FORM 10-Q

SECURITIES AND EXCHANGE COMMISSION

Washington, D. C. 20549

QUARTERLY REPORT UNDERPURSUANT TO SECTION 13 OR 15 (d)
OF THE SECURITIES EXCHANGE ACT OF 1934


For Quarterthe quarterly period ended November 30, 2003February 29, 2004
Commission File Number 1-4304

COMMERCIAL METALS COMPANY


(Exact Name of registrant as specified in its charter)
   
Delaware 75-0725338
   

 
(State or other Jurisdiction of (I.R.S. Employer
incorporation of organization) Identification Number)

6565 N. MacArthur Blvd.
Irving, Texas 75039


(Address of principal executive offices)
(Zip Code)

(214) 689-4300


(Registrant’s telephone number, including area code)


Former name, former address and former fiscal year,
If changed since last report

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.

   
Yes No
   
[X] [   ]

Indicate by check mark whether the registrant is an accelerated filer (as defined in Rule 12b-2 of the Exchange Act).

   
Yes No
   
[X] [   ]

As of January 9,April 6, 2004 there were 28,495,88829,030,030 shares of the Company’s common stock issued and outstanding excluding 3,769,2783,235,136 shares held in the Company’s treasury.

 


COMMERCIAL METALS COMPANY AND SUBSIDIARIES

TABLE OF CONTENTS

   
  PAGE NO.

  
  
Condensed Consolidated Balance Sheets - November 30, 2003February 29, 2004 and August 31, 2003
 2-3
Condensed Consolidated Statements of Earnings - Three and Six months ended November 30,February 29, 2004 and February 28, 2003 and 2002
 4
Condensed Consolidated Statements of Cash Flows - ThreeSix months ended November 30,February 29, 2004 and February 28, 2003 and 2002
 5
Condensed Consolidated Statement of Stockholders’ Equity - ThreeSix months ended November 30, 2003February 29, 2004
 6
 7-137-15
 14-2216-25
 2226
 2226
  
 23-2427-29
 2530
 31-37
26Amendment to Restated Certificate of Incorporation
Certification Pursuant to Section 302
Certification Pursuant to Section 302
Certification Pursuant to Section 906
Certification Pursuant to Section 906

1


PART I — FINANCIAL INFORMATION

Table of Contents

ITEM 1 FINANCIAL STATEMENTS

COMMERCIAL METALS COMPANY AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS (UNAUDITED)
ASSETS


(In thousands except share data)
         
  February 29, August 31,
  2004
 2003
CURRENT ASSETS:        
Cash and cash equivalents $59,128  $75,058 
Accounts receivable (less allowance for collection losses of $16,662 and $9,275)  528,266   397,490 
Inventories  475,529   310,816 
Other  58,927   61,053 
   
 
   
 
 
TOTAL CURRENT ASSETS  1,121,850   844,417 
PROPERTY, PLANT AND EQUIPMENT:        
Land  36,588   34,617 
Buildings  164,969   127,780 
Equipment  812,931   747,207 
Leasehold improvements  39,745   38,117 
Construction in process  21,858   15,503 
   
 
   
 
 
   1,076,091   963,224 
Less accumulated depreciation and amortization  (618,617)  (588,842)
   
 
   
 
 
   457,474   374,382 
GOODWILL  31,681   6,837 
OTHER ASSETS  62,230   49,770 
   
 
   
 
 
  $1,673,235  $1,275,406 
   
 
   
 
 
            
     November 30, August 31,
     2003 2003
     
 
CURRENT ASSETS:        
 Cash and cash equivalents $133,544  $75,058 
 Accounts receivable (less allowance for collection losses of $10,036 and $9,275)  445,808   397,490 
 Inventories  362,192   310,816 
 Other  55,927   61,053 
    
   
 
   TOTAL CURRENT ASSETS  997,471   844,417 
PROPERTY, PLANT AND EQUIPMENT:        
 Land  34,592   34,617 
 Buildings  128,851   127,780 
 Equipment  749,391   747,207 
 Leasehold improvements  38,266   38,117 
 Construction in process  20,015   15,503 
    
   
 
   971,115   963,224 
 Less accumulated depreciation and amortization  (602,693)  (588,842)
    
   
 
   368,422   374,382 
OTHER ASSETS  53,446   56,607 
    
   
 
  $1,419,339  $1,275,406 
   
   
 

See notes to unaudited condensed consolidated financial statements.

2


Table of Contents

COMMERCIAL METALS COMPANY AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS (UNAUDITED)
LIABILITIES AND STOCKHOLDERS’ EQUITY


(In thousands except share data)
         
  February 29, August 31,
  2004
 2003
CURRENT LIABILITIES:        
Accounts payable — trade $280,401  $225,880 
Accounts payable — documentary letters of credit  143,895   74,782 
Accrued expenses and other payables  156,534   126,971 
Income taxes payable  1,179   1,718 
Notes payable — CMCZ  46,715    
Short-term trade financing arrangement  9,000   15,000 
Current maturities of long-term debt  804   640 
   
 
   
 
 
TOTAL CURRENT LIABILITIES  638,528   444,991 
DEFERRED INCOME TAXES  50,045   44,419 
OTHER LONG-TERM LIABILITIES  32,811   24,066 
LONG-TERM DEBT  362,902   254,997 
MINORITY INTEREST  30,651    
COMMITMENTS AND CONTINGENCIES        
STOCKHOLDERS’ EQUITY:        
Capital stock:        
Preferred stock      
Common stock, par value $5.00 per share:        
Authorized 100,000,000 and 40,000,000 Shares; Issued 32,265,166 shares; outstanding 28,825,642 and 27,994,690 shares  161,326   161,326 
Additional paid-in capital  4,083   863 
Accumulated other comprehensive income  10,089   2,368 
Retained earnings  431,132   401,869 
   
 
   
 
 
   606,630   566,426 
Less treasury stock, 3,439,524 and 4,270,476 shares at cost  (48,332)  (59,493)
   
 
   
 
 
   558,298   506,933 
   
 
   
 
 
  $1,673,235  $1,275,406 
   
 
   
 
 
             
      November 30, August 31,
      2003 2003
      
 
CURRENT LIABILITIES:        
 Accounts payable - trade $230,293  $225,880 
 Accounts payable–documentary letters of credit  93,963   74,782 
 Accrued expenses and other payables  118,673   126,971 
 Income taxes payable  2,208   1,718 
 Short-term trade financing arrangement  12,000   15,000 
 Current maturities of long-term debt  618   640 
    
   
 
    TOTAL CURRENT LIABILITIES  457,755   444,991 
DEFERRED INCOME TAXES  43,669   44,419 
OTHER LONG-TERM LIABILITIES  27,069   24,066 
LONG-TERM DEBT  362,365   254,997 
COMMITMENTS AND CONTINGENCIES        
STOCKHOLDERS’ EQUITY:        
 Capital stock:        
  Preferred stock      
  Common stock, par value $5.00 per share:        
   Authorized 40,000,000 shares; issued 32,265,166 shares; outstanding 28,325,301 and 27,994,690 shares  161,326   161,326 
 Additional paid-in capital  1,966   863 
 Accumulated other comprehensive income  7,841   2,368 
 Retained earnings  412,254   401,869 
    
   
 
   583,387   566,426 
   Less treasury stock, 3,939,865 and 4,270,476 shares at cost  (54,906)  (59,493)
    
   
 
   528,481   506,933 
    
   
 
  $1,419,339  $1,275,406 
    
   
 

See notes to unaudited condensed consolidated financial statements.

3


Table of Contents

COMMERCIAL METALS COMPANY AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF EARNINGS (UNAUDITED)

(In thousands except share data)

          
   Three months ended
   November 30,
   
   2003 2002
   
 
NET SALES $830,007  $636,179 
COSTS AND EXPENSES:        
 Cost of goods sold  737,488   575,119 
 Selling, general and administrative expenses  64,620   53,567 
 Interest expense  5,094   3,994 
 Loss on reacquisition of debt  2,792    
   
   
 
   809,994   632,680 
   
   
 
EARNINGS BEFORE INCOME TAXES  20,013   3,499 
INCOME TAXES  7,385   1,294 
   
   
 
NET EARNINGS $12,628  $2,205 
   
   
 
Basic earnings per share $0.45  $0.08 
Diluted earnings per share $0.44  $0.08 
Cash dividends per share $0.08  $0.08 
Average basic shares outstanding  28,145,679   28,486,578 
Average diluted shares outstanding  28,999,960   28,963,733 
                 
  Three Months Ended
 Six Months Ended
  February 29, February 28, February 29, February 28,
  2004
 2003
 2004
 2003
NET SALES $1,068,060  $660,816  $1,898,067  $1,296,995 
COSTS AND EXPENSES:                
Cost of goods sold  939,445   592,896   1,676,933   1,168,015 
Selling, general and administrative expenses  87,195   60,132   151,815   113,699 
Interest expense  6,895   3,131   11,989   7,125 
Loss on reacquisition of debt  280      3,072    
   
 
   
 
   
 
   
 
 
   1,033,815   656,159   1,843,809   1,288,839 
   
 
   
 
   
 
   
 
 
EARNINGS BEFORE INCOME TAXES AND MINORITY INTEREST  34,245   4,657   54,258   8,156 
INCOME TAXES  11,876   1,724   19,261   3,018 
   
 
   
 
   
 
   
 
 
EARNINGS BEFORE MINORITY INTEREST  22,369   2,933   34,997   5,138 
MINORITY INTEREST  1,214      1,214    
   
 
   
 
   
 
   
 
 
NET EARNINGS $21,155  $2,933  $33,783  $5,138 
   
 
   
 
   
 
   
 
 
Basic earnings per share $0.74  $0.10  $1.19  $0.18 
Diluted earnings per share $0.71  $0.10  $1.15  $0.18 
Cash dividends per share $0.08  $0.08  $0.16  $0.16 
Average basic shares outstanding  28,639,349   28,320,223   28,392,516   28,403,401 
Average diluted shares outstanding  29,878,156   28,825,167   29,439,058   28,894,450 

See notes to unaudited condensed consolidated financial statements.

4


Table of Contents

COMMERCIAL METALS COMPANY AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED)


(In thousands)
         
  Six months ended
  February 29, February 28,
  2004
 2003
CASH FLOWS FROM (USED BY) OPERATING ACTIVITIES:        
Net earnings $33,783  $5,138 
Adjustments to reconcile net earnings to cash used by operating activities:        
Depreciation and amortization  33,993   30,271 
Loss on reacquisition of debt  3,072    
Provision for losses on receivables  3,790   1,257 
Tax benefits from stock plans  1,472   101 
Minority interest  1,214    
Deferred income taxes  974   998 
Net loss (gain) on sale of property and other  (116)  763 
Changes in operating assets and liabilities, net of effect of acquisitions:        
Accounts receivable  (142,728)  (9,587)
Accounts receivable sold  55,671   30,550 
Inventories  (141,517)  (56,879)
Other assets  23,645   (14,012)
Accounts payable, accrued expenses, other payables and income taxes  42,188   (44,071)
Other long-term liabilities  3,820   3,394 
   
 
   
 
 
Net Cash Used By Operating Activities  (80,739)  (52,077)
CASH FLOWS FROM (USED BY) INVESTING ACTIVITIES:        
Purchases of property, plant and equipment  (14,572)  (22,564)
Sale of property, plant and equipment  420   162 
Acquisitions of CMCZ and Lofland, net of cash acquired  (99,793)   
   
 
   
 
 
Net Cash Used By Investing Activities  (113,945)  (22,402)
CASH FLOWS FROM (USED BY) FINANCING ACTIVITIES:        
Increase in documentary letters of credit  69,113   9,395 
Payments on short-term trade financing arrangement  (6,000)   
Proceeds from issuance of long-term debt  200,000    
Payments on long-term debt  (91,516)  (33)
Proceeds from notes payable — CMCZ  4,966    
Stock issued under incentive and purchase plans  12,909   4,533 
Treasury stock acquired     (9,191)
Dividends paid  (4,520)  (4,550)
Debt reacquisition and issuance costs  (4,989)   
   
 
   
 
 
Net Cash From Financing Activities  179,963   154 
Effect of exchange rate changes on cash  (1,209)  (326)
   
 
   
 
 
Decrease in Cash and Cash Equivalents  (15,930)  (74,651)
Cash and Cash Equivalents at Beginning of Year  75,058   124,397 
   
 
   
 
 
Cash and Cash Equivalents at End of Period $59,128  $49,746 
   
 
   
 
 
           
    Three months ended
    November 30,
    
    2003 2002
    
 
CASH FLOWS FROM (USED BY) OPERATING ACTIVITIES:        
 Net earnings $12,628  $2,205 
 Adjustments to reconcile net earnings to cash used by operating activities:        
  Depreciation and amortization  15,123   15,226 
  Loss on reacquisition of debt  2,792    
  Provision for losses on receivables  941   369 
  Net loss (gain) on sale of property  (101)  211 
  Deferred income taxes  (750)  101 
  Tax benefits from stock plans  1,042   5 
 Changes in operating assets and liabilities:        
  Decrease (increase) in accounts receivable  (51,916)  (12,291)
  Funding from accounts receivable sold  2,657   12,961 
  Decrease (increase) in inventories  (51,376)  (25,537)
  Decrease (increase) in other assets  10,038   (1,905)
  Increase (decrease) in accounts payable, accrued expenses, other payables and income taxes  (3,395)  (46,624)
  Increase (decrease) in other long-term liabilities  3,003   2,228 
    
   
 
Net Cash Flows Used By Operating Activities  (59,314)  (53,051)
CASH FLOWS FROM (USED BY) INVESTING ACTIVITIES:        
  Purchases of property, plant and equipment  (7,143)  (9,658)
  Sale of property, plant and equipment  101    
    
   
 
Net Cash Used By Investing Activities  (7,042)  (9,658)
CASH FLOWS FROM (USED BY) FINANCING ACTIVITIES:        
  Additional (payments on) documentary letters of credit  19,181  1,976 
  Payments on short-term trade financing arrangement  (3,000)   
  Proceeds from issuance of long-term debt  200,000    
  Payments on long-term debt  (89,035)  (16)
  Stock issued under incentive and purchase plans  4,648   26 
  Treasury stock acquired     (1,613)
  Dividends paid  (2,243)  (2,281)
  Debt reacquisition and issuance costs  (4,709)   
    
   
 
Net Cash From (used by) Financing Activities  124,842   (1,908)
    
   
 
Increase (Decrease) in Cash and Cash Equivalents  58,486   (64,617)
Cash and Cash Equivalents at Beginning of Year  75,058   124,397 
    
   
 
Cash and Cash Equivalents at End of Period $133,544  $59,780 
    
   
 

See notes to unaudited condensed consolidated financial statements.

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Table of Contents

COMMERCIAL METALS COMPANY AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENT OF STOCKHOLDERS’ EQUITY (UNAUDITED)

(In thousands except share data)

                                   
    Common Stock     Accumulated     Treasury Stock    
    
 Add’l Other     
    
    Number of     Paid-in Comprehensive Retained Number of        
    Shares Amount Capital Income Earnings Shares Amount Total
    
 
 
 
 
 
 
 
Balance September 1, 2003:  32,265,166  $161,326  $863  $2,368  $401,869   (4,270,476) $(59,493) $506,933 
Comprehensive income:                                
 Net earnings for three months ended November 30, 2003                  12,628           12,628 
 Other comprehensive income:                                
  Foreign currency translation adjustment              5,434               5,434 
  Unrealized loss on derivatives, net of taxes of $21              39               39 
                               
 
Comprehensive income                              18,101 
Cash dividends                  (2,243)          (2,243)
Stock issued under incentive and purchase plans          61           330,611   4,587   4,648 
Tax benefits from stock plans          1,042                   1,042 
   
   
   
   
   
   
   
   
 
Balance November 30, 2003  32,265,166  $161,326  $1,966  $7,841  $412,254   (3,939,865) $(54,906) $528,481 
   
   
   
   
   
   
   
   
 
                                 
  Common Stock     Accumulated     Treasury Stock  
  
 Add'l Other   
  
  Number of     Paid-in Comprehensive Retained Number of    
  Shares
 Amount
 Capital
 Income
 Earnings
 Shares
 Amount
 Total
Balance September 1, 2003:  32,265,166  $161,326  $863  $2,368  $401,869   (4,270,476) $(59,493) $506,933 
Comprehensive income:                                
Net earnings for six months ended February 29, 2004                  33,783           33,783 
Other comprehensive income:                                
Foreign currency translation adjustment              6,647               6,647 
Unrealized gain on derivative, net of taxes of $592              1,074               1,074 
                               
 
 
Comprehensive income                              41,504 
Cash dividends                  (4,520)          (4,520)
Stock issued under incentive and purchase plans          1,748           830,952   11,161   12,909 
Tax benefits from stock plans          1,472                   1,472 
   
 
   
 
   
 
   
 
   
 
   
 
   
 
   
 
 
Balance February 29, 2004  32,265,166  $161,326  $4,083  $10,089  $431,132   (3,439,524) $(48,332) $558,298 
   
 
   
 
   
 
   
 
   
 
   
 
   
 
   
 
 

See notes to unaudited condensed consolidated financial statements.

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Table of Contents

COMMERCIAL METALS COMPANY AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)

NOTE A QUARTERLY FINANCIAL DATA

     In the opinion of management, theThe accompanying unaudited condensed consolidated financial statements containhave been prepared on a basis consistent with that used in the Company’s Annual Report on Form 10-K filed with the Securities and Exchange Commission (SEC) for the year ended August 31, 2003, and include all adjustments (consisting of only normal recurring accruals)adjustments necessary to present fairly the financial position ascondensed consolidated balance sheet and statements of November 30 and August 31, 2003 and the results of operations andearnings, cash flows and stockholders’ equity for the three months ended November 30, 2003 and 2002.periods indicated. The results of operations for the three and six month periods are not necessarily indicative of the results to be expected for a full year. These interim financial statements should be read in conjunction with the Company’s consolidated financial statements for the year ended August 31, 2003 included in its Form 10-K filed with the Securities and Exchange Commission (SEC).

NOTE B ACCOUNTING POLICIES

Stock-Based Compensation

     The Company accounts for stock options granted to employees and directors using the intrinsic value based method of accounting. Under this method, the Company does not recognize compensation expense for the stock options because the exercise price is equal to the market price of the underlying stock on the date of the grant. If the Company had used the fair value based method of accounting, net earnings and earnings per share would have been reducedadjusted to the pro-forma amounts listed in the table below. The Black-Scholes option pricing model was used to calculate the pro forma stock-based compensation costs. For purposes of the pro forma disclosures, the assumed compensation expense is amortized over the options’ vesting periods. The pro forma information is consistent with assumptions used in the year end information.

                 
  Three months ended
 Six months ended
  February 29, February 28, February 29, February 28,
(in thousands, except per share amounts) 2004 2003 2004 2003
  
 
 
 
Net earnings-as reported $21,155  $2,933  $33,783  $5,138 
Pro forma stock-based compensation cost  316   406   657   739 
   
 
   
 
   
 
   
 
 
Net earnings-pro forma $20,839  $2,527  $33,126  $4,399 
   
 
   
 
   
 
   
 
 
Net earnings per share-as reported:                
Basic $0.74  $0.10  $1.19  $0.18 
Diluted $0.71  $0.10  $1.15  $0.18 
Net earnings per share-pro forma:                
Basic $0.73  $0.09  $1.17  $0.15 
Diluted $0.70  $0.09  $1.13  $0.15 

(in thousands, except per share amounts)

          
   Three months ended
   November 30,
   
   2003 2002
   
 
Net earnings-as reported $12,628  $2,205 
Pro forma stock-based compensation cost  335   334 
   
   
 
Net earnings-pro forma $12,293  $1,871 
   
   
 
Net earnings per share-as reported:        
 Basic $0.45  $0.08 
 Diluted $0.44  $0.08 
Net earnings per share-pro forma:        
 Basic $0.44  $0.07 
 Diluted $0.43  $0.07 

Reclassifications

     Certain reclassifications have been made to the prior period financial statements to conform to the classifications used in the current period.

Accounts Payable — Documentary Letters of Credit

     In order to facilitate certain trade transactions, especially international, we utilizethe Company utilizes documentary letters of credit to provide assurance of payment to ourits suppliers. These letters of credit may be for prompt payment or for payment at a future date conditional upon the bank finding the documentation presented to be in strict compliance with all terms and conditions of the letter of credit. OurThe banks issue these letters of credit under informal, uncommitted lines of credit which are in addition to the Company’s contractually committed revolving credit agreement. In some cases, if ourthe Company’s suppliers choose to discount the future dated obligation, wethe Company may absorb the discount cost. The amounts currently payable under letters of credit in connection with such discount arrangements are classified as Accounts Payable — Documentary Letters of

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COMMERCIAL METALS COMPANY AND SUBSIDIARIES


NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)

classified as Accounts Payable – Documentary Letters of Credit and the related discount charges are included as a component of interest expense in the condensed consolidated financial statements.

NOTE C — ACQUISITIONS

     On December 3, 2003, the Company’s Swiss subsidiary acquired 71.1% of the outstanding shares of Huta Zawiercie, S.A. (CMCZ), of Zawiercie, Poland for 200 million Polish Zlotys (PLN), $51.9 million on the acquisition date. In connection with the acquisition, the Company also assumed debt of 176 million PLN ($45.7 million), acquired $3.8 million in cash and incurred $1.7 million of directly related costs. CMCZ operates a steel minimill similar to those operated by the Company’s steel group with total annual capacity of over 1 million metric tons consisting of rebar and wire rod products as well as merchant bar. With this acquisition, the Company has become a significant manufacturer of rebar and wire rod in a key Central European market.

On December 23, 2003, the Company acquired 100% of the stock of Lofland Acquisition, Inc. (Lofland) for $48.8 million cash, $9 million of which was placed in escrow which could be used to resolve any claims that the Company might have against the sellers for up to eighteen months post-acquisition. The Company also incurred $1.1 million of external costs directly related to this acquisition. Lofland is the sole stockholder of the Lofland Company and subsidiaries which operate steel reinforcing bar fabrication and construction-related product sales facilities from 11 locations in Texas, Arkansas, Louisiana, Oklahoma, New Mexico and Mississippi. This acquisition complements the Company’s existing Texas rebar fabrication and construction-related product sales operations and expands the Company’s service areas in each of the neighboring states.

The following is a summary of the allocation of purchase price as of the date of the acquisitions (in thousands). Although the Company does not anticipate any material changes, these purchase price allocations may be revised following the completion of the valuation process. The minority interest in CMCZ is recorded at historical cost.

             
  CMCZ
 Lofland
 Total
Accounts receivable $42,355  $18,894  $61,249 
Inventories  30,360   5,150   35,510 
Property, plant and equipment  87,444   10,242   97,686 
Goodwill     24,876   24,876 
Other intangible assets  3,451   9,700   13,151 
Other assets  8,298   1,239   9,537 
Liabilities  (46,597)  (20,135)  (66,732)
Debt  (45,717)     (45,717)
Minority interest  (29,767)     (29,767)
   
 
   
 
   
 
 
  $49,827  $49,966  $99,793 
   
 
   
 
   
 
 

Inventory costs for Lofland and CMCZ are determined on the first-in, first out (FIFO) method. The intangible assets acquired include customer base, non-competition agreement, favorable land leases and production backlog, all of which have finite lives and will be amortized over lives from one year (for the backlog) to 96 years (for the favorable land leases), with a weighted average life of 34 years. Also, the acquisition of Lofland resulted in a brand name of $2.3 million with an indefinite life. From the estimates reported at November 30, 2003, Lofland’s other intangible assets decreased by $3.3 million and goodwill increased by $10.3 million primarily due to changes in the estimated valuation of the customer base and the non-competition agreement and assessment of deferred tax impacts. From November 30, 2003, the estimated valuations of CMCZ’s inventories decreased by approximately $2.6 million and property, plant and equipment increased by $2.8 million. For tax purposes, the Company expects to be able to deduct approximately $4 million of goodwill related to carry-over tax attributes. The estimated aggregate amortization expense for each of the five succeeding fiscal years is as follows: 2004 — $1.9 million; 2005 — $1.6 million; 2006 — $1.2 million; 2007 — $1.0 million

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COMMERCIAL METALS COMPANY AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)

and 2008 — $326 thousand. The fair value estimates were determined either on a market-based or income-based approach.

The following pro forma financial information reflects the consolidated results of operations of the Company as if the acquisitions of CMCZ and Lofland had taken place at the beginning of the period. The pro forma information includes primarily adjustments for amortization of acquired intangible assets, depreciation expense based upon the new basis of property, plant and equipment, and interest expense for assumed debt. The Company considers its investment in Poland to be permanent, and therefore does not provide for U.S. income taxes on the earnings of CMCZ. The pro forma financial information is not necessarily indicative of the results of operations as they would have been had the transaction been effected on the assumed dates.

                 
  Three months ended
 Six months ended
  February 29, February 28, February 29, February 28,
(in thousands except per share data) 2004 2003 2004 2003
  
 
 
 
Net sales $1,075,356  $739,966  $2,014,730  $1,456,798 
Net earnings  20,977   1,188   34,607   3,671 
Diluted earnings per common share  0.70   0.04   1.18   0.13 

NOTE D — SALES OF ACCOUNTS RECEIVABLE

     The Company has an accounts receivable securitization program (Securitization Program) which it utilizes as a cost-effective, short-term financing alternative. Under the Securitization Program, the Company and several of its subsidiaries (the Originators) periodically sell accounts receivable to the Company’s wholly-owned consolidated special purpose subsidiary (CMCR). CMCR is structured to be a bankruptcy-remote entity. CMCR, in turn, sells an undivided percentage ownership interest (Participation Interest) in the pool of receivables to an affiliate of a third party financial institution (Buyer). CMCR may sell undivided interests of up to $130 million, depending on the Company’s level of financing needs.

     At November 30February 29, 2004 and August 31, 2003, uncollected accounts receivable of $159$183 million and $152 million, respectively, had been sold to CMCR, and theCMCR. The Company’s undivided interest in these receivables (representing the Company’s retained interest) was 70% and 100%. at February 29, 2004 and August 31, 2003 respectively. At November 30 andFebruary 29, 2004 the Buyer owned $55 million in Participation Interests in CMCR’s accounts receivable pool, which was reflected as a reduction in accounts receivable on the Company’s condensed consolidated balance sheet. At August 31, 2003, no Participation Interests in CMCR’s accounts receivable pool were owned by the Buyer and, therefore, none were reflected as a reduction in accounts receivable on the Company’s consolidated balance sheets.Buyer.

     Discounts (losses) on the sales of accounts receivable to the Buyer under this Program were $116$332 thousand and $123$448 thousand for the three and six months ended November 30,February 29, 2004, respectively, and $188 thousand and $311 thousand for the three and six months ended February 28, 2003, and 2002, respectively. These losses primarily represented the costs of funds and were included in selling, general and administrative expenses.

     In addition to the Securitization Program described above, the Company’s international subsidiaries periodically sell accounts receivable. Uncollected accounts receivable that had been sold under these arrangements and removed from the consolidated balance sheets were $23.5$21.5 million and $20.8 million at November 30February 29, 2004 and August 31, 2003, respectively.

NOTE D –E — INVENTORIES

     Before deduction of last-in, first-out (LIFO) inventory valuation reserves of $18.7$28.2 million and $17.4 million at November 30February 29, 2004 and August 31, 2003, respectively, inventories valued under the first-in, first-out method approximated replacement cost. Approximately $46.3 million and $20.5 million were in raw materials at February 29, 2004 and August 31, 2003, respectively. The majority of the Company’s inventories are in finished goods, with minimal work in process. Approximately $28.6 million and $20.5 million were in raw materials at November 30 and August 31, 2003, respectively.

NOTE E – LONG TERM DEBT9

     Long-term debt (in thousands) was as follows:

         
  November 30, August 31,
  2003 2003
  
 
7.20% notes due 2005 $11,566  $104,185 
6.80% notes due 2007  50,000   50,000 
6.75% notes due 2009  100,000   100,000 
5.625% notes due 2013  200,000    
Other  1,417   1,452 
   
   
 
   362,983   255,637 
Less current maturities  618   640 
   
   
 
  $362,365  $254,997 
   
   
 

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NOTE F — LONG TERM DEBT

     Long-term debt (in thousands) was as follows:

         
  February 29, August 31,
  2004
 2003
7.20% notes due 2005 $10,455  $104,185 
6.80% notes due 2007  50,000   50,000 
6.75% notes due 2009  100,000   100,000 
5.625% notes due 2013  200,000    
Other  3,251   1,452 
   
 
   
 
 
   363,706   255,637 
Less current maturities  804   640 
   
 
   
 
 
  $362,902  $254,997 
   
 
   
 
 

In November 2003, the Company purchasedrepurchased $89 million of its 7.20% notes due in 2005. In February 2004, the Company repurchased $1 million of the 7.20% notes. The Company recorded a pre-tax chargecharges of $2.8$280 thousand and $3.1 million for the three and six months ended February 29, 2004, respectively, resulting from the cash paymentpayments made to retire the notes, whichnotes. The $3.1 million was in excess of the $4.2 million of cash proceeds received by the Company upon settlement of a related interest rate swap. Also, in November 2003, the Company issued $200 million of its 5.625% notes due in November 2013. Interest is payable semiannually. The Company had entered into an interest rate lock on $100 million of the new debt resulting in an effective rate of 5.54%.

On April 9, 2002 the Company entered into two interest rate swaps to convert a portion of the Company’s long term debt from a fixed interest rate to a floating interest rate. The impact of these swaps adjusted the amount of fixed rate and floating rate debt and reduced overall financing costs. TheseAt February 29, 2004, these hedges remained in effect and were highly effective for the $11$10 million remaining debt at November 30, 2003.on the 7.20% notes. The swaps effectively converted the interest rate on the $100 million notes ($1110 million remaining at November 30, 2003)February 29, 2004) due July 2005 from the fixed rate of 7.20% to the six month LIBOR (determined in arrears) plus a spread of 2.02%. The interest rate is set on January 15th and July 15th, and for the quarterthree and six months ended November 30, 2003,February 29, 2004, was estimated to be an annualized rate of 3.38%3.43%. The total fair value of both swaps, including accrued interest, was $566$500 thousand and $4.6 million at November 30February 29, 2004 and August 31, 2003, respectively. The swaps are recorded in other long-term assets, with a corresponding increase in the 7.20% long-term notes, representing the change in fair value of the hedged debt.

On March 26, 2004, CMCZ borrowed 150 million PLN ($38.4 million) under a five year term note with a group of four banks. The term note was used to refinance a portion of CMCZ’s notes payable. The note has scheduled principal and interest payments in eight equal semi-annual installments beginning in September 2005. Interest is accrued at the Warsaw Interbank Offered Rate (WIBOR) plus 1.25% and was fixed at 6.71% for three months. The term note is collateralized by CMCZ’s fixed assets. In March 2004, CMCZ also entered into a revolving credit facility with the same group of banks with maximum borrowings of 60 million PLN ($15.4 million) bearing interest at WIBOR plus 0.8% and collateralized by CMCZ’s accounts receivable. The facility was drawn down in stages, and the interest rate, which resets daily, was approximately 5.65%. The proceeds were used by CMCZ to payoff the remainder of the notes payable and for working capital. The term note and the revolving credit facility contain certain financial covenants for CMCZ. There are no guarantees by the Company or any of its subsidiaries for any of CMCZ’s debt.

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COMMERCIAL METALS COMPANY AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)

NOTE F –G — EARNINGS PER SHARE

     In calculating earnings per share, there were no adjustments to net earnings to arrive at incomeearnings for the three or six months ended November 30, 2003February 29, 2004 or 2002.February 28, 2003. The reconciliation of the denominators of earnings per share calculations are as follows:

         
  Three months ended
  November 30,
  
  2003 2002
  
 
Shares outstanding for basic earnings per share  28,145,679   28,486,578 
Effect of dilutive securities-stock options/purchase plans  854,281   477,155 
   
   
 
Shares outstanding for diluted earnings per share  28,999,960   28,963,733 
                 
  Three months ended
 Six months ended
  February 29, February 28, February 29, February 28,
  2004
 2003
 2004
 2003
Shares outstanding for basic earnings per share  28,639,349   28,320,223   28,392,516   28,403,401 
Effect of dilutive securities-stock options/purchase plans  1,238,807   504,944   1,046,542   491,049 
   
 
   
 
   
 
   
 
 
Shares outstanding for diluted earnings per share  29,878,156   28,825,167   29,439,058   28,894,450 
   
 
   
 
   
 
   
 
 

All stockStock options with total share commitments of 3,507,84335,247 at November 30, 2003February 29, 2004 were dilutiveanti-dilutive based on the average share price for the quarter of $22.14.$28.57. Stock options with total share commitments of 70,6901,208,863 were anti-dilutive at November 30, 2002February 28, 2003 based on the average share price of $17.48$15.42 for the quarter. All stock options expire by 2010.2011.

At November 30, 2003,February 29, 2004, the Company had authorization to purchase 1,116,152 of its common shares.

In January 2004, the Company’s stockholders increased the aggregate number of shares of common stock that are authorized for issuance to 100,000,000.

On March 5, 2004, the Company granted additional stock options with total share commitments of 857,325 at $31.125 per share.

NOTE G–H- DERIVATIVES AND RISK MANAGEMENT

     The Company’s worldwide operations and product lines expose it to risks from fluctuations in foreign currency exchange rates and metals commodity prices. The objective of the Company’s risk management program is to mitigate these risks using futures or forward contracts (derivative instruments). The Company enters into metal commodity forward contracts to mitigate the risk of unanticipated declines in gross margin due to the volatility of the commodities’ prices, and enters into foreign currency forward contracts, which match the expected settlements for purchases and sales denominated in foreign currencies. The Company designates only those contracts as hedges for accounting purposes, which closely match the terms of the underlying transaction. These hedges resulted in substantially no ineffectiveness in the statements of earnings for the three or six months ended November 30, 2003February 29, 2004 and 2002.February 28, 2003. Certain of the foreign currency and all of the commodity contracts were not designated as hedges for accounting purposes, although management believes they are essential economic hedges.

9The following chart shows the impact on the condensed consolidated statements of earnings of the changes in fair value of these economic hedges (in thousands):

                 
  Three months ended
 Six months ended
  February 29, February 28, February 29, February 28,
  2004
 2003
 2004
 2003
  Earnings (Expense)
 Earnings (Expense)
Cost of goods sold (commodity instruments) $2,160  $158  $1,271  $497 
Net sales (foreign currency instruments)  (859)  427   (1,574)  (653)

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NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)

they are essential economic hedges. The changes in fair value ofcompany’s derivative instruments were recorded as follows on the commodity hedging instruments resulted in a $889 thousand increase and a $339 thousand decrease in cost of goods sold for the three months ended November 30, 2003 and 2002, respectively. The Company also recognized a $715 thousand and a $1.1 million reduction in net sales relating primarily to foreign currency instruments for the three months ended November 30, 2003 and 2002, respectively. At November 30 and August 31, 2003, derivative assets recorded in other current assets were $4.8 million and $1.8 million, respectively. Derivative liabilities of $6.3 million and $1.7 million, respectively, were included in other current liabilities.condensed consolidated balance sheets (in thousands):

         
  February 29, August 31,
  2004
 2003
Derivative assets (other current assets) $5,410  $1,809 
Derivative liabilities (other payables)  5,602   1,690 

The Company recognized a gain of $1.5 million during the threesix months ended November 30, 2003February 29, 2004, relating to the forward purchase of Polish Zlotys in connection with the acquisition of Huta Zawiercie S.A.CMCZ. This was recorded in net sales for the threesix months ended November 30, 2003.February 29, 2004.

All of the instruments are highly liquid, and none are entered into for trading purposes.

See Note E,F, Long-Term Debt, regarding the Company’s interest rate risk management strategies.

NOTE H –I — CONTINGENCIES

     There were no material developments relating to the Company’s contingencies during the three or six months ended November 30, 2003.February 29, 2004. See Note 9, Commitments and Contingencies, to the consolidated financial statements for the year ended August 31, 2003.

     In the ordinary course of conducting its business, the Company becomes involved in litigation, administrative proceedings and governmental investigations, including environmental matters. Management believes that adequate provision has been made in the condensed consolidated financial statements for the potential impact of these issues, and that the outcomes will not significantly impact the results of operations or the financial position of the Company, although they may have a material impact on earnings for a particular quarter.

     The Company has not entered into or modified any significant guarantees since December 31, 2002, and therefore no liability was recorded at November 30, 2003.February 29, 2004. The Company’s existing guarantees have been given at the request of a customer and its surety bond issuer.issurer. The Company has agreed to indemnify the surety against all costs that the surety may incur should the customer fail to perform its obligations under construction contracts covered by payment and performance bonds issued by the surety. As of November 30, 2003,February 29, 2004, the surety had issued bonds in the total amount (without reduction for the work performed to date) of $11.9$10.0 million, which are subject to the Company’s guarantee obligation under the indemnity agreement. The fair value of these guarantees is not significant.

The Company charged $1 million to selling, general and administrative expense during the three months ended February 28, 2003 relating to payments from a customer within 90 days of its bankruptcy filing, which were potentially voidable. This dispute was settled during the three months ended August 31, 2003 for $118 thousand.

NOTE I – SUBSEQUENT ACQUISITIONSJ — BUSINESS SEGMENTS

     OnFollowing the acquisitions of CMCZ and Lofland in December 3, 2003 the Company’s international Swiss subsidiary acquired 71.1% of the outstanding shares of Huta Zawiercie, S.A.(see Note C - Acquisitions), of Zawiercie, Poland for 200 million Polish Zlotys ($51.9 million). In connection with the acquisition, the Company also assumed debt of 180 million Polish Zlotys ($46.7 million), acquired $4.8 million in cash and incurred $1.7 million of directly related costs. Huta Zawiercie operates a steel minimill similar to those operated by the Company’s steel group with annual capacity of about 1 million metric tons consisting mainly of rebar and wire rod products. With this acquisition, the Company has become a significant manufacturer of rebarfive reportable segments: domestic mills, CMCZ, fabrication, recycling and wire rod in a key Central European market.marketing and distribution. Prior period results have been revised to be consistent with the current segment presentation.

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NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)

On December 23, 2003,The domestic mills segment includes the Company acquired 100%Company’s domestic steel minimills (including the scrap processing facilities which directly support these mills) and the copper tube minimill. The newly-acquired CMCZ minimill and subsidiaries in Poland have been presented as a separate segment because the economic characteristics of their markets and the regulatory environment in which they operate are not similar to that of the stock of Lofland Acquisition, Inc. (Lofland) for $48.8 million cash.Company’s domestic minimills. The Company also incurred approximately $1.0 million of external costs directly related to this acquisition. Lofland is the sole stockholderfabrication segment consists of the Lofland Companysteel group’s other steel and subsidiaries which operate steel reinforcing barjoist fabrication operations (including Lofland), fence post manufacturing plants, construction-related and construction-related product sales facilities from 11 locations in Texas, Arkansas, Louisiana, Oklahoma, New Mexico and Mississippi. This acquisition complements the Company’s existing Texas rebar fabrication and construction-related product sales operations and expands the Company’s service areas in each of the neighboring states.

The following is a summary of the preliminary allocation of purchase price as of the date of the acquisitions (in thousands) presented in conformity with U.S. GAAP. The purchase price allocations have been prepared on a preliminary basis, and changes may be made following the completion of the valuation of the net assets by independent appraisers.

             
  Huta        
  Zawiercie Lofland Total
  
 
 
Accounts receivable $42,907  $19,125  $62,032 
Inventories  32,958   5,138   38,096 
Property, plant and equipment  84,650   10,316   94,966 
Intangible assets  3,044   27,616   30,660 
Other assets  6,164   133   6,297 
Accounts payable and accrued expenses  (46,126)  (12,550)  (58,676)
Debt  (46,674)     (46,674)
Minority interest  (28,110)     (28,110)
   
   
   
 
  $48,813  $49,778  $98,591 
   
   
   
 

The intangible assets acquired include customer base, favorable land leases and production backlog, all of which have finite lives and will be amortized over lives from one year (for the backlog) to 96 years (for the favorable land leases). Also,other products. Following the acquisition of Lofland, will result in goodwillthe Company’s chief operating decision maker began reviewing the results of approximately $15 millionfabrication operations separately, thus necessitating the reporting of these operations as a separate segment. The recycling and a trade name with an indefinite life.marketing and distribution segments are as they have been previously reported. The Company expects to be able to deduct approximately $4 million goodwill for tax purposes. The estimated aggregate amortization expense for eachcorporate and eliminations segment contains eliminations of intersegment transactions, expenses of the five succeeding fiscal years is as follows: 2004 - $2.4 million; 2005 - $1.7 million; 2006 through 2008 - $1.3 million per year. The fair value estimates are being determined either on a market-based or income-based approach.Company’s corporate headquarters and interest expense relating to our long-term public debt and commercial paper program.

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NOTE J – BUSINESS SEGMENTS

The following is a summary of certain financial information by reportable segment (in thousands):

                     
  Three months ended November 30, 2003
      
    
          Marketing & Corp. &    
  Manufacturing Recycling Distribution Elim. Consolidated
  
 
 
 
 
Net sales – unaffiliated customers $377,806  $120,484  $331,689  $28  $830,007 
Inter-segments sales  820   11,408   8,692   (20,920)   
   
   
   
   
   
 
   378,626   131,892   340,381   (20,892)  830,007 
Adjusted operating profit (loss)  20,325   5,734   6,267   (7,103)  25,223 
Total assets – November 30, 2003  764,927   117,383   399,388   137,641   1,419,339 
                     
  Three months ended November 30, 2002
      
    
          Marketing & Corp. &    
  Manufacturing Recycling Distribution Elim. Consolidated
  
 
 
 
 
Net sales – unaffiliated customers $295,530  $89,707  $250,736  $206  $636,179 
Inter-segments sales  800   6,649   5,627   (13,076)   
   
   
   
   
   
 
   296,330   96,356   256,363   (12,870)  636,179 
Adjusted operating profit (loss)  3,744   1,404   4,431   (1,963)  7,616 
Total assets – November 30, 2002  707,307   95,342   293,264   90,736   1,186,649 
                             
          Three months ended February 29, 2004
    
  Domestic             Mktg. & Corp.  
  Mills
 CMCZ
 Fabrication
 Recycling
 Distrib.
 & Elim.
 Consol.
Net sales — unaffiliated customers $190,687  $88,867  $216,998  $175,206  $396,212  $90  $1,068,060 
Inter-segment sales  60,276   25,624   2,972   14,669   6,905   (110,446)   
   
 
   
 
   
 
   
 
   
 
   
 
   
 
 
   250,963   114,491   219,970   189,875   403,117   (110,356)  1,068,060 
Adjusted operating profit (loss)  15,985   6,221   (1,224)  17,702   8,825   (6,037)  41,472 
                         
      Three months ended February 28, 2003
    
  Domestic         Mktg. & Corp.  
  Mills
 Fabrication
 Recycling
 Distrib.
 & Elim.
 Consol.
Net sales — unaffiliated customers $135,771  $170,968  $93,952  $259,967  $158  $660,816 
Inter-segment sales  38,589   648   6,516   4,839   (50,592)   
   
 
   
 
   
 
   
 
   
 
   
 
 
   174,360   171,616   100,468   264,806   (50,434)  660,816 
Adjusted operating profit (loss)  4,597   (3,449)  4,050   4,919   (2,141)  7,976 

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          Six months ended February 29, 2004
    
  Domestic             Mktg. & Corp.  
  Mills
 CMCZ
 Fabrication
 Recycling
 Distrib.
 & Elim.
 Consol.
Net sales — unaffiliated customers $356,053  $88,867  $429,438  $295,690  $727,901  $118  $1,898,067 
Inter-segment sales  107,437   25,624   4,160   26,077   15,597   (178,895)   
   
 
   
 
   
 
   
 
   
 
   
 
   
 
 
   463,490   114,491   433,598   321,767   743,498   (178,777) $1,898,067 
Adjusted operating profit (loss)  30,594   6,221   4,492   23,436   15,092   (13,140)  66,695 
Total assets-February 29, 2004  417,855   182,249   421,837   140,418   452,194   58,682   1,673,235 
                         
      Six months ended February 28, 2003
    
  Domestic         Mktg. & Corp.  
  Mills
 Fabrication
 Recycling
 Distrib.
 & Elim.
 Consol.
Net sales — unaffiliated customers $259,209  $343,060  $183,659  $510,703  $364  $1,296,995 
Inter-segment sales  74,447   960   13,165   10,466   (99,038)   
   
 
   
 
   
 
   
 
   
 
   
 
 
   333,656   344,020   196,824   521,169   (98,674)  1,296,995 
Adjusted operating profit (loss)  8,282   (3,390)  5,454   9,350   (4,104)  15,592 
Total assets-February 28, 2003  392,521   316,707   96,769   312,025   76,902   1,194,924 

The following table provides a reconciliation of the non-GAAP measure, adjusted operating profit (loss), to net earnings (loss), (in thousands):

                     
  Three months ended November 30, 2003
      
    
          Marketing & Corp. &    
  Manufacturing Recycling Distribution Elim. Consolidated
  
 
 
 
 
Net earnings (loss) $12,509  $3,868  $4,919  $(8,668) $12,628 
Income taxes  7,745   1,846   1,271   (3,477)  7,385 
Interest expense  30   1   47   5,016   5,094 
Discounts on sales of accounts receivable  41   19   30   26   116 
   
   
   
   
   
 
Adjusted operating profit (loss) $20,325  $5,734  $6,267  $(7,103) $25,223 
   
   
   
   
   
 
                     
  Three months ended November 30, 2002
      
    
          Marketing & Corp. &    
  Manufacturing Recycling Distribution Elim. Consolidated
  
 
 
 
 
Net earnings (loss) $2,283  $900  $2,827  $(3,805) $2,205 
Income taxes  1,387   485   1,543   (2,121)  1,294 
Interest expense  33   1   22   3,938   3,994 
Discounts on sales of accounts receivable  41   18   39   25   123 
   
   
   
   
   
 
Adjusted operating profit (loss) $3,744  $1,404  $4,431  $(1,963) $7,616 
   
   
   
   
   
 
                             
          Three months ended February 29, 2004
    
  Domestic             Mktg. & Corp.  
  Mills
 CMCZ
 Fabrication
 Recycling
 Distrib.
 & Elim.
 Consol.
Net earnings (loss) $9,817  $2,824  $(732) $11,879  $6,298  $(8,931) $21,155 
Minority interest     1,214               1,214 
Income taxes (benefit)  6,121   1,288   (550)  5,805   2,173   (2,961)  11,876 
Interest expense  21   895   54      323   5,602   6,895 
Discounts on sales of accounts receivable  26      4   18   31   253   332 
   
 
   
 
   
 
   
 
   
 
   
 
   
 
 
Adjusted operating profit (loss) $15,985  $6,221  $(1,224) $17,702  $8,825  $(6,037) $41,472 
   
 
   
 
   
 
   
 
   
 
   
 
   
 
 
                         
      Three months ended February 28, 2003
    
  Domestic         Mktg. & Corp.  
  Mills
 Fabrication
 Recycling
 Distrib.
 & Elim.
 Consol.
Net earnings (loss) $3,071  $(2,348) $2,565  $4,304  $(4,659) $2,933 
Income taxes (benefit)  1,487   (1,137)  1,465   501   (592)  1,724 
Interest expense  2   31   (1)  77   3,022   3,131 
Discounts on sales of accounts receivable  37   5   21   37   88   188 
   
 
   
 
   
 
   
 
   
 
   
 
 
Adjusted operating profit (loss) $4,597  $(3,449) $4,050  $4,919  $(2,141) $7,976 
   
 
   
 
   
 
   
 
   
 
   
 
 

1314


COMMERCIAL METALS COMPANY AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)

                             
          Six months ended February 29, 2004
    
  Domestic             Mktg. & Corp.  
  Mills
 CMCZ
 Fabrication
 Recycling
 Distrib.
 & Elim.
 Consol.
Net earnings (loss) $18,860  $2,824  $2,734  $15,747  $11,217  $(17,599) $33,783 
Minority interest     1,214               1,214 
Income taxes (benefit)  11,640   1,288   1,676   7,651   3,444   (6,438)  19,261 
Interest expense  32   895   73   1   370   10,618   11,989 
Discounts on sales of accounts receivables  62      9   37   61   279   448 
   
 
   
 
   
 
   
 
   
 
   
 
   
 
 
Adjusted operating profit (loss) $30,594  $6,221  $4,492  $23,436  $15,092  $(13,140) $66,695 
   
 
   
 
   
 
   
 
   
 
   
 
   
 
 
                         
      Six months ended February 28, 2003
    
  Domestic         Mktg. & Corp.  
  Mills
 Fabrication
 Recycling
 Distrib.
 & Elim.
 Consol.
Net earnings (loss) $5,321  $(2,315) $3,465  $7,131  $(8,464) $5,138 
Income taxes (benefit)  2,882   (1,145)  1,950   2,044   (2,713)  3,018 
Interest expense  6   60      99   6,960   7,125 
Discounts on sales of accounts receivables  73   10   39   76   113   311 
   
 
   
 
   
 
   
 
   
 
   
 
 
Adjusted operating profit (loss) $8,282  $(3,390) $5,454  $9,350  $(4,104) $15,592 
   
 
   
 
   
 
   
 
   
 
   
 
 

     The following presents external net sales by major product information for the Company (in thousands):

                 
  Three months ended
 Six months ended
  February 29, February 28, February 29, February 28,
  2004
 2003
 2004
 2003
Steel products $635,142  $422,309  $1,136,760  $822,210 
Industrial materials  137,070   55,071   234,105   109,280 
Other products  295,848   183,436   527,202   365,505 
   
 
   
 
   
 
   
 
 
Net sales $1,068,060  $660,816  $1,898,067  $1,296,995 
   
 
   
 
   
 
   
 
 

15


ITEM 2.MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

This Management’s Discussion and Analysis should be read in conjunction with our Form 10-K filed with the SEC for the year ended August 31, 2003.

CRITICAL ACCOUNTING POLICIES

Our critical accounting policies are not different from the information set forth in Item 7, Management’s Discussion and Analysis of Financial Condition and Results of Operations, included in our Form 10-K filed with the SEC for the year ended August 31, 2003 and are therefore not presented herein.

CONSOLIDATED RESULTS OF OPERATIONS

(in millions)

         
  Three Months Ended
  November 30,
  
  2003 2002
  
 
Net sales $830.0  $636.2 
Net earnings  12.6   2.2 
EBITDA  40.2   22.7 
                 
  Three Months Ended
 Six Months Ended
  February 29, February 28, February 29, February 28,
  2004
 2003
 2004
 2003
Net sales $1,068.1  $660.8  $1,898.1  $1,297.0 
Net earnings  21.2   2.9   33.8   5.1 
EBITDA  58.8   22.8   99.0   45.5 

We have included a financial statement measure in the table above that was not derived in accordance with generally accepted accounting principles (GAAP). EarningsWe use earnings before interest expense, income taxes, depreciation and amortization (EBITDA) isas a non-GAAP liquidityperformance measure. In calculating EBITDA, we exclude our largest recurring non-cash charge, depreciation and amortization. We use EBITDA as one guideline to assess our ability to pay our current debt obligations as they mature and a tool to calculate possible future levels of leverage capacity. Reconciliations to net earnings are provided below (in millions):

         
  Three Months Ended
  November 30,
  
  2003 2002
  
 
Net earnings $12.6  $2.2 
Income taxes  7.4   1.3 
Interest expense  5.1   4.0 
Depreciation and amortization  15.1   15.2 
   
   
 
EBITDA $40.2  $22.7 
   
   
 

Our management uses a non-GAAP measure, adjusted operating profit, to compare and evaluate the financial performance of our segments. See Note J, Business Segments, to the condensed consolidated financial statements. Adjusted operating profit is the sum of our earnings before income taxes, and financing costs. Adjusted operating profit provides a core operational earningsperformance measurement that compares segmentsresults without the need to adjust for federal, but more specifically state and local taxes which have considerable variation between domestic jurisdictions. Tax regulations in international operations add additional complexity. Also, we exclude interest cost in our calculation of adjusted operating profit.EBITDA. The results are therefore without consideration of financing alternatives of capital employed. See Note J, Business Segments,We use EBITDA as one guideline to assess our unlevered performance return on our investments. EBITDA is also the condensed consolidated financial statementstarget benchmark for a reconciliation of the non-GAAP measure, adjusted operating profit (loss)our long-term performance plan for management. Reconciliations to net earnings (loss).are provided below (in millions):

                 
  Three Months Ended
 Six Months Ended
  February 29, February 28, February 29, February 28,
  2004
 2003
 2004
 2003
Net earnings $21.2  $2.9  $33.8  $5.1 
Income taxes  11.9   1.7   19.3   3.0 
Interest expense  6.9   3.1   12.0   7.1 
Depreciation and amortization  18.8   15.1   33.9   30.3 
   
 
   
 
   
 
   
 
 
EBITDA $58.8  $22.8  $99.0  $45.5 
   
   
   
   
 

EBITDA increased by 158% to $58.8 million and by 118% to $99.0 million for the three and six months February 29, 2004, respectively, as compared to 2003. The following financial events were significant during the firstsecond quarter ended November 30, 2003:February 29, 2004:

- The improved market conditions that we experienced during the fourth quarter of fiscal 2003 continued duringWe reported our first quarter of fiscal 2004 for most of our businesses.highest net sales and net earnings ever.
 
- Steel group earnings increased primarily due to higher shipments, as realized product prices only kept upIn December 2003, we acquired a minimill in Poland and a rebar fabricator with the increasesoperations in input costs.

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Table of Contents

-The copper tube division reported increased gross margins due to higher volumesTexas and improved metal spreads.surrounding states, which significantly expanded our international manufacturing capabilities and enhanced our domestic market share in rebar fabrication.
 
- The recycling segment continued to be very profitable primarily due to improvementsunprecedented rise in the ferrousprice of steel scrap market overand a surge in non-ferrous scrap prices resulted in record profits for our recycling segment.
Selling price increases for our domestic mill products, along with high demand resulted in much higher profits in our domestic mill segment as compared to 2003.

16


Our new minimill in Poland experienced strong demand for its products and was profitable.
Margins in our fabrication segment were compressed because of the rapid increase in input costs, but results were better than last year.
 
- Marketing and distribution’s adjusted operating profit was higher than last year’s firstsecond quarter, with improvements in a numberspite of products’ prices.
-On November 12, 2003, we issued $200 million aggregate principal amount of 5.625% noteshigher freight costs, due 2013 followingto continued demand in Asia (especially China), the purchase of $89 million of notes otherwise due in 2005. We incurred a $2.8 million pre-tax charge on this purchase.
-Duringimproved U.S. economy, the three months ended November 30, 2003, we realized a pre-tax gain of $1.5 million in marketingweak U.S. dollar and distribution related to the forward purchase of Polish Zlotys in connection with our December 3, 2003 acquisition of Huta Zawiercie, S.A.low-end user inventories.

CONSOLIDATED DATA -

The LIFO method of inventory valuation decreased net earnings by $818 thousand and increased net earnings by $143 thousand (3 cents and 1 cent per diluted share) for the three months ended November 30, 2003 and 2002, respectively.

SEGMENT OPERATING DATA - (in thousands)

See Note J — Business Segments, to the condensed consolidated financial statements.

Following our acquisitions in December 2003, we have revised our segment reporting. We have maintained our recycling and marketing and distribution segments, but presented our new Polish minimill, CMC Zawiercie (CMCZ) separately because its economic characteristics are different from our domestic minimills. Our former manufacturing segment has been split into two segments: 1) domestic mills, including our four steel minimills and copper tube minimill and 2) fabrication, including our new rebar acquisition. Following our acquisition of the rebar fabricator, we made internal management reporting changes, which necessitated this change in segment reporting.

Our management uses adjusted operating profit (loss), to compare and evaluate the financial performance of our segments. Adjusted operating profit is the sum of our earnings before income taxes, and financing costs.

Unless otherwise indicated, all dollarsdollar amounts below are before income taxes.

The following table shows net sales and adjusted operating profit (loss) by business segment.

         
  Three months ended
  November 30,
  
  2003 2002
  
 
NET SALES:        
Manufacturing $378,626  $296,330 
Recycling  131,892   96,356 
Marketing and Distribution  340,381   256,363 
Corporate and Eliminations  (20,892)  (12,870)
   
   
 
  $830,007  $636,179 
   
   
 
ADJUSTED OPERATING PROFIT (LOSS):        
Manufacturing $20,325  $3,744 
Recycling  5,734   1,404 
Marketing and Distribution  6,267   4,431 
Corporate and Eliminations  (7,103)  (1,963)
   
   
 
  $25,223  $7,616 
   
   
 
                 
  Three Months Ended
 Six Months Ended
  February 29, February 28, February 29, February 28,
  2004
 2003
 2004
 2003
NET SALES:                
Domestic Mills $250,963  $174,360  $463,490  $333,656 
CMCZ  114,491      114,491    
Fabrication  219,970   171,616   433,598   344,020 
Recycling  189,875   100,468   321,767   196,824 
Marketing and Distribution  403,117   264,806   743,498   521,169 
Corporate and Eliminations  (110,356)  (50,434)  (178,777)  (98,674)
   
 
   
 
   
 
   
 
 
  $1,068,060  $660,816  $1,898,067  $1,296,995 
   
 
   
 
   
 
   
 
 
ADJUSTED OPERATING PROFIT (LOSS):                
Domestic Mills $15,985  $4,597  $30,594  $8,282 
CMCZ  6,221      6,221    
Fabrication  (1,224)  (3,449)  4,492   (3,390)
Recycling  17,702   4,050   23,436   5,454 
Marketing and Distribution  8,825   4,919   15,092   9,350 
Corporate and Eliminations  (6,037)  (2,141)  (13,140)  (4,104)

MANUFACTURINGDOMESTIC MILLS -

We include our domestic steel groupminimills and our copper tube divisionminimill in our manufacturingdomestic mill segment. Adjusted operating profit is equal to earnings before income taxes for our four

The table below reflects steel minimills, our copper tube mill and the steel group’s fabrication operations. scrap prices per ton:

                 
  Three Months Ended
 Six Months Ended
  February 29, February 28, February 29, February 28,
  2004
 2003
 2004
 2003
Average mill selling price (total sales) $339  $271  $324  $271 
Average mill selling price (finished goods)  345   277   330   279 
Average fabrication selling price  584   535   570   546 
Average ferrous scrap purchase price  147   89   132   89 

17


Our manufacturingdomestic mills segment’s adjusted operating profit for the three months ended November 30, 2003February 29, 2004 increased $16.6by $11.4 million (443%(247%) as compared to 20022003 on $82.3$76.6 million (28%(44%) more net sales. Our steel group’s minimillsNet sales and our copper tube mill reported higher adjusted operating profitsprofit were higher due to higherimproved selling prices and increased shipments. Selling prices and shipments although higherincreased due to increased demand, which was partially due to the recovering U.S. economy. Also, the competition from foreign steel imports was less as a result of the weaker U.S. dollar. The mills’ production levels (tons melted and rolled) for the 2004 quarter were at or near all time records. These factors were partially offset by significant rapid increases in steel scrap purchase costs and utility costs resulted in continued compressed gross margins. Our steel group’s downstream fabrication operations were more profitable due to higher shipments with stable selling prices. Slower demand for commercial construction was more than offset by demandincreases in other construction markets. Our downstream rebar fabrication, construction related products, steel post plants, steel joist manufacturing and structural steel fabrication businesses, were profitable for the three months ended November 30, 2003.

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Table of Contents

The table below reflects steel and scrap prices per ton:

         
  Three months ended
  November 30,
  
  2003 2002
  
 
Average mill selling price (total sales) $309  $272 
Average mill selling price (finished goods)  313   281 
Average fabrication selling price  555   558 
Average ferrous scrap purchase price  118   89 

Adjusted operating profit for our four steel minimills increased 408% for the three months ended November 30, 2003 compared to 2002, due to higher selling prices and shipments.input costs. Adjusted operating profits at all four mills were significantly higher.higher in 2004 as compared to 2003. The largest increases in profitability were at SMI TexasAlabama and SMI South Carolina. Adjusted operating profitsprofit at SMI TexasAlabama increased $2.7$2.6 million (91%(436%) for the three months ended November 30, 2003February 29, 2004 as compared to 2002.2003. SMI South Carolina reported $1.7 million$918 thousand in adjusted operating profit for the three months ended November 30, 2003February 29, 2004 as compared to a $2.3$2.4 million adjusted operating loss in 2002.2003. Adjusted operating profits at SMI Texas and SMI Arkansas increased 33% and 133%, respectively. The mills shipped 566,000609,000 tons in the current2004 quarter as compared to 505,000 last year,537,000 in 2003, an increase of 12%13%. Mill production increased as well, with tons rolled up 13%26% to 541,000.540,000. Tons melted increased 9%19% to 561,000.567,000. The average total mill selling price at $309$339 per ton was $37 (14%$68 (25%) above last year. Our average mill selling price for finished goods also increased $32$68 per ton (11%(25%). AverageHowever, average scrap purchase costs were $29$58 per ton (33%(65%) higher than last year. Utility expensesyear due primarily to increased by $1.8 million as compareddemand resulting from higher production at U.S. minimills, coupled with the high level of scrap exports to last year; both natural gas and electricitythe Far East, especially China. In spite of the increased scrap costs, were higher. Consequently, the increases in our steel product prices were only enough to offset the increase in these input costs, resulting in continuing restricted mill product margins. However, our metal spread (the difference between our average total mill selling price and our average scrap purchase price) was $8$192 per ton, $10 per ton higher during the three months ended November 30, 2003February 29, 2004 as compared to 2002.2003. This increased metal spread more than offset cost increases for utilities and other inputs. Utility expenses increased by $2.9 million in 2004 as compared to 2003. Natural gas increased due to a combination of higher usage and rates, and electricity costs were higher due to usage from increased production. Costs for ferroalloys and graphite electrodes increased as well due largely to more demand from U.S. mills and the impact of the weaker U.S. dollar and higher ocean freight costs on these imported items.

AdjustedOur copper tube mill’s adjusted operating profit increased $1.4 million (386%) to $1.7 million during the three months ended February 29, 2004 as compared to 2003. Copper tube shipments increased 16% to 15.9 million pounds due primarily to better weather in the steel group’s fabrication and other businesses2004 as compared to 2003. Production increased by $6.611% to 16.4 million (472%pounds. The average selling price increased 40 cents per pound (33%) to $1.59 for the three months ended November 30, 2003February 29, 2004 as compared to 2002.$1.19 for the three months ended February 28, 2003. Strong demand in our housing and commercial markets outpaced supply of finished copper tube. The average copper scrap purchase cost increased 28 cents per pound (40%) during the three months ended February 29, 2004 as compared to 2003. The unusually strong copper market resulted in historically high costs for copper scrap. Our metal spreads improved by 12 cents per pound to 59 cents because the average copper scrap purchase cost increased less than the average copper tube sales price.

Adjusted operating profit for our four domestic steel minimills increased 313% for the six months ended February 29, 2004 as compared to 2003. The average total mill selling price at $324 per ton increased $53 (20%) in 2004 as compared to 2003. As a result, metal margins increased $10 per ton for the six months ended February 29, 2004 as compared to 2003. These higher margins more than offset increases in utilities and other input costs. Average scrap purchase costs were $43 per ton (48%) higher than last year. Utility expenses increased by $4.6 million for the six months ended February 29, 2004 as compared to 2003, due to higher natural gas and electricity costs. Electricity usage increased, but prices remained relatively stable. Natural gas costs increased due to both higher usage and prices. The mills shipped 1,175,000 tons year to date in 2004 as compared to 1,042,000 tons in 2003, an increase of 13%.

Our copper tube mill reported an adjusted operating profit of $3.9 million for the six months ended February 29, 2004 as compared to an adjusted operating profit of $631 thousand in 2003. Copper tube shipments increased 3.2 million pounds (11%) to 32.5 million pounds. Average selling prices increased by 33 cents per pound (29%) to $1.47 in 2004 as compared to $1.14 in 2003. The average copper scrap purchase cost increased by 22 cents per pound (32%) during the six months ended February 29, 2004 as compared to 2003.

CMCZ -

On December 3, 2003, our Swiss subsidiary acquired 71.1% of the outstanding shares of Huta Zawiercie, S.A. (CMCZ), of Zawiercie, Poland for 200 million Polish Zlotys (PLN), $51.9 million on the acquisition date. In connection with the acquisition, we also assumed debt of 176 million PLN ($45.7 million). CMCZ operates a steel minimill similar to our domestic steel minimills with total annual capacity of over 1 million metric tons of rebar and wire rod products as well as merchant bar. With this acquisition, we have become a significant manufacturer of rebar and wire rod in a key Central

18


European market. See Note C — Acquisitions, to the condensed consolidated financial statements. We have presented CMCZ and its subsidiaries as a separate segment because the economic characteristics of their markets and the regulatory environment in which they operate are not similar to that of our domestic minimills. CMCZ recorded net sales of $114 million and an adjusted operating profit of $6.2 million for the three months ended February 29, 2004. Historically, the period from December through February has been weak in terms of profits and shipments because of winter weather conditions. However, subsequent to our acquisition, the mill, in coordination with our international marketing and distribution operation, found new outlets for its products. CMCZ melted 375,000 tons, rolled 271,000 tons and shipped 390,000 tons, including billets, during the three months ended February 29, 2004. The average total mill selling price was $286 per ton (including 22% billets). The average scrap purchase cost was $147 per ton.

FABRICATION -

On December 23, 2003, we acquired 100% of the stock of Lofland Acquisition, Inc. (Lofland) for $48.8 million cash. Lofland is the sole stockholder of The Lofland Company and subsidiaries which operate steel reinforcing bar fabrication and construction-related product sales facilities from 11 locations in Texas, Arkansas, Louisiana, Oklahoma, New Mexico and Mississippi. This acquisition complements our existing Texas rebar fabrication and construction-related product sales operations and expands our service areas in each of the neighboring states. See Note C — Acquisitions to the condensed consolidated financial statements. Following our acquisition of Lofland, we changed our internal management reporting structure, which necessitated our reporting fabrication (including Lofland) as a separate segment. See Note J - Business Segments to our condensed consolidated financial statements.

Our fabrication businesses reported an adjusted operating loss of $1.2 million for the three months ended February 29, 2004 as compared to an adjusted operating loss of $3.4 million in 2003. However, net sales were $220 million in 2004, an increase of $48 million (28%) as compared to 2003. Lofland accounted for $18 million of this increase. Although shipments and selling prices increased, we recorded a loss in 2004 primarily because the overall purchase costs from our steel suppliers increased more than our selling prices. Our sales prices did not increase as fast as our steel purchase costs because much of our fabrication work is sold months in advance at a fixed price. We recorded contract loss provisions in excess of $1 million during the three months ended February 29, 2004 on firm sales commitments at various fabrication operations, the largest of which was at Lofland. Construction activity varied by region. Some private nonresidential construction markets were more active, while others remained flat. Public construction continued at a solid level. Fabrication plant shipments totaled 280,000286,000 tons, 29%24% more than last year’s firstsecond quarter shipments of 217,000231,000 tons. Our acquisition of Lofland resulted in 23,000 additional tons. The remainder of the increase was due to the acquisitions of several small rebar fabrication operations during the last half of fiscal 2003 and higher shipments at Fontana Steel. The average fabrication selling price for the three months ended November 30, 2003 was approximately the sameFebruary 29, 2004 increased $49 per ton (9%) to $584 as compared to 2002. All of these lines of business2003. However, rebar fabrication, construction related products, steel post plants, steel joist manufacturing and structural steel fabrication were profitable forall adversely affected by higher input costs during the three months ended November 30, 2003 including rebar and structural fabrication, construction-related products, steel post plants, and steel joist manufacturing. During the three months ended November 30, 2002, our structural steel fabrication and joist plants had reported adjusted operating losses.February 29, 2004 as compared to 2003. We are continuing to evaluate certain facilities which are performing under expectations or for which we are considering alternative uses. Our current estimates of cash flows do not indicate that the assets are impaired. However, these estimates and expected uses could change resulting in asset impairments.

On December 23, 2003, we acquired Lofland Acquisition, Inc. (Lofland) for $48.8 million. Lofland is the sole stockholder of the Lofland Company and subsidiaries which operate steel reinforcing bar fabrication and construction-related products sales facilities from 11 locations in Texas, Arkansas, Louisiana, Oklahoma, New Mexico and Mississippi. The acquisition of Lofland complements our existing Texas rebar fabrication and construction-related product sales operations and expands our service areas in each of the neighboring states. See Note I, Acquisitions, to the condensed consolidated financial statements.

Our copper tube division’s adjusted operating profit increased $1.9 million (695%) to $2.2 million on 32% higher net sales. Copper tube shipments increased 7% to 16.6 million pounds. Production increased 5% to 16.1 million pounds. The average selling price increased 26 cents per pound (24%) to $1.36 for During the three months ended November 30,February 28, 2003, as compared to $1.10we recorded a $1 million loss provision for the three months ended November 30, 2002. The average copper scrap price increased 15 cents per pound (22%)payments from a customer within 90 days of its bankruptcy filing, which were potentially voidable. This dispute was settled during the three months ended November 30,August 31, 2003 for $118 thousand.

Our fabrication businesses reported an adjusted operating profit of $4.5 million for the six months ended February 29, 2004 as compared to 2002. Demandan adjusted operating loss of $3.4 million in our end use markets remained relatively strong, but2003. Fabrication plant shipments for the six months ended February 29, 2004 were 566,000 tons, an increase of 26% as compared to 2003. The average fabrication selling prices remained constrained by over-supply of water and refrigeration tubing. Our metal spreads improved because the average copper scrap price increased less than$24 per ton (4%) to $570. However, our steel purchase costs increased significantly especially during the average product sales price.

16


Tablesecond quarter of Contents2004. Also, professional services (primarily legal) expenses, decreased by $1.7 million in 2004 as compared to 2003 due to the settlement of contingencies at SMI-Owen during the second half of 2003.

RECYCLING -

Our recycling segment reported an adjusted operating profit of $5.7$17.7 million for the three months ended November 30, 2003February 29, 2004 as compared with an adjusted operating profit of $1.4$4.1 million in 2002.2003. Net sales for the three months ended November 30, 2003February 29, 2004 were 37%89% higher at $132$190 million. Gross margins were 42% higher thanin 2004 doubled as compared to 2003. Ferrous and nonferrous selling prices significantly increased because demand from Far Eastern buyers, especially China, and the same period last year.weaker U.S. dollar, resulted in more scrap exports by our competitors. In addition, domestic demand for scrap increased due to the

19


recovering U.S. economy. The segment processed and shipped 430,000493,000 tons of ferrous scrap during the three months ended November 30, 2003, 10%February 29, 2004, 32% more than 2002.2003. Ferrous sales prices were on average $124increased $77 (82%) to $171 per ton or $35 (39%) higher than 2002.as compared to 2003. Nonferrous shipments were 2.5% lower15% higher at 54,00063,000 tons. The average nonferrous scrap sales price of $1,139$1,371 per ton for the three months ended November 30, 2003February 29, 2004 was 18%34% higher than in 2002.2003. The total volume of scrap processed, including the steel group’sall of our domestic processing plants, was 734,000838,000 tons, an increase of 10%31% from the 669,000642,000 tons processed in 2002.2003. Volumes were up due to increased demand caused by the recovery in the global economy.

Our recycling segment reported an adjusted operating profit of $23.4 million for the six months ended February 29, 2004 as compared to an adjusted operating profit of $5.5 million in 2003. Year to date gross margins were 72% higher than in 2003, due to increased selling prices and shipments for both ferrous and nonferrous scrap. For the six months ended February 29, 2004, ferrous and nonferrous scrap selling prices increased by 64% and 28% respectively. The total volume of scrap processed and shipped during the six months ended February 29, 2004, including all of our domestic processing plants, was 1,572,000 tons, an increase of 20% from the 1,311,000 tons processed in 2003. Volumes increased due to increased demand caused by the recovering global economies and the weak U.S. dollar.

MARKETING AND DISTRIBUTION -

Net sales inincreased $138 million (52%) for the three months ended November 30, 2003 for our marketing and distribution segment increased 33% to $340 millionFebruary 29, 2004 as compared to net sales2003, $25 million of $256 million in 2002.which resulted from foreign currency fluctuations. Adjusted operating profit for the three months ended November 30, 2003February 29, 2004 was $6.3$8.8 million, as compared to $4.4$4.9 million in 2002,2003, an increase of 42%79%. The net effect of foreign currency fluctuations on our adjusted operating profit was $553 thousand. Markets were solidfavorable in several geographic regions and product lines. Sales to and within Asia, especially China, were up significantly. Also, the economy in Australia was still strong. Sales were levelAdjusted operating profits increased in Europe and importsEurope. Imports into the United States were mixed. A numbermixed with a significant decline in our steel imports, but sales of industrial raw materials increased. Most product prices (as expressed in U.S. dollars) improved during the three months ended November 30,February 29, 2004 as compared to 2003. Gross margins were better for steel products and industrial raw materials, but were lower for nonferrous metal products. The increased profitability in marketing and distribution was largely due to our strategy in recent years to build up our regional business around the world and to increase our downstream presence.

On December 3,Net sales for the six months ended February 29, 2004 increased by $222 million (43%), $46 million of which was due to foreign currency fluctuations. Adjusted operating profit for the six months ended February 29, 2004 for our marketing and distribution segment increased to $15.1 million as compared to $9.4 million in 2003 we purchased a 71.1% interestdue mostly to better results from our international operations and increased sales and margins for our imports of industrial raw materials in Huta Zawiercie, S.A. in Zawiercie, Poland. Huta Zawiercie is a steel minimill, with annual capacitythe U.S. Foreign currency fluctuations accounted for $1.1 million of about 1 million metric tons of primarily rebarthe increase. Adjusted operating profits increased for Europe and wire rod products. See Note I, Acquisitions,Australia. Sales into Asia, including China were strong during the six months ended February 29, 2004 as compared to the condensed consolidated financial statements.2003. During the threesix months ended November 30, 2003,February 29, 2004, we recognized a $1.5 million gain on our forward purchases of Polish Zlotys related to this acquisition.our acquisition of CMCZ.

OTHERCORPORATE AND ELIMINATIONS -

During the threesix months ended November 30, 2003,February 29, 2004, we incurred a $2.8$3.1 million charge from the purchaserepurchase of $89$90 million of our notes otherwise due in 2005. Discretionary items, such as bonuses and profit sharing increased commensurate with increased profitability for the three and six months ended February 29, 2004 as compared to 2003. Also, professional services expenses increased $1.5 million and $1.9 million, respectively for the three and six months ended February 29, 2004 as compared to 2003 due primarily to costs associated with compliance with Section 404 of Sarbanes Oxley.

CONSOLIDATED DATA -

The LIFO method of inventory valuation decreased net earnings by $6.2 million and $1.9 million (21 cents and 7 cents per diluted share) for the three months ended February 29, 2004 and 2003, respectively. For the six months ended February 29, 2004 and February 28, 2003, after-tax LIFO expense was $7.0 million (24 cents per diluted share) and $1.8 million (6 cents per diluted share), respectively.

Overall selling, general and administrative expenses were $27 million (45%) higher during the three months ended February 29, 2004 as compared to 2003. Our acquisitions of CMCZ and Lofland accounted for $8.2 million of the increase. Also, bad debt expense increased $2.5 million for the six months ended February 29, 2004 as compared to 2003 due to higher sales and increased accounts receivable. During the three and six months ended February 29, 2004, interest expense increased by $3.8 million and $4.9 million,

20


respectively, primarily due to additional long-term debt used to finance the Lofland and CMCZ acquisitions.

CONTINGENCIES -

See Note H,I — Contingencies, to the condensed consolidated financial statements.

In the ordinary course of conducting our business, we become involved in litigation, administrative proceedings, governmental investigations including environmental matters, and contract disputes. We may incur settlements, fines, penalties or judgments and otherwise become subject to liability because of some of these matters. While we are unable to estimate precisely the ultimate dollar amount of exposure to loss in connection with these matters, we make accruals as amounts become probable and estimable. The amounts we accrue could vary substantially from amounts we pay due to several factors including the following: evolving remediation technology, changing regulations, possible third-party contributions, the inherent shortcomings of the estimation process and the uncertainties involved in litigation. Accordingly, we cannot always estimate a meaningful range of possible exposure. We believe that we have adequately provided in our financial statements for the estimable potential impact of these contingencies. We also believe that the outcomes will not significantly affect the long-term results of operations or our financial position. However, they may have a material impact on earnings for a particular period.

We are subject to federal, state and local pollution control laws and regulations in all locations where we have operating facilities. We anticipate that compliance with these laws and regulations will involve continuing capital expenditures and operating costs.

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NEAR-TERM OUTLOOK -

We expect our fiscal year ending August 31, 2004 to be significantly more profitable than 2003, primarily due to market improvements, the weakened U.S. dollar, acquisitions, internal cost reductionsour recent acquisition of CMCZ and productivity improvements. Earnings each month will be significantly influenced by the realized selling prices in our recycling, domestic mill and fabrication segments. We anticipate that the price of steel scrap will stop increasing and could decrease during our third quarter. Therefore, we expect that mill margins and fabrication margins will increase as the year progresses. Assuming that steel scrap prices gradually decrease, and our second quarter, which is typically our weakest, will be relatively strong. Weother selling prices remain substantially flat, we estimate that our net earnings (excluding anyper diluted share (including the impact of adjusting our inventory valuation to the LIFO method which we are unable to estimate)method) will be between $7 million$0.55 and $10 million$0.75 for the three months ending February 28,May 31, 2004. Interest rates remain historically low, and economic and industry sector trends are generally strong. We have noted signsexpect some slowing of increasingactivity in China, because we believe that the government is trying to moderate the growth rate. Supply and demand in the U.S. manufacturing sector,factors for ferrous and some improvement in construction. However, office, lodging and industrial construction will be slower to recover. Also, orders for capital goodsnonferrous scrap are higher. Asian markets are relatively strong and European markets are partially recovering.all positive. We anticipate that our overall results will be better in the second half of 2004 as compared to the first half.

We anticipate our profits will be higher in 2004 in our manufacturingdomestic mill segment as compared to 2003 because of higher metal spreads and increased production, shipments and selling prices. We have implemented several price increases on most of our steel minimill products. Manufacturing margins are likely to be squeezedshould improve in the short run becauseas scrap purchase costs moderate, although the benefits of higher volumes and improved pricing will continue to be partially offset by continued increased raw material costs as well as higher energy and freightother input costs. We are expecting theseour selling price increases to become fully effective during the second half of fiscal 2004. As a result, gross margins at our steel minimills should increase.

As weather improves, we anticipate that our adjusted operating profit at CMCZ will increase during the second half of 2004 as compared to its results since our acquisition.

We expect the gross margins in our fabrication and other related businesses to continue at current levelsimprove during the second quarterhalf of fiscal 2004, as our new backlog was obtained at higher selling prices. However, job losses could increase if steel purchase prices continue to rise. This may particularly affect Lofland resulting in short-term losses for this operation. We believe that these losses will turn around as the backlog which we acquired (which included sales contracts at fixed prices) is depleted. However, Lofland may breakeven or report a slight adjusted operating loss for fiscal 2004. However, these margins should improve later this year. The weak U.S. dollar, high freight costs, and strong Asian demand will minimizeAlso, we anticipate that fabrication bad debts may rise due to the negative impact of the Section 201 tariff repeal.generally higher prices on some of our weaker customers.

We anticipate that our recycling segment will continue to report significant profits during the second half of 2004, due to strong demand for steel scrap and nonferrous metal scrap and the effect of reduced competition due to continuing exports resulting from the relatively weak U.S. dollar.dollar and continued global demand. Ferrous scrap prices should peak and may decrease. Demand for nonferrous scrap should remain strong.

21


Our marketing and distribution segment should remain consistently profitable during our fiscal 2004. We expect that our U.S. operations willshould be more profitable but that our international operations will have lower profits in 2004 as compared to 2003. Our international operations should continue to be profitable in 2004. Overall prices and volumes should remain constant.constant or increase. Increases in freight costs and bad debt expense could partially offset these positive factors.

We anticipate that our capital spending for 2004 will be $61 million, excluding acquisition costs for Huta ZawiercieCMCZ and Lofland. Most of these expenditures will be inat our manufacturing segmentsteel minimills including a major improvement project at our SMI-Texas melt shop. We believe that our purchaseshop and capital expenditures of Huta Zawiercie, S.A. and Lofland will be accretive to our 2004 earnings.$6.2 million for CMCZ in Poland.

LONG-TERM OUTLOOK -

We believe that we are well-positioned to exploit long-term opportunities. We expect stronger demand for our products due to the increased possibility of a recovery in demand throughout the major global economies as well as continued growth in developing countries. Emerging countries often have a higher growth rate for steel and nonferrous metals consumption. We believe that the demand will increase in Asia, particularly in China, as well as in Central and Eastern Europe.

We believe that there will be further consolidation in theour industries, in which we participate, and we plan to continue

to participate in a prudent way. The reasons for further consolidation include an inadequate return on capital for most companies, numerous bankruptcies, a high degree of fragmentation, the need to eliminate non-competitive capacity and more effective marketing.

This outlook section contains forward-looking statements regarding the outlook for our financial results including net earnings, product pricing and demand, production rates, energy expense, freight expense, interest rates, inventory levels, acquisitions and general market conditions. These forward-looking statements generally can be identified by phrases such as we “will”, “expect”, “anticipate”, “believe”, “presume”, “think”, “plan to”, “should”, “likely”, “appear”, “project”, or other similar words or phrases of similar impact. There is inherent risk and uncertainty in any forward-looking statements. Variances will occur and some could be materially different from our current opinion. Developments that could impact our expectations include the following:

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interest rate changes
construction activity
litigation claims and settlements
difficulties or delays in the execution of construction contracts resulting in cost overruns or contract disputes
metals pricing over which we exert little influence
increased capacity and product availability from competing steel minimills and other steel suppliers including import quantities and pricing
industry consolidation or changes in production capacity or utilization
global factors including credit availability
currency fluctuations
scrap, energy and freight prices
decisions by governments impacting the level of steel imports
pace of overall economic activity.

LIQUIDITY AND CAPITAL RESOURCES -

We discuss liquidity and capital resources on a consolidated basis. Our discussion includes the sources and uses of our threefive operating segments and centralized corporate functions. We have a centralized treasury function and use inter-company loans to efficiently manage the short-term cash needs of our operating divisions. We invest any excess funds centrally.

We rely upon cash flows from operating activities, and to the extent necessary, external short-term financing sources for liquidity. Our short-term financing sources include the issuance of commercial paper, sales of accounts receivable, documentary letters of credit with extended terms, short-term trade financing arrangements and borrowing under our bank credit facilities. From time to time, we have issued long-term public debt and private debt placements.debt. Our investment grade credit ratings and general business conditions affect our access to external financing on a cost-effective basis. Depending on the price of our common stock, we may realize significant cash flows from the exercise of stock options.

Moody’s Investors Service (P-2) and Standard & Poor’s Corporation (A-2) rate our $275 million commercial paper program in the second highest category. To support our commercial paper program, we have an unsecured contractually committed revolving credit agreement with a group of sixteen banks. Our $275 million facility expires in August 2006. The costs of our revolving credit agreement may be impacted by a change in our credit ratings. We plan to continue our commercial paper program and the revolving credit agreements in comparable amounts to support the commercial paper program. Also, we have numerous informal, uncommitted, nonbinding, short-term credit facilities available from domestic and international banks. These credit facilities are available to support import letters of credit, foreign exchange transactions and, in certain instances, short-term working capital loans.

For added flexibility, we may secure financing through sales of certain accounts receivable in an amount not to exceed $130 million and direct sales of accounts receivable. We may continually sell accounts receivable on an ongoing basis to replace those receivables that have been collected from our customers. Our long-term public debt was $362$360 million at November 30, 2003February 29, 2004 and is investment grade rated by Standard & Poors’ Corporation (BBB) and by Moody’s Investors Services (Baa2). We believe we will have access to the public markets for potential refinancing or the issuance of additional long-term debt. In November 2003,During the six months ended February 29, 2004, we purchased $89$90 million of our 7.20% notes otherwise due in 2005, and issued $200 million of 5.625% rate notes due November 2013. See Note E, Long-termF — Long-Term Debt to the condensed consolidated financial statements. Also,

On March 26, 2004, we refinanced the notes payable that we assumed upon the acquisition of CMCZ with a five year term note with a group of four banks for 150 million PLN ($38.4 million) and a revolving credit facility with maximum borrowings of 60 million PLN ($15.4 million). The term note and the revolving credit facility contain certain financial covenants for CMCZ. We have numerous informal, uncommitted, nonbinding, short-term credit facilities available from domestic and international banks. These credit facilities are priced at bankers’ acceptance rates on a cost of funds basis.

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Table of Contentsnot issued any guarantees for this debt. See Note F — Long-Term Debt, to the condensed consolidated financial statements.

In order to facilitate certain trade transactions, especially international, we utilize bank letters of credit to provide assurance of payment to our suppliers. These letters of credit may be for prompt payment or for payment at a future date conditional upon the bank finding the documentation presented to be in strict compliance with all terms and conditions of the letter of

22


credit. Our banks issue these letters of credit under informal, uncommitted lines of credit which are in addition to the committed revolving credit agreement. In some cases, if our suppliers choose to discount the future dated obligation we may absorb the discount cost.

Credit ratings affect our ability to obtain short and long-term financing and the cost of such financing. If the rating agencies were to reduce our credit ratings, we would pay higher financing costs and probably would have less availability of the informal, uncommitted facilities. In determining our credit ratings, the rating agencies consider a number of both quantitative and qualitative factors. These factors include earnings, fixed charges such as interest, cash flows, total debt outstanding, off balance sheet obligations and other commitments, total capitalization and various ratios calculated from these factors. The rating agencies also consider predictability of cash flows, business strategy, industry condition and contingencies. Maintaining our investment grade ratings is a high priority for us.

Certain of our financing agreementagreements include various covenants. The most restrictive of theseOur revolving credit agreement contains financial covenants requires us to maintain an interest coveragewhich require that we (a) not permit our ratio of consolidated long-term debt (including current maturities) to total capitalization (defined in our credit agreement as stockholders’ equity less intangible assets plus long-term debt) to be greater than three times0.55 to 1.00 at any time and a(b) not permit our ratio of consolidated EBITDA to consolidated interest expense for the past four consecutive fiscal quarters to be less than 3.00 to 1.00. At February 29, 2004, our ratio of consolidated debt to total capitalization was 0.41 to 1.00. Our ratio of 55%, as defined inconsolidated EBITDA to interest expense for the financing agreement. A fewsix months ended February 29, 2004 was 8.25 to 1.00, which was approximately equal to the EBITDA ratio for the past four consecutive quarters. In addition, our credit agreement contains covenants that restrict our ability to, among other things:

create liens;
enter into transactions with affiliates;
sell assets;
in the case of some of our subsidiaries, guarantee debt; and
consolidate or merge.

The indenture governing our long-term public debt contains restrictions on our ability to create liens, sell assets, enter into sale and leaseback transactions, consolidate or merge and limits the ability of the agreements provide that if we default on the termssome of another financing agreement, it is considered a default under these agreements.our subsidiaries to incur certain types of debt or to guarantee debt. We have complied with the requirements, including the covenants of our financing agreements as of and for the three months ended November 30, 2003.February 29, 2004.

Our revolving credit andOff-Balance Sheet Arrangement — For added flexibility, we may secure financing through sales of certain accounts receivable securitization agreements include ratings triggers. The trigger in the revolving credit agreement is solely a meansan amount not to reset pricing for facility feesexceed $130 million (the Securitization Program) and if a borrowing occurs, on loans. Within thedirect sales of accounts receivable. We may continually sell accounts receivable securitization agreement,on an ongoing basis to replace those receivables that have been collected from our customers. See Note D - Sales of Accounts Receivable, to the ratings trigger is contained in a “termination event”, butcondensed consolidated financial statements. In the trigger requires a combination of ratings actions on behalf ofunlikely event that two independent rating agencies and is set at levelslower our credit rating by six ratings categories below our current rating.rating, the Securitization Program could be terminated by the Buyer. Also, the Securitization Program contains certain cross-default provisions whereby a termination event could occur should we default under another credit arrangement. We use the Securitization Program as a source of funding that is not reliant on either our short-term commercial paper program or our revolving credit facility. As such, we do not believe that any reductions in the capacity or termination of the Securitization Program would materially impact our financial position, cash flows or liquidity because we have access to other sources of external funding.

Our manufacturing and recycling businesses are capital intensive. Our capital requirements include construction, purchases of equipment and maintenance capital at existing facilities. We plan to invest in new operations, working capital to support the growth of our businesses, and pay dividends to our stockholders.

We continue to assess alternative means of raising capital, including potential dispositions of under-performing or non-strategic assets. Any potential future major acquisitions could require additional financing from external sources such as the issuance of common or preferred stock.

Cash Flows

Our cash flows from operating activities primarily result from sales of steel and related products, and to a lesser extent, sales of nonferrous metal products. We also sell and rent construction-related products and accessories. We have a diverse and generally stable customer base. We use futures or forward contracts as needed to mitigate the risks from fluctuations in foreign currency exchange rates and metals commodity prices. See Note G,H - Derivatives and Risk

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Management, to the condensed consolidated financial statements.

The volume and pricing of orders from our U.S. customers in the construction sector affects our cash flows from operating activities. The pace of economic expansion and retraction of major industrialized markets outside of the United States also significantly affects our cash flows from operating activities. The weather can influence the volume of products we ship in any given period. Also, the general economy, the strength of the U.S. dollar, governmental action, and various other factors beyond our control influence our volume and prices. Periodic fluctuations in our prices and volumes can result in variations in cash flows from operations. Despite these fluctuations, we have historically relied on operating activities as a steady source of cash.

We used $59.3$80.7 million of net cash flows in our operating activities for the threesix months ended November 30, 2003February 29, 2004 as compared to the $53.1$52.7 million of net cash flows used by our operating activities for the threesix months ended November 30, 2002.February 28, 2003. Net earnings were $10.4$28.6 million higher for the threesix months ended November 30, 2003February 29, 2004 as compared to 2002. Net2003. However, net working capital increased by $70 million to $540$483 million at

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November 30, 2003 February 29, 2004 from $399 million at August 31, 2003, primarily becauseexcluding the effect of our acquisitions of CMCZ and Lofland. Accounts receivable (excluding CMCZ and Lofland) increased $143 million. Although accounts receivable (primarilyincreased in marketingall segments primarily due to higher selling prices and distribution) and inventories (primarilyshipments, the majority of the increases were in manufacturingrecycling and marketing and distribution).distribution. Inventories increased $142 million due to higher purchase costs, higher quantities in anticipation of increased sales, goods in transit and foreign currency fluctuations primarily in Australia. The majority of the increase was in our marketing and distribution, domestic mills and fabrication segments.

WeExcluding the acquisitions of Lofland and CMCZ, we invested $7.1$14.6 million in property, plant and equipment during the threesix months ended November 30, 2003,February 29, 2004, which was less than during 2002.2003. We expect our capital spending for fiscal 2004 to be $61 million, excluding our acquisitions of Huta ZawiercieCMCZ and Lofland. We assess our capital spending each quarter and reevaluate our requirements based upon current and expected results.

In November 2003, we issued $200 million of long-term notes due in 2013. The proceeds from this offering were used in November 2003 to purchase $89$90 million of our notes otherwise due in 2005, and finance our purchases of Huta ZawiercieCMCZ and Lofland in December 2003.Lofland.

At November 30, 2003, 28,325,301February 29, 2004 28,825,642 common shares were issued and outstanding, with 3,939,8653,439,524 held in our treasury. During the six months ended February 29, 2004, we received $12.9 million from stock issued under our employee incentive and stock purchase plans as compared to $4.5 million in 2003. We paid dividends of $2.2$4.5 million during the threesix months ended November 30, 2003,February 29, 2004, approximately the same amount as we paid during 2002. During the three months ended November 30, 2002, we2003. We purchased 100,000no shares of our common stock at an average price of $16.13 per share. These shares were held in our treasury. We purchased no shares during the threesix months ended November 30, 2003.February 29, 2004.

For the twelve months following February 29, 2004, our long-term debt service requirements will be minimal, as the earliest maturity of principal is for $10 million to be paid in July 2005. Our $9 million short-term trade financing arrangement will be self-liquidating with cash flows from our operating activities. We believe that we have sufficient liquidity from cash flows from operating activities and our short-term financing arrangements to enable us to meet our contractual obligations for fiscal 2004.the next twelve months.

CONTRACTUAL OBLIGATIONS -

The following table represents our contractual obligations as of November 30, 2003 belowFebruary 29, 2004 (dollars in thousands):

                      
       Payments Due Within *
       
           2-3 4-5 After
   Total 1 Year Years Years 5 Years
   
 
 
 
 
Contractual Obligations:                    
 Long-term Debt (1) $362,983  $618  $12,256  $50,037  $300,072 
 Operating Leases (2)  32,852   8,151   10,771   5,811   8,119 
 Unconditional Purchase Obligations (3)  176,858   98,040   51,913   12,834   14,071 
   
   
   
   
   
 
Total Contractual Cash Obligations $572,693  $106,809  $74,940  $68,682  $322,262 
    
   
   
   
   
 
                     
      Payments Due Within *
          2-3 4-5 After
  Total
 1 Year
 Years
 Years
 5 Years
Contractual Obligations:                    
Long-term Debt (1) $363,706  $804  $11,191  $51,639  $300,072 
Interest  159,451   22,263   43,193   37,717   56,278 
Operating Leases (2)  51,969   10,996   13,457   7,434   20,082 
Unconditional Purchase Obligations (3)  210,447   45,076   90,109   61,191   14,071 
   
 
   
 
   
 
   
 
   
 
 
Total Contractual Cash Obligations $785,573  $79,139  $157,950  $157,981  $390,503 
   
 
   
 
   
 
   
 
   
 
 

* Cash obligations herein are not discounted.

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(1) Total amounts are included in the November 30, 2003February 29, 2004 condensed consolidated balance sheet. See Note E,F — Long-Term Debt, to the condensed consolidated financial statements.
 
(2) Includes minimum lease payment obligations for noncancelable equipment and real-estate leases in effect as of November 30, 2003.February 29, 2004.
 
(3) About 73%78% of these purchase obligations are for inventory items to be sold in the ordinary course of business; most of the remainder are for supplies associated with normal revenue-producing activities.

Other Commercial Commitments

We maintain stand-by letters of credit to provide support for certain transactions that our customersinsurance providers and suppliers request. At November 30, 2003,February 29, 2004, we had committed $20.7$24.4 million under these arrangements. All of the commitments expire within one year.

At the request of a customer and its surety bond issuer, we have agreed to indemnify the surety against all costs the surety may incur should our customer fail to perform its obligations under construction contracts covered by payment and performance bonds issued by the surety. We are the customer’s primary supplier of steel, and steel is a substantial portion of our customer’s cost to perform the contracts. We believe we have

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Table of Contents

adequate controls to monitor the customer’s performance under the contracts including payment for the steel we supply. As of November 30, 2003,February 29, 2004, the surety had issued bonds in the total amount (without reduction for the work performed to date) of $11.9$10.0 million which are subject to our guaranty obligation under the indemnity agreement.

FORWARD-LOOKING STATEMENTS -

This Form 10-Q contains forward-looking statements regarding the outlook for our financial results including net earnings, product pricing and demand, production rates, energy expense, freight expense, interest rates, inventory levels, acquisitions and general market conditions. These forward-looking statements generally can be identified by phrases such as we “will”, “expect”, “anticipate”, “believe”, “presume”, “think”, “plan to”, “should”, “likely”, “appear”, “project”, or other similar words or phrases of similar impact. There is inherent risk and uncertainty in any forward-looking statements. Variances will occur and some could be materially different from our current opinion. Developments that could impact our expectations include the following:

interest rate changes
construction activity
difficulties or delays in the execution of construction contracts resulting in cost overruns or contract disputes
metals pricing over which we exert little influence
increased capacity and product availability from competing steel minimills and other steel suppliers including import quantities and pricing
industry consolidation or changes in production capacity or utilization
global factors including credit availability and military uncertainties
credit availability
currency fluctuations
scrap, energy and freight prices
decisions by governments impacting the level of steel imports
pace of overall economic activity, particularly China.

25


ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

The information required hereunder for the Company is not materially different from the information set forth in Item 7a. Quantitative and Qualitative Disclosures About Market Risk included in the Company’s Annual Report of Form 10-K for the year ended August 31, 2003, filed with the Securities Exchange Commission, and is therefore not presented herein.

Also, see Note G,H — Derivatives and Risk Management, to the condensed consolidated financial statements.

ITEM 4. CONTROLS AND PROCEDURES

The term “disclosure controls and procedures” is defined in Rules 13a-15(e) and 15d-15(e) of the Securities Exchange Act of 1934, or the Exchange Act. This term refers to the controls and procedures of a company that are designed to ensure that information required to be disclosed by a company in the reports that it files under the Exchange Act is recorded, processed, summarized and reported within required time periods. Our Chief Executive Officer and our Chief Financial Officer have evaluated the effectiveness of our disclosure controls and procedures as of the end of the period covered by this quarterly report, and they have concluded that as of that date, our disclosure controls and procedures were effective at ensuring that required information will be disclosed on a timely basis in our reports filed under the Exchange Act.

No change to our internal control over financial reporting occurred during our last fiscal quarter that has materially affected, or is reasonably likely to materially affect, our internal control over financial reporting.

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PART II OTHER INFORMATION

ITEM 1. LEGAL PROCEEDINGS

Reference is made to the information incorporated by reference from Item 3. Legal Proceedings in the Company’s Annual Report on Form 10-K for the year ending August 31, 2003, filed November 24, 2003, with the Securities and Exchange Commission.

     ITEM 2. CHANGES IN SECURITIES AND USE OF PROCEEDS

          Not Applicable

     ITEM 3. DEFAULTS UPON SENIOR SECURITIES

          Not Applicable

     ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS

          Not ApplicableAt the registrant’s annual meeting of stockholders held January 22, 2004, the five nominees named in the Company’s Proxy Statement dated December 8, 2003, were elected to serve as directors, one nominee to a one year term and four to three year terms. There was no solicitation in opposition to the nominees for directors. The proposal to amend the Company’s restated certificate of incorporation to increase the number of authorized shares of common stock from 40,000,000 to 100,000,000 was approved and the appointment of Deloitte & Touche, LLP, as independent auditors of the registrant for the fiscal year ending August 31, 2004 was ratified.

Additional information as to the vote on each nominee standing for election, all matters voted on at the meeting and directors continuing in office is provided below:

Proposal 1 — Election of Directors

         
  For
 Withheld
Harold L. Adams  22,963,697   2,319,602 
Moses Feldman  22,844,603   2,438,696 
Ralph E. Loewenberg  22,963,678   2,319,621 
Stanley A. Rabin  22,961,514   2,312,785 
J. David Smith (1)  22,962,759   2,320,540 

(1) elected to a one year term — all other nominees were elected to three year terms.

Directors continuing in office are:

A. Leo Howell
Anthony A. Massaro
Robert D. Neary
Dorothy G. Owen
Clyde P. Selig
Robert R. Womack

27


Proposal 2 — Amendment to increase authorized shares of common stock from 40,000,000 to 100,000,000.

For 19,942,611Against 5,315,857Abstain 24,831

Proposal 3 — Ratification of appointment of Deloitte & Touche LLP as independent auditors for the year ending August 31, 2004.

For 24,876,805Against 391,116Abstain 15,378

     ITEM 5. OTHER INFORMATION

          Not Applicable

     ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K

 A. Exhibits required by Item 601 of Regulation S-K.*
 
 2.12. Share Purchase Agreement dated July 22, 2003 between Impexmetal, S.A. and Plan of Merger among Commercial Metals (International) AGCompany, LAI Acquisition Company, Lofland Acquisition, Inc., The Lofland Company, E. F. Private Equity Partners (Americas) L.P. and the Texas Growth Fund - 1995 Trust dated December 23, 2003 (Filed as Exhibit 2(b) to Commercial Metals’ Form, S-4 filed January 27, 2004 ((File NO. 333-112243)) and incorporated herein by reference).
3(i)(d)Certificate of Amendment to Certificate of Incorporation filed with the Delaware Secretary of State February 5, 2004 (filed herewith).
 
 31.1 Certification of Stanley A. Rabin, Chairman of the Board, President and Chief Executive Officer of Commercial Metals Company, pursuant to Section 302 of the Sarbanes-Oxley Act of 2002 (filed herewith).
 
 31.2 Certification of William B. Larson, Vice President and Chief Financial Officer of Commercial Metals Company, pursuant to Section 302 of the Sarbanes-Oxley Act of 2002 (filed herewith).
 
 32.1 Certification of Stanley A. Rabin, Chairman of the Board, President and Chief Executive Officer of Commercial Metals Company, pursuant to 18 U.S.C. 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 (filed herewith).
 
 32.2 Certification of William B. Larson, Vice President and Chief Financial Officer of Commercial Metals Company, pursuant to 18 U.S.C. 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 (filed herewith).
 
 *Does not include a long-term debt instrument representing less than ten percent of the assets of the Company and its subsidiaries on a consolidated basis. A copy of such instrument will be furnished to the Securities and Exchange Commission upon request.
B. Commercial Metals Company filed and/or furnished the following Form 8-K’s during the quarter ended November 30, 2003:February 29, 2004:
 
   Form 8-K on October 14,December 3, 2003 under Item 5 and 7 for the purpose of furnishing the press release announcing the acquisition of 71% of the outstanding shares of Huta Zawiercie S. A. on December 3, 2003.
Form 8-K on December 17, 2003 under Items 9 and 12 for the purpose of furnishing the

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press release announcing Commercial Metals Company’s financial results for the fiscal yearquarter ended August 31,November 30, 2003.

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Form 8-K on October 31, 2003 under Items 5 and 7 for the purpose of announcing the commencement of a tender offer for Commercial Metals Company’s 7.20% notes due 2005.
 
   Form 8-K dated November 5,on December 23, 2003 under Items 5 and 7 for the purpose of furnishing the press release announcing the fixed price per $1,000 principal amountacquisition of notes tendered in Commercial Metals Company’s tender offer for its 7.20% notes due 2005.
Form 8-K dated November 6, 2003 under Items 5, 7 and 9 for the purpose of (1) announcing that Commercial MetalsThe Lofland Company was proposing to make, subject to market and other conditions, an offering of up to $200 million aggregate principal amount of senior notes due 2013 in a private offering and (2) furnishing information pursuant to Regulation FD.
Form 8-K dated November 6, 2003 under Items 5 and 7 for the purpose of announcing that Commercial Metals Company had agreed to sell $200 million aggregate principal amount of senior notes due 2013 in a private offering.
Form 8-K dated November 7, 2003 under Items 5, 7 and 9 for the purpose of (1) announcing the expiration of Commercial Metals Company’s tender offer for its 7.20% notes due 2005 and (2) furnishing information pursuant to Regulation FD.
The Form 8-K information in this Item 6 identified as being “furnished” shall not be deemed “filed” for purposes of Section 18 of the Securities Exchange Act of 1934, as amended, and is not incorporated by reference into any filing of Commercial Metals Company, whether made before or after the date hereof, regardless of any general incorporation language in such filing.on December 23, 2003.

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SIGNATURES

Table of Contents

SIGNATURES

Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.

   
 COMMERCIAL METALS COMPANY
/s/ William B. Larson  
April 13, 2004       William B. Larson 
Vice President and Chief Financial Officer 
   
 /s/ Malinda G. Passmore  /s/ William B. Larson
April 13, 2004       
January 14, 2004      William B. Larson
Vice President
& Chief Financial Officer
Malinda G. Passmore  
 /s/ Malinda G. Passmore

January 14, 2004      Malinda G. Passmore
Controller

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Table of Contents

INDEX TO EXHIBITS

  
2.1

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INDEX TO EXHIBITS*

Exhibit No Share Purchase Agreement dated July 22, 2003 between Impexmetal, S.A. and Commercial Metals (International) AGDescription
3(i)(d)Certification of Amendment to Certificate of Incorporation filed with the Delaware Secretary of State February 5,2004 (filed herewith).
 
31.1 Certification of Stanley A. Rabin, Chairman of the Board, President and Chief Executive Officer of Commercial Metals Company, pursuant to Section 302 of the Sarbanes-Oxley Act of 2002 (filed herewith).
 
31.2 Certification of William B. Larson, Vice President and Chief Financial Officer of Commercial Metals Company, pursuant to Section 302 of the Sarbanes-Oxley Act of 2002 (filed herewith).
 
32.1 Certification of Stanley A. Rabin, Chairman of the Board, President and Chief Executive Officer of Commercial Metals Company, pursuant to 18 U.S.C. 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 (filed herewith).
 
32.2 Certification of William B. Larson, Vice President and Chief Financial Officer of Commercial Metals Company, pursuant to 18 U.S.C. 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 (filed herewith).
*Does not include a long-term debt instrument representing less than ten percent of the assets of the Company and its subsidiaries on a consolidated basis. A copy of such instrument will be furnished to the Securities and Exchange Commission upon request.

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