Summary of ASTEC INDUSTRIES INC

Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations

Forward-Looking Statements
This Quarterly Report on Form 10-Q contains forward-looking statements made pursuant to the safe harbor provisions of the Private Securities Litigation Reform Act of 1995. Statements contained anywhere in this Quarterly Report on Form 10-Q that are not limited to historical information are considered forward-looking statements within the meaning of Section 27A of the Securities Act of 1933 and Section 21E of the Securities Exchange Act of 1934 and are sometimes identified by the words "will," "would," "should," "could," "may," "believes," "anticipates," "intends," "forecasts" and "expects" and similar expressions. Such forward-looking statements include, without limitation, statements regarding the Company's expected sales and results of operations during 2009, the Company's expected capital expenditures in 2009, the expected benefit and impact of financing arrangements, the ability of the Company to meet its working capital and capital expenditure requirements through September 30, 2010, the impact of the enactment of the American Recovery and Reinvestment Act of 2009 ("ARRA") or any future state or federal funding for transportation construction programs, the need for road improvements, the impact of other public sector spending and funding mechanisms, changes in the economic environment as it affects the Company, the timing and impact of changes in the economy, the market confidence of customers and dealers, the Company being called upon to fulfill certain contingencies, the expected dates of granting of restricted stock units, changes in interest rates and the impact of such changes on the financial results of the Company, changes in the prices of steel and oil, the ability of the Company to offset future changes in prices in raw materials, the change in the level of the Company's presence and sales in international markets, the seasonality of the Company's business, the percentage of the Company's equipment sold directly to end users rather than distributors, the amount or value of unrecognized tax benefits, the Company's discussion of its critical accounting policies and the ultimate outcome of the Company's current claims and legal proceedings.

These forward-looking statements are based largely on management's expectations, which are subject to a number of known and unknown risks, uncertainties and other factors discussed in this Report and in other documents filed by the Company with the Securities and Exchange Commission, which may cause actual results, financial or otherwise, to be materially different from those anticipated, expressed or implied by the forward-looking statements. All forward-looking statements included in this document are based on information available to the Company on the date hereof, and the Company assumes no obligation to update any such forward-looking statements to reflect future events or circumstances.

The risks and uncertainties identified herein under the caption "Item 1A. Risk Factors" in Part II of this Report, elsewhere herein and in other documents filed by the Company with the Securities and Exchange Commission, including the Company's Annual Report on Form 10-K for the fiscal year ended December 31, 2008, should be carefully considered when evaluating the Company's business and future prospects.

Overview
Astec Industries, Inc., ("the Company") is a leading manufacturer and marketer of road building equipment. The
Company's businesses:
• design, engineer, manufacture and market equipment that is used in each phase of road building, from quarrying and crushing the aggregate to applying the asphalt;
• design, engineer, manufacture and market equipment and components unrelated to road construction, including trenching, auger boring, directional drilling, industrial heat transfer, wood chipping and grinding; and
• manufacture and sell replacement parts for equipment in each of its product lines.

The Company has 14 manufacturing companies, 13 of which fall within four reportable operating segments, which include the Asphalt Group, the Aggregate and Mining Group, the Mobile Asphalt Paving Group and the Underground Group. The business units in the Asphalt Group design, manufacture and market a complete line of asphalt plants and related components, heating and heat transfer processing equipment and storage tanks for the asphalt paving and other unrelated industries. In early 2009, this segment introduced a new line of concrete mixing plants. The business units in the Aggregate and Mining Group design, manufacture and market equipment for the aggregate, metallic mining and recycling industries. In September 2009 this segment acquired a small company with unique machine technology used to make wood pellets. The Company began production of the new pellet production equipment in October 2009. The business units in the Mobile Asphalt Paving Group design, manufacture and market asphalt pavers, material transfer vehicles, milling machines, stabilizers and screeds. The business units in the Underground Group design, manufacture and market a complete line of trenching equipment, directional drills and auger boring machines for the underground construction market as well as vertical drills for gas and oil field development. The Company also has one other category that contains the business units that do not meet the requirements for separate disclosure as an operating segment. The business units in the Other category include Peterson Pacific Corp. (Peterson), Astec Australia Pty Ltd. (Astec Australia), Astec Insurance Company and Astec Industries, Inc., the parent company. Peterson designs, manufactures and markets whole-tree pulpwood chippers, horizontal grinders and blower trucks. Astec Australia is the Australian and New Zealand distributor of equipment manufactured by Astec Industries, Inc. Astec Insurance Company is a captive insurance provider.

The Company's financial performance is affected by a number of factors, including the cyclical nature and varying conditions of the markets it serves. Demand in these markets fluctuates in response to overall economic conditions and is particularly sensitive to the amount of public sector spending on infrastructure development, privately funded infrastructure development, changes in the price of crude oil, which affects the cost of fuel and liquid asphalt, and changes in the price of steel.

In August 2005, President Bush signed into law Safe, Accountable, Flexible and Efficient Transportation Equity Act - A Legacy for Users ("SAFETEA-LU"), which authorized appropriation of $286.5 billion in guaranteed federal funding for road, highway and bridge construction, repair and improvement of the federal highways and other transit projects for federal fiscal years October 1, 2004 through September 30, 2009. The Company believes that federal highway funding such as SAFETEA-LU significantly influences the purchasing decisions of the Company's customers who are more comfortable making purchasing decisions with such legislation in place. Federal funding provides for approximately 25% of highway, street, roadway and parking construction funding in the United States.

SAFETEA-LU funding expired on September 30, 2009 and federal transportation funding is currently operating on short term appropriations at the most recent approved funding levels until mid-December. The current bill marks the second continuation of federal government funding at last year's levels, a move made necessary because Congress has still been unable to complete its appropriations work from fiscal 2009. The U.S. government is currently considering two proposals regarding federal appropriation of funds for highway construction. The first proposal, which is favored by the Obama administration and the Senate, consists of an eighteen-month extension of the current SAFETEA-LU funding levels, approximately $41 billion per year. The second proposal, which is favored by the House of Representatives, consists of the adoption of a new six-year highway bill that would appropriate approximately $450 billion in federal funding for road, highway and bridge construction and repair, with $337 billion allocated to the construction and repair of highways. The adoption of the proposed highway bill would result in an increase of approximately $15 billion in federal funding per year as compared to the current amount of federal funding under SAFETEA-LU.

On February 17, 2009, President Obama signed into law ARRA, which authorizes the expenditure of approximately $27.5 billion in federal funding for highway and bridge construction activities. These funds are in addition to the $41.2 billion apportioned to the federal highway program under SAFETEA-LU for fiscal year 2009. The measure required the funding to be apportioned to the states within 21 days of the bill's enactment. Half of the funds were required to be obligated by the states within 120 days with the remaining portion required to be under contract one year after the bill's enactment. The bill also provided for favorable tax policies regarding the deduction of certain expenses relating to the purchase of business equipment.

Several other countries have also implemented infrastructure spending programs to stimulate their economies. The Company believes these spending programs will have a positive impact on its financial performance; however, the magnitude of that impact cannot be determined.

The public sector spending described above is needed to fund road, bridge and mass transit improvements. The Company believes that increased funding is unquestionably needed to restore the nation's highways to a quality level required for safety, fuel efficiency and mitigation of congestion. In the Company's opinion, amounts needed for such improvements are significantly greater than amounts approved to date, and funding mechanisms such as the federal usage fee per gallon of gasoline, which has not been increased in fifteen years, would need to be increased along with other measures to generate the funds needed.

In addition to public sector funding, the economies in the markets the Company serves, the price of oil and its impact on customers' purchase decisions and the price of steel may each affect the Company's financial performance. Economic downturns, like the one experienced from 2001 through 2003, and the current downturn that began in late 2008, generally result in decreased purchasing by the Company's customers, which, in turn, causes reductions in sales and increased pricing pressure on the Company's products. Rising interest rates typically have the effect of negatively impacting customers' attitudes toward purchasing equipment. The Federal Reserve has maintained historically low interest rates in response to the current economic downturn, and the Company expects only slight changes, if any, in interest rates in the remainder of 2009 and does not expect such changes to have a material impact on the financial results of the Company.

Significant portions of the Company's revenues relate to the sale of equipment involved in the production, handling and installation of asphalt mix. A major component of asphalt is oil. An increase in the price of oil increases the cost of providing asphalt, which is likely to decrease demand for asphalt and therefore decrease demand for certain Company products. While increasing oil prices may have a negative financial impact on the Company's customers, the Company's equipment can use a significant amount of recycled asphalt pavement, thereby mitigating the cost of asphalt for the customer. The Company continues to develop products and initiatives to reduce the amount of oil and related products required to produce asphalt mix. Oil price volatility makes it difficult to predict the costs of oil-based products used in road construction such as liquid asphalt and gasoline. The Company's customers appear to be adapting their prices in response to the fluctuating oil prices, and the fluctuations did not appear to significantly impair equipment purchases in 2008 and the first nine months of 2009. The Company expects oil prices to continue to fluctuate in the remainder of 2009 but does not believe the fluctuation will have a significant impact on customers' buying decisions.

Contrary to the negative impact of higher oil prices on many of the Company's products as discussed above, sales of several of the Company's products, including products manufactured by the Underground segment which are used to drill for oil and natural gas and install oil and natural gas pipelines, would benefit from higher oil and natural gas prices, to the extent that such higher prices lead to further development of oil and natural gas production.

Steel is a major component in the Company's equipment. Steel prices increased significantly during the first eight months of 2008, and the Company increased sales prices during 2008 to offset these rising steel costs. Late in the third quarter of 2008, steel prices began to retreat from their 2008 highs. Steel pricing declined sharply in the fourth quarter of 2008 and the first quarter of 2009. Favorable pricing continued through the first nine months of 2009, and we expect pricing levels throughout the remainder of 2009 to remain well below the peak levels reached in the third quarter of 2008. However, steel prices may increase moderately during the remainder of 2009 due to reduced mill output and reductions in automotive and appliance output, which in turn reduce the amount of high-quality scrap, a prime input factor for steel pricing. Although the Company would institute price increases in response to rising steel and component prices, if the Company is not able to raise the prices of its products enough to cover increased costs, the Company's financial results will be negatively affected. If the Company sees increases in upcoming steel prices, it will take advantage of buying opportunities to offset such future pricing where possible.

In addition to the factors stated above, many of the Company's markets are highly competitive, and its products compete worldwide with a number of other manufacturers and distributors that produce and sell similar products. During most of 2008, the reduced value of the dollar relative to many foreign currencies and the positive economic conditions in certain foreign economies had a positive impact on the Company's international sales. During the latter months of 2008, the dollar began to strengthen as the current economic recession began to have an impact around the world. During the first quarter of 2009, the dollar stabilized somewhat but at a stronger position than in the first nine months of 2008. This had a negative impact on the Company's international sales during the first half of 2009 even though the dollar began to weaken in the second quarter of 2009 and has remained relatively weak compared to other major currencies through the third quarter of 2009. The Company expects the dollar to fluctuate but remain relatively weak for the remainder of 2009.

In the United States and internationally, the Company's equipment is marketed directly to customers as well as through dealers. During 2008, approximately 75% to 80% of equipment sold by the Company was sold directly to the end user. The Company expects this ratio to remain relatively consistent throughout 2009.

The Company is operated on a decentralized basis and there is a complete management team for each operating subsidiary. Finance, insurance, legal, shareholder relations, corporate accounting and other corporate matters are primarily handled at the corporate level (i.e. Astec Industries, Inc., the parent company). The engineering, design, sales, manufacturing and basic accounting functions are all handled at each individual subsidiary. Standard accounting procedures are prescribed and followed in all reporting.

The non-union employees of each subsidiary have the opportunity to earn bonuses in the aggregate up to 10% of the subsidiary's after-tax profit if such subsidiary meets established goals. These goals are based on the subsidiary's return on capital employed, cash flow on capital employed and safety. The bonuses for subsidiary presidents are paid from a separate corporate pool.

Results of Operations
For the three months ended September 30, 2009, net sales decreased $71,359,000, or 30.1%, to $166,084,000 from $237,443,000 for the three months ended September 30, 2008. Sales are generated primarily from new equipment purchases made by customers for use in construction for privately funded infrastructure development and public sector spending on infrastructure development. The overall decline in sales for the three months ended September 30, 2009 compared to the three months ended September 30, 2008 is reflective of the weak overall economic conditions, both domestic and international. For the quarter ended September 30, 2009 compared to the quarter ended September 30, 2008, (1) net sales for the Asphalt Group decreased approximately $12,102,000, or 21.4%; (2) net sales for the Aggregate and Mining Group decreased approximately $34,403,000, or 38.1%; (3) net sales for the Underground Group decreased approximately $23,504,000, or 58.1%; and (4) net sales for the Mobile Asphalt Paving Group increased approximately $8,821,000, or 31.5%. The Company believes that in addition to a weak third quarter experienced by the Mobile Asphalt Paving Group in 2008, the Group was also the beneficiary of government stimulus spending in the third quarter of 2009, resulting in the increase in sales for the segment. Consolidated parts sales for the quarter ended September 30, 2009 were $46,146,000, compared to $54,865,000 for the quarter ended September 30, 2008, for a decrease of $8,719,000, or 15.9%.

For the nine months ended September 30, 2009, net sales decreased $217,987,000, or 28.0%, to $560,231,000 from $778,218,000 for the nine months ended September 30, 2008. Sales are generated primarily from new equipment purchases made by customers for use in construction for privately funded infrastructure development and public sector spending on infrastructure development. The overall decline in sales for the nine months ended September 30, 2009 compared to the nine months ended September 30, 2008 is reflective of the weak overall economic conditions, both domestic and international. A stronger dollar during the first quarter of 2009 also negatively impacted international sales for the nine months ended September 30, 2009, even though the dollar weakened during the second and third quarters of 2009. For the nine months ended September 30, 2009 compared to the nine months ended September 30, 2008, (1) net sales for the Asphalt Group decreased approximately $3,187,000, or 1.6%; (2) net sales for the Aggregate and Mining Group decreased approximately $110,860,000, or 40.5%; (3) net sales for the Underground Group decreased approximately $54,967,000, or 50.3%; and (4) net sales for the Mobile Asphalt Paving Group decreased approximately $25,103,000, or 19.3%. The Company believes that, although sales are down in all segments for the nine months ended September 30, 2009 compared to the same period in 2008, the Asphalt Group and the Mobile Asphalt Paving Group benefited somewhat from federal stimulus spending in 2009 resulting in smaller declines in sales for those segments compared to the Aggregate and Mining Group and the Underground Group. Parts sales for the nine months ended September 30, 2009 were $136,188,000, compared to $157,953,000 for the nine months ended September 30, 2008, for a decrease of $21,765,000, or 13.8%.

For the quarter ended September 30, 2009 compared to the same quarter in 2008, domestic sales decreased 25.2% from $135,270,000 to $101,241,000. Domestic sales for the third quarter of 2009 compared to the third quarter of 2008 increased in the Mobile Asphalt Paving Group by 49.6%, while the Aggregate and Mining, Underground and Asphalt Group segments experienced declines of 26.9%, 66.2% and 33.7%, respectively. The Company believes that in addition to a weak third quarter experienced by the Mobile Asphalt Paving Group in 2008, the Group was also the beneficiary of government stimulus spending in the third quarter of 2009, resulting in the increase in domestic sales for the segment. Domestic sales accounted for 61.0% of sales and international sales accounted for 39.0% of sales for the three months ended September 30, 2009, compared to 57.0% for domestic sales and 43.0% for international sales for three months ended September 30, 2008. Domestic sales were impacted by weakened economic conditions in the U.S.

For the nine months ended September 30, 2009 compared to the same period in 2008, domestic sales decreased 26.1% from $490,542,000 to $362,422,000. Domestic sales increased in the Asphalt Group by 5.1%, while the Aggregate and Mining, Underground and Mobile Asphalt Paving segments experienced declines of 45.0%, 61.6% and 9.1%, respectively. The increase in domestic sales in the Asphalt Group primarily resulted from sales by Dillman, which was acquired in October 2008. Domestic sales accounted for 64.7% of sales and international sales accounted for 35.3% of sales for the nine months ended September 30, 2009, compared to 63.0% for domestic sales and 37.0% for international sales for same period in 2008. Domestic sales were impacted by weakened economic conditions in the U.S.

International sales for the three months ended September 30, 2009, compared to the same period of 2008 decreased $37,331,000, or 36.5%, from $102,173,000 to $64,842,000. International sales for the third quarter of 2009 decreased in all geographic areas except for Canada. The Company believes the decrease in the overall level of international sales is the result of the weak economic conditions in most foreign markets. Compared to the same quarter in 2008, international sales increased 3.0% in the Mobile Asphalt Paving segment and decreased 43.7% in the Aggregate and Mining segment, 51.1% in the Underground segment and 9.3% in the Asphalt Group segment. The Mobile Asphalt Paving Group was the beneficiary of increased highway construction spending in Canada.

International sales for the nine months ended September 30, 2009, compared to the same period of 2008, decreased $89,867,000, or 31.2%, from $287,676,000 to $197,809,000. International sales for the first nine months of 2009 decreased in all geographic areas except the West Indies. The Company believes the decrease in the overall level of international sales is the result of the weak economic conditions in most foreign markets and the volatility of the U.S. dollar during the first nine months of 2009. Compared to the same nine-month period in 2008, international sales decreased 42.6% in the Mobile Asphalt Paving Group, 29.5% in the Asphalt Group, 38.4% in the Underground Group and 30.8% in the Aggregate and Mining Group.

Gross profit for the three months ended September 30, 2009 decreased $24,086,000, or 41.0%, to $34,717,000 from $58,803,000 for the three months ended September 30, 2008. Gross profit as a percentage of sales decreased 390 basis points to 20.9% from 24.8%. The primary reason for the decrease in gross margin as a percent of sales is reduced plant utilization due to lower production volumes.

Gross profit for the nine months ended September 30, 2009 decreased $70,345,000, or 36.8%, to $120,967,000 from $191,312,000 for the nine months ended September 30, 2008. Gross profit as a percentage of sales decreased 300 basis points to 21.6% from 24.6%. The primary reason for the decrease in gross margin as a percent of sales is reduced plant utilization due to lower production volumes.

For the quarter ended September 30, 2009 compared to the same period in 2008, gross profit for the Asphalt Group decreased to $10,769,000 compared to $17,045,000, and gross profit as a percentage of sales decreased from 30.1% to 24.2%, or 590 basis points. The Asphalt Group experienced a 21.4% drop in sales in the third quarter of 2009 compared to the same period in 2008.

For the quarter ended September 30, 2009 compared to the same period in 2008, gross profit for the Aggregate and Mining Group decreased to $12,691,000 from $20,402,000, a decrease of $7,711,000 or 37.8% and gross profit as a percentage of sales increased from 22.6% to 22.7%, or 10 basis points. The Aggregate and Mining Group was impacted by a 38.1% decrease in sales during the third quarter of 2009 compared to the third quarter of 2008.

For the quarter ended September 30, 2009 compared to the same period in 2008, gross profit for the Mobile Asphalt Paving Group increased from $6,547,000 to $9,148,000, an increase of $2,601,000, or 39.7%, resulting in an increase in gross profit as a percentage of sales from 23.4% to 24.8%, or 140 basis points. This group experienced a 31.5% increase in sales in the third quarter of 2009 compared to the third quarter of 2008.

For the quarter ended September 30, 2009 compared to the same period in 2008, gross profit for the Underground Group decreased from $11,318,000 to $784,000, a decrease of $10,534,000, or 93.1%, resulting in a decrease in gross profit as a percentage of sales from 28.0% to 4.6%. The Underground Group experienced a decline in sales of 58.1% in the third quarter of 2009 compared to the third quarter of 2008, resulting in significantly reduced plant utilization.

For the nine months ended September 30, 2009 compared to the same period in 2008, gross profit for the Asphalt Group decreased to $49,860,000 compared to $54,652,000, a decrease of $4,792,000, or 8.8%,and gross profit as a percentage of sales decreased from 27.2% to 25.3%, or 190 basis points. This decrease in gross profit as a percent of sales is primarily due to significant underutilization of Dillman's manufacturing facility which was acquired in October 2008.

For the nine months ended September 30, 2009 compared to the same period in 2008, gross profit for the Aggregate and Mining Group decreased to $37,165,000 from $66,087,000, a decrease of $28,922,000, or 43.8%, and gross profit as a percentage of sales decreased from 24.1% to 22.8%, or 130 basis points. This decrease in gross profit corresponds to the 40.5% decrease in sales for the same period.

For the nine months ended September 30, 2009 compared to the same period in 2008, gross profit for the Mobile Asphalt Paving Group decreased from $32,696,000 to $24,501,000, a decrease of $8,195,000, or 33.4%, resulting in a decrease in gross profit as a percentage of sales from 25.1% to 23.3%, or 180 basis points. This group experienced a 19.3% decrease in sales in the first nine months of 2009 compared to the first nine months of 2008.

For the nine months ended September 30, 2009 compared to the same period in 2008, gross profit for the Underground Group decreased from $26,728,000 to $3,820,000, a decrease of $22,908,000, or 85.7%, resulting in a decrease in gross profit as a percentage of sales from 24.5% to 7.0%, or 2,380 basis points. The Underground Group experienced a decline in sales of 50.3% in the first nine months of 2009 compared to the same period in 2008 resulting in significantly reduced plant utilization.

Selling, general, administrative and engineering expenses for the quarter ended September 30, 2009 were $30,433,000, or 18.3% of net sales, compared to $34,269,000, or 14.4% of net sales, for the quarter ended September 30, 2008, a decrease of $3,836,000, or 11.2%. The decrease in selling, general, administrative and engineering expenses for the three months ended September 30, 2009, compared to the same period of 2008, was primarily due to a decrease in payroll related expenses of $1,680,000, a decrease in commission expense of $810,000, a decrease in stock based compensation of $537,000 and a decrease in profit sharing expense of $496,000.

Selling, general, administrative and engineering expenses for the nine months ended September 30, 2009 were $93,466,000, or 16.7% of net sales, compared to $106,638,000, or 13.7% of net sales, for the same period in 2008, a decrease of . . .