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; the impact of the global financial crisis on our business and financial condition; 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 third quarter of 2007 and year-to-date September 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.
Third Quarter 2008 Compared with Third Quarter 2007 Third quarter 2008 net sales were $958.8 million, an increase of 13% compared with $844.9 million in the third quarter of 2007. Pricing for our products remained strong and helped to mitigate the earnings effect of lower volumes and higher energy-related costs. Energy-related costs such as diesel fuel, liquid asphalt and natural gas increased sharply from the prior year's third quarter and reduced earnings approximately $0.38 per diluted share. The unit price for diesel fuel increased 51% from the prior year's third quarter reducing net earnings approximately $0.08 per diluted share. The unit price for liquid asphalt increased 106% from the prior year's third quarter, which reduced net earnings approximately $0.25 per diluted share. Net earnings per diluted share were $0.53 in the third quarter of 2008 compared with $1.38 per diluted share for the third quarter of 2007.
In a period of financial and economic turbulence, we continued to achieve solid results in key areas of the business that further position us for an outstanding future when the economic recovery begins. The external factors affecting our industry are well known: turmoil in the financial markets severely constraining the availability of credit and weakening construction activity that was already soft; costs for petroleum-based products such as diesel fuel and liquid asphalt soaring to record levels thus burdening production costs for our products; and hurricanes and severe rains affecting construction activity in the Central Gulf Coast, Texas, Florida, the upper Midwest and the Mid-Atlantic. Texas and the Central Gulf Coast have previously been experiencing strong demand due to large industrial projects.
We are addressing these challenges by aggressively managing costs and by pricing our products to reflect their great value in the attractive markets we serve. We are highly focused on preserving our profitability during this period of weak demand while improving our earnings leverage. During the third quarter, we continued to reduce operating hours, streamline our work force, decrease operating costs and improve production efficiencies in the face of a sharp decline in demand for our products. Because of these actions, the cash earnings generated per ton of aggregates sold are higher than in the prior year's third quarter and are more than 40% higher than at the peak of demand in 2005. Continuing Operations:
Aggregates segment revenues decreased $10.6 million, or less than 2%, to $662.0 million in the third quarter of 2008 compared with $672.6 million in the third quarter of 2007, as improved pricing and the inclusion of results from former Florida Rock aggregates operations were more than offset by the effects of lower volumes in most markets. With respect to aggregates pricing, which increased 6% from the prior year's third quarter, many Vulcan-served markets realized double-digit growth in average unit prices, despite sharp declines in shipments compared with the third quarter of 2007. Hurricane-related weather in August and September slowed shipments in a number of Vulcan-served markets, contributing, in part, to the 13% decline in shipments quarter over quarter. Gross profit for the Aggregates segment was $185.2 million in the third quarter of 2008 compared with

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$238.1 million in the same period last year. Improvements in aggregates pricing and employee initiatives taken in response to further weakness in demand partially offset the earnings effects from the decline in shipments and sharply higher costs for diesel fuel. While periods of weak demand are challenging for any business, in our aggregates business, production levels can be adjusted efficiently to meet changes in demand. During the third quarter, we continued to rationalize production and reduce operating hours in response to weaker demand. Key operating metrics, such as production tons per work-hour and energy efficiency, improved versus the prior year. Excluding energy-related costs, unit variable production costs for legacy Vulcan aggregates operations were slightly lower than the prior year and cash fixed costs were 10% lower. Asphalt mix and Concrete segment revenues increased $136.8 million to $340.7 million in the third quarter of 2008 compared with $203.9 in the third quarter of 2007. Shipments of asphalt mix decreased 11% while concrete shipments increased significantly due to the addition of Florida Rock concrete operations. Asphalt mix prices increased 18% from the prior year's third quarter while concrete prices remained relatively flat compared with the prior year. Gross profit in the third quarter for the Asphalt mix and Concrete segment decreased 68% to $12.7 million compared with $39.2 million in 2007. Asphalt mix earnings were off sharply from the prior year due primarily to a 106% increase in the unit cost for purchased liquid asphalt. Concrete earnings increased slightly due to the addition of Florida Rock concrete operations.
Revenues and gross profit for the Cement segment in the third quarter of 2008 were $25.6 million and $3.0 million, respectively. There were no comparable revenues or earnings in the prior year's third quarter.
Selling, administrative and general expenses of $76.4 million increased $10.0 million from the prior year's third quarter due to the Florida Rock acquisition. Excluding the Florida Rock acquisition, selling, administrative and general expenses in legacy Vulcan operations declined $7.2 million or 11% from the prior year's third quarter.
Operating earnings were $128.3 million in the third quarter of 2008 versus $214.3 million in the prior year. Increased energy-related costs reduced operating earnings $69.6 million in the third quarter.
Interest expense increased $38.1 million from the prior year's third quarter due primarily to debt incurred for the acquisition of Florida Rock.
Our effective tax rate from continuing operations during the third quarter of 2008 was 26.0% compared with 30.4% during the third quarter of 2007. The decrease results primarily from a greater favorable effect of statutory depletion, partially offset by an increase in state tax.
Earnings from continuing operations were $0.54 per diluted share compared with $1.47 per diluted share in the third quarter of 2007. Discontinued Operations:
Third quarter pretax losses from discontinued operations were $1.3 million in 2008 and $14.2 million in 2007. As described in Note 20 to the condensed consolidated financial statements, we were named one of several defendants in a claim filed by the city of Modesto, California for alleged contamination from a dry cleaning compound, perchloroethylene, produced by several manufacturers, including our former Chemicals business. During the third quarter of 2007, we settled with the city and recorded an additional $14.1 million of pretax charges, including legal defense costs. Comparatively, the current quarter includes $0.4 million of pretax charges, including legal defense costs, related to the Modesto claim. Additionally, the 2008 third quarter loss reflects a $125,000 charge for a cash transaction bonus payable to certain key former Chemicals employees relating to cash receipts realized from the two earn-out

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agreements as described in Note 3 to the condensed consolidated financial statements. The remaining losses primarily reflect charges related to other general and product liability costs, including legal defense costs, and environmental remediation costs associated with our former Chemicals businesses. Year-to-Date Comparisons as of September 30, 2008 and September 30, 2007 Net sales in the first nine months of 2008 were $2,696.6 million compared with $2,282.9 million in the first nine months of 2007. Volumes in the first nine months of 2008 were adversely affected by the continuing sharp downturn in construction activity. Pricing for our products remained strong and helped offset the earnings effects 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 57% and 70%, respectively, from the prior year's first nine months. Net earnings per diluted share were $1.93 for the first nine months of 2008 compared with $3.74 per diluted share in the first nine months of 2007. The current year's 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, while the prior year's results include net earnings per diluted share of $0.25 referable to the sale of real estate in California. Additionally, the higher energy-related costs lowered earnings per diluted share $0.76 compared with the prior year. Continuing Operations:
Aggregates segment revenues increased $41.2 million to $1,877.3 million in the first nine months of 2008 compared with $1,836.1 million in 2007, as the effect of improved pricing and the inclusion of sales from Florida Rock aggregates operations more than offset the effect of lower volumes from legacy Vulcan operations. Total aggregates unit shipments declined 8% compared with the first nine months of 2007. The average freight-adjusted sales price for aggregates increased approximately 7%. Gross profit for the Aggregates segment was $529.9 million in 2008 compared with $636.4 million in the first nine months 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 Vulcan 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 nine months. Asphalt mix and Concrete segment revenues increased $399.1 million to $932.7 million in the first nine months of 2008 compared with $533.6 million in 2007. Shipments of asphalt mix were down slightly while concrete shipments increased significantly due to the addition of Florida Rock concrete operations. Asphalt mix prices increased approximately 12% from the prior year's first nine months. Gross profit in the first nine months of 2008 for the Asphalt mix and Concrete segment decreased 40% to $56.0 million compared with $93.4 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 Vulcan operations.
Revenues and gross profit for the Cement segment in the first nine months of 2008 were $85.9 million and $14.5 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 nine months of 2007.
Selling, administrative and general expenses of $253.7 million increased $41.6 from the prior year's first nine months due to the addition of Florida Rock businesses and $5.8 million of expense related to donations of real estate. On a comparable basis, selling, administrative and general expenses decreased approximately $20.5 million or 9% in the first nine months compared with the prior year, primarily as a

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result of lower employee-related costs.
Operating earnings were $433.5 million in the first nine months of 2008 versus $568.7 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 $41.0 million gain in the first nine months of 2007 referable to the sale of real estate in California. Additionally, increased energy-related costs lowered operating earnings $138.7 million in the first nine months of 2008.
Interest expense increased $105.0 million from the prior year's first nine months due primarily to debt incurred for the acquisition of Florida Rock. Our effective tax rate from continuing operations was 29.8% for the nine months ended September 30, 2008, down from the 31.5% rate during the same period of 2007. The decrease results primarily from a greater favorable effect of statutory depletion.
Earnings from continuing operations were $1.94 per diluted share compared with $3.85 per diluted share in the first nine months of 2007. Discontinued Operations:
We reported pretax losses from discontinued operations of $3.0 million during the first nine months of 2008 and $17.8 million during the first nine months of 2007. In addition to the aforementioned litigation and settlement with the city of Modesto, California (year-to-date September 2008 - $0.6 million and 2007 - $15.9 million), these remaining losses primarily reflect charges related to other general and product liability costs and environmental remediation costs associated with our former Chemicals businesses. Additionally, the 2008 loss reflects a $0.4 million charge for a cash transaction bonus payable to certain key former Chemicals employees relating to the aforementioned cash receipts from the two earn-out agreements.

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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 and dividend payments.
Cash Flows
Cash flows from operating activities contributed $325.6 million to cash during the first nine months of 2008 as compared with $421.3 million during the same period in 2007. The decrease in cash from operating activities of $95.7 million is primarily attributable to a decrease in net earnings of $152.6 million and a $29.9 million increase in net gains on the sale of property, plant & equipment and businesses for which the associated cash received is presented as a component of investing activities. Partially offsetting these unfavorable changes in operating cash flows was a $100.4 million positive adjustment for noncash expenses related to depreciation, depletion, accretion and amortization. Net cash used for investing activities during the first nine months of 2008 totaled $182.3 million compared with $315.4 million during the same period in 2007. The $133.1 million decrease in net investing cash outflows is primarily attributable to increased proceeds from the sale of businesses of $195.2 million, partially offset by decreased proceeds from the sale of property, plant & equipment of $44.3 million. During 2008, proceeds from the sale of businesses include approximately $216.0 million cash consideration received from the divestitures required in connection with the Florida Rock acquisition. During 2007, proceeds from the sale of property, plant & equipment include approximately $46.0 million of cash received from the sale of real estate in California. Additionally, $37.0 million in assets held in money market and other money funds were reclassified from cash equivalents to medium-term investments during 2008, as discussed in Note 6.
Net cash used for financing activities was $87.2 million during the first nine months of 2008 as compared with $130.1 million during the same period in 2007, a decrease of $42.9 million. Proceeds from the issuance of long-term debt, net of discounts and debt issuance costs, of $943.4 million were partially offset by increased net short-term debt payments of $876.9 million (Note 11). The issuance of common stock provided an additional $55.1 million of cash (Note 10) offset by payments to settle forward starting interest rate swaps of $32.5 million (Note
7) and increased dividends of $29.3 million. 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 $(777.3) million at September 30, 2008, an increase of $593.7 million from the $(1,371.0) level at December 31, 2007 and a decrease of $1,143.1 million from the $365.8 million level at September 30, 2007. The increase in working capital over the nine month period ended September 30, 2008 primarily resulted from a decrease of $928.0 million in short-term borrowings partially offset by an increase in current maturities of $309.6 million. The reduction in short-term borrowings primarily resulted 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 primarily relates 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 September 30, 2008 primarily resulted 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):

                                    September 30       December 31        September 30
                                        2008               2007               2007
   Short-term investments
   Cash equivalents                 $      63,465     $       32,981     $       23,731
   Medium-term investments                 36,992                  0                  0

   Total short-term investments     $     100,457     $       32,981     $       23,731

   Short-term borrowings
   Bank borrowings                  $   1,163,500     $    1,260,500     $       11,500
   Commercial paper                             0            831,000            136,275

   Total short-term borrowings      $   1,163,500     $    2,091,500     $      147,775

   Net short-term borrowings        $  (1,063,043 )   $   (2,058,519 )   $     (124,044 )


   Bank borrowings
   Maturity                              1 day          2 to 22 days       1 to 29 days
   Weighted-average interest rate            2.73 %             4.88 %             5.42 %

   Commercial paper
   Maturity                                   n/a       2 to 28 days        1 to 9 days
   Weighted-average interest rate             n/a               4.92 %             5.62 %

Short-term investments at September 30, 2008 of $100.5 million include approximately $63.3 million 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. Subsequent to September 30, 2008, $4.0 million of these proceeds were used for qualified like-kind exchange transactions. The balance of $59.3 million was returned for general corporate purposes, primarily debt reduction. Due to the temporary suspension of redemptions, and the uncertainty as to the timing of such redemptions, $37.0 million of our short-term investments are classified as medium-term as explained more fully in Note 6 to the condensed consolidated financial statements.
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 September 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 intend to renew a majority of 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 September 30, 2008, $1,163.5 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 September 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 October 29, 2008, Standard & Poor's maintained our A-2 rating for our commercial paper program but downgraded the outlook to negative.

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

                                      September 30       December 31      September 30
                                          2008              2007              2007
   3-year floating loan dated 2008   $       60,000     $           0     $           0
   6.00% 10-year notes issued 1999          250,000                 0                 0
   Private placement notes                   33,000            33,000                 0
   Other notes                                1,753             2,181               562

   Total                             $      344,753     $      35,181     $         562

Maturity dates for our $344.8 million of current maturities as of September 30, . . .