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Vulcan Reports Q2 Growth

Vulcan Materials reported that its aggregate shipments rose 6% during the second quarter compared with that period in 2009

Vulcan Materials reported that its aggregate shipments rose 6% during the second quarter compared with that period in 2009. However, its aggregate earnings fell by $5 million.

Vulcan Chairman and CEO Don James said, "Our second-quarter volume growth is encouraging as we look ahead to the second half of 2010 and continuing recovery in demand. The upward trend in aggregates shipments that started in March and continued throughout the second quarter led to the first year-over-year quarterly increase in shipments in four years. The earnings effect of higher volumes was more than offset by charges for settlement of the lawsuit in Illinois, the flooding in Nashville, higher unit costs for liquid asphalt and diesel fuel and lower product pricing. Improvement in the overall economy as well as higher levels of contract awards for highway construction and single-family housing starts provided the catalyst for growth in demand for our products in the second quarter.

"The flow of contract awards for highway construction, a leading indicator of future construction activity, has been improving since March of 2009, when stimulus-related funds became available to each state. During the first six months of 2010, total contract awards for highway construction in Vulcan-served states, including awards for federal, state and local projects, increased 11% from the prior year. Through June 2010, the Federal Highway Administration reported that only 38% of the $26 billion of total stimulus funds obligated for highways had been spent--which bodes well for increased construction activity from federal stimulus spending for the remainder of 2010 and 2011."

Second-quarter aggregates earnings were $122 million versus $127 million in the prior year. Aggregates shipments increased 6% from the prior year's second quarter. The earnings effect from higher aggregates shipments was more than offset by the effects of a 2% decrease in aggregates prices, a 38% increase in the unit cost for diesel fuel and $3 million of charges associated with flooding in the Nashville, Tennessee area in May.

Aggregates pricing continues to reflect wide variations across Vulcan-served markets. Markets in Florida, and to a lesser extent the far west, have remained challenging due to increased competitive pressures. Additionally, a number of long-haul markets served by rail, barge and ship reported lower freight-adjusted prices. Higher energy costs related to these modes of long-haul transportation were not recovered in second-quarter selling prices to customers. The average second-quarter selling price for aggregates in markets not mentioned above approximated prior year levels. Aggregates gross profit in these markets increased as expected based on the increased levels of shipments.

Segment earnings in asphalt were $14 million lower than the prior year due primarily to a 26% increase in the cost for liquid asphalt and lower selling prices. Selling prices for asphalt mix generally lag increasing liquid asphalt costs and were further held in check due to competitive pressures. Asphalt volumes increased 2% from the prior year's second quarter.

Concrete segment earnings declined $3 million from the prior year's second quarter, as the earnings effects from slightly higher shipments of ready-mixed concrete and lower costs were more than offset by a decrease in the average selling price. Cement segment earnings in the second quarter were slightly lower than the prior year as lower average unit selling prices offset higher sales volumes.

In May, the company reached final settlement in a lawsuit filed in 2001 against it by the Illinois Department of Transportation. As a result, a $41 million charge was recorded in the second quarter. Vulcan believes that the settlement is covered by insurance policies and is taking appropriate actions, including one or more arbitrations, to recover the amount paid in settlement above a self-insured retention of $2 million, as well as a portion of its defense costs, from its insurers. The ultimate amount and timing of such recoveries, which will be recorded as income when realized, cannot be predicted with certainty.

Selling, administrative and general expense in the second quarter was $83 million versus $79 million in the prior year's second quarter. Included in the current year's second quarter was $1.5 million of legal expenses related to the lawsuit in Illinois.

"Key drivers of the demand for our products are improving," James said. "First, from the perspective of the overall economy, most GDP forecasts for the U.S. indicate further growth in the overall economy in 2010. In past economic cycles, demand for aggregates has improved as GDP has grown during the initial years of economic recovery. Additionally, state and local tax revenues have historically rebounded after GDP recovers. Since the second quarter of 2009, the gross state product of all Vulcan-served states has shown positive growthóan indication economic recovery is underway.

"Initially, Vulcan-served states lagged the rest of the country in obligating and awarding stimulus-related highway projects. From March to the end of December 2009, contract awards for highways in Vulcan-served states were up 9% versus 17% for the remaining states. In the six months ended June 2010, contract awards for highways were up 11% in Vulcan-served states versus down 1% for other states. The above-average increase during the six months ended June 2010 provides encouragement that highway construction activity in our states should improve in 2010 and beyond.

"Our forecast for aggregates demand in the second half of 2010 continues to reflect an increase in residential construction, albeit from low levels, and continued weakness in private nonresidential building construction. Residential construction contract awards in the second quarter increased 6% from the prior year in Vulcan-served states. This year-over-year increase follows a 41% increase in Vulcan-served states in the first quarter. As a result, most key states for Vulcan now reflect positive growth in trailing 12-month single-family housing starts. In private nonresidential construction, the rate of decline in contract awards has slowed in recent months. The start of a recovery in this end market will be influenced by employment growth, business investment and lending activity. In the second half of 2010, we expect aggregates volumes to be flat to up 5% from the prior year's levels.

"Overall, pricing for aggregates remains solid despite the year-over-year decline reported in the second quarter. A number of Vulcan-served markets are still realizing year-over-year price growth, while in certain other markets, pricing remains under competitive pressures or is being affected by recent increases in long-haul transportation costs. As a result, we expect aggregates pricing in the second half of 2010 to approximate the prior year's levels.

"In our asphalt business, we expect sales volumes and segment earnings in the second half of 2010 to approximate last year's levels, a significant improvement from the current year's first half. In concrete, we expect sales volumes in the second half of 2010 to increase from the prior year's second half, but pricing to decline due to competitive pressures. In our cement business, we expect second half earnings to be a slight loss versus the break-even results reported in the prior year.

"Our available production capacity positions Vulcan to participate efficiently and effectively in the $50 billion to $60 billion of stimulus-related construction. We expect approximately 75% of stimulus-related demand for our products to occur during 2010 and 2011. By the second half of 2011, we expect continued growth in the overall economy and an improving job market to begin driving an increase in private nonresidential construction activity, accelerating the earnings leverage of the company."