See Notes to Unaudited Condensed Consolidated Financial Statements

See Notes to Unaudited Condensed Consolidated Financial Statements

See Notes to Unaudited Condensed Consolidated Financial Statements

The accompanying unaudited condensed consolidated financial statements have been prepared in accordance with accounting principles generally accepted in the United States of America for interim financial information and with the instructions to Form 10-Q and Article 10 of Regulation S-X promulgated under the Securities Act of 1933.  Accordingly, they do not include all of the information and footnotes required by accounting principles generally accepted in the United States of America (“U.S. GAAP”) for complete financial statements.  In the opinion of management, all adjustments (consisting of normal recurring accruals) considered necessary for a fair presentation have been included.  Operating results for the three and nine-month periodsthree-month period ended September 30, 2010March 31, 2011 are not necessarily indicative of the results that may be expected for the year ending December 31, 2010.2011.  It is suggested that these condensed financial statements be read in conjunction with the financial statements and the notes thereto included in the Astec Industries, Inc. Annual Report on Form 10-K for the year ended December 31, 2009.2010.

The condensed consolidated balance sheet at December 31, 20092010 has been derived from the audited financial statements at that date but does not include all of the information and footnotes required by U.S. GAAP for complete financial statements.

Basic earnings per share is determined by dividing net income attributable to controlling interest by the weighted average number of common shares outstanding during each period.  Diluted earnings per share include the potential dilutive effects of options, restricted stock units and shares held in the Company’s Supplemental Executive Retirement Plan.

The following table sets forth the computation of basic and diluted earnings per share:

A total of 1,4271,072 and 1,801 options were antidilutive for the three months ended September 30,March 31, 2011 and 2010, and 2009, respectively.  A total of 1,433 and 1,814 options were antidilutive for the nine months ended September 30, 2010 and 2009, respectively.  Antidilutive options are not included in the diluted earnings per share computation.

Receivables are net of allowances for doubtful accounts of $1,784,000$1,925,000 and $2,215,000$1,820,000 as of September 30, 2010March 31, 2011 and December 31, 2009,2010, respectively.

Inventories consist of the following (in thousands):

The above inventory amounts are net of reserves totalling $18,027,000$20,232,000 and $16,378,000$19,399,000 as of September 30, 2010March 31, 2011 and December 31, 2009,2010, respectively.

Property and equipment is stated at cost, less accumulated depreciation of $165,286,000$174,182,000 and $152,959,000$169,955,000 as of September 30, 2010March 31, 2011 and December 31, 2009,2010, respectively.

The Company has various financial instruments that must be measured at fair value on a recurring basis including marketable debt and equity securities held by Astec Insurance Company (“Astec Insurance”), the Company’s captive insurance company, and marketable equity securities held in an unqualified Supplemental Executive Retirement Plan (“SERP”).  The financial assets held in the SERP also constitute a liability of the Company for financial reporting purposes.  The Company’s subsidiaries also occasionally enter into foreign currency exchange contracts to mitigate exposure to fluctuations in currency exchange rates.

For cash and cash equivalents, trade receivables, other receivables, revolving debt and accounts payable, the carrying amount approximates the fair value because of the short-term nature of these instruments.  Investments are carried at their fair value based on quoted market prices for identical or similar assets or, where no quoted prices exist, other observable inputs for the asset.  The fair values of foreign currency exchange contracts are based on quotations from various banks for similar instruments using models with market based inputs.

Financial assets and liabilities are categorized based upon the level of judgment associated with the inputs used to measure their fair value.  The inputs used to measure the fair value are identified in the following hierarchy:

As indicated in the table below (which excludes the Company’s pension assets), the Company has determined that all its financial assets and liabilities excluding pension assets, at September 30, 2010March 31, 2011 are level 1 and level 2 in the fair value hierarchy as defined above (in thousands):

The Company’s investments (other than pension assets) consist of the following (in thousands):

The trading equity investments noted above are valued at their estimated fair value based on their quoted market prices and the debt securities are valued based upon a mix of observable market prices and model driven prices derived from a matrix of observable market prices for assets with similar characteristics obtained from a nationally recognized third party pricing service.  Additionally, a significant portion of the trading equity securities are in equity money market and mutual funds and also comprise a portion of the Company’s liability under its SERP.

Trading debt securities are comprised of marketable debt securities held by Astec Insurance. Astec Insurance has an investment strategy that focuses on providing regular and predictable interest income from a diversified portfolio of high-quality fixed income securities. At September 30, 2010March 31, 2011 and December 31, 2009, $1,427,0002010, $443,000 and $1,651,000,$1,156,000, respectively, of trading debt securities were due to mature within twelve months and, accordingly, are included in other current assets in the accompanying balance sheets.assets.  The financial liabilities related to the SERP shown above are included in other long-term liabilities and the derivative financial liabilities are included in other accrued liabilities in the accompanying balance sheets.

Net unrealized gains or losses incurred during the three and nine-monththree-month periods ended September 30,March 31, 2011 and 2010 on investments still held as of September 30, 2010 totaledthe end of each reporting period amounted to gains of $242,000$600,000 and $227,000,$86,000, respectively.

During April 2007, the Company entered into an unsecured credit agreement with Wachovia Bank, National Association (“Wachovia”), whereby Wachovia has extended to the Company an unsecured line of credit of up to $100,000,000, including a sub-limit for letters of credit of up to $15,000,000.  Wachovia has subsequently been acquired by Wells Fargo Bank, N.A. (“Wells Fargo”), and therefore the credit agreement is now with Wells Fargo.

The WachoviaWells Fargo credit facility had an original term of three years with two one-year extensions available.  Early in 2010, the Company exercised the final extension bringing the new loan maturity date to May 2012.  The interest rate for borrowings is a function of the Adjusted LIBOR Rate or Adjusted LIBOR Market Index Rate, as elected by the Company, plus a margin based upon a leverage ratio pricing grid ranging between 0.5% and 1.5%.  As of September 30, 2010March 31, 2011 the applicable margin based upon the leverage ratio pricing grid was equal to 0.5%.  The unused facility fee is 0.125%.  The WachoviaWells Fargo credit facility requires no principal amortization and interest only payments are due, in the case of loans bearing interest at the Adjusted LIBOR Market Index Rate, monthly in arrears and, in the ca secase of loans bearing interest at the Adjusted LIBOR Rate, at the end of the applicable interest period therefore.  The WachoviaWells Fargo credit agreement contains certain financial covenants related to minimum fixed charge coverage ratios, minimum tangible net worth and maximum allowed capital expenditures.  At September 30, 2010,March 31, 2011, the Company had no borrowings outstanding under the credit facility but did have letters of credit totalling $7,504,000totaling $7,608,000 outstanding, resulting in additional borrowing availability of $92,496,000$92,392,000 on the WachoviaWells Fargo credit facility.  The Company was in compliance with the financial covenants under its credit facility as of September 30, 2010.March 31, 2011.

The Company's South African subsidiary, Osborn Engineered Products SA (Pty) Ltd. (“Osborn”), has available a credit facility of approximately $8,580,000$8,833,000 (ZAR 60,000,000) to finance short-term working capital needs, as well as to cover letterperformance letters of credit, performance, advance payment and retention guarantees. As of September 30, 2010,March 31, 2011, Osborn had no outstanding borrowings under the credit facility, but approximately $3,865,000$3,760,000 in performance letters of credit, advance payment and retention bondsguarantees were issued under the facility.  The facility is secured by Osborn's buildings and improvements, accounts receivable, cash balances and a $2,000,000 letter of credit issued by the parent Company.  As of September 30, 2010,March 31, 2011, Osborn had available credit under the facility of approximately $4,715,000.$5,073,000.  The facility ha shas an ongoing, indefinite term subject to annual reviews by the bank.  The interest rate is the South African prime rate.  The agreement has an unused facility fee of 0.793%.

The Company’s Australian subsidiary, Astec Australia Pty Ltd (“Astec Australia”) has an available credit facility to finance short-term working capital needs of approximately $773,000$827,000 (AUD 800,000), and banking arrangements to finance foreign exchange dealer limit orders of approximately $1,450,000up to $1,705,000 (AUD 1,500,000) and to provide bank guarantees to others of $193,000 (AUD 200,000).  The facility is1,650,000) secured by cash balances in the amount of $1,033,000 (AUD 1,000,000) and a $1,000,000 letter of credit issued by the parent Company.  No amounts were outstanding under the credit facility at September 30, 2010.March 31, 2011.  The interest rate is the Australian adjusted Bank Business Rate plus a margin of 1.05%.

The Company warrants its products against manufacturing defects and performance to specified standards. The warranty period and performance standards vary by market and uses of its products, but generally range from three months to one year or up to a specified number of hours of operations. The Company estimates the costs that may be incurred under its warranties and records a liability at the time product sales are recorded.  The product warranty liability is primarily based on historical claim rates, nature of claims and the associated cost.

Changes in the Company's product warranty liability for the three and nine-monththree-month periods ended September 30,March 31, 2011 and 2010 and 2009 are as follows (in thousands):

The Company accrues reserves for losses related to known workers' compensation and general liability claims that have been incurred but not yet paid or are estimated to have been incurred but not yet reported to the Company.  The undiscounted reserves are actuarially determined based on the Company's evaluation of the type and severity of individual claims and historical information, primarily its own claims experience, along with assumptions about future events.  Changes in assumptions, as well as changes in actual experience, could cause these estimates to change in the future.  Total accrued loss reserves were $8,001,000$7,766,000 at September 30, 2010March 31, 2011 compared to $9,253,000$8,044,000 at December 31, 2009,2010, of which $3,955,000$3,313,000 and $5,613,000$4,248,000 were included in other long-term liabilities at September 30, 2010March 31, 2011 and December 31, , 2009,2010, respectively.

The Company's liability recorded for uncertain tax positions as of September 30, 2010March 31, 2011 has not changed significantly in amount or composition since December 31, 2009.2010.  

The Company has four reportable operatingsegments. These segments which include the Asphalt Group, the Aggregate and Mining Group, the Mobile Asphalt Paving Group and the Underground Group.  Theare combinations of business units in the that offer similar products and services. A brief description of each segment is as follows:

A reconciliation of total segment profits to the Company's consolidated totals is as follows (in thousands):

Certain customers have financed purchases of Company products through arrangements expiring through May 2016 in which the Company is contingently liable for customer debt of approximately $3,172,000$3,173,000 and $4,276,000$3,037,000 at September 30, 2010March 31, 2011 and December 31, 2009,2010, respectively.  At September 30, 2010,March 31, 2011, the maximum potential amount of future payments for which the Company would be liable is equal to $3,172,000.$3,173,000.  These arrangements also provide that the Company will receive the lender’s full security interest in the equipment financed if the Company is required to fulfill its contingent liability under these arrangements.  The Company has recorded a liability of $302,000$330,000 related to these guarantees at September 30, 2010.March 31, 2011.

TheIn addition, the Company is contingently liable under letters of credit issued by Wachovia totalling approximately $7,504,000Wells Fargo totaling $7,608,000 as of September 30, 2010,March 31, 2011, including a $1,000,000 and a $2,000,000 letter of credit issued on behalf of Astec Australia and Osborn, respectively, two of the Company’s foreign subsidiaries.  The outstanding letters of credit expire at various dates through June 2011.  Additionally, asApril 2012.  As of September 30, 2010March 31, 2011, Osborn is contingently liable for a total of $3,865,000$3,760,000 in outstandingperformance letters of credit.credit, advance payments and retention guarantees.  As of September 30, 2010,March 31, 2011, the maximum potential amount of future payments under these letters of credit and bondsguarantees for which the Company could be liable is approximately $11,369,000.$11,368,000.

The Company is currently a party to various claims and legal proceedings that have arisen in the ordinary course of business.  If management believes that a loss arising from such claims and legal proceedings is probable and can reasonably be estimated, the Company records the amount of the loss (excluding estimated legal fees), or the minimum estimated liability when the loss is estimated using a range, and no point within the range is more probable than another.  As management becomes aware of additional information concerning such contingencies, any potential liability related to these matters is assessed and the estimates are revised, if necessary.  If management believes that a loss arising from such claims and legal proceedings is either (i) probable but cannot be reasonably estimated or (ii) reason ablyreasonably possible but not probable, the Company does not record the amount of the loss, but does make specific disclosure of such matter, if material.matter.  Based upon currently available information and with the advice of counsel, management believes that the ultimate outcome of its current claims and legal proceedings, individually and in the aggregate, will not have a material adverse effect on the Company’s financial position, cash flows or results of operations.  However, claims and legal proceedings are subject to inherent uncertainties and rulings unfavorable to the Company could occur.  If an unfavorable ruling were to occur, there exists the possibility of a material adverse effect on the Company’s financial position, cash flows or results of operations.

TheDuring 2009, the Company has received notice that Johnson Crushers International, Inc. is subject to an enforcement action brought by the U.S. Environmental Protection Agency (EPA)(“EPA”) and the Oregon Department of Environmental Quality related to an alleged failure to comply with federal and state air permitting regulations. Each agency is expected to seek sanctions that will include monetary penalties. No penalties havepenalty has yet been proposed. The Company believes that it has cured the alleged violations and is cooperating fully with the regulatory agencies. At this stage of the investigations, the Company is unable to predict the outcome or the amount of any such sanctions or monetary penalties that may be assessed.sanctions.

TheDuring 2004, the Company also has received notice from the EPA that it may be responsible for a portion of the costs incurred in connection with an environmental cleanup in Illinois. The discharge of hazardous materials and associated cleanup relate to activities occurring prior to the Company’s acquisition of Barber-Greene in 1986. The Company believes that over 300 other parties have received similar notices. At this time, the Company cannot predict whether the EPA will seek to hold the Company liable for a portion of the cleanup costs or the amount of any such liability.

The Company has not recorded a liability with respect to either EPA relatedenvironmental matter because no estimates of the amount of any such liabilities can be made at this time.

Under terms of the Company’s stock option plans, officers and certain other employees were granted options to purchase the Company’s common stock at no less than 100% of the market price on the date the option was granted.  No additional options can be granted under these plans; however the Company has reserved unissued shares of common stock for the exercise of the 113,82791,323 unexercised and outstanding options as of September 30, 2010March 31, 2011 under these employee plans.  All options granted to employees under these plans vested prior to 2007.

In addition, a Non-employee Directors Stock Incentive Plan has been established to allow non-employee directors to have a personal financial stake in the Company through an ownership interest.  Directors may elect to receive their compensation in cash, common stock, deferred stock or stock options.  Options granted tounder the Non-employee Directors Stock Incentive Plan vest and become fully exercisable immediately upon grant.immediately.  All stock options have a 10-year term.  The shares reserved under the 1998 Non-Employee Directors Stock Incentive Plan total 145,304140,063 as of September 30, 2010,March 31, 2011, of which 135,054132,210 shares are available for future grants of stock or deferred stock to directors.  No additional options can be granted under this plan.  The fair value of stock awards granted to non-employee directors totaled $49,000 for each of$58,000 and $42,000 during the three-month periods ended September 30,March 31, 2011 and 2010, and 2009 .  The fair value of stock awards granted to non-employee directors totaled $140,000 and $161,000 for the nine-month periods ended September 30, 2010 and 2009, respectively.

In August 2006, the Compensation Committee of the Board of Directors implementedCompany adopted a five-year plan to award key members of management restricted stock units (“RSU’s”) each year. The details of the plan were formulatedyear under the Company’s 2006 Incentive Plan approved by the Company’s shareholders in their annual meeting held in April 2006.Plan.  The plan allowsallowed the Company to grant up to 700,000 sharesRSU’s to be granted to employees.  RSU’s granted each year will be determinedemployees based upon the annual performance of individual subsidiaries and  consolidated annual financial performance.the Company as a whole during each of the five years ended December 31, 2010.  Additional RSU’s may bewere granted in 2011 based upon cumulative five-year performance.  Generally, each award will vest at the end of five years from theits date of grant, or at the time a recipient retires after reaching age 65, if earlier.  Co mpensationIn early 2011, a subsequent plan was formulated under the Company’s 2011 Incentive Plan which was approved by the Company’s shareholders in their annual meeting held in April 2011.  This plan also allows the Company to grant up to 700,000 RSU’s to employees and will operate in a similar fashion to the 2006 Incentive Plan for each of the five years ending December 31, 2015.  Compensation expense of $367,000$865,000 and $(43,000)$591,000 has been recorded in the three-month periods ended September 30,March 31, 2011 and 2010, and 2009, respectively, to reflect the fair value of the total shares granted or expected to be granted under both plans, amortized over the portion of the vesting period occurring during the periods.  Compensation expense of $1,091,000 and $545,000 has been recorded in the nine-month periods ended September 30, 2010 and 2009, respectively, to reflect theThe fair value of the total shares amortized overRSU’s that vested in the portion of the vestingthree-month period occurring during the periods.ending March 31, 2011 was $115,000.

Based upon historical results of the past several years, 75%25% to 80%28% of the Company's annual revenues typically occur during the first ninethree months of the year.  During the usual seasonal trend, the first three quarters of the year are the Company's stronger quarters for sales volume, with the fourth quarter normally being the weakest quarter.

The components of total comprehensive income attributable to controlling interest for the three and nine-monththree-month periods ended September 30,March 31, 2011 and 2010 and 2009 is presented below (in thousands):

Other income, net of expenses for the three and nine-monththree-month periods ended September 30,March 31, 2011 and 2010 and 2009 is presented below (in thousands):

The Company is exposed to certain risks related to its ongoing business operations.  The primary risk managed by using derivative instruments is foreign currency risk.  From time to time the Company’s foreign subsidiaries enter into foreign currency exchange contracts to mitigate exposure to fluctuations in currency exchange rates.  The fair value of the derivative financial instrument is recorded on the Company’s balance sheet and is adjusted to fair value at each measurement date based on the contractual forward exchange rate and the forward exchange rate at the measurement date.  The changes in fair value are recognized in the consolidated statements of operations in the current period.  The Company does not engage in speculative transactions nor does it hold or issue financial instruments for t radingtrading purposes.  The average U.S. dollar equivalent notional amount of outstanding foreign currency exchange contracts was $14,286,000 during the three months ended March 31, 2011.  The Company reported $1,240,000 of derivative liabilities of $775,000 in other accrued liabilities and $45,000 in other long-term liabilities at September 30, 2010.March 31, 2011.  The Company reported $111,000$1,221,000 of derivative liabilities in other accrued liabilities and $10,000$30,000 in other long-term liabilities at December 31, 2009.2010.  The Company recognized, as a component of cost of sales, lossesa net loss of $978,000$530,000 and $156,000a net gain of $14,000 on the change in fair value of derivative financial instruments in the three-month periods ended September 30,March 31, 2011 and 2010, and 2009, respectively.   The Company recognized, as a component of cost of sales, losses of $809,000 and $872,000 on the change in fair value of derivative financial instruments for the nine months ended September 30, 2010 and 2009, respectively.  There were no derivatives that were designated as hedges at September 30, 2010March 31, 2011 or December 31, 2009.2010.

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 2010,2011, the Company's expected capital expenditures in 2010,2011, 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, 2011,March 31, 2012, the impact of the enactment of the Hiring Incentives to Restore Employment (HIRE) Act of 2010 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, 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, 2009,2010, should be carefully considered when evaluating the Company's business and future prospects.

Astec Industries, Inc., (“the Company”) is a leading manufacturer and marketer of equipment for road building, aggregate processing, directional drilling, trenching and wood processing. The Company’s businesses:

•           design, engineer, manufacture and market equipment that is used in each phase of road building, including quarrying and crushing the aggregate to producing asphalt or concrete, recycling old asphalt or concrete and applying the asphalt;

•           design, engineer, manufacture and market additional equipment and components including trenching, auger boring, directional drilling, geothermal drilling, oil and natural gas 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 including energy production and 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 to make wood pellets. The Company began production of the new pellet pro duction equipment in January 2010. 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, geothermal 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)(“Peterson”), Astec Australia Pty Ltd (Astec Australia)(“Astec Australia”), Astec Insurance Company (“Astec Insurance” or “the captive”) and Astec Industries, Inc., the parent company. Peterson designs, manufactures and markets whole-tree pulpwood chippers, horizontal grinders and blower trucks. Astec Australia markets and installs equipment, a nd installs,and services and provides parts for many of the products produced by the Company’s manufacturing companies.  Astec Insurance is a captive insurance company.

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 the 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 all highway, street, roadway and parking construction in the United States.

SAFETEA-LU funding expired on September 30, 2009 and federal transportation funding operated on short-term appropriations through March 17, 2010. On March 18, 2010, President Obama signed into law the Hiring Incentives to Restore Employment (HIRE) Act. This law extended authorization of the surface transportation programs previously funded under SAFETEA-LU through December 31, 2010 at 2009 levels. In addition, the HIRE Act authorized a one-time transfer of $19.5 billion from the general fund to the highway trust fund related to previously foregone interest payments. It also shifted the cost of fuel tax exemptions for state and local governments from the highway trust fund to the general fund, which is estimated to generate an anticipated $1.5 billion annually, and allows the highway trust fund to retain interest earned on f uturefuture unexpended balances. Although the HIRE Act helped stabilize the federal highway program, the Company believes a new multi-year highway program at increased funding levels would have the greatest positive impact on the road construction industry and allow its customers to plan and execute longer termlonger-term projects. The current resolution funding federal transportation expenditures expires on September 30, 2011 and funds federal highway spending for fiscal year 2011 at the 2010 level of $41.1 billion. The level of future federal highway construction is uncertain, and any future funding may be at lower levels than in the past.

Several other countries have also implemented infrastructure spending programs to stimulate their economies. The Company believes these spending programs have had a positive impact on theits financial performance of certain of its business segments;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 17nearly 20 years, would likely 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’ purchasepurchasing 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 also typically negatively impact customers’ attitudes toward purchasing equipment. The Federal Reserve has maintained historically low interest rates in response to the currentrecent economic downturn, anddownturn; however, the Company expects only slight changes, if any, in interest rates in the near ter m; however, management believes that upward pressure is building on long-term interest rates.to begin to increase during 2011.

Significant portions of the Company’s revenues relate to the sale of equipment involved in the production, handling and installation of asphalt mix. AsphaltLiquid asphalt is a by-product of oil production. An increase in the price of oil increases the cost of 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 many of the Company’s customers, the Company’s equipment can use a significant amount of recycled asphalt pavement, thereby mitigating the final 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 2009 and2010 or the first three quartersquarter of 2010.2011. The Company expects oil prices to continue to fluctuate during the remainder of 2011. Minor fluctuations in 2010 but doesoil prices should not believe the fluctuation will have a significant impact on customers’ buying decisions. However, political uncertainty in oil producing countries, interruptions in oil production due to disasters, whether natural or man-made, or other economic factors could significantly impact oil prices, which in turn could negatively impact demand for the Company’s products.

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 Group, 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. The Company believes further development of domestic oil and natural gas production capabilities is needed and would positively impact the domestic economy and the Company’s business.

Steel is a major component in the Company’s equipment. Steel prices increased modestlypricing declined sharply in the fourth quarter of 2008 and into 2009. Favorable pricing continued through 2009, causing steel mills to reduce production to match reduced demand. Steel customers worked through their excess inventories of steel during the first half of2009 and began buying steel again in 2010, with small variations through the third quarter. We expect pricingalbeit at reduced levels, causing steel prices to remain stable throughrelatively stable.  Near the end of 2010.  Seasonal demand2010, as the result of an increase in the price of certain raw materials used to make steel, steel prices began a rapid series of increases forthat will likely continue through the second quarter of 2011. The Company was able to mitigate a portion of this increase in price of steel duringin the first quarter of 2011 coupled with possibleas a result of its advanced steel purchases and existing supply contracts at previously negotiated prices. The Company may experience rising steel prices during the second quarter of 2011; however, management believes that steel prices will remain stable in the second half of 2011. Although the Company normally institutes price increases in scrapresponse to rising steel and iron orecomponent prices, could put upward pressure on steel pricing. We will continue our practice of mixing spot purchases and long-term contracts to offset potential market fluctuations. In the event of significant steel, commodity and other component increases, the Company would institute price increases; however, the Company may not be able to raise the prices of its products enough to cover increased costs, which wouldmay have a negative effect on the Company’s financial res ults. If theresults. The Company expects thatwill continue to closely monitor steel prices will increase, itpricing and 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 dealers that produce and sell similar products. During 2010 and through the first halfquarter of 2009 the dollar was stronger relative to currencies in many of the Company’s foreign markets, negatively impacting the Company’s international sales.  During the latter half of 2009 and during 2010,2011, a weakening dollar, combined with improving economic conditions in certain foreign economies, had a positive impact on the Company’s international sales. The Company expects the dollar to fluctuate duringremain weak in the remainder of 2010.  Future strengthening ofnear-term relative to most foreign currencies; however, increasing domestic interest rates or weakening economic conditions abroad could cause the dollar could have a negativeto strengthen, which may negatively impact on the Company’s international sales.

In the United States and internationally, the Company’s equipment is marketed directly to customers as well as through dealers. During 2009, approximately2010, 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 through 2010.2011.

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 profit sharingprofit-sharing incentives in the aggregate of up to 10% of each 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 profit sharingprofit-sharing incentives for subsidiary presidents are normally paid from a separate corporate pool.

Net sales increased $11,769,000$36,735,000 or 7.1%19.0%, from $166,084,000$193,454,000 for the thirdfirst quarter of 20092010 to $177,853,000$230,189,000 in the thirdfirst quarter of 2010.2011. Sales are generated primarily from new equipment and related parts purchases made by customers for use in construction for infrastructure funded by both the private and public sectors. The overall increase in sales for the thirdfirst quarter of 2010 compared to the third quarter of 2009 reflects strengthening international economic conditions.  Domestic sales decreased slightly in the third quarter of 2010 compared to the third quarter of 2009.

Domestic sales for the first nine monthsquarter of 20102011 were $357,341,000$147,523,000 or 61.6%64.1% of consolidated net sales compared to $362,422,000$129,451,000 or 64.7%66.9% of consolidated net sales for the first nine monthsquarter of 2009, a decrease2010, an increase of $5,081,000$18,072,000, or 1.4%14.0%.  International sales for the first nine monthsquarter of 20102011 were $223,216,000$82,666,000 or 38.4%35.9% of consolidated net sales compared to $197,809,000$64,003,000 or 35.3%33.1% of consolidated net sales for the first nine monthsquarter of 2009,2010, an increase of $25,407,000$18,663,000 or 12.8%29.2%.  Domestic sales were negatively impacted by the lack of action by Congress in renewing the new long-term highway bill to replace the previous bill that expired in September 2009.  The overall increase in international sales for the first nine monthsquarter of 20102011 compared to the first nine monthsquarter of 20092010 is due to improved economic conditions in sev eralinternational markets and significant weakness in the dollar compared to currencies in many of the international markets the company serves and the adoption of stimulus packages with significant emphasis on the development of highways and other infrastructure projects.Company serves. The year-to-date increases in international sales occurred primarily in Canada, South America, Africa, Central AmericaEurope, Canada, Russia and Australia.

Parts sales for the thirdfirst quarter increased 6.6%14.0% or $7,061,000 from $46,146,000$50,264,000 in 20092010 to $49,193,000$57,325,000 in 2010.  Parts sales for the third quarter of 2010 as a percentage of consolidated net sales decreased 10 basis points from 27.8% in 2009 to 27.7% in 2010.

Consolidated gross profit as a percentage of sales increased 270 basis points to 23.6% in the third quarter of 2010 from 20.9% in the third quarter of 2009.  Reasons for the increasefirst quarter increased 18.6% or $8,563,000 from $46,141,000 in gross margin as a percent of sales include efficiency and cost cutting improvements2010 to $54,704,000 in our manufacturing facilities implemented during 2009 and 2010, improved plant utilization and increased international sales which typically carry a higher gross margin than domestic sales.

Selling, general, administrative and engineering expenses for the thirdfirst quarter of 20102011 were $31,808,000,$39,489,000, or 17.9%17.2% of net sales, compared to 30,445,000,$32,718,000, or 18.3%16.9% of net sales, for the thirdfirst quarter of 2009,2010, an increase of $1,363,000,$6,771,000, or 4.5%20.7%.  The increase was composed of increases in SERP expensepayroll and related expenses of $496,000 and restricted stock expense of $410,000, both of which primarily resulted from an increase in the Company’s stock price during the third quarter of 2010, along with a decrease in the Company’s stock price during the third quarter of 2009 plus increases in sales salaries and$3,472,000, commissions of $596,000$1,166,000 and sales promotions and accommodationsexpenses of $536,000.$2,655,000 related to ConExpo, the triennial equipment show held in March of 2011.  These increasedincreases in expenses were offset by a decrease in research and developmenthealth insurance expense of $608,000.

Interest expense in the thirdfirst quarter of 20102011 decreased $36,000,$87,000, or 54.5%70.7%, to $30,000$36,000 from $66,000 in the third quarter of 2009.

Other income, net of expenses was income of $492,000$406,000 for the thirdfirst quarter of 2011 compared to $488,000 in the first quarter of 2010, compared to income of $555,000 in the third quarter of 2009, a decrease in income of $63,000,$82,000, or 11.4%16.8%.  The decrease is primarily attributable to a decrease in investment income of $108,000.

Income tax expense for the first nine monthsquarter of 20102011 was $13,655,000,$5,427,000, compared to income tax expense of $10,157,000$4,956,000 for the first nine monthsquarter of 2009.2010. The effective tax rates for the first nine monthsquarters of 2011 and 2010 were 34.8% and the first nine months of 2009 were 34.0% and 35.4%35.9%, respectively.   The reasonsdifference in effective tax rates for the decreasefirst quarters of 2011 and 2010 is related to research and development tax credits which were recognized in the effective tax rate fromfirst quarter of 2011 but not in the first nine monthsquarter of 20092010 due to the first nine monthstiming of 2010 were an increase in a tax deductionCongressional approval of the Company receives for domestic production activity and increased research and development credits.

The Company had net income attributable to controlling interest of $7,362,000$10,144,000 for the thirdfirst quarter of 2011 compared to $8,794,000 in the first quarter of 2010, compared to $3,344,000 in the third quarter of 2009, an increase of $4,018,000,$1,350,000, or 120.2%15.4%. Earnings per diluted share were $0.32$0.44 in the thirdfirst quarter of 2011 compared to $0.39 in the first quarter of 2010, compared to $0.15 in the third quarter of 2009, an increase of $0.17$0.05 or 113.3%12.8%. Diluted shares outstanding for the quarters ended September 30,March 31, 2011 and 2010 were 22,919,430 and 2009 were 22,843,300 and 22,735,064,22,767,460, respectively. The increase in shares outstanding is primarily due to the exercise of stock options by employees of the Company.