ASTE Astec Industries Inc

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

Explanatory Note

As previously disclosed in its Annual Report on Form 10-K for the year ended December 31, 2013 and its Quarterly Report on Form 10-Q for the quarter ended March 31, 2014, due to the recent change in the Company's chief operating decision maker, sale of a Company subsidiary and other product lines as well as the transfer of responsibility for certain product lines between Company's subsidiaries, the Company performed an evaluation of its reportable segments composition.  This process was completed during the first quarter of 2014 and the composition of the Company's reportable segments was changed beginning with the Company's Form 10-Q for the quarter ended March 31, 2014.  Financial information by segment is included in Note 11 to the accompanying financial statements and elsewhere in Management's Discussion and Analysis of Financial Condition and Results of Operations.  Historical segment information included in this Report has been reclassified to reflect the new segment structure.

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 2014, the Company's expected capital expenditures in 2014, the expected benefit and impact of financing arrangements, the ability of the Company to meet its working capital and capital expenditure requirements through June 30, 2015, the amount and impact of any current or future state or federal funding for transportation construction programs, the need for road improvements, the amount and impact of other public sector spending and funding mechanisms, changes in the economic environment as it affects the Company, 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 and the impact of such changes generally and on the demand for the Company's products, customer's buying decisions and the Company's business, the ability of the Company to offset future changes in prices in raw materials, the change in the strength of the dollar and the level of the Company's presence and sales in international markets, the impact that further development of domestic oil and natural gas production capabilities would have on the domestic economy and the Company's business, the seasonality of the Company's business, the Company's investments, the percentage of the Company's equipment sold directly to end users, the amount or value of unrecognized tax benefits, the impact of IRS tax regulations, payment of dividends by the Company, the effect of the South African factory workers strike, 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, 2013, should be carefully considered when evaluating the Company's business and future prospects.

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Overview  

The Company is a manufacturer of specialized equipment for asphalt road building, aggregate processing, oil, gas and water drilling 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 equipment for the aggregate, mining, construction, port and recycling industries;

•              design, engineer, manufacture and market additional equipment and components including geothermal drilling, oil and natural gas drilling, industrial heat transfer, biomass recycling, wood chipping and grinding, wood pellet processing; and

•              manufacture and sell replacement parts for equipment in each of its product lines.

The Company has 16 manufacturing companies which fall within three business segments, which include the Infrastructure Group, the Aggregate and Mining Group and the Energy Group.

Infrastructure Group – This segment consists of five business units, three of which design, engineer, manufacture and market a complete line of portable, stationary and relocatable hot-mix asphalt plants, asphalt pavers, material transfer vehicles, milling machines and paver screeds. The other two business units in this segment operate as Company-owned dealers in the foreign countries in which they are domiciled.  These two business units sell, service and install products produced by the manufacturing subsidiaries of the Company, and a majority of their sales are to customers in the infrastructure industry.   The principal purchasers of the products produced by this group are asphalt producers, highway and heavy equipment contractors and foreign and domestic governmental agencies.

Aggregate and Mining Group – This segment consists of eight business units that design, engineer, manufacture and market a complete line of jaw crushers, cone crushers, horizontal shaft impactors, vertical shaft impactors, material handling systems, roll rock crushers and stationary rockbreaker systems, vibrating feeders and high frequency vibrating screens, conveyors, inclined, vertical and horizontal screens and sand classifying and washing equipment. The principal purchasers of products produced by this group are distributors, open mine operators, quarry operators, port operators, highway and heavy equipment contractors and foreign and domestic governmental agencies.

Energy Group – This segment consists of five business units that design, engineer, manufacture and market a complete line of drilling rigs for the oil and gas, geothermal and water well industries, high pressure diesel pump trailers for fracking and cleaning oil and gas wells, a variety of industrial heaters to fit a broad range of applications including heating equipment for refineries, oil sands and energy related processing, heat transfer processing equipment, thermal fluid storage tanks, waste heat recovery equipment, and whole-tree pulpwood and biomass chippers and horizontal grinders. The principal purchasers of products produced by this group are oil, gas and water well drilling industry contractors, processors of oil, gas and biomass for energy production and contractors in the construction and demolition recycling markets.

Individual Company subsidiaries included in the composition of the Company's revised segments are as follows:

1.	Infrastructure Group – Astec, Inc., Roadtec, Inc., Carlson Paving Products, Inc., Astec Australia, Pty Ltd and Astec Mobile Machinery GmbH.

2.

Aggregate and Mining Group – Telsmith, Inc., Kolberg-Pioneer, Inc., Johnson Crushers International, Inc., Osborn Engineered Products SA (Pty) Ltd, Breaker Technology, Inc., Astec Mobile Screens, Inc., Astec do Brasil Fabricacao de Equipamentos LTDA and Telestack Ltd (which was acquired on April 1, 12014).

3.	Energy Group – Heatec, Inc., CEI, Inc., GEFCO, Inc., Astec Underground, Inc. and Peterson Pacific, Inc.

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The Company has two other business units that do not meet the requirement for separate disclosure as an operating segment: the Company's parent company, Astec Industries, Inc., and Astec Insurance Company, a Company-owned captive insurance company. The Company evaluates performance and allocates resources to its operating segments based on profit or loss from operations before U.S. federal income taxes and corporate overhead and thus these costs are included in the Corporate category.

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, the amount of 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.

The U.S. Congress funded federal transportation expenditures for the fiscal year ending September 30, 2011 at the 2010 level of $41.1 billion, and it approved short-term funding of federal transportation expenditures for the six-month period ending on June 30, 2012 at the same levels.  In July 2012, President Obama signed into law the "Moving Ahead for Progress in the 21st Century Act" ("Map-21"), which authorized $105 billion of federal spending on highway and public transportation programs through fiscal year 2014. Map-21 was the first long-term highway legislation enacted since 2005 and continued federal highway and transit funding at 2012 levels with modest increases for inflation. Although Map-21 helped stabilize the federal highway program in the near term, the Company believes a longer multi-year highway program would have the greatest positive impact on the road construction industry and allow its customers to plan and execute longer-term projects. 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 implemented infrastructure spending programs to stimulate their economies. The Company believes these spending programs have had 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 is currently still at the 1993 level of 18.4 cents per gallon, 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' purchasing decisions and the price of steel may each affect the Company's financial performance. Economic downturns 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 current economic downturn; however, interest rates may increase during the remainder of 2014 and thereafter.

Significant portions of the Company's revenues relate to the sale of equipment involved in the production, handling, recycling or installation of asphalt mix. Liquid 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 effect of increased oil prices on 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 2013 or the first half of 2014. The Company expects oil prices to continue to fluctuate in 2014 and thereafter.  Minor fluctuations in oil prices should not 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 could negatively impact demand for the Company's products.

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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 Energy Group, which are used to drill for oil and natural gas, 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 modestly during the first six months of 2014, and a continuing strong demand for steel is expected to cause additional moderate price increases during the third quarter of 2014. The rate of the increase in steel prices has slowed since the raw material supply constraints experienced in first six months of 2014 have subsided, and we anticipate that pricing will soon plateau as pricing pressure from imports increases. The Company continues to utilize forward-looking contracts coupled with advanced steel purchases to minimize the impact of increased steel prices. The Company will continue to review the trends in steel prices in future months and establish future contract pricing accordingly.

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. A weak dollar, combined with improving economic conditions in certain foreign economies, had a positive impact on the Company's international sales in 2010 through mid-2012. The dollar strengthened against many foreign currencies during the later portion of 2012 through mid-2014, which has negatively impacted pricing and the Company's backlog at June 30, 2014 in certain foreign markets.  Increasing domestic interest rates or weakening economic conditions abroad could cause the dollar to further strengthen, which could negatively impact 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. In recent years, 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 through the end of 2014.

The Company is operated on a decentralized basis, and there is a complete management team for each operating subsidiary with oversight by Company Group Presidents.  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-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-sharing incentives for subsidiary presidents are normally paid from a separate corporate pool.

A factory union strike in South Africa began on July 1, 2014 and has forced the temporary closing of our Osborn facility.  The strike could have an impact on the Company's international sales, but the Company does not believe it will have a material adverse effect on our business, financial position, cash flows or results of operations.

Results of Operations (dollar amounts shown in thousands)

Net Sales

Net sales for the second quarter of 2014 were $277,256 compared to $248,127 for the second quarter of 2013, an increase of $29,129 or 11.7%. Sales are generated primarily from new equipment and parts sales to domestic and international customers. Sales increased by $14,831 in the Infrastructure Group, $6,807 in the Aggregate and Mining Group and $7,491 in the Energy Group.

Net sales for the first six months of 2014 were $515,929 compared to $495,960 for the first six months of 2013, an increase of $19,969 or 4.0%. Sales are generated primarily from new equipment and parts sales to domestic and international customers.  Sales increased by $4,302 in the Infrastructure Group, $9,153 in the Aggregate and Mining Group and $6,514 in the Energy Group.

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Domestic sales for the second quarter of 2014 were $184,676 or 66.6% of consolidated net sales compared to $162,304 or 65.4% of consolidated net sales for the second quarter of 2013, an increase of $22,372 or 13.8%,  Domestic sales increased $8,297 in the Infrastructure Group, $6,981 in the Aggregate and Mining Group and $7,094 in the Energy Group.  International sales for the second quarter of 2014 were $92,580 or 33.4% of consolidated net sales compared to $85,823 or 34.6% of consolidated net sales for the second quarter of 2013, an increase of $6,757 or 7.9%. International sales increased by $6,534 in the Infrastructure Group and were relatively flat in the Energy Group and the Aggregate and Mining Group.  The increases in international sales occurred primarily in Russia, Asia and China, offset by a decrease in sales in Canada, Africa, Australia and the West Indies.

Domestic sales for the first six months of 2014 were $360,107 or 69.8% of consolidated net sales compared to $324,245 or 65.4% of consolidated net sales for the first six months of 2013, an increase of $35,862 or 11.1%, due to increases in all groups.  International sales for the first six months of 2014 were $155,822 or 30.2% of consolidated net sales compared to $171,715 or 34.6% of consolidated net sales for the first six months of 2013, a decrease of $15,893 or 9.3%, due to decreases in all groups.  Sales were negatively impacted by economic uncertainties in several of the countries in which the Company markets its products as well as a strengthening of the U.S. dollar against many foreign currencies.  The decreases in international sales occurred primarily in Canada, Africa, Australia, Europe and the West Indies, offset by an increase in sales in Asia, Russia and other post-Soviet States and Central America.

Parts sales for the second quarter of 2014 were $60,168 compared to $62,736 for the second quarter of 2013, a decrease of $2,568 or 4.1%.  Parts sales as a percentage of net sales decreased 360 basis points from 25.3% for the second quarter of 2013 to 21.7% for the second quarter of 2014.  The decrease in parts sales occurred in the Aggregate and Mining and Energy groups and was offset by an increase in parts sales in the Infrastructure Group.

Parts sales for the first six months of 2014 were $129,426 compared to $130,767 for the first six months of 2013, a decrease of $1,341 or 1.0%.  Parts sales as a percentage of net sales decreased 130 basis points from 26.4% for the first six months of 2013 to 25.1% for the first six months of 2014.  The decrease in parts sales occurred primarily in the Aggregate and Mining Group along with a small decline in the Energy Group and was offset by an increase in parts sales in the Infrastructure Group.

Gross Profit

Consolidated gross profit increased $6,736 or 12.1% to $62,178 for the second quarter of 2014 compared to $55,442 for the second quarter of 2013.  Gross profit as a percentage of sales remained relatively flat at 22.4% for the second quarter of 2014 compared to 22.3% for the second quarter of 2013.

Consolidated gross profit increased $4,926 or 4.3% to $118,935 for the first six months of 2014 compared to $114,009 for the first six months of 2013.  Gross profit as a percentage of sales remained relatively flat at 23.1% for the first six months of 2014 compared to 23.0% for the first six months of 2013.

Selling, General, Administrative and Engineering Expenses

Selling, general, administrative and engineering expenses for the second quarter of 2014 were $40,247 or 14.5% of net sales, compared to $37,795 or 15.2% of net sales for the second quarter of 2013, an increase of $2,452 or 6.5%, due primarily to Telestack (acquired on April 1, 2014) operating expenses of $1,329 being included in the second quarter of 2014.  Additional increases occurred in salaries, commissions, profit sharing, bad debt and acquisition costs.

Selling, general, administrative and engineering expenses for the first six months of 2014 were $83,672 or 16.2% of net sales, compared to $78,162 or 15.8% of net sales for the first six months of 2013, an increase of $5,510 or 7.0%, due primarily to an increase in expenses related to the tri-annual Con-Expo trade show held in March 2014 along with the inclusion of Telestack's operating expenses since its acquisition in April 2014.  Additional increases occurred in salaries, commissions, profit sharing, and acquisition costs.

Interest Expense

Interest expense for the second quarter of 2014 increased $33 to $109 from $76 for the second quarter of 2013.

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Interest expense for the first six months of 2014 increased $35 to $182 from $147 for the first six months of 2013.

Other Income, net of expenses

Other income, net of expenses was $729 for the second quarter of 2014 compared to $32 for the second quarter of 2013, an increase of $697.  Other income is generated primarily by earnings on investments of excess cash and funds held by Astec Insurance, the Company's captive insurance company, as well as interest income from customers and license fee income.  The increase is primarily due to increased interest income, primarily from customers.

Other income, net of expenses was $1,544 for the first six months of 2014 compared to $784 for the first six months of 2013, an increase of $760.  Other income is generated primarily by earnings on investments of excess cash and funds held by Astec Insurance, the Company's captive insurance company, as well as interest income from customers and license fee income.  The increase is primarily due to increased earnings on investments, interest income (primarily from customers), and license fee income received by the Company's subsidiaries.

Income Tax Expense

Income tax expense for the second quarter of 2014 was $8,061 compared to $6,450 for the second quarter of 2013. The Company's combined effective tax rates for the second quarters of 2014 and 2013 were 35.7% and 36.6%, respectively.  The Company's effective tax rate for the second quarter of 2014 includes the effect of state income taxes and other discrete items but does not include a benefit for research and development tax credits given that Congress had not extended the research and development credit to 2014 as of June 30, 2014.  The Company's effective tax rate for the second quarter of 2013 included a benefit for research and development tax credits.

Income tax expense for the first six months of 2014 was $12,589 compared to $12,081 for the first six months of 2013. The Company's combined effective tax rates for the first six months of 2014 and 2013 were 34.4% and 33.1%, respectively.  The Company's effective tax rate for the six months ended June 30, 2014 includes the effect of state income taxes and other discrete items but does not include a benefit for research and development tax credits given that Congress had not extended the research and development credit to 2014 as of June 30, 2014.  The Company's effective tax rate for the six months ended June 30, 2013 included a benefit for research and development tax credits earned for the first six months of 2013 as well as the entire 2012 calendar year given that Congress did not extend the tax credit for the 2012 calendar year until January 2013.

In September 2013, the Treasury Department and the Internal Revenue Service released the final regulations governing when taxpayers must capitalize or deduct their expenses for acquiring, maintaining, repairing, and replacing tangible property.  The regulations became effective January 1, 2014.  It is management's opinion that any adjustments resulting from the implementation of the regulations will not be material.   Management is currently taking the necessary steps to comply with the final regulations by the end of 2014.

Net Income

The Company had net income attributable to controlling interest of $14,497 for the second quarter of 2014 compared to $11,092 for the second quarter of 2013, an increase of $3,405, or 30.7%. Net income attributable to controlling interest per diluted share was $0.63 for the second quarter of 2014 compared to $0.48 for the second quarter of 2013, an increase of $0.15.  Diluted shares outstanding for the quarters ended June 30, 2014 and 2013 were 23,099 and 23,069, respectively.

The Company had net income attributable to controlling interest of $24,042 for the first six months of 2014 compared to $24,263 for the same period in 2013, a decrease of $221, or 0.9%. Net income attributable to controlling interest per diluted share was $1.04 for the first six months of 2014 compared to $1.05 for the first six months of 2013, a decrease of $0.01.  Diluted shares outstanding for the six months ended June 30, 2014 and 2013 were 23,101 and 23,075, respectively.

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Dividends

On February 28, 2013, the Company's Board of Directors approved a dividend policy pursuant to which the Company began paying a quarterly $0.10 per share dividend on its common stock beginning in the second quarter of 2013.  The actual amount of future quarterly dividends, if any, will be based upon the Company's financial position, results of operations, cash flows, capital requirements and restrictions under the Company's existing credit agreement, among other factors.  The Board retained the power to modify, suspend or cancel the Company's dividend policy in any manner and at any time it deems necessary or appropriate in the future.  The Company paid quarterly dividends of $0.10 per common share to shareholders beginning in the second quarter of 2013 through the second quarter of 2014. An additional $0.10 per common share dividend was approved by the Board in July 2014 to be paid in late August 2014.

Backlog

The backlog of orders as of June 30, 2014 was $264,095 compared to $247,260 (adjusted for the acquisition of Telestack) as of June 30, 2013, an increase of $16,835, or 6.8%. Domestic backlogs increased $16,739 or 11.9%, and international backlogs remained relatively flat.   The June 30, 2014 backlog was comprised of 59.6% domestic orders and 40.4% international orders, as compared to 56.9% domestic orders and 43.1% international orders as of June 30, 2013.  Included in the June 30, 2014 backlog is $58,660 for three pellet plant orders from one customer. The June 30, 2013 backlog included $20,800 for the first of the three pellet plants which has been delivered to the customer and is producing pellets in production runs while continuing to be evaluated and calibrated as part of the normal new product performance testing. The Company has agreed to finance these first three pellet plant line orders for a two to three-year period and thus revenues will be recorded by the Company as payments are received.  The Company is unable to determine whether the changes in backlogs were experienced by the industry as a whole; however, the Company believes the changes in backlogs reflect the current economic conditions the industry is experiencing.

Infrastructure Group : Sales in this group were $118,585 for the second quarter of 2014 compared to $103,754 for the same period in 2013, an increase of $14,831 or 14.3%.  Domestic sales for the Infrastructure Group increased $8,297 or 11.1% for the second quarter of 2014 compared to the same period in 2013.  Sales by the Infrastructure Group improved in the paver related product lines, but these were offset by declines in asphalt plant related business due in large part to the continuing lack of a long-term federal highway bill.  Additionally, due to the financing structure of the sales contract, no pellet plant related sales revenue was recorded in the second quarter of 2014.  Pellet plant revenue is expected to be recorded over the life of the financing arrangement after the final plant performance testing, scheduled for the third quarter, is completed.  International sales for the Infrastructure Group increased $6,534 or 22.6% for the second quarter of 2014 compared to the same period in 2013 due primarily to increased sales in Russia, South America and Mexico, offset by decreased sales in Australia, Europe and Canada.  Parts sales for the Infrastructure Group increased 7.4% for the second quarter of 2014 compared to the same period in 2013 due primarily to improved sales of paver equipment parts.

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Aggregate and Mining Group : Sales in this group were $106,691 for the second quarter of 2014 compared to $99,884 for the same period in 2013, an increase of $6,807 or 6.8%.  Domestic sales for the Aggregate and Mining Group increased $6,981 or 13.2% for the second quarter of 2014 compared to the same period in 2013.    The increase in sales occurred in the aggregate processing equipment. International sales for the Aggregate and Mining Group remained flat for the second quarter of 2014 compared to the same period in 2013, with the added Telestack sales volumes being offset by reductions in the sales volumes by the Company's other subsidiaries in this group.  International sales increases in Europe, China and other Asian countries were offset by declines in sales in Canada, Africa, Brazil and other South American countries.  Parts sales for this group decreased 10.7% for the second quarter of 2014 compared to the same period in 2013.

Energy Group : Sales in this group were $51,980 for the second quarter of 2014 compared to $44,489 for the same period in 2013, a decrease of $7,491 or 16.8%.  Domestic sales for the Energy Group increased $7,095 or 20.5% for the second quarter of 2014 compared to the same period in 2013 due primarily to stronger wood grinder, wood chipper and industrial heater sales.  International sales for the Energy Group increased $396 or 4.0% for the second quarter of 2014 compared to the same period in 2013.  The increase in international sales occurred primarily in the Middle East, Canada and Brazil, offset by a decline in sales in Africa.  Parts sales for this group decreased 9.0% for the second quarter of 2014 compared to the same period in 2013 due to declines in most product lines except wood grinder and chipper related parts.

Segment Net Sales-Six Months :

 

Infrastructure Group : Sales in this group were $217,376 for the first six months of 2014 compared to $213,074 for the same period in 2013, an increase of $4,302 or 2.0%.  Domestic sales for the Infrastructure Group increased $5,898 or 3.7% for the first six months of 2014 compared to the same period in 2013.  Sales by the Infrastructure Group improved in the paver related product lines, but these were offset by declines in asphalt plant related business due in large part to the continuing lack of a long-term federal highway bill.  Additionally, due to the financing structure of the sales contract, no pellet plant related sales revenue was recorded in the first six months of 2014.  Pellet plant revenue is expected to be recorded over the life of the financing arrangement after the final plant performance testing, scheduled for the third quarter, is completed.  International sales for the Infrastructure Group decreased $1,596 or 2.9% for the first six months of 2014 compared to the same period in 2013 due primarily to decreased sales in Australia,  Canada and Europe, offset by increased sales in Russia and other post-Soviet States, South America and Mexico.  Parts sales for the Infrastructure Group increased 7.2% for the first six months of 2014 compared to the same period in 2013 due primarily to improved sales of paver equipment parts.

Aggregate and Mining Group : Sales in this group were $199,799 for the first six months of 2014 compared to $190,646 for the same period in 2013, an increase of $9,153 or 4.8%.  Domestic sales for the Aggregate and Mining Group increased $20,010 or 20.5% for the first six months of 2014 compared to the same period in 2013.  Much of the increase in sales is attributable to the adoption of a very successful order writing program through the National Dealers Conference in the fall of 2013.  International sales for the Aggregate and Mining Group decreased $10,857 or 11.7% for the first six months of 2014 compared to the same period in 2013.  The added international sales volume due to the Telestack acquisition was negated by reductions in sales by the Company's other subsidiaries in this group, due primarily to the impact of the strong U.S. dollar in many international markets. The decreases in international sales occurred primarily in Canada, Africa, South America, Mexico and Russia, offset by increased sales in China and other Asian countries as well as in the post-Soviet States excluding Russia.  Parts sales for this group decreased 7.6% for the first six months of 2014 compared to the same period in 2013.

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Energy Group : Sales in this group were $98,754 for the first six months of 2014 compared to $92,240 for the same period in 2013, an increase of $6,514 or 7.1%.  Domestic sales for the Energy Group increased $9,954 or 14.5% for the first six months of 2014 compared to the same period in 2013 due primarily to stronger wood grinder, wood chipper and industrial heater sales.  International sales for the Energy Group decreased $3,440 or 14.6% for the first six months of 2014 compared to the same period in 2013.  The decreases in international sales occurred primarily in Africa and Canada, offset by improved sales in Japan and Korea.  Parts sales for this group decreased 3.8% for the first six months of 2014 compared to the same period in 2013.

Segment Profit   (Loss)-Quarter :

 

Infrastructure Group : Segment profit for this group was $11,808 for the second quarter of 2014 compared to $6,103 for the same period in 2013, an increase of $5,705 or 93.5%. The group's profits between periods were positively impacted by a $14,831 increase in sales volume and an improvement in gross margins from 18.8% in the second quarter of 2013 to 21.2% in the same period in 2014.

Aggregate and Mining Group : Segment profit for this group was $11,158 for the second quarter of 2014 compared to $11,141 for the same period in 2013, an increase of $17 or 0.2%.  This group's sales increased by $6,807 primarily due to the inclusion of sales by Telestack, which was acquired on April 1, 2014; however, Telestack's sales during the quarter did not result in an increase to segment profits due to the required acquisition date inventory write-up to fair value on its opening balance sheet.

Energy Group : Segment profit for this group was $2,946 for the second quarter of 2014 compared to $2,235 for the second quarter of 2013, an increase of $711 or 31.8%.  The increase in this group's profits, which was due to an increase in sales of $7,491, was negatively impacted by a decrease of 130 basis points in gross margins and increased selling, general, and administrative expenses of $636.

Corporate Group : The Corporate Group had a loss of $11,323 for the second quarter of 2014 compared to a loss of $8,190 for the second quarter of 2013, an increase in loss of $3,133 or 38.3%.  The decrease in results in the second quarter of 2014 as compared to the second quarter of 2013 is due primarily to increased consolidated U.S. federal income taxes, which are recorded on the parent company books, as well as increased salaries and profit sharing expenses.

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Segment Profit   (Loss)-Six Months :

Infrastructure Group : Segment profit for this group was $20,604 for the first six months of 2014 compared to $18,981 for the same period in 2013, an increase of $1,623 or 8.6%. The group's profits between periods were positively impacted by a $4,302 increase in sales volume, a small increase in gross margin percent and reduced state and foreign income taxes, offset by an increase in ConExpo related expenses of $1,940 in the six months ended June 30, 2014 as compared to the same period in 2013.

Aggregate and Mining Group : Segment profit for this group was $20,259 for the first six months of 2014 compared to $20,198 for the same period in 2013, an increase of $61 or 0.3%.  This group's profits were positively impacted by an increase in sales of $9,153 and negatively impacted by a 90 basis point decrease in gross margins. The majority of this group's increased sales were related to sales by Telestack, which was acquired on April 1, 2014; however, Telestack's sales during the period did not result in an increase to segment profits due to the required acquisition date inventory write-up to fair value on its opening balance sheet.  Additionally, this group's profits were negatively impacted by an increase in ConExpo related expenses of $1,563 in the six months ended June 30, 2014 as compared to the same period in 2013.

Energy Group : Segment profit for this group was $4,870 for the first six months of 2014 compared to $3,426 for the first six months of 2013, an increase of $1,444 or 42.1%. This increase is due primarily to a $6,514 increase in sales and a 150 basis point increase in gross margin, offset by an increase in ConExpo related expenses of $659 in the six months ended June 30, 2014 as compared to the same period in the prior year.

Corporate Group : The Corporate Group had a loss of $20,441 for the first six months of 2014 compared to a loss of $17,450 for the first six months of 2013, an increase in loss of $2,991 or 17.1 %.  The increase in loss in the first six months of 2014 as compared to the first six months of 2013 is due primarily to increased consolidated U.S. federal income taxes, which are recorded on the parent company books, as well as increased salaries, SERP and profit sharing expenses, offset by an increase in investment income.

Liquidity and Capital Resources (dollar amounts in thousands, unless otherwise specified)

The Company's primary sources of liquidity and capital resources are its cash on hand, investments, borrowing capacity under a $100 million revolving credit facility and cash flows from operations. The Company had $18.6 million of cash available for operating purposes as of June 30, 2014, of which $10.7 million was held by the Company's foreign subsidiaries.  At June 30, 2014, the Company had no borrowings outstanding under its credit facilities with Wells Fargo Bank, N.A.  Net of letters of credit totaling $6.0 million, the Company had borrowing availability of $94.0 million under the credit facility as of June 30, 2014.  During the six months ended June 30, 2014, the highest amount of outstanding borrowings at any time under the facility was $16.1 million.

The Wells Fargo credit facility is a five-year agreement that was entered into in April 2012.  The amended and restated credit agreement with Wells Fargo continued the Company's previous $100 million revolving credit facility and includes a sub-limit for letters of credit of $25 million.  Borrowings under the agreement are subject to an interest rate equal to the daily one month LIBOR rate plus a 0.75% margin, resulting in a rate of 0.91% as of June 30, 2014.  Interest only payments are due monthly. The unused facility fee is 0.175%.  The amended and restated credit agreement contains certain financial covenants, including provisions concerning required levels of annual net income, minimum tangible net worth and maximum allowed capital expenditures.  The Company was in compliance with these covenants as of June 30, 2014.

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The Company's South African subsidiary, Osborn Engineered Products SA (Pty) Ltd ("Osborn"), has a credit facility of $8.9 million (ZAR 95 million) with a South African  bank to finance short-term working capital needs, as well as to cover performance letters of credit, advance payment and retention guarantees. As of June 30, 2014, Osborn had $2.2 million of outstanding borrowings (which is included in other current liabilities in the accompanying balance sheet) and $3.2 million in performance, advance payment and retention guarantees outstanding under the facility. The facility is unsecured and a 0.75% unused facility fee is charged if less than 50% of the facility is utilized. As of June 30, 2014, Osborn had available credit under the facility of $3.5 million. The interest rate is 0.25% less than the South Africa prime rate, resulting in a rate of 8.75% as of June 30, 2014.

The Company's Brazilian subsidiary, Astec do Brasil Fabricacao de Equipamentos Ltda. ("Astec Brazil"), has a $2.3 million working capital loan from a Brazilian bank with an interest rate of 12.5% which matures in May 2016.  Additionally, Astec Brazil has various 5-year equipment financing loans with another Brazilian bank in the aggregate of $1.6 million as of June 30, 2014 that have interest rates ranging from 3.5% to 6.0%.  Astec Brazil's loans are included in the accompanying balance sheets as other current liabilities ($0.4 million) and other long-term liabilities ($3.5 million).  Additional local financing is expected to be obtained by Astec Brazil as they acquire additional plant equipment during the construction of their manufacturing plant which is currently scheduled to be completed in the third quarter of 2014.

Net cash from operating activities increased by $19,932 for the for six months of 2014 as compared to the first six months of 2013 due primarily to the use of $7,883 less in cash to finance prepaid expenses; less cash used to pay accounts payable of $6,847; an increase in advance payments received from customers of $5,633; and other increasing sources of operational cash as shown in the table above.  Operating cash flows decreased in the first six months of 2014 as compared to the same period in the prior year due to changes in the amount of cash used to finance receivables of $9,059 and inventories of $3,030.

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For the six-month periods ended June 30, 2014, net cash used by investing activities increased $2,157 compared to the same period in 2013, primarily due to the April 1, 2014 acquisition of Telestack Limited for $34,965 offset by the $31,249 impact of the purchase of short-term investments in the first six months of 2013 and the sale of those investments in the first six months of 2014.

Capital expenditures for 2014, including those by the Company's Brazilian operations, are forecasted to be approximately $33,000. The Company expects to finance these expenditures using currently available cash balances, internally generated funds and available credit under the Company's credit facilities, as well as local financing for the equipment in the new Brazilian manufacturing facility. Capital expenditures are generally for machinery, equipment and facilities used by the Company in the production of its various products.

Cash from financing activities improved by $3,107 for the first six months of 2014 compared to the same period in 2013 due to $5,247 in bank loans being obtained by two of the Company's foreign subsidiaries to finance their operations and capital improvements, which was offset by a $2,297 increase in cash used to pay dividends.  The Company began paying quarterly dividends of $0.10 per share in the second quarter of 2013.

Financial Condition (dollar amounts shown in thousands)

The Company's current assets increased to $536,373 as of June 30, 2014 from $522,411 as of December 31, 2013, an increase of $13,962 or 2.7%.  The increase is primarily attributable to increases in inventories of $21,785 and trade receivables of $25,358. These increases were offset by decreases in cash and cash equivalents of $16,940 and short-term investments of $15,801.

The Company's current liabilities increased to $160,032 as of June 30, 2014 as compared to $133,531 as of December 31, 2013, an increase of $26,501 or 19.8%. The increase is primarily due to increases in accounts payable of $11,747, other current liabilities of $6,174 and customer deposits of $6,421.

Market Risk and Risk Management Policies

We have no material changes to the disclosure on this matter made in our Annual Report on Form 10-K for the year ended December 31, 2013.

Off-balance Sheet Arrangements

As of June 30, 2014, the Company does not have any off-balance sheet arrangements as defined by Item 303(a)(4) of Regulation S-K.

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Contractual Obligations

During the six months ended June 30, 2014, there were no substantial changes in the Company's commitments or contractual liabilities.