ITEM 2 - MANAGEMENT'S DISCUSSION AND ANALYSIS OF

FINANCIAL CONDITION AND RESULTS OF OPERATIONS

Executive Overview

The Corporation currently operates in two business segments - the Forged and Cast Rolls segment and the Air and Liquid Processing segment.

Over the past year, the Forged and Cast Rolls group has been affected by the weak economy and worldwide recession which has forced customers to cut back their level of steel and aluminum production, temporarily shut down facilities and place new mill projects on hold. Operating results for Davy Roll have been further impacted by the weakening of the British pound sterling in relation to the U.S. dollar. There are signs that the industries served are recovering, particularly in China and Asia, which will improve demand for rolling mill rolls as customers consume their existing roll inventories. In addition, other areas of the world including North America are expected to increase production levels in 2010. The Corporation's capital investment program, in the second of three years, is progressing on schedule. It will enable the segment to maximize capacity and productivity when business returns to more normal volumes.

Year-to-date operating results for the Air and Liquid Processing group have not been affected by the weakened economy as significantly as the Forged and Cast Rolls group due to strong shipments to the energy sector. Performance for the remainder of the year and 2010, however, is contingent on the volume of new orders.

Operations for the Nine and Three Months Ended September 30, 2009 and 2008

Net Sales. Net sales for the nine months ended September 30, 2009 and 2008 were $232,695,000 and $306,425,000, respectively, and $71,961,000 and $105,906,000, respectively, for the three months then ended. Backlog approximated $538,073,000 at September 30, 2009 versus $690,727,000 as of December 31, 2008 and $831,116,000 as of September 30, 2008. A discussion of sales and backlog for the Corporation's two segments is included below.

Costs of Products Sold. Costs of products sold, excluding depreciation, as a percentage of net sales approximated 67.7% and 71.3% for the nine months ended September 30, 2009 and 2008, respectively, and 66.0% and 71.9% for the three months then ended. The improvement is primarily attributable to lower material, labor and operating costs offset by higher pension-related costs. Additionally, for the first nine months of the current year, the Forged and Cast Rolls group benefited from higher surcharge revenues which recoup certain increases in material costs charged in earlier periods.

Selling and Administrative. Selling and administrative expenses decreased principally due to the effects from the lower volumes of shipments, particularly commission costs. Recognition of stock-based compensation related to stock options granted amounted to $1,425,000 and $380,000 for the nine and three months ended September 30, 2009 in comparison to $1,279,000 for the nine and three months ended September 30, 2008.

Income from Operations. Income from operations for the nine months ended September 30, 2009 and 2008 approximated $39,009,000 and $50,134,000, respectively, and $12,713,000 and $16,562,000 for the three months ended September 30, 2009 and 2008, respectively. A discussion of operating results for the Corporation's two segments is included below.

Forged and Cast Rolls. Sales and operating income are less than the comparable prior year periods and have been affected by the diminution in consumption of rolling mill rolls by the steel and aluminum industries. In contrast, through September 2008, prior to the financial dislocation, the global steel and aluminum industries were operating at or near capacity. Although negatively impacted by the fall off in shipments, operating income benefited from lower costs for scrap and alloys, short-time working, reductions in manning, and a decrease in commission expense and freight costs.

Backlog approximated $500,949,000 at September 30, 2009 against $635,884,000 as of December 31, 2008 and $775,880,000 as of September 30, 2008. The decline is a result of current period shipments; customers not adding to existing orders which, in many instances, extended several years into the future due to concerns over the availability of rolls; and lower order values as surcharges are reduced to reflect the decrease in material costs and exchange rates used to convert the backlog of Davy Roll. To date, order cancellations have been minimal. The backlog of orders continues to be subject to rescheduling to better match the changing production levels of the segment's customers. Accordingly, it is difficult to accurately predict the proportion of backlog to ship in 2010 and thereafter; however, based

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on current estimates, approximately $222,000,000 is expected to be released after 2010. In addition, the Forged and Cast Rolls group has commitments of roughly $60,000,000 from customers under long-term supply arrangements which will be included in backlog upon receipt of specific purchase orders closer to the requirement dates for delivery.

Air and Liquid Processing. Generally, business activity for this segment trails the economy by six to twelve months. Accordingly, sales and operating income for the group exceeded the comparable prior year periods principally because of strong orders brought forward from 2008 and received during the earlier part of this year as well as lower material and labor costs. Specifically, Buffalo Pumps benefited from a higher volume of pumps to the energy sector and the U.S. Navy. A shift in product mix aided Aerofin's performance with increased shipments to electric utility customers offset by a reduction in lower-margin sales to original equipment manufacturers. Buffalo Air Handling, however, continues to operate at close to a break-even level due to a significant reduction in its backlog of orders as construction projects for pharmaceutical, hospital and universities have been adversely impacted by the weak economy. As of September 30, 2009, backlog approximated $37,124,000 in comparison to $54,843,000 as of December 31, 2008 and $55,236,000 as of September 30, 2008 and has declined for each of the units because of the slowdown in business activity. Approximately 75% of the month-end backlog is expected to ship in 2009.

Other Income (Expense). Investment-related income for the nine months ended September 30, 2009 was less than the comparable prior year period due to lower investment returns. The improvement in investment-related income for the three months ended September 30, 2009 is attributable to the timing of the dividend from its Chinese cast-roll joint venture which was received in the third quarter of the current year but in the second quarter of the prior year. The dividend approximated $800,000 in both years.

Interest expense decreased due to a decline in average interest rates incurred on the outstanding Industrial Revenue Bonds.

The fluctuation in other - net for the nine months ended September 30, 2009 is due to an additional provision of $382,000 for environmental costs estimated to be incurred relating to the remediation of real estate previously owned whereas the comparable prior year period benefited from a $960,000 reduction in an accrual for environmental remediation for unrelated locations which were previously sold. Other - net for the three month periods is relatively comparable. The third quarter of 2009 benefited from foreign exchange gains whereas 2008 recognized income from the $960,000 reduction in the accrual for environmental remediation of locations previously sold.

Income Taxes. The increase in the effective income tax rate between the two years is primarily attributable to a change in the composition of projected net income before income taxes. For 2009, a higher proportion of net income before income taxes is anticipated to be generated by the U.S. operations which are taxed at a statutory federal rate of 35% versus 28% in the U.K.

Net Income and Earnings per Common Share. As a result of the above, the Corporation's net income for the nine months ended September 30, 2009 and 2008 equaled $23,827,000 or $2.34 per common share and $33,726,000 or $3.31 per common share, respectively, and $8,715,000 or $0.85 per common share and $11,974,000 or $1.18 per common share for the three months ended September 30, 2009 and 2008, respectively.

Liquidity and Capital Resources

Net cash flows provided by operating activities increased for the nine months ended September 30, 2009 when compared to the nine months ended September 30, 2008 principally due to a reduction in accounts receivables offset by lower earnings. While business activity declined in 2009 as a result of the economic slowdown, the first nine months of 2008 was experiencing significant growth and record-level demand from steel and aluminum producers throughout the world.

The decrease in net cash flows used in investing activities is primarily attributable to maintaining available funds in cash and cash equivalents versus investing in short-term marketable securities. During the third quarter of 2009, Union Electric Steel made its final contribution for its 49% interest in a Chinese joint venture; contribution requirements of $14,700,000 were made over the past three years with $8,820,000 contributed in 2009 and $2,940,000 contributed in each of 2008 and 2007. Also, in 2009, monies were deposited in escrow and are being held as collateral for the outstanding foreign currency sale contracts of Davy Roll. A portion of these monies were returned during the quarter in connection with the diminishing exposure relating to the outstanding contracts. As of September 30, 2009, future capital expenditures approximating $32,593,000, to be spent over the next 12 - 18 months, have been approved.

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Net cash flows used in financing activities represent primarily the payment of dividends which are paid one quarter in arrears. The increase in dividends paid is due to an increase in the dividend rate ($0.54 per common share through September 2009 versus $0.51 through September 2008) and the number of common shares outstanding.

The effect of exchange rate changes on cash and cash equivalents for the nine months ended September 30, 2009 is related to the strengthening of the U.K. pound sterling against the U.S. dollar.

As a result of the above, cash and cash equivalents increased $1,383,000 in 2009 and ended the period at $82,990,000 in comparison to $81,607,000 at December 31, 2008.

Funds on hand and funds generated from future operations are expected to be sufficient to finance the operational and capital expenditure requirements of the Corporation. The Corporation also maintains short-term lines of credit and an overdraft facility in excess of the cash needs of its businesses. The total available at September 30, 2009 was approximately $9,500,000 (including £3,000,000 in the U.K. and €400,000 in Belgium).

Litigation and Environmental Matters

See Notes 12 and 13 to the condensed consolidated financial statements.

Critical Accounting Pronouncements

The Corporation's critical accounting policies, as summarized in its Annual Report on Form 10-K for the year ended December 31, 2008, remain unchanged.

Recently Issued Accounting Pronouncements

See Note 1 to the condensed consolidated financial statements.

Forward-Looking Statements

Management's Discussion and Analysis of Financial Condition and Results of Operations and other sections of the Form 10-Q contain forward-looking statements that reflect the Corporation's current views with respect to future events and financial performance.

Forward-looking statements are identified by the use of the words "believes," "expects," "anticipates," "estimates," "projects," "forecasts" and other expressions that indicate future events and trends. Forward-looking statements speak only as of the date on which such statements are made, are not guarantees of future performance or expectations and involve risks and uncertainties. For the Corporation, these risks and uncertainties include, but are not limited to, those described under Item 1A, Risk Factors, of Part II of this Form 10-Q. In addition, there may be events in the future that the Corporation is not able to accurately predict or control which may cause actual results to differ materially from expectations expressed or implied by forward-looking statements. The Corporation undertakes no obligation to update any forward-looking statement whether as a result of new information, events or otherwise.