from 15.5% to 10.6% and resulted in a gain of $1.9 million, which is included in other income (expense) for the nine months ended September 30, 2003.

11. Line of Credit:

On June 27, 2003, we entered into an agreement for a $100.0 million bank revolving line of credit, which allows for unsecured borrowings for up to three years through June 27, 2006, with interest rate options. Outstanding borrowings under the revolving line of credit are at our choice of selected LIBOR rates plus a margin (1.25% at September 30, 2003) that is recalculated quarterly. This line of credit replaced a $60.0 million line of credit we entered into in June 2001. Additionally, we have standby letters of credit totaling $1.4 million, of which $1.2 million reduces the amount available under the line of credit. The unused and available portion of the line of credit at September 30, 2003 was $98.8 million. Restrictive covenants under the terms of this line of credit include the maintenance of certain financial ratios and tangible net worth (as defined) of approximately $386.0 million. We are in compliance with these covenants and the covenants of our other debt agreements at September 30, 2003.

12. Reclassifications:

Certain financial statement items have been reclassified to conform to the current year’s format. These reclassifications had no impact on previously reported net income, financial position or cash flows.

Granite Construction Incorporated
NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

Item 2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

Forward-Looking Disclosure:

This Quarterly Report on Form 10-Q contains “forward-looking statements” within the meaning of the Private Litigation Reform Act of 1995 regarding future events and the future results of Granite that are based on current expectations, estimates, forecasts, and projects as well as the beliefs and assumptions of Granite’s management. Words such as “outlook”, “believes”, “expects”, “appears”, “may”, “will”, “should”, “anticipates” or the negative thereof or comparable terminology, are intended to identify such forward-looking statements. These forward-looking statements are only predictions and are subject to risks, uncertainties and assumptions that are difficult to predict. Therefore actual results may differ materially and adversely from those expressed in any forward-looking statements. Factors that might cause or contribute to such differences include, but are not limited to, those discussed in our Annual Report on Form 10-K under the section entitled “Risk Factors”. You should not place undue reliance on these forward-looking statements, which speak only as of the date of this Report. Granite undertakes no obligation to revise or update publicly any forward-looking statements for any reason.

General:

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

Our contracts are obtained primarily through competitive bidding in response to advertisements by federal, state and local agencies, private parties and, to a lesser extent, through negotiation with private parties. Our bidding activity is affected by such factors as backlog, current utilization of equipment and other resources, ability to obtain necessary surety bonds and competitive considerations. Bidding activity, backlog and revenue resulting from the award of new contracts may vary significantly from period to period.

Our general and administrative costs include salaries and related expenses, incentive compensation, discretionary profit sharing and other variable compensation, as well as other overhead costs to support our overall business. In general, these costs will increase in response to the growth and the related increased complexity of our business. These costs may also vary depending on the number of projects in process in a particular area and the corresponding level of estimating activity. For example, as large projects are completed or if the level of work slows down in a particular area, we will often re-assign employees from those projects to estimating and bidding activities until another project assignment becomes available, temporarily moving their salaries and related costs from cost of revenue to general and administrative expense. Additionally, our compensation strategy for selected management personnel is to rely heavily on a variable cash and restricted stock performance-based incentive element. The cash portion of these incentives is expensed when earned while the restricted stock portion is expensed over the vesting period of the stock (generally five years). Depending on the mix of cash and restricted stock, these incentives can have the effect of increasing general and administrative expenses in a very profitable year and decreasing expenses in less profitable years.

Granite Construction Incorporated
NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

Results of Operations


			Three Months Ended September 30,										Nine Months Ended September 30,

Revenue			2003					2002					2003					2002

(in thousands)			Amount		Percent			Amount		Percent			Amount		Percent			Amount		Percent

Revenue by Division:
	Branch Division		$	396,860		68.4	%	$	430,704		73.8	%	$	848,489		62.8	%	$	889,492		67.8	%
	Heavy Construction Division			183,340		31.6	%		153,024		26.2	%		503,276		37.2	%		422,391		32.2	%

			$	580,200		100.0	%	$	583,728		100.0	%	$	1,351,765		100.0	%	$	1,311,883		100.0	%

Revenue by Geographic Area:
	California		$	218,247		37.6	%	$	254,273		43.6	%	$	480,951		35.7	%	$	547,472		41.8	%
	West (excluding California)			205,412		35.4	%		219,138		37.5	%		468,067		34.5	%		448,887		34.2	%
	Midwest			20,313		3.5	%		19,507		3.3	%		44,988		3.4	%		54,941		4.2	%
	Northeast			38,825		6.7	%		25,045		4.3	%		109,151		8.1	%		71,538		5.5	%
	South			97,403		16.8	%		65,765		11.3	%		248,608		18.3	%		189,045		14.3	%

			$	580,200		100.0	%	$	583,728		100.0	%	$	1,351,765		100.0	%	$	1,311,883		100.0	%

Revenue by Market Sector:
	Federal Agencies		$	20,535		3.5	%	$	18,972		3.3	%	$	42,747		3.2	%	$	44,438		3.4	%
	State Agencies			241,433		41.6	%		233,109		39.9	%		544,785		40.3	%		535,452		40.8	%
	Local Public Agencies			159,976		27.6	%		177,107		30.3	%		398,924		29.5	%		361,091		27.5	%

		Total Public Sector		421,944		72.7	%		429,188		73.5	%		986,456		73.0	%		940,981		71.7	%

	Private Sector			74,725		12.9	%		79,253		13.6	%		176,078		13.0	%		202,648		15.5	%
	Material Sales			83,531		14.4	%		75,287		12.9	%		189,231		14.0	%		168,254		12.8	%

			$	580,200		100.0	%	$	583,728		100.0	%	$	1,351,765		100.0	%	$	1,311,883		100.0	%

Revenue: Total revenue for the three-month period ended September 30, 2003 decreased $3.5 million and for the nine-month period ended September 30, 2003 increased $39.9 million over the corresponding 2002 periods. Branch Division revenue for the nine month period in 2003 includes $161.1 million from our majority-owned Wilder Construction Company (“Wilder”) subsidiary, which was consolidated in our financial statements beginning in May 2002, versus $113.5 million in the nine month period in 2002. Branch Division revenue for the three-month period ended September 30, 2003 decreased over the corresponding 2002 period by $33.8 million and decreased for the nine month period (excluding Wilder revenue) by $88.7 million, due primarily to the continuing effects of a weaker general economy and uncertainty surrounding public funding, particularly in California (see “Outlook”). Revenue from our Heavy Construction Division increased 19.8% and 19.1% in the three and nine months ended September 30, 2003 over the corresponding periods in 2002 due primarily to the results from a higher backlog at the beginning of 2003.

Granite Construction Incorporated
NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS


			September 30,					June 30,					September 30,

Backlog			2003					2003					2002

(in thousands)			Amount		Percent			Amount		Percent			Amount		Percent

Backlog by Division:
	Branch Division		$	482,321		25.4	%	$	536,209		27.8	%	$	529,752		30.4	%
	Heavy Construction Division			1,417,794		74.6	%		1,395,185		72.2	%		1,213,750		69.6	%

			$	1,900,115		100.0	%	$	1,931,394		100.0	%	$	1,743,502		100.0	%

Backlog by Geographic Area:
	California		$	311,264		16.4	%	$	296,469		15.4	%	$	308,185		17.7	%
	West (excluding California)			310,053		16.4	%		401,387		20.8	%		496,460		28.5	%
	Midwest			44,703		2.4	%		65,186		3.3	%		106,743		6.1	%
	Northeast			561,494		29.5	%		426,987		22.1	%		257,605		14.8	%
	South			672,601		35.3	%		741,365		38.4	%		574,509		32.9	%

			$	1,900,115		100.0	%	$	1,931,394		100.0	%	$	1,743,502		100.0	%

Backlog by Market Sector:
	Federal agencies		$	81,616		4.3	%	$	88,997		4.6	%	$	89,981		5.2	%
	State agencies			790,556		41.6	%		847,726		43.9	%		737,691		42.3	%
	Local public agencies			850,163		44.7	%		817,399		42.3	%		773,050		44.3	%

		Total public sector		1,722,335		90.6	%		1,754,122		90.8	%		1,600,722		91.8	%

	Private sector			177,780		9.4	%		177,272		9.2	%		142,780		8.2	%

			$	1,900,115		100.0	%	$	1,931,394		100.0	%	$	1,743,502		100.0	%

Backlog: Our backlog at September 30, 2003 of $1,900.1 million was $156.6 million, or 9.0%, higher than the backlog at September 30, 2002. Branch Division backlog decreased by $47.4 million, or 9.0%, from September 30, 2002 to September 30, 2003. The Branch Division backlog decrease occurred primarily in the public sector, where we have witnessed a decline in public funding in many of the states in which our branches are located.

Heavy Construction Division backlog at September 30, 2003 of $1,417.8 million represents an increase of $204.0 million, or 16.8%, from its backlog at September 30, 2002 and $22.6 million, or 1.6%, from its backlog at June 30, 2003. HCD’s awards for the third quarter of 2003 included a $62.3 million highway contract in New York, a $39.2 million share of a highway joint venture contract in Texas and a $96.4 million share of an elevated train joint venture contract in Pennsylvania.


	Three Months Ended September 30,						Nine Months Ended September 30,

Gross Profit	2003			2002			2003			2002

(in thousands)
Total gross profit	$	82,059		$	77,221		$	168,259		$	167,992
Percent of revenue		14.1	%		13.2	%		12.4	%		12.8	%

Gross Profit: Gross profit as a percent of revenue increased to 14.1% in the third quarter of 2003 from 13.2% in the third quarter of 2002 and decreased to 12.4% in the nine months ended September 30, 2003 from 12.8% in the corresponding 2002 period. Gross profit margins in the quarter ended September 30, 2003 were positively impacted by higher profit margins from both material sales and construction in many branch locations due largely to more effective execution of the work and the inclusion of margin from two large HCD projects that reached the 25% completion threshold for profit recognition during the

Granite Construction Incorporated
NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

quarter. These increases were partially offset by lowered profit forecasts on several HCD projects, principally as a result of not performing as anticipated. Gross profit margins in the nine months ended September 30, 2003 were also negatively impacted by a higher volume of revenue from projects less than 25% complete, increased pressure on Branch Division margins due to increased competition resulting from reductions in various state and local transportation funding programs and revised profit forecasts on several HCD projects. We recognize revenue only to the extent of cost, deferring profit recognition, until a project reaches 25% complete. The amount of revenue generated from projects below the 25% completion threshold was approximately $45.0 million and $39.0 million for the three months ended September 30, 2003 and 2002, respectively, and $81.0 million and $58.0 million for the nine months ended September 30, 2003 and 2002, respectively.

Cost of revenue consists of direct costs on contracts, including labor and materials, subcontractor costs, direct overhead costs and equipment expense (primarily depreciation, maintenance and repairs and fuel). Although the composition of costs varies with each contract, our gross profit margins were not significantly impacted by changes in any one of these costs during the first nine months of 2003.


		Three Months Ended September 30,						Nine Months Ended September 30,

General and Administrative Expenses		2003			2002			2003			2002

(in thousands)
Salaries and related expenses		$	19,311		$	18,231		$	60,725		$	52,965
Incentive compensation, discretionary profit sharing and other variable compensation			11,927			10,945			20,962			18,837
Other general and administrative expenses			11,295			11,006			33,791			34,366

	Total	$	42,533		$	40,182		$	115,478		$	106,168

Percent of revenue			7.3	%		6.9	%		8.5	%		8.1	%

General and Administrative Expenses: General and administrative expenses increased by $2.4 million in the quarter ended September 30, 2003 compared with the September 2002 quarter and by $9.3 million in the nine months ended September 30, 2003 from the comparable 2002 period. Included in the increase for the nine months ended September 30, 2003 were costs of approximately $6.6 million associated with our Wilder subsidiary and our expansion into Northern California, both of which were first reflected in our costs in May 2002. Variable compensation increased in the three and nine-month periods ended September 30, 2003 due to higher income than in the comparable 2002 periods. Other general and administrative costs include information technology, occupancy, office equipment and supplies, depreciation, travel and entertainment, outside services, advertising and marketing, training and other miscellaneous expenses, none of which individually exceeded 10% of total general and administrative expense.


							Nine Months Ended
	Three Months Ended September 30,						September 30,

Operating Income	2003			2002			2003			2002

(in thousands)
Branch Division	$	48,046		$	42,778		$	64,419		$	77,414
Heavy Construction Division		4,877			6,730			18,914			16,495
Unallocated other corporate expenses		(13,397	)		(12,469	)		(30,552	)		(32,085	)

Total	$	39,526		$	37,039		$	52,781		$	61,824

Operating Income: Our Heavy Construction Division’s contribution to operating income decreased in the third quarter of 2003 compared with the third quarter of 2002 primarily due to lower gross margins as described in “Gross Profit” above and higher general and administrative expenses to support a higher volume of work. For the nine months ended September 30, 2003, HCD’s contribution to operating income increased due to the margin generated from higher 2003 revenue. Our Branch Division’s

Granite Construction Incorporated
NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

contribution to operating income increased in the third quarter of 2003 compared with the third quarter of 2002 primarily due to higher gross margins as described in “Gross Profit” above. For the nine months ended September 30, 2003, our Branch Division’s contribution to operating income decreased due to the factors described in “Revenue”, “Gross Profit” and “General and Administrative Expenses” above. Unallocated other corporate expenses principally comprise corporate general and administrative expenses.


		Three Months Ended September 30,						Nine Months Ended September

Other Income (Expense)		2003			2002			2003			2002
(in thousands)
Interest income		$	1,145		$	2,122		$	4,633		$	6,014
Interest expense			(1,939	)		(2,527	)		(6,577	)		(6,703	)
Gain on sales of property and equipment			3,018			939			3,546			1,570
Equity in income (loss) of affiliates			(37	)		466			18,088			2,419
Other, net			86			652			2,364			(1,342	)

	Total	$	2,273		$	1,652		$	22,054		$	1,958

Other Income (Expense): Included in equity in income (loss) of affiliates in the nine months ended September 30, 2003 is $18.4 million recognized in the first quarter of 2003 related to the sale of the State Route 91 toll road franchise by the California Private Transportation Corporation, of which we are a 22.2% limited partner. Additionally, included in other, net is approximately $1.9 million in gain recognized on the sale of a portion of our investment in T.I.C. Holdings, Inc. (“TIC”) back to TIC for a cash payment of approximately $6.0 million.


	Three Months Ended September 30,						Nine Months Ended September 30,

Provision for Income Taxes	2003			2002			2003			2002
(in thousands)
Provision for income taxes	$	15,131		$	13,695		$	27,090		$	23,104
Effective tax rate		36.2	%		35.4	%		36.2	%		36.2	%

Provision for Income Taxes: Our effective tax rate increased to 36.2% for the three month period ended September 30, 2003 from 35.4% in the comparable period in 2002. The third quarter 2002 effective tax rate reflected an adjustment to reduce the 2002 annual rate to 36.2% from 37.5% due to the combined factors of higher percentage depletion deductions related to quarry properties and higher tax credits.

Granite Construction Incorporated
NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

Outlook

We remain cautiously optimistic on our outlook for the remainder of 2003 and into 2004, although we continue to face uncertainty due to a number of unresolved state and federal political issues and the continued strength and timing of the economic recovery in our markets. Nevertheless, we are encouraged by the performance of some of our California-based profit centers in what has been a challenging environment for the Branch Division. In addition, we believe that the Heavy Construction Division (HCD) will have a better year in 2004 than in 2003 – propelled by a healthy backlog of work.

Given the current climate in which we are operating, our Branch Division performed much better than expected in the quarter. We are pleased that despite decreased transportation funding and competitive pressures throughout the West, some of our California branches continue to generate strong performance. Although HCD has been a significant contributor to backlog in 2003, we do not anticipate it will contribute to 2003 earnings at the level that we had expected at the beginning of the year. Therefore, we currently expect earnings for the year 2003 to be in the range of $1.28 to $1.36 per diluted share, which includes the $18.4 million income related to the sale of the State Route 91 Tollroad Franchise by the California Private Transportation Corporation, of which Granite is a 22.2% limited partner, that was recorded in the first quarter of 2003.

Looking ahead to 2004, we do not anticipate a significant improvement in California’s economy as the new administration begins its attempts to turn the state’s fiscal crisis around. We believe that we will likely witness a highly competitive public sector market in most of our California locations. We also anticipate that the private sector market will remain active and be similar to what we have experienced so far in 2003, in most of our locations.

HCD is building momentum across the country and is targeting an additional $14.0 billion of work to bid on over the next 12-18 months. The division is entering the fourth quarter with $1.4 billion of backlog, a 17% increase over the same period last year. HCD continues to seek out new markets throughout the U.S. with healthy long-term transportation programs. As discussed below, these long-term programs are dependent in part on federal funding – making the federal highway bill reauthorization a key driver. Based in part on the strong backlog of work and a number of projects expected to reach the 25% complete stage, we anticipate that 2004 will be a better year for HCD.

On September 30, 2003, President Bush approved the Surface Transportation Extension Act of 2003, a bill to extend authorizations for federal highway, highway safety and transit programs until February 29, 2004. The bill, an extension to the 6-year Transportation Equity Act for the 21^st Century (TEA-21), which expired on September 29, authorizes $14.7 billion for highway programs and $3.0 billion for transit. Although the bill was necessary to enable the Federal Highway Administration to reimburse states for road funding obligations, it does not the provide long-term certainty needed to enable the various state departments of transportations to plan their respective capital improvement programs.

Members of the House and Senate are now focusing on how to provide a significant increase to a long-term authorization bill. Transportation industry lobbyists continue to push for another 6-year bill that will be a substantial increase over the prior level of $218.0 billion. The Bush administration, which favors a $247.0 billion plan, opposes a fuel-tax increase while the House of Representatives’ $375.0 billion plan calls for indexing the fuel tax to inflation in order to raise additional revenues. Members of the House and Senate, and the Bush administration, undoubtedly face a number of difficult decisions, including the prospect of raising taxes in an election year. We understand how difficult an increase in the fuel tax will be to achieve given the pending election in November 2004 and therefore do not anticipate that President Bush would sign a bill that includes a tax increase.

Granite Construction Incorporated
NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

It also remains to be seen whether Congress will take action on a new 6 year bill or continue the current program and act on a new bill after the November 2004 election. Congress is also wrestling with the tax treatment of ethanol – an issue that has a significant impact on the Highway Trust Fund. Ethanol is being effectively mandated as a gasoline additive in many states, including California. Since ethanol is subject to a lower excise tax than gasoline, and a portion of the tax is retain by the general fund, this mandated displacement of gasoline volume will result in a loss in revenue to the General Fund. Senator Charles Grassley has proposed an overhaul of this tax treatment that would substantially restore lost revenues to the Highway Trust Fund, while retaining ethanol incentives. Although House and Senate conferees have apparently reached some agreement on this proposal, its implementation is being held up pending action on the federal transportation re-authorization legislation now scheduled to be taken up next year.

In California, voters recalled Gray Davis and elected Arnold Schwarzenegger as the state’s new governor. On or about November 17, Mr. Schwarzenegger will be sworn into office and will inherit the task of finding approximately $8.0 billion to sustain public services next year at current levels. Although it is too early to tell how transportation will fare under this new administration, Governor Elect Schwarzenegger has publicly stated, “the first step [to resolving the state’s transportation crisis] is to commit to no more stealing of transportation revenues.” He has also stated that he intends to carefully “review the state’s transportation needs and to create a multilevel transportation plan.” While we are encouraged by these statements, we must take a ‘wait and see’ approach before making any assumptions about the impact of the new administration on our business.

In summary, we are very pleased with our results so far this year in an uncertain economic environment. We feel that our diversification, both by project type and geographic location, has served us very well in this current market – and will continue to do so for the foreseeable future. While it is too early to accurately predict the outcome of the state and federal funding issues, and the extent to which we will be impacted, we are buoyed by a healthy backlog and an outstanding list of large projects on which to bid.

Granite Construction Incorporated
NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

Liquidity and Capital Resources


		Nine Months Ended September 30,

(in thousands)		2003			2002

Cash and cash equivalents		$	73,383		$	35,367
Net cash provided (used) by:
	Operating activities		82,006			56,683
	Investing activities		(40,041	)		(114,445	)
	Financing activities		(20,614	)		(32,045	)
Capital expenditures			(54,435	)		(43,804	)

Cash provided by operating activities of $82.0 million for the nine months ended September 30, 2003 represents a $25.3 million increase from the amount provided by operating activities in the same period in 2002. This increase was primarily attributable to a larger growth in accounts payable in the first nine months of 2003 due to costs associated with higher revenue, particularly in the month of September, and a lower increase in accounts receivable in the same period due primarily to improved collections and a change in the mix between billed receivables and unbilled revenue (costs and estimated earnings in excess of billings). Changes in cash from operating activities primarily reflect seasonal variations based on the amount and progress of work being performed.

Cash used by investing activities of $40.0 million for the nine months ended September 30, 2003 represents a $74.4 million decrease from the amount used in investing activities in the same period in 2002. The decrease was largely due to cash received from the sale of the State Route 91 Toll Road franchise by the California Private Transportation Corporation, of which we are a 22.2% limited partner, the absence of cash expended for acquisitions of businesses in 2003 and lower net purchases of marketable securities. We have budgeted approximately $59.0 million for capital expenditures in 2003, which includes amounts for construction equipment, aggregate and asphalt plants, buildings, leasehold improvements and the purchase of aggregate reserves.

Cash used by financing activities was $20.6 million for the nine months ended September 30, 2003, a decrease of $11.4 million from the same period in 2002. The decrease was mainly due to lower net repayments of long-term debt by our Wilder subsidiary, and the absence of cash expended to repurchase our common stock in 2003, partially offset by increased cash dividends paid to shareholders and the absence of proceeds from the exercise of warrants in 2003.

On June 27, 2003, we entered into an agreement for a $100.0 million bank revolving line of credit, which allows for unsecured borrowings for up to three years through June 27, 2006, with interest rate options. Outstanding borrowings under the revolving line of credit are at our choice of selected LIBOR rates plus margin (1.25% at September 30, 2003) that is recalculated quarterly. This line of credit replaces a $60.0 million line of credit we entered into in June of 2001. Additionally, we have standby letters of credit totaling $1.4 million, of which $1.2 million reduces the amount available under the line of credit. The unused and available portion of the line of credit at September 30, 2003 was $98.8 million. Restrictive covenants under the terms of this line of credit include the maintenance of certain financial ratios and tangible net worth (as defined) of approximately $386.0 million. We are in compliance with these covenants and the covenants of our other debt agreements at September 30, 2003.

Additionally, our Wilder subsidiary has a bank revolving line of credit of $10.0 million that expires in September 2005; there were no amounts outstanding under that line of credit at September 30, 2003.

Granite Construction Incorporated
NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

Our cash and cash equivalents and short-term and long-term marketable securities totaled $213.4 million at September 30, 2003. We believe that our current cash and cash equivalents, short-term marketable securities, cash generated from operations and amounts available under our existing credit facilities will be sufficient to meet our expected working capital needs, capital expenditures, financial commitments and other liquidity requirements associated with our existing operations through at least the next twelve months.

Recent Accounting Pronouncements:

FIN 46

In January 2003, the Financial Accounting Standards Board (“FASB”) issued Interpretation No. 46 (“FIN 46”), “Consolidation of Variable Interest Entities - - an Interpretation of ARB No. 51.” FIN 46 addresses consolidation accounting for certain entities in which equity investors do not have the characteristics of a controlling financial interest or do not have sufficient equity at risk for the entity to finance its activities without additional subordinated financial support from other parties. FIN 46 was effective immediately for all Variable Interest Entities created or acquired after January 31, 2003. For Variable Interest Entities created or acquired prior to February 1, 2003, the provisions of FIN 46 must be applied at the end of the first interim or annual period ending after December 15, 2003. As more fully described in our Annual Report on Form 10-K under the section entitled “Critical Accounting Policies,” we participate in various construction joint ventures in order to share expertise, risk and resources for certain highly complex projects. We are currently evaluating whether certain of these jointly controlled entities meet the definition of a Variable Interest Entity in FIN 46. If all of the entities being evaluated met the definition and we were required to consolidate them, the effect on our financial position would be an increase in assets (primarily current assets) of approximately $110.0 million and an increase in current liabilities of approximately $85.0 million. Additionally, consolidation of these entities would increase our revenue and cost of revenue, but there would be no impact on net income.

SFAS 150

In May 2003, the FASB issued Statement of Financial Accounting Standards No. 150 (“SFAS 150”), “Accounting for Certain Financial Instruments with Characteristics of Both Liabilities and Equity.” SFAS 150 establishes standards for how an issuer classifies and measures certain financial instruments with characteristics of both liabilities and equity. It requires that an issuer classify a financial instrument that is within its scope as a liability (or an asset in some circumstances). It was effective for financial instruments entered into or modified after May 31, 2003, and otherwise was effective at the beginning of the first interim period beginning after June 15, 2003, except for mandatorily redeemable financial instruments of nonpublic entities. On November 7, 2003 the FASB issued FASB Staff Position No. 150-3 (“FSP 150-3”) “Effective Date, Disclosures, and Transition for Mandatorily Redeemable Financial Instruments of Certain Nonpublic Entities and Certain Mandatorily Redeemable Noncontrolling Interests under FASB Statement No. 150, Accounting for Certain Financial Instruments with Characteristics of Both Liabilities and Equity.” FSP 150-3 requires that implementation of certain provisions of SFAS 150 be deferred indefinitely, including those provisions that pertain to mandatorily redeemable financial instruments of nonpublic entities and the measurement provisions (but not the classification provisions) for certain mandatorily redeemable noncontrolling interests.

Substantially all of the non-Granite held common shares of our majority-owned subsidiary, Wilder Construction Company (“Wilder”) are redeemable by the holder upon retirement, voluntary termination,

Granite Construction Incorporated
NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

death or permanent disability. Approximately 60% of these shares are outside the scope of APB Opinion No. 25, “Accounting for Stock Issued to Employees” and are therefore subject to the provisions of SFAS 150. Wilder generally has up to eight years to pay the redemption price following a redemption event, as defined in its shareholder agreements, and the redemption price is adjusted each year, primarily for the Wilder net income attributable to the shares. Pursuant to FSP 150-3, we have adopted the classification provisions of SFAS 150 by reclassifying the carrying amount of these Wilder shares from minority interest in consolidated subsidiaries to other long-term liabilities on our balance sheet. If all of these Wilder shares had been redeemed at the September 30, 2003 redemption price, a payment of approximately $13.0 million would have been required.

Website Access

Our website address is www.graniteconstruction.com. On our website we make available, free of charge, our annual report on Form 10-K, quarterly reports on Form 10-Q, current reports on Form 8-K, and all amendments to those reports as soon as reasonably practicable after such material is electronically filed with or furnished to the Securities and Exchange Commission. The information on our website is not incorporated into, and is not part of, this report.

Granite Construction Incorporated
NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

Item 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

In February 2003, we entered into two interest rate swap agreements in order to gain access to the lower borrowing rates normally available on floating-rate debt, while avoiding the prepayment and other costs that would be associated with refinancing our long-term fixed-rate debt. The swaps purchased have a combined notional amount of $50.0 million, a thirty-month term with six-month settlement periods and provide for us to pay variable interest at LIBOR plus a set rate spread and receive fixed interest of between 6.54% and 6.96%. The notional amount does not quantify risk or represent assets or liabilities, but rather, is used in the determination of cash settlement under the swap agreement. As a result of purchasing these swaps, we will be exposed to credit losses from counter-party non-performance; however, we do not anticipate any such losses from these agreements, which are with a major financial institution. The agreements will also expose us to interest rate risk should LIBOR rise during the term of the agreements. These swap agreements are accounted for under Statement of Financial Accounting Standards No. 133, “Accounting for Derivative Instruments and Hedging Activities” (“SFAS 133”). Under the provisions of SFAS 133, we initially recorded the interest rate swaps at fair value, and subsequently recorded any changes in fair value in other income, net. Fair value is determined based on quoted market prices, which reflect the difference between estimated future variable-rate payments and future fixed-rate receipts.

Item 4. CONTROLS AND PROCEDURES

We carried out an evaluation, under the supervision of and with the participation of management, including our Chief Executive Officer and our Chief Financial Officer, of the 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 this evaluation, our Chief Executive Officer and Chief Financial Officer concluded that, as of September 30, 2003, our disclosure controls and procedures are effective for gathering, analyzing and disclosing the information we are required to disclose in the reports we file under the Exchange Act, within the time periods specified in the Securities and Exchange Commission’s rules and forms.

Granite Construction Incorporated
NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

PART II. OTHER INFORMATION

Granite Construction Incorporated
NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS


Item 1.	LEGAL PROCEEDINGS

	None

Item 2.	CHANGES IN SECURITIES AND USE OF PROCEEDS

	None

Item 3.	DEFAULTS UPON SENIOR SECURITIES

	None

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

	None

Item 5.	OTHER INFORMATION

	None

Item 6.	EXHIBITS AND REPORTS ON FORM 8-K

	a)	Exhibits

		10.1 Granite Construction Incorporated 1999 Equity Incentive Plan as Amended and Restated through September 25, 2003

		31.1 Certification of Chief Executive Officer Pursuant to Rule 13a-14(a)

		31.2 Certification of Chief Financial Officer Pursuant to Rule 13a-14(a)

		32.1 Certification of Chief Executive Officer Pursuant to 18 U.S.C section 1350, as adopted Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002

		32.2 Certification of Chief Financial Officer Pursuant to 18 U.S.C Section 1350, as adopted Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002

	b)	Reports on Form 8-K

		None

Granite Construction Incorporated
NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

SIGNATURES

Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.


	GRANITE CONSTRUCTION INCORPORATED

Date: November 14, 2003	By:	/s/ William E. Barton

		William E. Barton
		Senior Vice President and Chief Financial Officer

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1.		Basis of Presentation:

		The condensed consolidated financial statements included herein have been prepared by Granite Construction Incorporated (“we”, “us”, “our” or “Granite”) without audit, pursuant to the rules and regulations of the Securities and Exchange Commission and should be read in conjunction with our Annual Report on Form 10-K for the year ended December 31, 2002. Certain information and footnote disclosures normally included in financial statements prepared in accordance with accounting principles generally accepted in the United States of America have been condensed or omitted, although we believe the disclosures which are made are adequate to make the information presented not misleading. Further, the condensed consolidated financial statements reflect, in the opinion of management, all normal recurring adjustments necessary to present fairly our financial position at September 30, 2003 and the results of our operations and cash flows for the periods presented. The December 31, 2002 condensed consolidated balance sheet data was derived from audited consolidated financial statements, but does not include all disclosures required by accounting principles generally accepted in the United States of America.

		Interim results are subject to significant seasonal variations and the results of operations for the three and nine months ended September 30, 2003 are not necessarily indicative of the results to be expected for the full year.

2.		Newly Effective and Recently Issued Accounting Pronouncements:

		FIN 46

		In January 2003, the Financial Accounting Standards Board (“FASB”) issued Interpretation No. 46 (“FIN 46”), “Consolidation of Variable Interest Entities - an Interpretation of ARB No. 51.” FIN 46 addresses consolidation accounting for certain entities in which equity investors do not have the characteristics of a controlling financial interest or do not have sufficient equity at risk for the entity to finance its activities without additional subordinated financial support from other parties. FIN 46 was effective immediately for all Variable Interest Entities created or acquired after January 31, 2003. For Variable Interest Entities created or acquired prior to February 1, 2003, the provisions of FIN 46 must be applied at the end of the first interim or annual period ending after December 15, 2003. As more fully described in our Annual Report on Form 10-K under the section entitled “Critical Accounting Policies,” we participate in various construction joint ventures in order to share expertise, risk and resources for certain highly complex projects. We are currently evaluating whether certain of these jointly controlled entities meet the definition of a Variable Interest Entity in FIN 46. If all of the entities being evaluated met the definition and we were required to consolidate them, the effect on our financial position would be an increase in assets (primarily current assets) of approximately $110.0 million and an increase in current liabilities of approximately $85.0 million. Additionally, consolidation of these entities would increase our revenue and cost of revenue, but there would be no impact on net income.

		SFAS 150

		In May 2003, the FASB issued Statement of Financial Accounting Standards No. 150 (“SFAS 150”), “Accounting for Certain Financial Instruments with Characteristics of Both Liabilities and Equity.” SFAS 150 establishes standards for how an issuer classifies and measures certain financial instruments with characteristics of both liabilities and equity. It requires that an issuer classify a financial instrument that is within its scope as a liability (or an asset in some circumstances). It was effective for financial instruments entered into or modified after May 31, 2003, and otherwise was effective at the beginning of the first interim period beginning after June

		15, 2003, except for mandatorily redeemable financial instruments of nonpublic entities. On November 7, 2003 the FASB issued FASB Staff Position No. 150-3 (“FSP 150-3”) “Effective Date, Disclosures, and Transition for Mandatorily Redeemable Financial Instruments of Certain Nonpublic Entities and Certain Mandatorily Redeemable Noncontrolling Interests under FASB Statement No. 150, Accounting for Certain Financial Instruments with Characteristics of Both Liabilities and Equity.” FSP 150-3 requires that implementation of certain provisions of SFAS 150 be deferred indefinitely, including those provisions that pertain to mandatorily redeemable financial instruments of nonpublic entities and the measurement provisions (but not the classification provisions) for certain mandatorily redeemable noncontrolling interests.

		Substantially all of the non-Granite held common shares of our majority-owned subsidiary, Wilder Construction Company (“Wilder”) are redeemable by the holder upon retirement, voluntary termination, death or permanent disability. Approximately 60% of these shares are outside the scope of APB Opinion No. 25, “Accounting for Stock Issued to Employees” and are therefore subject to the provisions of SFAS 150. Wilder generally has up to eight years to pay the redemption price following a redemption event, as defined in its shareholder agreements, and the redemption price is adjusted each year, primarily for the Wilder net income attributable to the shares. Pursuant to FSP 150-3, we have adopted the classification provisions of SFAS 150 by reclassifying the carrying amount of these Wilder shares from minority interest in consolidated subsidiaries to other long-term liabilities on our balance sheet. If all of these Wilder shares had been redeemed at the September 30, 2003 redemption price, a payment of approximately $13.0 million would have been required.

3.		Inventories:

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

4.		Property and Equipment:

5.		Intangible Assets:

		The following intangible assets are included in other assets on our condensed consolidated balance sheet:

		Goodwill at September 30, 2003 and December 31, 2002 relates primarily to the HCD operating segment.

		Additionally, purchased lease rights related to certain aggregate reserves of our Branch Division operating segment with a net book value of $16,361,000 at September 30, 2003 and $15,796,000 at December 31, 2002, are included in property and equipment. These assets are amortized based on the usage of the related reserves.

		Aggregate amortization expense related to intangible assets was $316,000 and $383,000 for the three months ended September 30, 2003 and 2002, respectively, and $1,019,000 and $1,092,000 for the nine months ended September 30, 2003 and 2002, respectively.

6.		Earnings Per Share:

		A reconciliation of shares used in calculating basic and diluted earnings per share in the accompanying condensed consolidated statements of income is as follows:

		Common stock options, warrants and common stock equivalents representing 30 shares and 24 shares for the three months ended September 30, 2003 and 2002, respectively and 67 shares and 8 shares for the nine months ended September 30, 2003 and 2002, respectively, have been excluded from the calculation of diluted earnings per share because their effects are anti-dilutive.

7.		Comprehensive Income:

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

8.		Commitments and Contingencies:

		We are a party to a number of legal proceedings and believe that the nature and number of these proceedings are typical for a construction firm of our size and scope. Our litigation typically involves claims regarding public liability or contract related issues. While management currently believes that the ultimate outcome of these proceedings, individually and in the aggregate, will not have a material adverse effect on our financial position or overall trends in results of operations, litigation is subject to inherent uncertainties. Were an unanticipated unfavorable ruling to occur, there exists the possibility of a material adverse impact on the results of operations for the period in which the ruling occurs.

9.		Business Segment Information:

		We have two reportable segments: the Branch Division and the Heavy Construction Division (“HCD”). The Branch Division is comprised of branch offices, including our majority owned subsidiary, Wilder Construction Company, that serve local markets, while HCD pursues major

		infrastructure projects throughout the nation. HCD focuses on building larger heavy-civil projects with contract durations that are frequently greater than two years, while the Branch Division projects are typically smaller in size and shorter in duration. HCD has been the primary participant in our construction joint ventures.

		The accounting policies of the segments are the same as those described in the summary of significant accounting policies contained in our 2002 Annual Report on Form 10-K. We evaluate performance based on operating profit or loss, which does not include income taxes, interest income, interest expense or other income (expense).

		Information about Profit and Assets (in thousands):

10.		Investments in Affiliates:

		On January 3, 2003, the California Private Transportation Company, LP (“CPTC”), of which we are a 22.2% limited partner, closed the sale of the State Route 91 Toll Road Franchise to the Orange County Transportation Authority for $72.5 million in cash and the assumption of $135.0 million in long-term debt. We completed construction of the $60.4 million project in 1995 and have maintained an equity interest in the partnership since its inception. Included in other income (expense) for the nine months ended September 30, 2003 is $18.4 million related to this sale by CPTC.

		In June 2003, T.I.C. Holdings, Inc. (“TIC”) repurchased 0.3 million shares of the TIC shares held by us for a cash payment of $6.0 million. We account for our investment in TIC using the cost method. This transaction reduced our ownership interest from 15.5% to 10.6% and resulted in a gain of $1.9 million, which is included in other income (expense) for the nine months ended September 30, 2003.

11.		Line of Credit:

		On June 27, 2003, we entered into an agreement for a $100.0 million bank revolving line of credit, which allows for unsecured borrowings for up to three years through June 27, 2006, with interest rate options. Outstanding borrowings under the revolving line of credit are at our choice of selected LIBOR rates plus a margin (1.25% at September 30, 2003) that is recalculated quarterly. This line of credit replaced a $60.0 million line of credit we entered into in June 2001. Additionally, we have standby letters of credit totaling $1.4 million, of which $1.2 million reduces the amount available under the line of credit. The unused and available portion of the line of credit at September 30, 2003 was $98.8 million. Restrictive covenants under the terms of this line of credit include the maintenance of certain financial ratios and tangible net worth (as defined) of approximately $386.0 million. We are in compliance with these covenants and the covenants of our other debt agreements at September 30, 2003.

12.		Reclassifications:

		Certain financial statement items have been reclassified to conform to the current year’s format. These reclassifications had no impact on previously reported net income, financial position or cash flows.