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 - 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 trends.
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, including the federal stimulus funds; 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; healthcare costs; the amount of long-term debt and interest expense we incur; volatility in pension plan asset values which may require cash contributions to the pension 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; the impact of environmental clean-up costs and other liabilities relating to previously divested businesses; our ability to secure and permit aggregates reserves in strategically located areas; our ability to manage

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and successfully integrate acquisitions; the impact of the global financial crisis on our business and financial condition and access 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. The construction environment remains challenging, reflecting continued weak private construction activity and uncertainty surrounding the timing and amount of a new multi-year federal highway program. Despite these challenges, we continue to run the business in a cost-efficient manner. Although sales volumes in the third quarter were 19% to 29% lower than the prior year for our key product lines, overall gross profit as a percentage of net sales of 21% equaled the prior year's third quarter. Our ongoing focus on managing costs and improving productivity will enhance our ability to increase earnings as the economy recovers and construction activity improves.
Through the first nine months of 2009, highway construction awards have been buoyed by stimulus-related funding. Through September, contract awards for highways have increased 5% from the prior year and state departments of transportation and local governments continued to make good progress obligating stimulus dollars for transportation projects. In September, the Federal Highway Administration reported that approximately 4,000 stimulus-funded projects were under construction, involving $11 billion of stimulus funds. In addition, there are $8 billion of projects for which funds have been obligated but work has not yet begun. As of the end of September, approximately five months remain for each state to obligate the remaining federal stimulus funds apportioned to them for highways. Afterwards, unobligated funds must be returned to the Federal Highway Administration for redistribution.
Third Quarter 2009 Compared with Third Quarter 2008 Third quarter 2009 net sales were $738.7 million, a decrease of 23% compared with $958.8 million in the third quarter of 2008. Aggregates shipments declined 20%, reducing earnings $0.46 per diluted share while aggregates pricing increased 2.4%, increasing earnings $0.07 per diluted share.
Net earnings were $54.2 million, or $0.43 per diluted share, in the third quarter of 2009 compared with $59.1 million, or $0.53 per diluted share, for the third quarter of 2008. Current year third quarter net earnings per diluted share include $0.05 referable to discontinued operations and $0.08 referable to the 49% comparative decrease in the unit cost for diesel fuel. Additionally, the effective tax rate from continuing operations was a 14.3% benefit in the third quarter of 2009, versus a 26.0% expense in the prior year.
Economic stimulus funds of $27 billion designated for highway projects are working their way into the U.S. economy. While 73% of these funds had been obligated to specific projects by the end of September, only $2.4 billion of these stimulus funds had been paid to contractors for construction work performed. Vulcan-served states generally have obligated funds for new highway projects at the same pace as other states; however, our states have lagged the rest of the country when it comes to starting stimulus-related construction. At the end of September, our states had spent less than 7% of their available stimulus funds for work performed compared with 12% for the rest of the country. These differences in spending patterns between Vulcan-served states and other states are due in part to the types of projects planned.

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Continuing Operations
Earnings from continuing operations before income taxes for the third quarter of
2009 versus the third quarter of 2008 are summarized below (in millions of
dollars):

    Third quarter 2008                                                  $  81

    Lower aggregates earnings due to
    Lower volumes                                                         (69 )
    Higher selling prices                                                  11
    Lower costs                                                             7
    Higher asphalt mix and concrete earnings                                8
    Lower cement earnings                                                  (2 )
    Higher selling, administrative and general expenses                    (3 )
    Higher gain on sale of property, plant & equipment and businesses       5
    All other                                                               4

    Third quarter 2009                                                  $  42

Aggregates segment revenues decreased $128.9 million, or 19%, to $533.0 million in the third quarter of 2009 compared with $661.9 million in the third quarter of 2008. Aggregates shipments declined 20% from the prior year due to weak demand and wet weather in certain key markets. Stimulus projects in most Vulcan-served states were slow to get underway due in part to the types of projects being implemented by state transportation agencies. In Florida for example, most stimulus dollars are going to fund projects that will add lane capacity. These projects require more time for design and permitting. As a result, less than 1% of Florida's highway stimulus dollars had been spent by the end of September. Illinois and Tennessee were exceptions, with pavement improvement projects comprising most of the shovel-ready work in those states, resulting in relatively higher levels of stimulus-funded spending during the third quarter. As a result, aggregates sales volumes in most of the markets in these two states outperformed other Vulcan-served markets. The 2.4% 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 2.4% average, while markets in the West and in Florida reported year-over-year declines in average selling price.
Gross profit for the Aggregates segment was $133.3 million in the third quarter of 2009 compared with $185.2 million in the same period last year. Profitability for the Aggregates segment declined as the impact of lower shipments more than offset the earnings benefit from improved prices, lower unit costs for diesel fuel and cost control measures. Throughout the recession, we have rationalized production, reduced operating hours, streamlined the workforce and effectively managed spending, thereby offsetting some of the cost impact related to lower volumes. Aggregates cash fixed costs were 12% lower than in the prior year's third quarter.
Asphalt mix and Concrete segment revenues decreased $97.5 million, or 29%, to $243.2 million in the third quarter of 2009 as compared with $340.7 million in the third quarter of 2008. Shipments of asphalt mix and ready-mixed concrete declined 19% and 29%, respectively. Gross profit for the Asphalt mix and Concrete segment increased $8.1 million, or 63%, to $20.7 million in the third quarter of 2009 compared with $12.6 million in the third quarter of 2008. Asphalt mix earnings were higher this quarter as compared with the third quarter of 2008 as material margins improved due to lower costs for liquid asphalt, more than offsetting the earnings effect of the 19% decline in volumes. Concrete earnings decreased from the prior year's third quarter due primarily to lower volumes.
As a result of weaker sales volumes, third quarter 2009 Cement segment revenues of $19.8 million and gross profit of $0.5 million declined from the prior year's third quarter levels of $25.6 million and $3.0 million, respectively. The decline in earnings from weaker sales volume was slightly offset by lower

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energy costs.
Selling, administrative and general expenses in the third quarter of 2009 increased $3.2 million from the prior year. The year-over-year increase was due to project costs related to the replacement of legacy information technology systems and costs associated with reducing employment levels. Operating earnings were $82.7 million in the third quarter compared with $128.3 million in the prior year. The decline in shipments resulting from weak demand was the primary factor in the decline in profitability. The 49% decrease in the unit cost for diesel fuel increased operating earnings by $16.6 million. Interest expense of $44.0 million was down $0.6 million from the third quarter of 2008 due to a reduction in total debt.
In the third quarter, we recorded a tax benefit of $5,983,000, compared with a tax expense in the prior year of $21,038,000. An adjustment to the current quarter's income tax provision was required so that the year-to-date provision reflects the expected annual tax rate.
Earnings from continuing operations were $47.9 million, or $0.38 per diluted share, in the third quarter of 2009 compared with $59.8 million, or $0.54 per diluted share, in the third quarter of 2008. Discontinued Operations
During the third quarter of 2009, we settled with one more of our insurers in the Modesto case (see Note 19 to the condensed consolidated financial statements) resulting in a pretax gain of $10.5 million. The insurance proceeds and associated gain represent a partial recovery of legal and settlement costs recognized in prior periods. Overall, third quarter pretax results of discontinued operations were earnings of $10.4 million in 2009 and a loss of $1.3 million in 2008. Excluding the 2009 gain from insurance recovery, the 2009 and 2008 third quarter results primarily reflect charges related to general and product liability costs, including legal defense costs and environmental remediation costs associated with our former Chemicals businesses.

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Year-to-Date Comparisons as of September 30, 2009 and September 30, 2008 Net sales in the first nine months of 2009 were $1,987.9 million compared with $2,696.6 million in the first nine months of 2008. Aggregates shipments declined 27%, reducing earnings $1.67 per diluted share while improved aggregates pricing increased earnings $0.20 per diluted share. Net earnings per diluted share were $0.37 for the first nine months of 2009 compared with $1.93 in the first nine months of 2008. Current year net earnings include earnings per diluted share of $0.10 referable to discontinued operations and $0.26 referable to the 48% 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. Additionally, the effective tax rate from continuing operations was a 44.5% benefit for the first nine months of 2009, versus a 29.8% expense in the prior year.
Continuing Operations
Earnings from continuing operations before income taxes year-to-date September 30, 2009 versus year-to-date September 30, 2008 are summarized below (in millions of dollars):

   Year-to-date September 30, 2008                                      $  307

   Lower aggregates earnings due to
   Lower volumes                                                          (264 )
   Higher selling prices                                                    32
   Lower costs                                                              26
   Lower cement earnings                                                   (16 )
   Lower selling, administrative and general expenses                       15
   Lower gain on sale of property, plant & equipment and businesses 1      (76 )
   All other                                                                (2 )

   Year-to-date September 30, 2009                                      $   22

1 $71 million
is referable
to the sale
of quarry
sites
divested in
connection
with the
Florida Rock
transaction.

Aggregates segment revenues decreased $445.0 million, or 24%, to $1,432.3 million in the first nine months of 2009 compared with $1,877.3 million in 2008. This decrease was primarily the result of a 27% decline in shipments during the first nine months due to weak demand and wet weather in key markets during the second and third quarters of 2009. Aggregates pricing was up 2.7% overall with wide variations across Vulcan-served markets. Efforts to rationalize production, reduce operating hours, streamline the work force and effectively manage spending levels resulted in lower costs which helped to mitigate the effect of lower volumes. Aggregates unit variable production costs were essentially flat when compared with the prior year's first nine months while cash fixed costs were reduced 16% from the prior year. Gross profit for the Aggregates segment was $323.7 million in the first nine months of 2009 compared with $529.9 million in the same period last year. Asphalt mix and Concrete segment revenues decreased $278.0 million to $654.7 million in the first nine months of 2009 as compared with $932.7 million in the first nine months of 2008. Shipments of asphalt mix and ready-mixed concrete declined 25% and 32%, respectively. Gross profit of $55.5 million for the Asphalt mix and Concrete segment was essentially flat when compared with the first nine months of 2008. Asphalt mix earnings were higher in the first nine months of 2009 as compared with the first nine months 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 nine months due primarily to lower volumes.
Cement segment revenues of $56.4 million and gross profit (loss) of ($1.3) million for the first nine months of 2009 represented a decline from the prior year's first nine month levels of $85.8 million and $14.5 million, respectively, as a result of weaker demand.

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Selling, administrative and general expenses of $238.6 million for the first nine months of 2009 decreased $15.1 million from the prior year. Cost-saving actions implemented across Vulcan to align spending levels with weak product demand offset $6.5 million in project costs related to the replacement of legacy information technology systems. Additionally, the prior year includes $5.8 million of 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 as of September 30, 2009 were down 19% on average from September 30, 2008. Operating earnings were $147.1 million in the first nine months of 2009 versus $433.5 million in the prior year, a decline of $286.4 million. The prior year's 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 48% decrease in the unit cost for diesel fuel increased operating earnings by $52.2 million. Interest expense of $131.9 million was up $5.7 million from the first nine months of 2008 due to an increase in the weighted-average interest rate offset in part by a reduction in total debt.
During the first nine months of 2009, we recognized a tax benefit from continuing operations of $9.6 million, as compared with a tax expense of $91.4 million during the same period of 2008. The change in our tax provision resulted from the relatively greater effect that certain items such as statutory depletion, undistributed earnings from foreign operations, and charitable contributions of property had on the 2009 tax rate due to the significantly lower level of earnings. As a result of these factors, our effective tax rate for the nine months ended September 30, 2009 was -44.5%, as compared with a 29.8% rate for the first nine months of 2008.
Earnings from continuing operations were $31.2 million, or $0.27 per diluted share, in the first nine months of 2009 compared with earnings of $215.5 million, or $1.94 per diluted share, in the first nine months of 2008. Discontinued Operations
The first nine months pretax earnings from discontinued operations was $20.7 million during 2009 and includes the Modesto insurance settlement gains of $23.5 million and the $0.8 million of gain on disposal of discontinued operations (see Note 2 to the condensed consolidated financial statements). Excluding these gains, the 2009 and 2008 first nine months 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. Plant operating costs and overhead expenses are being tightly managed as we continue to adjust our cost structure to match the weak demand environment. Aggregates production in the first nine months of 2009 was lower than shipments, reducing inventory and conserving cash. As we have throughout this downturn, we continue to aggressively manage controllable costs and to focus on cash margins and earnings. Additionally, we completed two financing transactions during 2009 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 nine months of 2009, we reduced total debt by $694.8 million. See the Debt and Capital section below for additional information.
As of September 30, 2009, we have $1,675.0 million in bank lines of credit, of which none was drawn and $286.4 million was used to support outstanding commercial paper. 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 $354.8 million to cash during the first nine months of 2009 as compared with $278.2 million during the same period in 2008. The $76.6 million increase in cash from operating activities is primarily attributable to favorable changes in certain working capital accounts, in particular, accounts receivable, inventories, and accruals for incentives and other compensation. Additionally, net gains on sale of property, plant & equipment and businesses decreased $75.2 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. These favorable comparative changes in operating cash flows were partially offset by a $170.1 million decrease in net earnings and a $24.4 million increase in contributions to pension plans.
Net cash used by investing activities during the first nine months of 2009 totaled $77.4 million compared with $135.0 million during the same period in 2008. In light of the weak demand environment, we continued to evaluate the strategic nature and timing of all capital projects leading to a $242.9 million comparative reduction in purchases of property, plant & equipment and business acquisitions. The cash savings from significant reductions in capital spending were largely offset by a $220.1 reduction in proceeds from the sale of property, plant and equipment and businesses primarily attributable to the divestitures required in connection with the Florida Rock acquisition. Additionally, during the nine months ended September 30, 2008, $37.0 million in assets held in money market and other money funds at The Reserve were reclassified from cash equivalents to medium-term investments (see Note 5 to the condensed consolidated financial statements). We received redemptions totaling $30.6 million of these investments during the first nine months of 2009 resulting in a net comparative increase in cash flows of $67.6 million. This favorable change in investing cash flows was partially 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 $241.1 million for the first nine months of 2009 as compared

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with $87.2 million during the same period in 2008. During 2009, proceeds from the issuance of long-term debt (net of debt issuance costs) of $394.6 million and common stock of $587.1 million were used to retire $296.6 million of short-term debt and current maturities and contributed largely to the $798.1 million reduction in commercial paper and bank line of credit borrowings. During 2008, proceeds from the issuance of long-term debt (net of debt issuance costs) of $943.4 million were used primarily to pay down $928.0 million of bank lines of credit. Dividends of $140.0 million and $160.8 million were paid during the first nine months of 2009 and 2008, respectively. Working Capital
Working capital, the excess of current assets over current liabilities, totaled $209.7 million at September 30, 2009, an increase of $978.9 million from ($769.2) million at December 31, 2008 and an increase of $987.0 million from ($777.3) million at September 30, 2008. The increase in working capital over the nine month period ended September 30, 2009 primarily resulted from a $796.1 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 . . .