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. 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. First Quarter 2009 Compared with First Quarter 2008 First quarter 2009 net sales were $567.9 million, a decrease of 26% compared with $771.8 million in the first quarter of 2008. The sharp decline in demand for construction materials is unprecedented. Aggregates shipments declined 30% quarter over quarter, reducing earnings $0.58 per diluted share. In response to continuing market weakness and the corresponding reduced demand, we remain focused on reducing costs, improving productivity and maintaining unit variable margins. These actions helped mitigate the earnings effect of lower sales volumes. In contrast to typical seasonal operating plans, during the first quarter, we reduced production and inventory levels. These decisions penalized first quarter earnings but improved cash generation and better positioned us for improved operating performance going forward. First quarter results were a net loss of ($0.30) per diluted share compared with net earnings of $0.13 per diluted share in the first quarter of 2008.
We remain highly focused on cash generation and improving our liquidity during this period of weak demand for our products. Critical evaluation of the strategic nature and timing of all capital projects led us to reduce spending on capital projects to $25.6 million from the $109.3 million spent in the first quarter of the prior year. We improved our liquidity through an issuance in early February of $400.0 million of long-term debt. Proceeds of this debt offering reduced short-term bank borrowings, thereby freeing up a like amount of liquidity under our lines of credit. Overall, in the first quarter, we reduced total debt by $32.9 million. In April (subsequent to the first quarter), we utilized $250.0 of the liquidity under our bank lines of credit to pay off $250.0 million of 10-year notes as scheduled. Continuing Operations
Earnings from continuing operations before income taxes for the first quarter of 2009 versus the first quarter of 2008 are summarized below (in millions of dollars):

           First quarter 2008                                   $   21

           Lower aggregates earnings due to
           Lower volumes                                           (84 )
           Higher selling prices                                     7
           Lower costs                                              13
           Lower asphalt mix and concrete earnings                  (4 )
           Lower cement earnings                                    (9 )
           Lower selling, administrative and general expenses       13
           All other                                                (3 )

           First quarter 2009                                     ($46 )

Aggregates segment revenues decreased $134.3 million, or 25%, to $401.8 million in the first quarter of 2009 compared with $536.1 million in the first quarter of 2008. Aggregates shipments declined 30% on average and were sharply lower compared with the prior year's first quarter in all markets except the Central Gulf Coast where large energy-related and industrial construction projects have sustained aggregates demand. Overall, aggregates pricing increased 2% from the prior year. The overall increase in the average selling price for aggregates reflects wide variations across Vulcan-served markets. Many

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major markets realized price improvement from the prior year above the 2% average, while markets in the far west reported year-over-year declines in average selling price. Excluding these western markets, aggregates pricing improved 4% from the prior year's first quarter. Aggregates pricing in western markets was lower due to a substantial increase in sales of lower priced products, including fill material and railroad ballast. Excluding the sales of lower priced products, aggregates pricing in western markets decreased 3% as compared with the prior year's first quarter due to lower demand.
First quarter earnings for aggregates declined as the lower shipments more than offset the earnings effect from price improvement, lower unit costs for diesel fuel and prudent cost control. Gross profit for the Aggregates segment was $63.6 million in the first quarter of 2009 compared with $126.9 million in the same period last year. Rationalizing production, reducing operating hours, streamlining the work force and effectively managing spending levels reduced aggregates costs versus the prior year. Aggregates unit variable production costs were flat compared with the prior year's first quarter and cash fixed costs declined 21% from the prior year.
Asphalt mix and Concrete segment revenues decreased $73.4 million to $193.2 million in the first quarter of 2009 compared with $266.6 million in the first quarter of 2008. Shipments of asphalt mix and ready-mixed concrete declined 27% and 32%, respectively. Gross profit for the Asphalt mix and Concrete segment declined $4.8 million, or 24%, to $15.3 million in the first quarter of 2009 compared with the first quarter of 2008. Asphalt mix earnings were higher this quarter as compared with the first quarter of 2008 as material margins recovered to more normal levels reflecting recent moderation in the cost of liquid asphalt. Concrete earnings decreased from the prior year's first quarter due to weaker demand.
As a result of weak demand and lower production levels, Cement segment first quarter 2009 revenues of $19.7 million and gross profit (loss) of ($1.3) million declined from the prior year's first quarter levels of $31.1 million and $7.5 million, respectively.
Selling, administrative and general expenses in the first quarter decreased $12.9 million, or 14%, from the prior year's first quarter. Cost-saving actions implemented across Vulcan to align spending levels with weak product demand more than offset project costs related to the replacement of legacy information technology systems and higher severance costs. Performance-based compensation accruals as well as employee expenses, including salaries and benefits, were lower compared with the prior year. Employment levels across Vulcan were down 14% from the prior year.
In the first quarter of 2009, operating results were a loss of ($1.3) million versus operating earnings of $66.8 million in the prior year's first quarter. The unprecedented weak demand was the primary factor in this sharp decline in profitability. The unit price for diesel fuel decreased 47% from the prior year's first quarter, increasing operating earnings $13.1 million.
Interest expense of $43.9 million was up slightly from the first quarter of 2008 due to an increase in the weighted-average interest rate offset in part by a reduction in total debt.
Our effective tax rates from continuing operations for the three months ended March 31, 2009 and 2008 were 29.1% and 32.1%, respectively. These rates include discrete adjustments in the first quarter of 2009 for the reversal of uncertain tax position accruals for which the statute of limitations has expired. Our projected effective tax rate from continuing operations for the first quarter of 2009, excluding discrete adjustments, is 24.2%, a decrease of 6.0 percentage points from the 30.2% projected effective tax rate for the first quarter of 2008, also excluding discrete adjustments. The decrease in the effective tax rate primarily results from a greater benefit from statutory depletion partially offset by an increase in state taxes.
Results from continuing operations were a loss of ($0.29) per diluted share compared with earnings from continuing operations of $0.13 per diluted share in the first quarter of 2008.

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Discontinued Operations
First quarter pretax losses from discontinued operations were $0.9 million in both 2009 and 2008. The 2009 loss includes a $0.7 million gain on disposal of discontinued operations. The net losses primarily reflect charges related to other general and product liability costs, including legal defense costs, environmental remediation costs associated with our former Chemicals businesses, and charges related to a cash transaction bonus payable as described in Note 2 to the condensed consolidated financial statements.

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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.
As of March 31, 2009, we have $1,675.0 million in bank lines of credit, of which $565.0 million was drawn. In the current credit environment, we are exposed to the risks that one or more banks will not be able to fully fund their respective commitments under our lines of credit or to fulfill their commitments on a timely basis. In the event we are unable to access our unused bank lines of credit on a same day basis or issue commercial paper, it could temporarily affect our ability to fund cash requirements. Cash Flows
Cash flows from operating activities contributed $105.1 million to cash during the first three months of 2009 as compared with $12.9 million during the same period in 2008. The $92.2 million increase in cash from operating activities is primarily attributable to decreases of $127.0 million in certain working capital and other assets, including accounts receivable, inventories and prepaid expenses. These favorable changes in operating cash flows were partially offset by a $46.7 million decrease in net earnings.
Net cash provided by investing activities during the three months ended March 31, 2009 totaled $14.6 million compared with $107.3 million of cash used for investing activities during the same period in 2008. The $121.9 million increase in net investing cash inflows is primarily attributable to a $139.5 million reduction in capital spending. Additionally, during the three months ended March 31, 2009, we received redemptions totaling $25.2 million from our $38.8 million principal balance of investments held in money market and other money funds at The Reserve as of December 31, 2008 (Note 5). This favorable change in investing cash flows was offset by $28.6 million in cash received during 2008 from a loan against the cash surrender value of life insurance policies acquired in the Florida Rock transaction.
Net cash used for financing activities was $82.5 million during the three months ended March 31, 2009 as compared with $110.5 million of cash provided by financing activities during the same period in 2008. The $193.0 million decrease in cash generated from financing activities was primarily driven by our debt reduction initiatives. During the current period, reductions in short-term borrowings and payments of current maturities exceeded net proceeds from the issuance of debt by $37.9 million whereas in the prior year, proceeds from short-term debt exceeded payments of current maturities and debt issuance payments by $100.7 million. Further contributing to the decrease in cash provided by financing activities was a $48.3 million reduction in proceeds from the issuance of common stock. The 2008 common stock issuances were for business acquisitions (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 ($389.9) million at March 31, 2009, an increase of $379.3 million from the ($769.2) million level at December 31, 2008 and an increase of $1,065.4 million from the ($1,455.3) million level at March 31, 2008. The increase in working capital over the three month period ended March 31, 2009 primarily resulted from a decrease in short-term borrowings of $415.5 million. This reduction in short-term borrowings primarily resulted from the February 2009 partial replacement of short-term debt with long-term debt. The increase in working capital over the twelve month period ended March 31, 2009 primarily resulted from a $1,525.7 million decrease in short-term borrowings partially offset by a $276.9 million increase in current maturities. The

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reduction in short-term borrowings primarily resulted from the aforementioned February 2009 issuance of long-term debt as well as the June 2008 partial replacement of short-term debt with long-term debt and a 3-year term loan. Further offsetting the comparative increase in working capital was $148.7 million of assets held for sale as of March 31, 2008. Additionally, during the twelve month period ended March 31, 2009, weakness in demand for our products contributed to a $107.2 million decrease in net accounts and notes receivable, offset by a decrease in trade payables and other current liabilities of $87.9 million.
Short-term Borrowings and Investments
Net short-term borrowings and investments consisted of the following (in thousands of dollars):

                                       March 31         December 31         March 31
                                         2009              2008               2008
   Short-term investments
   Cash equivalents                 $       17,811     $       3,217     $       51,023
   Medium-term investments                  11,530            36,734                  0

   Total short-term investments     $       29,341     $      39,951     $       51,023

   Short-term borrowings
   Bank borrowings                  $      565,000     $   1,082,500     $    1,401,300
   Commercial paper                        100,000                 0            791,389
   Other notes payable                       2,000                 0                  0

   Total short-term borrowings      $      667,000     $   1,082,500     $    2,192,689

   Net short-term borrowings             ($637,659 )     ($1,042,549 )      ($2,141,666 )


   Bank borrowings
   Maturity                           1 to 20 days            2 days       1 to 28 days
   Weighted-average interest rate             0.73 %            1.63 %             3.09 %

   Commercial paper
   Maturity                                  1 day               n/a       1 to 18 days
   Weighted-average interest rate             0.82 %             n/a               3.34 %

   Other notes payable
   Maturity                               2 months               n/a                n/a
   Weighted-average interest rate              n/a               n/a                n/a

Due to the temporary suspension of redemptions, and the uncertainty as to the timing of such redemptions, $11.5 million as of March 31, 2009 and $36.7 million as of December 31, 2008 of our short-term investments are classified as medium-term as explained more fully in Note 5 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 $1,675.0 million were maintained at March 31, 2009, of which $175.0 million expires November 16, 2009 and $1,500.0 million expires November 16, 2012. As of March 31, 2009, $565.0 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 March 31, 2009, our commercial paper program was rated A-2 and P-2 by Standard & Poor's and Moody's Investors Services, Inc. (Moody's), respectively. Both Standard & Poor's and Moody's have

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assigned a negative outlook to our commercial paper ratings. Current Maturities
Current maturities of long-term debt are summarized below (in thousands of dollars):

                                         March 31       December 31      March 31
                                           2009            2008            2008
       3-year floating loan dated 2008   $  60,000     $      60,000     $       0
       6.00% 10-year notes issued 1999     250,000           250,000             0
       Private placement notes                   0                 0        33,000
       Other notes                           1,689             1,685         1,834

       Total                             $ 311,689     $     311,685     $  34,834

Maturity dates for our $311.7 million of current maturities as of March 31, 2009 are as follows: April 2009 - $250.0 million, June 2009 - $15.0 million, September 2009 - $15.0 million, December 2009 - $15.0 million, March 2010 - $15.0 million, and various dates for the remaining $1.7 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):

                                                         March 31          December 31          March 31
                                                           2009                2008               2008
Debt
Current maturities of long-term debt                    $   311,689        $    311,685        $    34,834
Short-term borrowings                                       667,000           1,082,500          2,192,689
Long-term debt                                            2,536,211           2,153,588          1,529,672

Total debt                                              $ 3,514,900        $  3,547,773        $ 3,757,195

Capital
Total debt                                              $ 3,514,900        $  3,547,773        $ 3,757,195
Shareholders' equity                                      3,453,330           3,522,736          3,747,019

Total capital                                           $ 6,968,230        $  7,070,509        $ 7,504,214


Total debt as a percentage of total capital                    50.4 %              50.2 %             50.1 %

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. 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 the next three to five years, 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.
In February 2009, we issued $400.0 million of long-term notes in two related series (tranches), as follows: $150.0 million of 10.125% coupon notes due December 2015 and $250.0 million of 10.375% coupon notes due December 2018. The notes were initially sold to a purchaser pursuant to an exemption from the Securities Act of 1933 (the Securities Act), as amended, and subsequently resold to Berkshire Hathaway pursuant to Rule 144A under the Securities Act. The notes are presented in our consolidated

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balance sheet as of March 31, 2009 net of unamortized discounts from par in the amounts of $0.5 million for the 2015 notes and $1.8 million for the 2018 notes. These discounts and the debt issuance costs of the notes are being amortized using the effective interest method over the respective lives of the notes. The effective interest rates for these notes are 10.305% for the 2015 notes and 10.584% for the 2018 notes.
The 2008 debt issuances noted below relate primarily to funding the November 2007 acquisition of Florida Rock. Including the 2007 debt issuances, these issuances effectively replaced a portion of the short-term borrowings we incurred to initially fund the cash portion of the acquisition. In June 2008, we issued $650.0 million of long-term notes in two series (tranches), as follows: $250.0 million of 5-year 6.30% coupon notes and $400.0 million of 10-year 7.00% coupon notes. These notes are presented in our condensed consolidated balance sheet as of March 31, 2009 net of unamortized discounts from par in the amounts of $0.4 million and $0.4 million, respectively. These discounts are being amortized using the effective interest method over the respective lives of the notes. The effective interest rates for the 5-year and 10-year 2008 note issuances, including the effects of underwriting commissions and the settlement of the forward starting interest rate swap agreements, are 7.47% and 7.86%, respectively.
Additionally, in June 2008 we established a $300.0 million 3-year syndicated term loan with a floating rate based on a spread over LIBOR (1, 2, 3 or 6-month LIBOR options). As of March 31, 2009, the spread was 1.5 percentage points above the selected LIBOR option (1-month LIBOR of 0.52%). The spread is subject to increase if our long-term credit ratings are downgraded. This loan requires quarterly principal payments of $15.0 million starting in December 2008 and a termination principal payment of $135.0 million in June 2011.
As of March 31, 2009, Standard & Poor's and Moody's rated our public long-term debt at the BBB+ and Baa2 level, respectively. Both Standard & Poor's has assigned a negative outlook to our long-term debt ratings. Cash Contractual Obligations . . .