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 private 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 amount of long-term debt and interest expense; losses in pension plan assets which will require an increase in the cash contributions to the plans; 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; the impact of the global financial crisis on our business and financial condition and access

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to the capital markets; 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. Second Quarter 2009 Compared with Second Quarter 2008 Second quarter 2009 net sales were $681.4 million, a decrease of 29% compared with $966.0 million in the second quarter of 2008. Aggregates shipments declined 31%, reducing earnings $0.64 per diluted share while aggregates pricing increased 3%, increasing earnings $0.08 per diluted share. While our current results reflect the volume effect of the prolonged recession, we are encouraged by the increased level of bid activity by state transportation departments as well as the significant increase in highway construction contract awards reported in May and June. The increased level of bid activity and contracts awarded demonstrate that funding provided by the federal economic stimulus plan, or American Recovery and Reinvestment Act, is working its way into the economy. We expect construction activity referable to these contract awards to begin in the second half of 2009 and to provide a meaningful contribution to overall aggregates demand in 2010.
Net earnings were $22.2 million, or $0.20 per diluted share, in the second quarter of 2009 compared with $140.8 million, or $1.27 per diluted share, for the second quarter of 2008. Current year second quarter net earnings per diluted share include $0.06 referable to discontinued operations and $0.12 referable to the 54% comparative decrease in the unit cost for diesel fuel. Prior year 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
Earnings from continuing operations before income taxes for the second quarter of 2009 versus the second quarter of 2008 are summarized below (in millions of dollars):

           Second quarter 2008                                    $205

           Lower aggregates earnings due to
           Lower volumes                                          (112 )
           Higher selling prices                                    14
           Lower costs                                               6
           Lower asphalt mix and concrete earnings                  (4 )
           Lower cement earnings                                    (5 )
           Lower selling, administrative and general expenses        5
           Gain on 2008 divestitures                               (74 )
           All other                                               (10 )

           Second quarter 2009                                  $   25

Aggregates segment revenues decreased $181.7 million, or 27%, to $497.6 million in the second quarter of 2009 compared with $679.3 million in the second quarter of 2008. Sharply lower shipments more than offset the earnings benefit from improved prices (3% increase), lower unit costs for diesel fuel and cost control measures. Aggregates shipments declined 31% from the prior year due to weak demand and wet weather. The increase in the average selling price for aggregates reflects wide variations across Vulcan-served markets. Many major markets realized price improvement from the prior year well above the 3% average, while certain markets in the far West and Florida reported year-over-year declines in average

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selling price. Aggregates cash fixed costs were reduced 17% from the prior year's second quarter. By rationalizing production, reducing operating hours, streamlining the workforce and effectively managing spending levels, we offset some of the cost impact related to lower volumes. Gross profit for the Aggregates segment was $126.8 million in the second quarter of 2009 compared with $217.9 million in the same period last year.
Asphalt mix and Concrete segment revenues decreased $107.1 million to $218.3 million in the second quarter of 2009 as compared with $325.4 million in the second quarter of 2008. Shipments of asphalt mix and ready-mixed concrete declined 30% and 35%, respectively. Gross profit for the Asphalt mix and Concrete segment declined $3.7 million, or 16%, to $19.5 million in the second quarter of 2009 compared with $23.2 million in the second quarter of 2008. Asphalt mix earnings were higher this quarter as compared with the second quarter of 2008 as material margins recovered to more normal levels, reflecting moderation in the cost of liquid asphalt, which more than offset the earnings effect of the 30% decline in shipments. Concrete earnings decreased from the prior year's second quarter due primarily to lower volumes.
As a result of weaker sales volumes, Cement segment second quarter 2009 revenues of $16.9 million and gross profit (loss) of ($0.5) million declined from the prior year's second quarter levels of $29.2 million and $4.1 million, respectively. The decline in earnings from weaker sales volume was slightly offset by lower energy costs.
Selling, administrative and general expenses in the second quarter of 2009 decreased $5.4 million from the prior year. Cost-saving actions implemented across Vulcan to align spending levels with weak product demand more than offset $3.9 million in project costs related to the replacement of legacy information technology systems. Additionally, the prior year's second quarter included expenses of $5.8 million for the fair market value of donated real estate. Operating earnings were $65.7 million in the second quarter of 2009 versus $238.5 million in the prior year, a decline of $172.8 million. The prior year's second quarter results include operating earnings of $73.8 million from the aforementioned gain on sale of required divestitures. The sharp decline in shipments resulting from weak demand was the primary factor in the remaining decline in profitability. The 54% decrease in the unit cost for diesel fuel increased operating earnings by $23.2 million.
Interest expense of $44.1 million was up $5.9 million from the second quarter of 2008 due to an increase in the weighted-average interest rate, offset in part by a reduction in total debt.
During the second quarter, we revised our estimated annual effective tax rate to 6.4%, significantly lower than the 23.2% estimated in the first quarter. An adjustment to the current quarter income tax provision was required so that the year-to-date provision reflects the expected annual tax rate. A substantial amount of the tax benefit recognized for the loss reported in the first quarter of 2009 was reversed during the second quarter to reflect the revised annual rate. This adjustment reduced earnings approximately $7.1 million, or $0.06 per diluted share, during the second quarter of 2009, resulting in an effective tax rate of 38.2%, as compared with 31.0% in the second quarter of 2008. Earnings from continuing operations were $15.6 million, or $0.14 per diluted share, in the second quarter of 2009 compared with $141.2 million, or $1.27 per diluted share, in the second quarter of 2008. Discontinued Operations
During the second quarter of 2009, we settled with one of our insurers in the Modesto case (see Note 19 to the condensed consolidated financial statements) resulting in a pretax gain, after deducting legal fees and other expenses, of $12.2 million. The insurance proceeds and associated gain represent a partial

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recovery of legal and settlement costs recognized in prior periods. Overall, second quarter pretax results of discontinued operations were a gain of $11.1 million in 2009 and a loss of $0.8 million in 2008. Excluding the 2009 gain from insurance recovery, the 2009 and 2008 results primarily reflect charges related to 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. Year-to-Date Comparisons as of June 30, 2009 and June 30, 2008 First half 2009 net sales were $1,249.3 million, a decrease of 28% compared with $1,737.7 million in the first half of 2008. Aggregates shipments declined 31%, reducing earnings $1.62 per diluted share while improved aggregates pricing increased earnings $0.17 per diluted share. First half results were a net loss of ($10.6) million, or ($0.09) per diluted share compared with net earnings of $154.7 million, or $1.40 per diluted share, for the first half of 2008. Current year first half results include net earnings per diluted share of $0.06 referable to discontinued operations and $0.19 referable to the 50% comparative decrease in the unit cost for diesel fuel. Prior year first half 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
Earnings from continuing operations before income taxes year-to-date June 30, 2009 versus year-to-date June 30, 2008 are summarized below (in millions of dollars):

           Year-to-date June 30, 2008                             $226

           Lower aggregates earnings due to
           Lower volumes                                          (196 )
           Higher selling prices                                    21
           Lower costs                                              20
           Lower asphalt mix and concrete earnings                  (9 )
           Lower cement earnings                                   (13 )
           Lower selling, administrative and general expenses       18
           Gain on 2008 divestitures                               (74 )
           All other                                               (13 )

           Year-to-date June 30, 2009                           $  (20 )

Aggregates segment revenues decreased $315.9 million, or 26%, to $899.4 million in the first half of 2009 compared with $1,215.3 million in the first half of 2008, primarily the result of sharply lower shipments (31% decline) due to weak demand and wet weather in key markets during the second quarter of 2009. Changes in aggregates pricing varied widely across Vulcan-served markets, improving overall and partially offsetting the effect of sharply lower shipments. Efforts to rationalize production, reduce operating hours, streamline the work force and effectively manage spending levels also helped to mitigate the effect of lower volumes. Aggregates unit variable production costs were essentially flat compared with the prior year's first half while cash fixed costs were reduced 19% from the prior year. Gross profit for the Aggregates segment was $190.4 million in the first half of 2009 compared with $344.8 million in the same period last year.
Asphalt mix and Concrete segment revenues decreased $180.5 million to $411.5 million in the first half of 2009 as compared with $592.0 million in the first half of 2008. Shipments of asphalt mix and ready-mixed concrete declined 29% and 33%, respectively. Gross profit for the Asphalt mix and Concrete segment declined $8.5 million, or 20%, to $34.8 million in the first half of 2009 compared with $43.3 million in the first half of 2008. Asphalt mix earnings were higher this half as compared with the first

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half of 2008 as material margins recovered to more normal levels, reflecting moderation in the cost of liquid asphalt. Concrete earnings decreased from the prior year's first half due primarily to lower volumes.
Cement segment first half 2009 revenues of $36.6 million and gross profit
(loss) of ($1.8) million declined from the prior year's first half levels of $60.2 million and $11.6 million, respectively, as a result of weaker demand. Selling, administrative and general expenses of $159.1 million decreased $18.3 million from the prior year. Cost-saving actions implemented across Vulcan to align spending levels with weak product demand offset $7.6 million in project costs related to the replacement of legacy information technology systems. Additionally, 2008 includes a $5.8 million expense related to donations of real estate while 2009 contains comparatively lower performance-based compensation accruals and employee expenses, including salaries and benefits. Employment levels across Vulcan were down 14% on average from the prior year. Operating earnings were $64.4 million in the first half of 2009 versus $305.2 million in the prior year, a decline of $240.8 million. The prior year's first half results include operating earnings of $73.8 million from the aforementioned gain on sale of required divestitures. Lower shipments resulting from weak demand was the primary factor in the remaining decline in profitability. The 50% decrease in the unit cost for diesel fuel increased operating earnings by $35.3 million. Interest expense of $88.0 million was up $6.3 million from the first half of 2008 due to an increase in the weighted-average interest rate offset in part by a reduction in total debt. Our projected effective tax rate from continuing operations for the six months ended June 30, 2009 was 17.9%, a decrease of 13.2 percentage points from the 31.1% projected effective tax rate for the six months ended June 30, 2008. The decrease in the projected effective tax rate primarily results from a greater favorable effect of statutory depletion, partially offset by an increase in state taxes. Results from continuing operations were a loss of ($16.7) million, or ($0.15) per diluted share, in the first half of 2009 compared with earnings of $155.7 million, or $1.41 per diluted share, in the first half of 2008. Discontinued Operations
The first half pretax gain from discontinued operations was $10.2 million during 2009 and includes both the aforementioned Modesto insurance settlement gain of $12.2 million and a $0.7 million gain on disposal of discontinued operations (see Note 2 to the condensed consolidated financial statements). Excluding these gains, the 2009 and 2008 first half results 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, dividend payments and potential future acquisitions.
We remain focused on managing costs and generating cash, which will enhance our ability to increase earnings as the economy recovers and construction activity improves. During the first half of 2009, we completed two financing transactions which strengthened our balance sheet and enhanced our financial flexibility. In February 2009, we issued $400.0 million of long-term notes. In June 2009 we completed a successful public equity offering that yielded $520.1 million in net proceeds. Proceeds from these transactions were used to reduce short-term bank borrowings, thereby freeing up a like amount of liquidity under our lines of credit. Overall, in the first half, we reduced total debt by $553.9 million. See the Debt and Capital section below for additional information.
As of June 30, 2009, we have $1,675.0 million in bank lines of credit, of which $46.0 million was drawn and $366.3 million was used to support outstanding commercial paper. 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 $169.4 million to cash during the first half of 2009 as compared with $134.1 million during the same period in 2008. The $35.3 million increase in cash from operating activities is primarily attributable to favorable changes in certain working capital accounts, in particular, trade payables and accruals, inventories and accrued incentives and other compensation. Additionally, net gains on sale of property, plant & equipment and businesses decreased $80.6 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. These favorable comparative changes in operating cash flows were partially offset by a $165.3 million decrease in net earnings.
Net cash used by investing activities totaled $50.2 million during the first half of 2009 compared with $5.0 million during the same period in 2008. The $45.2 million increase in net investing cash outflows resulted primarily from a $214.2 million decrease in proceeds from the sale of businesses partially offset by a $181.4 million reduction in purchases of property, plant & equipment and business acquisitions. Critical evaluation of the strategic nature and timing of all capital projects led us to reduce spending on capital projects, including business acquisitions, to $97.1 million from the $278.5 million spent in the first half of the prior year. Additionally, during the six months ended June 30, 2009, we received redemptions totaling $30.6 million of our $38.8 million principal balance of investments held in money market and other money funds at The Reserve (see Note 5 to the condensed consolidated financial statements). 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 $85.7 million for the first half of 2009 as compared with $12.7 million during the same period in 2008. During 2009, net proceeds from the issuance of long-term debt of $394.6 million and common stock of $578.2 million were used primarily to retire $281.5 million of short-term debt and current maturities and to pay down $672.2 million of commercial paper and bank lines of credit. During 2008, proceeds from the issuance of long-term debt of $943.4 million, net of debt issuance costs of $5.6 million, were used primarily to pay down $882.0 million of bank lines of credit. Dividends

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of $108.8 million and $107.0 million were paid during the first half of 2009 and 2008, respectively.
Working Capital
Working capital, the excess of current assets over current liabilities, totaled $178.5 million at June 30, 2009, an increase of $947.7 million from ($769.2) million at December 31, 2008 and an increase of $973.2 million from ($794.7) million at June 30, 2008. The increase in working capital over the six month period ended June 30, 2009 primarily resulted from a $670.2 million reduction in short-term borrowings and a $251.3 million reduction in current maturities. Proceeds from the issuance of long-term debt in February 2009 and proceeds from the issuance of stock in June 2009 were primarily used to pay down short-term debt. The increase in working capital over the twelve month period ended June 30, 2009 primarily resulted from a $797.2 million decrease in short-term borrowings and a $269.7 million decrease in current maturities. The reduction in short-term debt primarily resulted from the aforementioned issuances of long-term debt and common stock during the six month period ended June 30, 2009. A decrease in trade payables and other current liabilities of $118.8 million further contributed to the improvement in working capital. Partially offsetting the comparative increase in working capital was a $137.8 million decrease in accounts and notes receivable and a $107.5 million decrease in cash and cash equivalents.
Short-term Borrowings and Investments
Net short-term borrowings and investments consisted of the following (in thousands of dollars):

                                   June 30          December 31           June 30
                                     2009               2008                2008
 Short-term investments
 Cash equivalents                 $      400        $      3,217        $    133,213
 Medium-term investments               6,755              36,734                   0

 Total short-term investments     $    7,155        $     39,951        $    133,213

 Short-term borrowings
 Bank borrowings                  $   46,000        $  1,082,500        $  1,209,500
 Commercial paper                    366,300                   0                   0

 Total short-term borrowings      $  412,300        $  1,082,500        $  1,209,500

 Net short-term borrowings        $ (405,145 )      $ (1,042,549 )      $ (1,076,287 )


 Bank borrowings
 Maturity                                 1  day              2  days       1 to 28  days
 Weighted-average interest rate         0.62 %              1.63 %              2.63 %

 Commercial paper
 Maturity                            1 to 43 days            n/a                 n/a
 Weighted-average interest rate         0.72 %               n/a                 n/a

Due to the temporary suspension of redemptions in 2008, and the uncertainty as to the timing of such redemptions, $6.8 million as of June 30, 2009 and $36.7 million as of December 31, 2008 of our short-term investments are classified as medium-term investments as explained more fully in Note 5 to the condensed consolidated financial statements. During the first half of 2009 and the fourth quarter of 2008, The Reserve redeemed $30.6 million and $0.3 million, respectively, of our investment.
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.

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