Summary of VULCAN MATERIALS CO

Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations
GENERAL COMMENTS Overview
Vulcan provides essential infrastructure materials required by the U.S. economy. We are the nation's largest producer of construction aggregates - primarily crushed stone, sand and gravel - and a major producer of asphalt mix and concrete and a leading producer of cement in Florida. We operate primarily in the United States and our principal product - aggregates - is consumed in virtually all types of publicly and privately funded construction. While aggregates are our primary business, we believe vertical integration between aggregates and downstream products, such as asphalt mix and concrete, can be managed effectively in certain markets to generate acceptable financial returns. As such, we evaluate the structural characteristics of individual markets to determine the appropriateness of an aggregates only or vertical integration strategy. Demand for our products is dependent on construction activity. The primary end uses include public construction, such as highways, bridges, airports, schools and prisons, as well as private nonresidential (e.g., manufacturing, retail, offices, industrial and institutional) and private residential construction (e.g., single-family and multifamily). Customers for our products include heavy construction and paving contractors; commercial building contractors; concrete products manufacturers; residential building contractors; state, county and municipal governments; railroads; and electric utilities. Customers are served by truck, rail and water distribution networks from our production facilities and sales yards. Seasonality of Our Business
Virtually all our products are produced and consumed outdoors. Our financial results for any individual quarter are not necessarily indicative of results to be expected for the year, due primarily to the effect that seasonal changes and other weather-related conditions can have on the production and sales volumes of our products. Normally, the highest sales and earnings are attained in the third quarter and the lowest are realized in the first quarter. Our sales and earnings are sensitive to national, regional and local economic conditions and particularly to cyclical swings in construction spending. These cyclical swings are further affected by fluctuations in interest rates, and demographic and population fluctuations.
Forward-looking Statements
Certain matters discussed in this report, including expectations regarding future performance, contain forward-looking statements that are subject to assumptions, risks and uncertainties that could cause actual results to differ materially from those projected. These assumptions, risks and uncertainties include, but are not limited to, those associated with general economic and business conditions; changes in interest rates; the timing and amount of federal, state and local funding for infrastructure; changes in the level of spending for residential and private nonresidential construction; the highly competitive nature of the construction materials industry; the impact of future regulatory or legislative actions; the outcome of pending legal proceedings; pricing; weather and other natural phenomena; energy costs; costs of hydrocarbon-based raw materials; increasing healthcare costs; the timing and amount of any future payments to be received under the 5CP earn-out contained in the agreement for the divestiture of our Chemicals business; our ability to secure and permit aggregates reserves in strategically located areas; our ability to manage and successfully integrate acquisitions; risks and uncertainties related to our acquisition of Florida Rock including our ability to successfully integrate the operations of Florida Rock and to achieve the anticipated cost savings and operational synergies; the possibility that business may

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suffer because management's attention is diverted to integration concerns; and other assumptions, risks and uncertainties detailed from time to time in our periodic reports. Forward-looking statements speak only as of the date of this Report. We undertake no obligation to publicly update any forward-looking statements, as a result of new information, future events or otherwise. You are advised, however, to consult any further disclosures we make on related subjects in our future filings with the Securities and Exchange Commission or in any of our press releases.

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RESULTS OF OPERATIONS In the discussion that follows, continuing operations consist solely of our Construction Materials business, which is organized into three reportable segments: Aggregates; Asphalt mix and Concrete; and Cement. The results of operations discussed below exclude Florida Rock for the second quarter of 2007 and year-to-date June 30, 2007 as the acquisition was not completed until November 16, 2007. Discontinued operations, which consist of our former Chemicals businesses, are discussed separately. In the discussion that follows, segment revenue at the product line level includes intersegment sales. Net sales and cost of goods sold exclude intersegment sales and delivery revenues and costs. This presentation is consistent with the basis on which management reviews results of operations.
Second Quarter 2008 Compared with Second Quarter 2007 Second quarter net sales were $966.0 million compared with $807.8 million in the second quarter of 2007. Pricing for our products remained strong and helped to mitigate the earnings effect of lower volumes and higher energy-related costs. The unit price for diesel fuel increased 70% from the prior year's second quarter reducing net earnings approximately $0.09 per diluted share. The unit price for liquid asphalt increased 60% from the prior year's second quarter, which reduced net earnings approximately $0.12 per diluted share. Net earnings per diluted share were $1.27 in the second quarter of 2008 compared with $1.45 per diluted share for the second quarter of 2007. The current year's second quarter results include net earnings per diluted share of $0.34 referable to the sale of quarry sites divested as a condition for approval by the Department of Justice of the Florida Rock acquisition. Continuing Operations:
Aggregates segment revenues increased $26.3 million to $679.2 million in the second quarter of 2008 compared with $652.9 million in the second quarter of 2007, as improved pricing and the inclusion of sales from former Florida Rock aggregates operations offset the effects of lower volumes in most markets. Total aggregates unit shipments declined 6% compared with the second quarter of 2007. The average freight-adjusted unit price for aggregates increased 8%. Gross profit for the Aggregates segment was $217.9 million in the second quarter of 2008 compared with $250.9 million in the same period last year. Improvements in aggregates pricing and the inclusion of earnings from former Florida Rock operations partially offset the earnings effect from the decline in legacy shipments and sharply higher costs for diesel fuel. Most of our geographic markets reported double-digit declines in aggregates volumes except for markets in Texas and along the Central Gulf Coast where sales volumes increased versus the prior year's second quarter. Due to the lower sales volumes, we reduced inventory levels of aggregates in the second quarter by reducing operating hours. This planned action reduced second quarter earnings but increased cash generation and positions us for improved performance efficiencies going forward. Average total unit cost of sales for aggregates increased from the prior year's second quarter due mostly to higher energy-related costs, the effects of lower production levels, and the inclusion of former Florida Rock operations, which still have relatively higher production costs. Cost control initiatives in the second quarter improved operating results. Excluding energy-related costs, unit variable production costs in legacy Vulcan aggregates operations were relatively flat while cash fixed costs were approximately 14% lower than in the prior year's second quarter.
Asphalt mix and Concrete segment revenues increased $141.6 million to $325.4 million in the second quarter of 2008 compared with $183.8 in the second quarter of 2007. Shipments of asphalt mix increased 4% while concrete shipments increased significantly due to the addition of Florida Rock concrete operations. Asphalt mix prices increased approximately 8% from the prior year's second quarter. Gross profit in the second quarter for the Asphalt mix and Concrete segment decreased 32% to $23.2 million compared with $34.3 million in 2008. Asphalt mix earnings decreased due principally to higher costs for

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liquid asphalt. Concrete earnings increased as the impact of the addition of Florida Rock concrete operations more than offset the effects of lower volumes from legacy operations.
Revenues and gross profit for the Cement segment in the second quarter of 2008 were $29.2 million and $4.1 million, respectively. There were no comparable revenues or earnings in the prior year's second quarter. In the current year's second quarter, cement earnings were negatively affected by a planned maintenance outage.
Selling, administrative and general expenses of $84.8 million increased $13.5 million from the prior year's second quarter due to the addition of the Florida Rock businesses and a $5.8 million expense for the fair market value of donated real estate. On a comparable basis, our selling, administrative and general expenses in the second quarter were approximately $11.1 million or 16% lower than the second quarter of 2007, primarily as a result of lower employee related costs.
Operating earnings were $238.5 million in the second quarter of 2008 versus $217.2 million in the prior year. The current year's second quarter results include operating earnings of $73.8 million from the aforementioned gain on sale of two required divestiture sites. Our efforts to control selling, administrative and general expenses and operating costs lessened the earnings impact of lower volumes and the effect of sharp increases in energy-related costs. The increased unit cost for diesel fuel reduced operating earnings $17.2 million in the second quarter.
Interest expense increased $30.1 million from the prior year's second quarter due primarily to debt incurred for the acquisition of Florida Rock. Our effective tax rate from continuing operations during the second quarter of 2008 of 31.0% was down 0.6% from the 31.6% effective rate during the second quarter of 2007. The decrease results primarily from a greater favorable effect of statutory depletion.
Earnings from continuing operations were $1.27 per diluted share compared with $1.46 per diluted share in the second quarter of 2007. Discontinued Operations:
Second quarter pretax losses from discontinued operations were $0.8 million in 2008 and $2.8 million in 2007. The losses primarily reflect charges related to general and product liability costs, including legal defense costs, and environmental remediation costs associated with our former Chemicals businesses. Additionally, the 2008 loss reflects a $250,000 charge for a cash transaction bonus payable to certain key former Chemicals employees.

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Year-to-Date Comparisons as of June 30, 2008 and June 30, 2007 First half net sales were $1,737.7 million compared with $1,438.0 million in the first six months of 2007. Volumes in the first six months of 2008 were adversely affected by the continuing sharp downturn in residential construction. Continued growth in construction activity related to major industrial projects in Texas and along the Central Gulf Coast mitigated some of this weakness. Pricing for our products remained strong and helped offset the earnings effect of lower volumes, higher energy-related costs, higher noncash charges for depreciation, depletion and amortization, as well as increased interest expense. The unit cost for diesel fuel and liquid asphalt increased 61% and 45%, respectively, from the prior year's first half. Net earnings per diluted share were $1.40 for the first six months of 2008 compared with $2.36 per diluted share in the first half of 2007.
Continuing Operations:
Aggregates segment revenues increased $51.8 million to $1,215.3 million in the first six months of 2008 compared with $1,163.5 million in the first half of 2007, as the effect of improved pricing and the inclusion of sales from former Florida Rock aggregates operations more than offset the effect of lower volumes from legacy operations. Total aggregates unit shipments declined 5% compared with the first half of 2007. The average freight-adjusted sales price for aggregates increased approximately 8%. Gross profit for the Aggregates segment was $344.8 million in 2008 compared with $398.2 million in the first half of 2007. Improvements in aggregates pricing and the inclusion of earnings from the former Florida Rock operations partially offset the earnings effects from the decline in legacy shipments and sharply higher unit cost for diesel fuel. Most of our geographic markets reported double-digit declines in aggregates volumes except for markets in Texas and along the Central Gulf Coast where sales volumes increased versus the prior year's first half.
Asphalt mix and Concrete segment revenues increased $262.3 million to $592.0 million in the first half of 2008 compared with $329.7 in the first half of 2007. Shipments of asphalt mix were flat while concrete shipments increased significantly due to the addition of Florida Rock concrete operations. Asphalt mix prices increased approximately 6% from the prior year's first half. Gross profit in the first half for the Asphalt mix and Concrete segment decreased 20% to $43.3 million compared with $54.2 million in 2007. Asphalt mix earnings decreased due principally to higher costs for liquid asphalt. Concrete earnings increased as the impact of the addition of Florida Rock concrete operations more than offset effects of the lower volumes from legacy operations.
Revenues and gross profit for the Cement segment in the first half of 2008 were $60.2 million and $11.6 million, respectively. The Cement segment was acquired in November 2007 as part of the Florida Rock acquisition, and therefore, no comparable revenues or earnings were reported in the first half of 2007. Selling, administrative and general expenses of $177.4 million increased $31.7 from the prior year's first half due to the addition of Florida Rock businesses and expense related to donations of real estate. On a comparable basis, selling, administrative and general expenses decreased approximately $13.4 million or 9% in the first half compared with the prior year, primarily as a result of lower employee related costs.
Operating earnings were $305.2 million in the first half of 2008 versus $354.4 million in the prior year. The current year's results include operating earnings of $73.8 million from the aforementioned gain on sale of two legacy Vulcan required divestiture sites compared with a $43.8 million gain in the first half of 2007 referable to the sale of real estate in California. Additionally, increased unit cost for diesel fuel lowered first half operating earnings $29.0 million.
Interest expense increased $66.9 million from the prior year's first half due primarily to debt incurred for the acquisition of Florida Rock.

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Our effective tax rate from continuing operations was 31.1% for the six months ended June 30, 2008, down from the 32.1% rate during the same period of 2007. The decrease results primarily from a greater favorable effect of statutory depletion.
Earnings from continuing operations were $1.41 per diluted share compared with $2.38 per diluted share in the first six months of 2007. Discontinued Operations:
We reported pretax losses from discontinued operations of $1.7 million during the first six months of 2008 and $3.6 million during the first six months of 2007. The losses primarily reflect charges related to general and product liability costs, including legal defense costs, and environmental remediation costs associated with our former Chemicals businesses. Additionally, the 2008 loss reflects a $250,000 charge for a cash transaction bonus payable to certain key former Chemicals employees.

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LIQUIDITY AND CAPITAL RESOURCES We believe we have sufficient financial resources, including cash provided by operating activities, unused bank lines of credit and access to the capital markets, to fund business requirements in the future including debt service obligations, cash contractual obligations, capital expenditures, dividend payments, share purchases and potential future acquisitions. Cash Flows
Net cash provided by operating activities decreased $36.5 million to $181.4 million during the first half of 2008 as compared with $217.9 million during the same period in 2007. Net earnings adjusted for noncash expenses related to depreciation, depletion, accretion and amortization decreased $8.1 million when compared with the prior year. Additionally, net gains on sale of property, plant & equipment and businesses increased $33.2 million. While these gains increase net earnings, the associated cash received is appropriately adjusted out of operating activities and presented as a component of investing activities.
Net cash used for investing activities totaled $52.4 million during the first half of 2008 as compared with $227.4 million during the same period in 2007. The $175.0 million decrease in net investing cash outflows resulted primarily from an increase of $217.4 million in proceeds from the sale of businesses. These 2008 proceeds related to the required divestitures as discussed in Note 14 to the condensed consolidated financial statements. The increase in proceeds from the sale of businesses was partially offset by a decrease in proceeds from the sale of property, plant and equipment of $41.9 million and an increase in cash used for business acquisitions of $21.0 million.
Net cash used for financing activities for the first half of 2008 was flat compared with the first half of 2007, increasing $1.5 million to $12.7 million. The net financing cash uses were principally as follows: increased net short-term debt payments of $907.1 million (Note 11), settlements of forward starting swaps of $32.5 million (Note 6), increased dividends of $19.4 million and decreased proceeds and excess tax benefits from stock option exercises of $45.5 million. These financing cash uses were largely offset by the following:
proceeds from issuance of long-term debt net of discounts and debt issuance costs of $943.4 (Note 11) and proceeds from issuance of common stock of $55.1 million (Note 9). The Note references above are to the Notes to the condensed consolidated financial statements. Working Capital
Working capital, the excess of current assets over current liabilities, totaled $(794.7) million at June 30, 2008, an increase of $576.3 million from the $(1,371.0) level at December 31, 2007 and a decrease of $1,097.5 million from the $302.8 million level at June 30, 2007. The increase in working capital over the six month period ended June 30, 2008 resulted primarily from a decrease of $882.0 million in short-term borrowings partially offset by an increase in current maturities of $294.9 million. The reduction in short-term borrowings resulted primarily from the June 2008 partial replacement of short-term debt with long-term debt and a 3-year term loan. The increase in current maturities relates primarily to the April 2009 maturity of a $250.0 million 6.00% note issued in 1999 for the CalMat acquisition. The decrease in working capital over the twelve month period ended June 30, 2008 resulted primarily from an increase in current debt, both short-term borrowings and current maturities. With the exception of the aforementioned $250.0 million of current maturities related to the 1999 CalMat acquisition, the increase in current debt relates to the 2007 acquisition of Florida Rock.

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Short-term Borrowings and Investments
Net short-term borrowings and investments consisted of the following (in thousands of dollars):

                                        June 30            Dec. 31           June 30
                                          2008               2007             2007
    Short-term investments:
    Cash equivalents                 $      133,213     $       32,981     $    22,980

    Total short-term investments     $      133,213     $       32,981     $    22,980

    Short-term borrowings:
    Bank borrowings                  $    1,209,500     $    1,260,500     $    14,000
    Commercial paper                              -            831,000         210,000

    Total short-term borrowings      $    1,209,500     $    2,091,500     $   224,000

    Net short-term borrowings        $   (1,076,287 )   $   (2,058,519 )   $  (201,020 )


    Bank borrowings:
    Maturity                           1 to 28 days       2 to 22 days      July 2007
    Weighted average interest rate             2.63 %             4.88 %         5.545 %

    Commercial paper
    Maturity                                      -       2 to 28 days        2 days
    Weighted average interest rate                -               4.92 %          5.49 %

Short-term investments at June 30, 2008 of $133.2 million consist primarily of unused cash proceeds from like-kind exchange transactions arising principally from the divestitures required by the U.S. Department of Justice in connection with the Florida Rock acquisition. Before the end of the year, we expect these proceeds will either be used for qualified like-kind exchange transactions or returned for general corporate purposes, primarily debt reduction. We utilize our bank lines of credit as liquidity back-up for outstanding commercial paper or draw on the bank lines to access LIBOR-based short-term loans to fund our borrowing requirements. Periodically, we issue commercial paper for general corporate purposes, including working capital requirements. We plan to continue this practice from time to time as circumstances warrant. Our policy is to maintain committed credit facilities at least equal to our outstanding commercial paper. Unsecured bank lines of credit totaling $2,015.0 million were maintained at June 30, 2008, of which $500.0 million expires November 14, 2008, $15.0 million expires January 28, 2009 and $1,500.0 million expires November 16, 2012. We currently expect to renew the $500.0 million credit facility expiring November 14, 2008. Upon issuing the $650.0 million of 5-year and 10-year fixed-rate debt in June 2008, a credit facility in the amount of $785.0 million that was set to expire November 14, 2008 was terminated. As of June 30, 2008, $1,209.5 million of the lines of credit was drawn. Interest rates referable to borrowings under these lines of credit are determined at the time of borrowing based on current market conditions.
As of June 30, 2008, our commercial paper program was rated A-2 and P-2 by Standard & Poor's and Moody's Investors Services, Inc. (Moody's), respectively. Standard & Poor's has assigned a stable outlook to our commercial paper rating while Moody's has assigned a negative outlook.
On December 31, 2007, we had open forward starting interest rate swap agreements with a combined notional amount of $600.0 million and a fair value equal to a liability of $41.3 million. These swap agreements were designated as cash flow hedges against the variability of future interest payments attributable to changes in interest rates on $600.0 million of fixed-rate debt we expected to issue during 2008. On June 20, 2008, upon the issuance of $650.0 million of fixed-rate debt, we terminated and settled these forward starting swaps for a cash payment of $32.5 million.

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Current Maturities
Current maturities of long-term debt are summarized below (in thousands of
dollars):

                                             June 30      Dec. 31       June 30
                                              2008          2007         2007
          3-year floating loan dated 2008   $  45,000     $      -     $       -
          6.00% 10-year notes issued 1999     250,000            -             -
          Private placement notes              33,000       33,000             -
          Other notes                           2,081        2,181           727

          Total                             $ 330,081     $ 35,181     $     727

Maturity dates for our $330.1 million of current maturities as of June 30, 2008 are as follows: October 2008 - $1.3 million, December 2008 - $48.0 million, March 2009 - $15.0 million, April 2009 - $250.0 million, June 2009 - $15.0 million , and various dates for the remaining $0.8 million. We expect to retire this debt using available cash or by issuing commercial paper or other debt securities.
Debt and Capital
The calculations of our total debt as a percentage of total capital are summarized below (amounts in thousands, except percentages):

                                                June 30         Dec. 31         June 30
                                                 2008            2007            2007
Debt:
Current maturities of long-term debt          $   330,081     $    35,181     $       727
Short-term borrowings                           1,209,500       2,091,500         224,000
Long-term debt                                  2,183,584       1,529,828         321,365

Total debt                                    $ 3,723,165     $ 3,656,509     $   546,092

Capital:
Total debt                                    $ 3,723,165     $ 3,656,509     $   546,092
Shareholders' equity                            3,915,769       3,759,600       2,222,590

Total capital                                 $ 7,638,934     $ 7,416,109     $ 2,768,682


Total debt as a percentage of total capital          48.7 %          49.3 %          19.7 %

Our debt agreements do not subject us to contractual restrictions with regard to working capital or the amount we may expend for cash dividends and purchases of our stock. The percentage of consolidated debt to total capitalization (total debt as a percentage of total capital), as defined in our bank credit facility agreements, must be less than 65%. In the future, our total debt as a percentage of total capital will depend upon specific investment and financing decisions. As a result of our financing to fund the November 2007 Florida Rock acquisition, our total debt as a percentage of total capital increased for the two subsequent periods above. We intend to maintain an investment grade rating and expect our operating cash flows will enable us to reduce our total debt as a percentage of total capital to a target range of 35% to 40% within three years of the acquisition, in line with our historic capital structure targets. We have made acquisitions from time to time and will continue to pursue attractive investment opportunities. Such acquisitions could be funded by internally generated cash or issuing debt or equity securities. . . .