Granite Construction Inc (GVA) 2006 Q3 法說會逐字稿

Good morning. My name is Wess and I will be your conference operator. At this time, I would like to welcome everyone to the Granite Construction Third Quarter Fiscal Year 2006 Financial Results Conference Call. All lines have been placed on mute to prevent any background noise. After the speakers' remarks there will be a question-and-answer session. [OPERATOR INSTRUCTIONS]. Thank you, I will now turn the conference over to Ms. Jacque Underdown, Director of Investor Relations. Please go ahead Ma'am.

Good morning everyone and thank you for joining us today. This morning I am joined by Bill Dorey, President and Chief Executive Officer; Mark Boitano, Executive Vice President and Chief Operating Officer; David Watts, Chairman of the Board, Bill Barton, Senior Vice President and Chief Financial Officer; Mike Donnino, Senior Vice President and Manager of our Heavy Construction Division; and Jim Robert, Senior Vice President and Manager of our Branch Division.

You can find the earnings release and associated financials on our Investor Relations website at www.graniteconstruction.com. Today's call will be recorded. Please be aware that if you decide to ask a question it will be included in both our live transmission as well as any future uses or recording. As always shareholders, analysts and employees can listen to a live webcast of the call at the Granite Investor Relations website. We will be making statements during this call that are forward-looking. These statements are based on current expectations and assumptions that are subject to risks and uncertainties. Actual results could differ materially because of factors discussed in today's earnings press release and the comments made during this conference call and in the management discussion and analysis section of our Form 10-K and other reports and filings with the Securities and Exchange Commission. We do not take any -- we do not undertake any duty to update any forward-looking statements.

So, with that I will turn the call over to Bill Dorey. Bill?

Thanks Jacque. Welcome and good morning everyone and thanks for joining us. On our call today, I will address our third quarter performance, our assessment of our markets and our prospect for the remainder of 2006 as well as our outlook for 2007. As Jacque said, Dave Watts is on our call today and he will provide you with his insight into the very important transportation-related bond issues which will be decided by the California voters on November 7.

Let's start with our overall third quarter financial performance. Our net income for the quarter was $45.7 million, that's a 12.5% increase in net income compared to our record third quarter a year ago. Despite the negative impact of the operating losses incurred in HCD, which I will be discussing in more detail later. Earnings per share for the quarter was a record $1.10 per share compared to $0.98 per share a year ago. Along with the strong performance we experienced in our first two quarters, our financial results through nine months show us earning $77.6 million in net income compared with $47.3 million a year ago. Overall, this is easily the best nine month financial performance in our company's history. We are all very proud of that, and we are proud of the strength of our balance sheet, which reflects strong cash flow in the quarter and for the year. However, as you have probably deduced from our published financials, it could have been even better.

Let's look at our Branch Division. I think the message is clear. Our network of vertically-integrated construction and construction materials businesses is the right business in the right place at the right time. Our Branch Division quarterly results reflect revenue increasing to $654 million compared with $571 million a year ago. That's a 15% increase in revenue. More importantly, operating income for the quarter was $105 million compared with $72 million a year ago. That's a 45% increase. That's impressive performance and equates to a 16% operating income percentage.

For the nine months period, our Branch Division has earned $185 million in operating income and almost $1.4 billion in revenue that compares with $102 million in operating income on approximately $1.2 billion in revenue last year's three quarters. Our Branch Division operating income percentage for the year stands at 13.5% compared with 8.6% a year ago. Equally as impressive is our Branch Division backlog which currently stands at $885 million compared with $674 million at the end of our third quarter last year. This is truly extraordinary performance in the strength of our public markets and our backlog which suggests that our branches will finish the year strong and carry considerable momentum into 2007.

Diving even deeper into our Branch business, we are experiencing this improved performance in both our construction activities and our construction materials business. I think it's a clear indication of the broad strength of our western markets and our capability to capture the most from these markets. Certainly it's the robust public sector as well as our private non-residential opportunities that is providing most of the fuel that is driving our Branch Division's success. As Dave will expand on, we are paying very close attention to the transportation bond measures in California. If proposition 1A and 1B pass on November 7th, we should have a strong wind at our back in California for some time. The other markets in the west are strong as well, and we foresee these markets staying healthy through 2007.

Okay. Let's talk about our Heavy Construction Division, our third quarter financial results in HCD were far below our expectations. While our third quarter consolidated revenue was $287 million compared with $291 million for the third quarter a year ago, our unconsolidated operating income which means, we have adjusted for the minority interest in our joint ventures, was a loss of $21 million compared to a third quarter loss of $1 million last year.

Our HCD financial results through nine months show consolidated revenue growing to $839 million compared with $769 million a year ago. However, for the first nine months after adjusting once again for minority interest, we recorded an unconsolidated operating loss of $49 million compared to a profit of $544,000 a year ago. We had six projects that impacted the quarter which experienced forecast improvements of greater than $1 million and ten projects that experienced forecast deterioration of more than $1 million.

The two largest downward forecast adjustments which affected the quarter were the US183 design-build project in Austin, Texas of $8.6 million and a $22.2 million negative adjustment in the profit forecast for the SR-22 project -- design-build project in Southern California. After adjusting for minority interest in both of those projects, those downward forecast changes are $6.1 million and $12.9 million respectively. In the case of the 183 project in Austin, the recognition for additional future costs is a product of design changes, scope growth, production changes, and disputed extra work. We are hopeful that we will be successful in recovering most of those costs through negotiations with our owner. However, it is important for me to state that there is no guarantee that these types of negotiations will be successful. On our SR-22 project, most of the additional cost to the forecast is a product of recognizing losses and productivity, resulting from accelerating the project in an effort to meet the projects substantial completion date of November 30th, 2006 despite being delayed early in the project because of seismic changes ordered by the owner and extraordinarily wet weather in the winter of 2004-2005.

We are once again hopeful that we will be able to recover some of these costs through negotiations with our owner. However, as I said earlier, there's no guarantee of recovery. No matter how we view our HCD work results, we are disappointed. Our profit expectations have fundamentally changed, and we've been more careful and conservative in our bidding practices over the last 18 months. Particularly as it relates to design build projects, and we believe this strategy will minimize the number of problem projects added to our backlog. This strategy has also contributed to our HCD backlog shrinking from $1.7 billion in September of 2005 to $1.2 billion in September of 2006. These backlog numbers, however, do not include recognition of the World Trade Center project in New York. As it relates to our backlog, I think it's also important for our listeners to appreciate that in 2006 we have been the second bidder on $1.2 billion worth of projects, that's 7 projects, which would lead me to believe that even with our more conservative bidding strategy, there are many market opportunities available to us.

While I am still confident our conservative bidding strategy is the right strategy, our inability to improve our HCD project performance in 2006 is causing us to evaluate if corrective internal action is required. Obviously, we cannot accept this kind of performance and we are doing everything we can to address our situation. While it would be premature to discuss on this call what specific changes are being considered, I want our stakeholders to know that it is not business as usual. Having said that I continue to believe our large project capability is core to our overall business, and we are fundamentally committed to our strategy of successfully building projects ranging from very small to large and complex. If there is some good news in our HCD story, it is that our markets remain active and there continues to be plenty of bidding opportunities.

In conclusion, we are very excited about our markets in the West and with our ability to capitalize on those markets. Although our fourth quarter is always difficult to predict due to weather, we expect our earnings for the year to be in the range of $2.25 to $2.45 per share on a diluted basis. We are hopeful that the transportation bonds will pass in California and if they do we will be the beneficiary of increased investment into the infrastructure of our largest market. We believe our branches will finish the year strong and carry considerable backlog and momentum into 2007. And as we have discussed at length our HCD business will not perform well in 2006, but we intend to correct our course and position ourselves so that all of our business units can provide positive earnings in 2007.

Before I turn this call over to Dave Watts I want to extend my thanks to all of our employees throughout our company. We are absolutely busy as we can be and I know how hard everyone is working and I want everyone -- all of our employees that are listening to know that not only myself but Mark and Jim and Mike and Bill and Dave and all of us here in Watsonville appreciate all the hard work that everyone does for our company everyday. So, Dave I will turn it over to you.

Great. Bill thanks, good morning everyone. Yes, November 7th, the election is certainly a monumental one for the construction industry in California. There are five measures on the ballot, propositions 1A through 1E, for those of you will get that package who live in California. It's a combination. Over the past two years the transportation infrastructure particularly has become a top tier state priority and this year the Governor and legislative leaders on both sides of the aisle set aside partisan differences to place a major infrastructure package on this ballot. And they together have actively campaigned for the package that includes transportation, education, housing and flood controls bonds as well as constitutional protection for Prop. 42 funds -- Prop. 42 funds are the sales tax on gasoline.

Our industry, which means both the contracting industry, its suppliers and organized labor as well as the general business community have united in a substantial campaign on behalf of these measures. We have no organized opposition. On November 7th, however, the voters are going to weigh their concern for fiscal restraint; after all these bond measures total $40 billion over 10 years. But against that, their clear desire for traffic in release and transportation improvements. We're going all out to win this, it's an unprecedented opportunity for our industry and certainly an unprecedented opportunity for the economy of California. And Bill, I'll turn it back over to you.

Okay. That concludes our opening remarks. And we'll turn it back to the moderator for questions.

[OPERATOR INSTRUCTIONS]. We'll pause for just a moment to compile the Q&A roster. Your first question comes from Richard Rossi of FBW.

Good morning everybody.

Good morning Richard.

A couple of things, first, do we have aggregate tonnage, and could you give us some sense of pricing structures, how much they've been up over last year, obviously positive trends there?

Richard, this is Jim Roberts. I can get the actual aggregate tonnage for you. It's very similar to what it has been last year overall. Pricing has increased significantly though, and that's why we're seeing the greatest opportunities in the price fluctuations. One of the things that I would like to explain a little bit about pricing is that we had some significant petroleum-related product increases that obviously increased our cost bases as well. So, the pricing is increasing, the cost components are increasing as well and obviously, what we are trying to do is create that differential and maximize that opportunity for us, but actual tonnages are very similar to previous years.

Okay, well that's good enough. I don't need the exact number. And I presume going forward you are hopeful that prices will continue to be strong and on the uptick?

We would certainly hope so. We believe that market is moving in that direction continually, and we are fairly comfortable that those increases will continue in 2007.

Could you give me some sense of how much of those price increases went to covering those higher petroleum costs just in terms of general sense, was a third of the increase related to those cost increases, something of that nature?

May be another way to answer that would be that, that we have seen a greater opportunity for margin increase. So -- but overall I don't think I can answer the question as to what the percentage of cost increase is related to [petroleum costs].

Okay. And also on the branch side and in your business overall, but especially the branch, historically when the residential market turns over those competitors or some of them start to come over to the public sector, I understand a number of whom can't from the standpoint of bonding, etcetera. But some of them come over, put some pressure on pricing and on the branch side, are you seeing any indications that that's starting or is -- that branch operations are you anticipating that that will be a factor going forward?

Typically, what we see on that is the private/residential contractors have the ability to build some of the smaller public sector work. But when you get into the highway work itself, we don't see a great deal of them really getting into the larger work and although we have seen a few of them come over recently it has not been significant to affect our market at all.

Okay.

Richard, I might add, this is Mark Boitano that with the strength of the public works market because of the amount of work that's out there right now, the agencies are actually concerned that they won't have enough bidding activity on their works. So, the combination of that public market with the strength that it has in terms of the opportunities that are out there, we are not witnessing any major concern in regards to folks moving from the private sector into the public sector.

Okay, thank you. Moving on to HCD, well the first obviously -- these projects that are -- how many of the projects that were negative in the last quarter in terms of against profit forecast -- how many of those are the projects that have been a problem, are there any new ones of material interest? And could you give us sort of a schedule about how do these figures drop off as they are complete, when are we over this?

Mike, you want to handle it?

Yeah this is Mike Donnino. Well, again the six projects with increased profit forecast were scattered in regions as well as the ones with the decrease. The positive gains were two in Texas, one in the South East, one in the west and two in the North East. The losses as I said scattered as well, one in Texas, two in the South East, one in the west, two in our National Projects group, and four in the Northeast. As far as the -- that kind of the vintage of those projects, five of them were bid in 2003 or started, I would say, [knowledge to perceive was] in 2003 and 2002. Five of those are in 2004. The two large projects that Bill mentioned in his opening comments were bid in 2004, and as he said, we are hopeful that those losses can be recovered at a later time when we've had a chance to negotiate and -- with the owner.

As far as those two are concerned, when -- what are the completions on those or expected completions, when soon, I mean --

Both in 2005.

2006.

I am sorry -- 2007, yeah.

Yeah, 2007.

Yeah, one in the first quarter. Both about [inaudible] around April --

Rich I mentioned November 30th, 2006 --

6 right.

Substantial completion for the 20 -- SR-22, which is -- which was the targeted completion date for the majority of the project. They added some work on a change order which is not in dispute by the way, which extended the life of that project into the --

First quarter?

I would say the midyear, maybe first quarter midyear of next year, but it's not a huge amount of work. But the substantial completion on the SR-22 is November 30th of this year, and the 183 Mike is?

March, substantial completions in March…

Okay.

They generally take another few months to complete.

Talking about completion what about 24% completion work in the quarter?

We told you that I think last quarter, we told you that there are four projects that were on the cusp of that, it looks like two of those will make it and two of them won't.

Okay. Alright now you are shrinking -- I mean shrinking the backlog in the HCD operations and clearly that's mostly function of your more conservative and more cautious bidding attitude. How -- I guess the question really is I mean how much can and -- I know there is no answer to this, but how far down do you go and keep the operation intact? Is there a size that you need to be to be in that business competitively? How much of your capacity and both manpower and equipment can the branch operations absorb? Is there ability to manage through this smoothly without much interruption and have a much smaller HCD, but a handsomely profitable HCD, going forward?

There are several -- this is Mike again, there are several questions in there but --

And I know you can answer more in detail?

I feel sad you know there are -- we are still going to bid about the same as we bid last year, somewhere around $5 billion. And our -- although even if we have two very large projects pending, the World Trade Center which has been awarded is --

Right.

Awarded in pieces, so, and that's a very large project which is going to add to our backlog but it just won't see it in big chunks. We also have a proposal outstanding in Houston in the $500 million range and three others all in that range that will be submitted in December and January. So any one of those kind of puts us right back where we need to be. So the -- as Bill said also there are plenty of opportunities for us to continue bidding, and we are being cautious to make sure that we have the support in place and the people to put on the jobs as soon as we get them, so that we can do a better job executing those projects.

Are these lot -- I am sorry go ahead.

Yeah, let me add a little to that. In my remarks I did talk about the fact that the backlog had shrunk some, and I am -- frankly, I guess none of us are particularly surprised about that. We just fundamentally decided that we are not going to get ourselves involved in large complex projects with owners that are really tough unless we have an opportunity to be successful, and we think that that starts on bid day. And that has been reflected in our bidding strategy for certainly the last 12 months and probably about the last 18 months when that -- we just realized, I think, that this game is just a lot more complex and tougher than we had thought it was. And I think frankly the industry is -- some of the industry at least is coming to that same conclusion, and if they are not, they ought to. I can just tell you because it's a struggle, it's tough work.

And but having said that, and in my remarks I did talk about the fact that -- we've been second bidder on seven projects that are over $1 billion altogether -- $1.2 billion. And you know some -- when you're second bidder, often times with just a little change in luck sometimes, you can score. And so my sense is that we will continue to get work, maybe not quite at the same pace, but we're not going to add backlog, particularly in this design- build arena unless we have a chance to win with that backlog. My sense is that our business may shrink a little bit and it may not. It probably won't grow, because I don't think we're going to allow it to grow. Because I -- you know, we have certain capacities that probably are -- is a little bit of a restraint. But that's not an issue. Our goal is to make money on this work, and if we cannot add backlog, it gives us that opportunity to win. And in fact we will shrink some.

Okay, having said that, the other question you had was, can these resources be incorporated into our branch business? And the answer is yes, to some degree, certainly in the west, that's possible, because the logistics of our people in the west could go back and forth. And frankly they could go the other direction too if the opportunities were to be available. In the east, as probably not as reasonable -- you know, people are typically not willing to --

Right --

Cross the country. So I'm not sure that's a reasonable expectation.

All right on these large jobs that were just mentioned, the $500 million job, and the several jobs that are coming up, could you tell us what projects they are and are they design-build jobs?

Well again The World Trade Center [inaudible] the job in Houston is a CM/GC which is a similar procurement as the World Trade Center was. We have a design-build job that was submitted -- last couple of weeks ago in St. Louis. That's a highway reconstruction and then the other two are design-build jobs in the Dallas area and one in the mid-Florida area.

Okay, and are they design-build -- they are design-build also.

Those two are design-build.

Okay. All right. Just a couple of other things. I saw balance sheet, cash is down, I presume that's a function of just general activity. Going forward, I also noticed the absence of land sales which I think you had previewed in the previous quarter. Just from a forecasting standpoint, just if you would remind me again, I mean should we be looking for land profits in '07 similar to what they were in '06? Is that sort of the game plan?

Hey, Rich -- Richard, we are going to have Bill Barton answer this question but we really ought to move on probably --

Okay, I'm sorry. Sure.

[inaudible]. And Rick the answer is that that it's -- we are expecting ongoing -- that there is -- although we can't predict what quarter that we are going to have similar returns in --.

Okay, very good, thanks a lot.

Thanks Rich.

[OPERATOR INSTRUCTIONS]. Your next question comes from Richard Paget of Morgan Joseph.

Good morning everyone.

Good morning.

On the last call, we kind of -- you had expectations that HCD would be breakeven for the year which meant that it would be profitable in the second half, what changed so dramatically from that time to this time that all of a sudden we have 35 million loss for this quarter and looking at guidance its sounds like next quarter it might not be profitable either?

Mike you want to try that or you want me to answer?

Obliviously the main reason [was] those two projects had amounted to roughly $30 million and the other eight contributed the rest. Now, some of those were -- some of those write-downs were production issues, others were again changes in scope of projects where we feel that we have contractual right for extras and others are the case of change orders that are in progress, just haven't been signed yet, so they are not able to report that.

May be I can because I am the guy that on that last call said that we thought we would be breakeven so may be I need to way in here. One of the difficulties that we are experiencing is -- I know that the investment community is struggling with this as much as we are, is that we are just having an awful time trying to predict the outcome of this work and part of it is because the difficulties we are having with our owners and the events that occur from a standpoint of entitlement for additional work that occurs as we go through these projects, it's a complex -- this design build game is a complex game and you've seen some of this with, I think the Washington Group and others that have had some similar experiences. Fortunately for us, we haven't had quite the same experience as some of them, but, we've been around the fringe a little bit, and we are doing our level best to try to get a handle on how to forecast this work, so that we can be -- so we can avoid these ups-and-downs and surprises that we have experienced over the last, numerous quarters frankly.

One of the things that we're doing is, and I think we've talked about this a little bit, is to try to quantify forward risks as best we can and consider that in our cost structure in our forecasts. And in doing so, we impact our current quarter forecast in an effort to try to develop some risk contingencies for specific things that we expect might be in our future. And we've done that over the last 12 months in particular. We're hopeful that that process will help us as we go forward, but it's still a difficult game to try to look into the future and get these forecasts right.

Keep in mind though that these are generally as a result of events that take place during the quarter that we've not necessarily foreseen in the prior period.

Absolutely.

I mean just to kind of help to get a sense of what these types of issues were, I mean did they had to do with the lot of material or labor cost inflation or you really can't generalize?

Well, it's surely a number of things, and it stems from scope growth that we experience as we design the projects, it comes through availability of workforce and the productivity that we get accordingly that we are trying to forecast and we're getting the productions that we expect and those productions were an estimate at some prior point of time and then the actual activity that when it takes place doesn't meet those expectations, so we are working hard to try to adjust our crews and our procedures to try to -- get the best productivity we can as we are doing the work but that's really a function of what's available on the marketplace. And when you combine that with the issues that we find ourselves in with our owners that stem from a number of different reasons whether its expectations on the owners part or design issues that we find ourselves in, so you put that whole set of circumstances together and you get what you get and as Bill stated, it's a challenge for us to make sure that we are staying on top of that. And we are continually trying to upgrade our programs to make sure that we are trying to define where we are going in all of different arenas, but thus far, we are continuing to see issues arise every quarter that we couldn't perceive in the prior quarter.

Okay, thanks I will get back in queue.

Alright thank you.

Thank you.

Your next question comes from Jack Kasprzak of BB&T Capital Markets.

Thanks good morning.

Hi Jack.

Hi I wanted to ask just about HCD in 2007 because -- and you have discussed this a little with regard to strong bidding opportunities still, and still lots to go -- lots of work to go after but press release does mention revenue probably -- revenue and backlog down in '07 in HCD as you focus on execution of existing projects. So, just for modeling purposes thinking out to '07 as we have to do what guidance if any could you give us in terms of our thought process on HCD profitability in '07, clearly you would be disappointed if you had a similar year to '06 but?

Jack, we typically don't try to give a range or an expectation as to where we are going forward. It would be easy for us to sit here and say we are going to do better than we did in '06, but that's sort of [slammed on] at least it would be our opinion that would be the case. I think we need to see how the year ends and where we are going from there, and I think as we have said many times, we are focused on improving our performance and that's as best as I can give you right now. I know that doesn't help you as to what you put in your model but it's the best we can give you at this point.

I think may be if I could rephrase the question here, I think if am sitting in the shoes of probably most of our listeners the question is, are we going to lose money again in 2007 and that's may be the question and Mike, you want to venture a bit of a guess in that regard?

Well, a lot depends of course, that we are carrying backlog, about a third of it into the year on some of these projects with minimal margin in it, but the -- and assuming we have sufficient risk money as Bill mentioned for unforeseen items in the future, we should definitely be profitable. But, again, what we haven't been able to predict very well is the size and the resolution date of these issues, and we've done -- the last two years have done much better in collecting those, but, we've also been as, we said before we've also been pretty successful at creating new ones. So, that's -- I think the business itself will make money and the wildcard will be how much of this new work we get early in the year for these four or five projects we discussed and whether or not there is any major issues out there that we don't see right now.

Okay. Great. That helps. Thanks a lot.

Your next question comes from Robert Labick of CJS Securities.

Good morning, this is actually Casey Fagan in for Bob. You talked about some of the main drivers of strong performance in the Branch Division, can you talk to how sustainable the business is at current levels with 20 percentage margins?

Casey, this is Jim Roberts. Yeah, we had -- obviously 2006 is a spectacular year for the Branch Division. And I think that we have fundamentally changed our expectations, just as Bill mentioned relative to the HCD business, and we would certainly hope that those kinds of margins are sustainable in portions of our business and the area of business especially those of kind of returns are pretty much necessitated relative to the amount of estimate we have into that business. So, we are increasing our expectations as well. And I think the markets are fairly strong. So we'll have to see where 2007 goes though will certainly hope so.

Great and regarding Prop. 1B, if it passes, what's the timing there? And would it increase the amount or the annual transportation budget to 6 billion or simply allow for the current 4 billion to be maintained. And how would you expect to benefit? What would be the impact on Branch in HCD?

May be I'll answer that first and may be Dave can answer it as well. From a Branch perspective obviously Caltrans is our largest customer. We do see the Prop. 1B be adding significantly to the Caltrans budget, in the neighborhood of -- in the $2 billion range. We have about $4 billion budget going forward, for the next several years, without Proposition 1B. And I think that any time you add another $2 billion to that market Casey, your going to see some significant opportunities. So that it is an increase, it is not sustaining our portion of the budget today.

Okay and last one before I hop back in the queue here. Can you give us a sense of what the pipeline looks like for additional greenfields [through new additives].

Sure I think if I heard that correctly, one is the pipeline for greenfield opportunities. We have quite a few opportunities out there today. We have in excess of five greenfielding opportunities in the Q, as we speak. We believe that we can bring one online in the next couple of years and the other one online in the few years after that. So we are very bullish on greenfield opportunity, and our group -- our construction materials group under Branch Division has a several people that are focused just solely on greenfielding. And then our individual business units are attaching themselves to those greenfielding opportunities along with our materials groups, so that we can make those opportunities happen. So we are very confident that greenfielding is a very positive environment for the future for our Branch Division.

Great. Thank you. We look forward to seeing you in January at our conference.

Thank you.

Your next question comes from Richard Wesolowski of Sidoti & Company.

Thanks good morning.

Good morning Rich.

Do the -- these events that transpire between the 2Q call and today in the HCD reduce your internal expectations for this segment next year?

For the --

For the HCD?

For the HC business unit. Well that's a good question.

Bill -- this is Mike -- the most of that work that was affected is going to be, as we said, it's going to be completed in the first part of next year. So it wouldn't really reduce 2007, much if anything if we resolve some of those issues, it might actually help it.

I was about to say the same thing. I think that given the fact that we have got costs, Rich, in 2006 with no revenue, we could negotiate some settlements in either of those two jobs in 2007. And be successful in being able to recognize that from a reportable earnings standpoint, it might probably help us.

And there is other jobs in similar situations, it's not to that extent, there is always change orders -- there is always an amount of change order in process, that of some or all the money has been spent and none of the revenues has been recognized. And those two jobs are no exception and those other jobs just not to that extent so. And that's been actually if you look at our year what we are projecting for the year. The loss has come from jobs in 2000 -- they were started in 2003 and 2004 and the profitability comes from the jobs that were started in 2002, 2001 and 2005 and 2006. So, you've got better jobs that were bid more recently, and some of the older jobs that are now starting to recognize some of those issues that are being settled.

Were there any write-downs during the quarter on jobs that are not set to be completed within the next say four quarters?

Give me a minute, I will -- I need to look that up.

Okay. All right in the mean time, the SR-22 job, you guys mentioned that you're trying to accelerate that, that's where some of the write-downs came from? Is that to avoid some sort of liquidity down this penalty, or what was the reason behind that?

Well the answer is yes and no to that. I mean, certainly there's some penalties associated with the project, if we don't finish it. However, because of the delays that occurred earlier in the project, I think the owner is sympathetic to the LDs. The question really is that the owner has a fairly significant ballot measure in Orange County that would raise, frankly big money or this kind of work going forward, and they're really interested in having that ballot measure pass. And one of the things they think is key to the success of that ballot measure is to deliver on this particular project on time. So, they've been pushing us pretty hard to finish this, or to beat schedule to finish this, on the scheduled substantial completion time of November 30th, in the interest of trying to work with our owner, we've been trying to work -- we've been trying to do that for and they've recognized that and because of that we think that there is a prospect to negotiate some additional compensation on this project but as I suggested in my opening remarks there is certainly no guarantee, we have been negotiated one settlement, fairly large settlement within already on this project and a lot of that had to do with acceleration it occurred earlier in the project, and we are hopeful if they would be open to a second negotiation.

So, those 10 jobs one, two, three are going to carryover into 2008, the rest of them would be completed by next year.

Okay, about how much in revenue did the two highlighted projects contribute the US 183 and SR-22?

How much revenue in the…?

I am sorry, just necessary for 2006?

I don't have that handy.

Okay. Finally, you mentioned in your press release the timing of project completions influencing where you will come out in the bottom-line in the fourth quarter, does that suggest that if the projects perhaps some of them don't hit a stage of completion you'll get to $0.38 number or would you not reach a $0.38?

I am not sure I fully understood that question?

In the guidance I guess it implies $0.38 to $0.58 if I did [inaudible] math correctly for the fourth quarter, and it says that would be influenced by the timing of projects, I am curious as to whether if the timing of projects does not go your way, would you come out at $0.38 or would you come out at something way lower?

Well I think we tried our best to give ourselves some downside cushion Rich, I think the bigger influence is probably going to be weather. Our income in this year has traditionally come from our branch business, which is not as sensitive to jobs reaching completion threshold where we can recognize profit. So my sense is may be Jim can help me out here but I think that weather is probably the biggest wildcard. We are starting -- we are almost to 1st of November and the sun shining in the west, we are hopeful we can get through November before we start getting serious rains and if that's the case it will be okay.

I think Bill is right. The weather is going to be the indicator, I don't really enjoy using weather as one of those issues but we had a very healthy 2005 fourth quarter, we have tremendous momentum going into the fourth quarter of 2006, and I think its just a matter of mother nature allowing us to build the work and if the work is capable of being done, we are going to have a good fourth quarter.

Thank you very much.

Your next question comes from Brian Rafn of Morgan Dempsey.

Good morning guys.

Good morning Brian.

And I have asked this before there seems to been kind of a sea change or a paradigm shift relative to risk transfer from some of these owners to the different road construction companies; can you give a sense of the problem that you guys have focused whether it would be productivity or farms of sub-contractors or geological formations is there an ability to look at what's embedded in your backlog and perhaps front-run or mitigate or renegotiate some of the projects that have yet to perhaps start but have been awarded based upon problems that you have occurred with business or projects that have already been started, is there a kind of a way that kind of look at your backlog and say, here we should front run this problem here in negotiations within owner?

This is Mike, I -- of course once we get our project awarded; there is little opportunity to change the contract you have. I think what Bill said, and what we've been focusing on in the last 12 - 18 months is to identify those risks upfront, I think we've learned what some of those risks mean in dollars terms now that maybe we didn't have as an good idea earlier, and frankly there are some contracts out there now that we just would accept and have turned away. So, I think we're getting smarter all the time on the type of contracts we're looking at, and the ones we're willing to get involved with. My process for analyzing those contracts, and the risk, and the dollar amount of the risk prior to bid is much better and more disciplined than it was before. And well having said that, it's -- all of these -- virtually all of the design build jobs that we have in our backlog have money in them for all of those type of risks, the best that they can be evaluated at the time of the forecast.

Okay, yeah, I think you answered that. Relative to these problem owners, as you identify these, are these civil authorities, state highway authorities, or are they, where you guys are being subcontracted by a different general contract and other road owner -- where -- who are these, this group and if -- are they dominant, is this all across the country, or is it just in the northeast, or is it just in highway work, or, can you give us a sense as to --?

Yeah, well I don't want to throw all of our owners under the bus here. I mean we -- the stakes are higher, the issues and all that most of these contracts are under very tight schedules. They need the projects done. Many of them have financial ramifications as far as tolls or [caser trends work and affairs]. In a lot of cases the owners are putting construction managers or engineers in between us and them and that creates communication issues as well as this slows down the discussions and negotiations because it just adds the layer or a complexity to the projects. So, I don't think the owners are out there to get us in particular, but it's, they're just higher stakes and more complicated issue and they take time to resolve.

Okay, on the Branch side, you guys talked about your backlog, how much of that would be completed? I think you had mentioned 885 million. How much of that is completed here in '06 and what runs off in '07?

Brian, this is Jim Roberts. Typically, we obviously turn our backlog over much faster than HCD. So, the fourth quarter burn-off will be relative to the weather again, I think. We do look at tremendous bidding opportunities. So, we are hoping that our backlog reduction is not significant between now and the -- and over year as there is many opportunities out in front of us as we speak.

Okay, can you give us a sense as phenomenal as the Branch Division has done the last couple of years. Can you give us a sense perhaps in '05 and '06; you guys mentioned weather is the wildcard. Has weather been your friend or has it been something that you had to mitigate and that the business has actually been better and had you even better weather, and it is not even better.

Well, Brian. It certainly has been our friend. In '05 last year in the fourth quarter it was very friendly to us. This year in the south, reaction in southern part of our business, it was very friendly to us as well. We kept running very strong in all of our southern businesses all the way through the winter. So, you know, I think Mother Nature would -- will certainly lay course in the fourth quarter [trim] is a friend of us for the entire year. So far it's been allowing us to do things that maybe we wouldn’t have in a normal year.

Yeah, and Brian you got to remember, it can be a friend even when it gets nasty, because it might produce opportunities for us, as a result of how bad it can get. So, you know you just got to put in perspective and answer -- we didn’t really answer your question. We haven’t had any issues over the last couple of years that we would put in that category of weather related.

Okay, you guys have talked in the past certainly about bench strength. Bench strength -- is your guidance kind of making the turn in the '07? Give me a sense as to what kind of hiring, availability, tradecrafts people in journey programs or where you are at?

Brian, this is Jim again. I talked about that several quarters ago in the Branch Division. We made and we have made and the entire company a concerned effort, to increase our recruiting opportunities. And really minimize our voluntary turnover and the results have been very good over the last several quarters. So, we are probably in a better position today than we have been in several years, with our salaried employees. From our craft position, obviously as we do more work, we need more people in the field. We have a very strong core group of people in the field and we are really working hard to expand that group. So, I think we are in very good position from being a little elastic relative to building additional capabilities around our workforce and I'm very happy with the progress we've made so far.

Okay.

We want to get people setting one of the records.

Yeah, okay. One final question, for Bill, from the sense of what we’ve seen, and again mitigating these issues all across the industry and the HCD raising the stakes, paradigm shifts, and the risk transfer. Do you think at some point going forward, you shake out some of the players, the marginal players and design-build, and it would give the remaining players a little more upper hand as far as negotiating?

I hope so. I think there has been a little bit of shakeout in some of the major players frankly. We are seeing some of those publicly traded companies come out with statements, not that the similar to what you have heard from us today. That they think the game is changed. They are either going to get out of the business or they are going to change their philosophy as it relates to that business. I think some of the more regional players will get stunk in my opinion. If they stay and they don’t -- they are not listening to calls like this and reacting to it because, it's tough game and you just cannot -- you can't go into this game with the same philosophy that you have in the typical bid, build DOT contract. So, I think the game is -- I think it is shaking out some, we have learned a lot a in the last couple of years. It seems like it's been forever but it's really only been a couple of years. And it's been an interesting learning experience for us. And we are going to take those lessons and try to learn from them. And do a better job going forward.

Is it do you think -- is it more difficult and more onerous for the road builders that are public companies versus the private ones that, the Peter Kiewit or Bechtel, is their ability to mitigate that maybe a little longer because they are -- they had a private, they don’t have to answer the shareholders in these type of forms?

You know, from the standpoint of the game itself I don’t think so.

Okay.

I mean I think we all face pretty much same issues we have got to bid this work and determine what we think we can build it for. And we have to go build it. And deal with the problems that come with this kind of work. The difference is that private company doesn’t have to get on the telephone every quarter and share what's going on. But as far as the game itself I don’t think so.

Okay. Well superb job as always guys hang in there.

Hey thank you Brian.

Thank you.

I do have an answer for it. I think it was Rich on those two projects, looks like the revenue. This is kind of the rough numbers. Revenue on those two projects for the year is about 300 or 350 million in round numbers.

Your next question comes from John Rogers of D. A. Davidson.

Hi good morning.

Hi John

Just to open up couple of things -- in terms of the claims that you now have. And I know you don’t like to predict one we may seen it is. But can you give us where is the magnitude and spend some scheduling on when it's possible you might get some resolution on that. I mean is this out into 2008 and beyond or could we see something sooner?

Let me take a shot at that. Number one, I don’t think we are going speculate on the order of magnitude John. My fear is that when we do that we set up an expectation that I am concerned that if we are not able to -- if we get it wrong then there will be -- you know there is a penalty for that. And I don’t want to put us in that spot. We're constantly resolving issues and we did resolve some issues this year, doesn’t seem to look like it from our financials but we did. The problem is that we create -- as Mike as suggested, we created as many or more along the way than we resolved. So, they sort of washed out. I think the only -- what I -- you can go back I suppose to my opening comments around the magnitude of the write-downs on the 183 and SR-22 and you know we suggested that, we would be negotiating with those owners around those write-downs. So, that gives you some idea that at least the partially, the magnitude of the issues on those two jobs, but beyond that I wouldn’t want to speculate.

Okay. And then, secondly is -- just lean at the -- what you said about the Branch Division and some of your guidance. It looks like your thinking that fourth quarter will be down relative to year ago. Is that just or flattish, just relative to what happens with the weather just?

John is that question?

Yes.

The answer to that is you are right, it is relative to the weather as I said earlier. And in the fourth quarter of '05 it was tremendous. And we are on a very similar position for the fourth quarter of '06, as it's just yet to be determined on the number of the days we can physically work. And we want to be realistically, we want to be realistic when we send those ranges out so. Everything those starts are aligned, it's healthy, it's going full board. And the number of days we work on the fourth quarter will determine how the fourth quarter comes out.

You know I think from -- if you want to be realistic, I am not predicting anymore bad news out of our HCD business in the fourth quarter. But we have had a pattern that it's hard to overlook frankly. We are not expecting that same kind of pattern in the fourth quarter for HCD of 2006, but we have had that pattern. So be careful, we want to be careful when we try to provide yearend guidance and we try to do that.

Okay, and then just one final if I could. In terms of your tax-rate, what are you thinking about there, I mean it's kind of bounced around this year and that’s got to do it timing a projects in the minority interest, in those or taxes on some of those but?

Yeah this is Bill Barton and I mean you know you are right. It had us bounced around, but as each of these quarters has been taken on its own merit. And certainly what's happened this last quarter is part of this write-down, the second thing is as you know we may be consolidate our object joint ventures and so there is a minority interest associated with our partners. And some of those joint ventures have had loss in the quarter as part of the write-down. Well that gets passed through, it's not tax. And so tax that you are seeing in the third quarter is a result of as higher tax base, because it's unconsolidated Granite only. And so that’s worth 22.8 million, and when you get down to looking on our consolidated financials statements, you're taking that 22.8 million, dividing it into 55,100,000 and as a result I think it was 41.4%. So, it’s a way that it's gets structured on the financial statements itself. And it doesn’t reflect the unconsolidated Granite rank which is higher.

Okay, and then presumably built it, if the minority interest projects or JVs were breakeven or better, it would all move back towards that 34% rate?

Correct, in fact if you rather look at it from a perspective for the whole year, we think it's going to be around 36% overall.

Okay, great. Thank you.

Your next question comes from Rob Norfleet of Davenport & Company.

Good morning gentlemen, this is actually [Tom Brinkman] at Davenport.

Good morning Tom.

Just have a question for you about the basically the trade-off between dollar amounts and change orders and then request for time expansion. As the Orange County Transportation Authority increased the budget on SR-22 from 390 million to 550 million. I'm just curious of what time did you have in put into that dollar figure? And was it based on the unit labor cost that you specified, at the original time of bidding? And part of the problem here is that you've been forced to incur, you know, overtime labor as opposed to standard hourly labor rates that were baked into the number.

Really, the only input we had into their budget is the change orders that were resolved in our previous periods. We don’t really give them a feedback on what they do with their budget, and I'm sure that budget includes things besides our project, their engineering over site and things like that.

Okay, so at the time of bidding for projects, you don’t have to specify incremental labor rate for them to use in computing the change orders, that’s now how it works?

Essentially no. Essentially, the bids themselves, most of these design-build projects are essentially lump some and any changes from their lump some are negotiated with certain rates that are generally specified in the contract.

I see. Okay. But is it true that part of the problem in this project has been that you've been, you know, forced to put in a lot of overtime labor because they have held to the November 30th deadline?

Yeah, that’s correct. We've been, you know, we've been forced to do more work in a shorter period of time basically, and that means more people, and when you start backing people in the same area then your productivity goes down.

And you mentioned that you're going to try to be more conservative with bidding design-build projects. Does that speak to some issues you have internally within the joint venture between the engineer giving you some redesign and then quickly, you know in a timely fashion after expansions and sculpt occur?

Well As I said, our risk process is much more detailed and those kinds of activities is part of that risk evaluation, the success we've had with or on our previous projects, the type of contract language, the complexity of the job I mean our risk evaluation is literally hundreds of line items at this point, that we try to evaluate for each project.

Okay thank you gentlemen,

Thank you.

Your next question comes from [Kalpesh Patel] of Bear Stearns.

Hello everyone.

Good morning.

With the success in the Branch Division, are you guys considering expanding that business and as you spoke about aggregate Greenfields, but like new offices and perhaps into Nevada or Oregon, just more offices basically?

That’s a very good question. We've talked about this probably from the last 12 months, I think in these calls. We do have a concerted effort to geographically expand our business in the Western US and it is in part very strong component of our strategic plan. We have a dedicated workforce, strictly assigned to that task; and we have several opportunities in the queue right now. And I am hoping here in one of these conference calls that I will be able to tell you about one of our new acquisitions. So, the answer that that, that it's certainly a very strong part of our strategic plan and our growth opportunities in the Branch Division.

So, you actually have specific opportunities, you are currently evaluating?

Yes sir.

Okay, good stuff. I guess the other thing was for the HCD, how many jobs total are there now, with I guess the backlog is so low now, so I am thinking a lot of them were completed?

It [inaudible] but where we classify, we have about 50 active jobs.

Okay. And could you talk a little bit about the northeast markets and what you are seeing out there in terms of types of opportunity and what's available to bid?

Of course.

What the strategy is?

Of course our biggest opportunity is the project we have the World Trade Center project, and it’s a big project that’s gearing up as we speak and we will take a lot of our resources in the next few years, but there is also numerous opportunities out there, other some there's two or three major programs that are in the pipeline, the Texas projects the number seven line, second avenue line and just all the entire bridge program is an ongoing source of project. So, the projects are out there, we are trying to stay focused on the ones that we think we can get a good margin on and fit our management capabilities in our workforce.

Great. Thank you, one another question -- I know you touched on this earlier, in terms of claims, I think in the previous call you said you are may be changing your strategy or adding more resources to getting claims, how is that going, I know you said you don’t want to talk about the order of magnitude, but are you optimistic that you are going to recover a lot of these losses is your new strategy working, is the additional people that you are -- you have on now helping?

Again there is multiple there. But our strategy was to be [beep] up the support and not only with in-house capabilities, but external sources, and we’ve done that, and it is helping, and we have resolved -- the last 2 years we've resolved the [oldest in] order magnitude more than we had the previous 2 years. So, I think that is working. But I can tell you those resources that we added are still plenty busy with the issues that we had in front of us. But we have to continue to do that. And it may take even more, I mean we’re still looking for more resources in that area.

Okay. Thank you for your time. Good luck.

Thank you.

Thank you.

[OPERATOR INSTRUCTIONS]. Gentlemen at this time I'm showing no further question.

Okay, if there's no further questions that concludes our call this morning. Once again, we appreciate the interest in Granite Construction. We appreciate the questions. Bill, and Jim, and Mark and myself and Jacque will be here in Watsonville for the rest of the day. So, if you have questions that you think you need to be talking to us about we'll be here. Mike, you're going to be in Dallas I suppose so. Mike would be available as well. So, thank you very much. We appreciate your interest in the company.

Ladies and gentlemen, that concludes the Granite Construction third quarter fiscal year 2006 financial results conference call. We appreciate your time. You may now disconnect.