Commercial Metals (CMC) 10-Q 2006 Q2 Quarterly report

FORM 10-Q

UNITED STATES SECURITIES AND EXCHANGE COMMISSION

Washington, D. C. 20549

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

For the quarterly period ended February 28, 2006

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 incorporation of organization)	(I.R.S. Employer 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)

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
þ No
o

Indicate by check mark whether the registrant is a shell company (as defined by Rule 12b-2 of the Exchange Act).

Yes
o No
þ

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, or a non-accelerated filer. See definition of “accelerated filer and large accelerated filer” in Rule 12b-2 of the Exchange Act.

Large accelerated filerþ Accelerated filero Non-Accelerated filero

As of April 6, 2006, there were 60,160,954 shares of the Company’s common stock issued and outstanding excluding 4,369,378 shares held in the Company’s treasury.

TABLE OF CONTENTS

PART 1. FINANCIAL INFORMATION
	ITEM 1. FINANCIAL STATEMENTS
	ITEM 2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
	ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
	ITEM 4. CONTROLS AND PROCEDURES
PART II OTHER INFORMATION
	ITEM 1. LEGAL PROCEEDINGS
	ITEM 1A. RISK FACTORS
	ITEM 2. UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS
	ITEM 3. DEFAULTS UPON SENIOR SECURITIES
	ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
	ITEM 5. OTHER INFORMATION
	ITEM 6. EXHIBITS
SIGNATURES
Certificate of Amendment of Restated Certificate of Incorporation
Form of Executive Employment Continuity Agreement
Certification of CEO Pursuant to Section 302
Certification of CFO Pursuant to Section 302
Certification of CEO Pursuant to Section 906
Certification of CFO Pursuant to Section 906

PART 1. FINANCIAL INFORMATION

ITEM 1. FINANCIAL STATEMENTS

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

ASSETS

	February 28,			August 31,
(in thousands)	2006			2005
Current assets:
Cash and cash equivalents	$	72,111		$	119,404
Accounts receivable (less allowance for collection losses of $16,567 and $17,167)		901,040			829,192
Inventories		765,825			706,951
Other		52,087			45,370
Total current assets		1,791,063			1,700,917
Property, plant and equipment:
Land		44,004			41,887
Buildings and improvements		252,003			245,924
Equipment		874,233			863,748
Construction in process		84,657			49,183
		1,254,897			1,200,742
Less accumulated depreciation and amortization		(722,734	)		(695,158	)
		532,163			505,584
Goodwill		30,542			30,542
Other assets		117,602			95,879
	$	2,471,370		$	2,332,922

See notes to unaudited condensed consolidated financial statements.

1

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

LIABILITIES AND STOCKHOLDERS’ EQUITY

	February 28,			August 31,
(in thousands except share data)	2006			2005
Liabilities and Stockholders’ Equity
Current liabilities:
Accounts payable-trade	$	439,545		$	408,342
Accounts payable-documentary letters of credit		100,109			140,986
Accrued expenses and other payables		240,026			293,598
Income taxes payable and deferred income taxes		39,248			40,126
Short-term trade financing arrangements		—			1,667
Current maturities of long-term debt		9,743			7,223
Total current liabilities		828,671			891,942
Deferred income taxes		45,579			45,629
Other long-term liabilities		72,703			58,627
Long-term debt		391,973			386,741
Total liabilities		1,338,926			1,382,939
Minority interests		52,059			50,422
Commitments and contingencies
Stockholders’ equity:
Capital stock:
Preferred stock		—			—
Common stock, par value $0.01 per share and $5.00 per share:
authorized 200,000,000 shares; issued 64,530,332 shares; outstanding 59,762,595 and 58,130,723 shares		645			322,652
Additional paid-in capital		341,175			14,813
Accumulated other comprehensive income		27,374			24,594
Unearned stock compensation		—			(5,901	)
Retained earnings		787,041			644,319
		1,156,235			1,000,477
Less treasury stock:
4,767,737 and 6,399,609 shares at cost		(75,850	)		(100,916	)
Total stockholders’ equity		1,080,385			899,561
	$	2,471,370		$	2,332,922

See notes to unaudited condensed consolidated financial statements.

2

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

	Three Months Ended						Six Months Ended
	February 28,						February 28,
(in thousands, except share data)	2006			2005			2006			2005
Net sales	$	1,639,487		$	1,597,313		$	3,285,185		$	3,126,385
Costs and expenses:
Cost of goods sold		1,388,883			1,388,792			2,813,613			2,684,900
Selling, general and administrative expenses		118,623			113,630			225,357			223,435
Interest expense		6,952			8,517			13,876			15,818
		1,514,458			1,510,939			3,052,846			2,924,153
Earnings before income taxes and minority interests		125,029			86,374			232,339			202,232
Income taxes		45,504			31,709			82,945			70,984
Earnings before minority interests		79,525			54,665			149,394			131,248
Minority interests		(578	)		(1,910	)		(333	)		948
Net earnings	$	80,103		$	56,575		$	149,727		$	130,300
Basic earnings per share	$	1.36		$	0.95		$	2.57		$	2.20
Diluted earnings per share	$	1.29		$	0.91		$	2.44		$	2.11
Cash dividends per share	$	0.06		$	0.06		$	0.12		$	0.11
Average basic shares outstanding		58,775,891			59,489,851			58,371,850			59,097,619
Average diluted shares outstanding		61,915,314			62,427,957			61,429,080			61,664,332

See notes to unaudited condensed consolidated financial statements.

3

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

	Six Months Ended
	February 28,
(in thousands)	2006				2005
Cash Flows From (Used By) Operating Activities:
Net earnings	$	149,727			$	130,300
Adjustments to reconcile net earnings to cash from (used by) operating activities:
Depreciation and amortization		39,678				37,846
Business interruption insurance recovery		—				(4,500	)
Minority interests		(333	)			948
Provision for losses on receivables		1,841		��		3,012
Share-based compensation		4,424				27
Net gain on sale of assets and other		(1,098	)			(1,027	)
Changes in operating assets and liabilities, net of effect of acquisitions:
Accounts receivable		(75,138	)			(82,198	)
Accounts receivable sold		—				26,238
Inventories		(57,967	)			(99,255	)
Other assets		(23,577	)			(5,494	)
Accounts payable, accrued expenses, other payables and income taxes		(24,909	)			(50,164	)
Deferred income taxes		(635	)			(30	)
Other long-term liabilities		13,062				8,993
Net Cash Flows From (Used By) Operating Activities		25,075				(35,304	)
Cash Flows From (Used By) Investing Activities:
Purchases of property, plant and equipment		(59,460	)			(40,141	)
Sales of property, plant and equipment		3,672				2,598
Acquisitions of fabrication businesses		(5,140	)			(2,950	)
Net Cash Used By Investing Activities		(60,928	)			(40,493	)
Cash Flows From (Used By) Financing Activities:
Increase (Decrease) in documentary letters of credit		(40,877	)			26,207
Payments on trade financing arrangements		(1,667	)			(11,378	)
Short-term borrowings, net change		—				9,583
Payments on long-term debt		—				(423	)
Proceeds from issuance of long-term debt		6,040				—
Stock issued under incentive and purchase plans		21,172				14,121
Dividends paid		(7,005	)			(6,519	)
Tax benefits from stock plans		9,726				8,168
Net Cash From (Used By) Financing Activities		(12,611	)			39,759
Effect of Exchange Rate Changes on Cash		1,171				1,654
Decrease in Cash and Cash Equivalents		(47,293	)			(34,384	)
Cash and Cash Equivalents at Beginning of Year		119,404				123,559
Cash and Cash Equivalents at End of Period	$	72,111			$	89,175

See notes to unaudited condensed consolidated financial statements.

4

COMMERCIAL METALS COMPANY AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENT OF
STOCKHOLDERS’ EQUITY (UNAUDITED)

	Common Stock								Accumulated									Treasury Stock
						Additional			Other			Unearned
	Number of					Paid-In			Comprehensive			Stock			Retained			Number of
(in thousands, except share data)	Shares		Amount			Capital			Income			Compensation			Earnings			Shares			Amount			Total
Balance, September 1, 2005		64,530,332	$	322,652		$	14,813		$	24,594		$	(5,901	)	$	644,319			(6,399,609	)	$	(100,916	)	$	899,561
Comprehensive income:
Net earnings for six months ended February 28, 2006																149,727									149,727
Other comprehensive income (loss):
Foreign currency translation adjustment, net of taxes of $528										2,964															2,964
Unrealized 1oss on hedges, net of taxes of $(62)										(184	)														(184	)
Comprehensive income																									152,507
Cash dividends																(7,005	)								(7,005	)
Change in par value of common stock				(322,007	)		322,007																		—
Restricted stock grant							(253	)											16,000			253			—
Stock issued under incentive and purchase plans							(3,738	)											1,622,072			24,910			21,172
Stock-based compensation							(1,380	)					5,901						(6,200	)		(97	)		4,424
Tax benefits from stock plans							9,726																		9,726
Balance, February 28, 2006		64,530,332	$	645		$	341,175		$	27,374		$	—		$	787,041			(4,767,737	)	$	(75,850	)	$	1,080,385

See notes to unaudited condensed consolidated financial statements.

5

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

NOTE A – QUARTERLY FINANCIAL DATA

The accompanying unaudited condensed consolidated financial statements have been prepared in accordance with accounting principles generally accepted in the United States. The basis is 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, 2005 (with the exception of the Company’s adoption of Financial Accounting Standards Board (FASB) Statement No.123R, Share-Based Payment (123(R)) as described below). They include all normal recurring adjustments necessary to present fairly the condensed consolidated balance sheets and statements of earnings, cash flows and stockholders’ equity for the periods indicated. These Notes should be read in conjunction with such Form 10-K. 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.

NOTE B – ACCOUNTING POLICIES

Stock-Based Compensation

See Note 9, Capital Stock, to the Company’s consolidated financial statements for the year ended August 31, 2005 filed on Form 10-K with the SEC for a description of the Company’s stock incentive plans.

In December 2004, the FASB issued 123(R), requiring that the compensation cost relating to share-based compensation transactions be recognized at fair value in financial statements. The Company adopted 123(R) effective September 1, 2005 using the modified prospective method. As a result, compensation expense was recorded for the unvested portion of previously issued awards that were outstanding at September 1, 2005. The Black-Scholes pricing model was used to calculate total compensation cost which is amortized on a straight-line basis over the remaining vesting period of previously issued awards. (See Note 1, Summary of Significant Accounting Policies, to the Company’s consolidated financial statements for the year ended August 31, 2005 for the assumptions used to estimate the fair value and the weighted average grant date fair value. The Company developed its volatility assumption based on historical data). The Company recognized pre-tax stock-based compensation expense of $2.5 million ($.03 per diluted share) and $4.4 million ($.05 per diluted share) as a component of selling, general and administrative expenses for the three and six months ended February 28, 2006, respectively. The cumulative effect of adoption (primarily arising from the recognition of anticipated forfeitures) was not material. At February 28, 2006, the Company had $5.8 million of total unrecognized compensation cost related to non-vested share-based compensation arrangements. This cost is expected to be recognized over the next 28 months.

Prior to the adoption of 123(R), the Company accounted for stock options and stock appreciation rights (SARs) granted to employees and directors using the intrinsic value-based method of accounting. If the Company had used the fair value-based method of accounting, net earnings and earnings per share for the three and six months ended February 28, 2005 would have been adjusted to the pro forma amounts listed in the table below.

	Three Months Ended			Six Months Ended
	February 28,			February 28,
(in thousands, except share data)	2005			2005
Net earnings, as reported	$	56,575		$	130,300
Add: Stock-based compensation expense recognized		18			18
Less: Pro forma stock-based compensation cost		(602	)		(1,256	)
Net earnings — pro forma	$	55,991		$	129,062
Net earnings per share, as reported:
Basic	$	0.95		$	2.20
Diluted	$	0.91		$	2.11
Net earnings per share — pro forma:
Basic	$	0.94		$	2.18
Diluted	$	0.90		$	2.09

Combined information for shares subject to options and SARs for the six months ended February 28, 2006 was as follows:

6

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

				Weighted
				Average		Price
				Exercise		Range
	Number			Price		Per Share
August 31, 2005
Outstanding		5,374,129		$	11.64	$	5.48-$27.16
Exercisable		3,979,879			9.08		5.48- 27.16
Granted		—			—		—     -     —
Exercised		(1,001,777	)		8.58		5.88- 15.56
Forfeited		(31,400	)		19.31		15.56- 24.62
February 28, 2006
Outstanding		4,340,952			12.29		5.48-27.16
Exercisable		3,005,002			9.31		5.48-27.16

Share information for options and SARs at February 28, 2006:

Outstanding							Exercisable
			Weighted
			Average		Weighted				Weighted
Range of			Remaining		Average				Average
Exercise	Number		Contractual		Exercise		Number		Exercise
Price	Outstanding		Life (Yrs.)		Price		Outstanding		Price
$5.48-  7.98		1,626,022		2.7	$	6.97		1,626,022	$	6.97
$8.58-10.71		710,314		2.9		8.66		710,314		8.66
15.05-15.56		1,489,121		5.0		15.54		659,421		15.52
24.62-27.16		515,495		6.4		24.66		9,245		26.88
$5.48-27.16		4,340,952		4.0	$	12.29		3,005,002	$	9.31

Of the Company’s previously granted restricted stock awards, 8,000 shares vested during the six months ended February 28, 2006.

Intangible Assets

The total gross carrying amounts of the Company’s intangible assets that were subject to amortization were $17.8 million and $15.7 million at February 28, 2006 and August 31, 2005, respectively. Aggregate amortization expense for the three months ended February 28, 2006 and 2005 was $660 thousand and $409 thousand, respectively. Aggregate amortization expense for each of the six months ended February 28, 2006 and 2005 was $1.1 million.

Inventory Costs

In November 2004, the FASB issued Statement of Financial Accounting Standards No. 151, Inventory Costs, which specifies that certain abnormal costs must be recognized as current period charges. The Company adopted this Statement, which is effective for inventory costs incurred after September 1, 2005, and it did not materially affect the Company’s results of operations or financial position as of and for the three and six months ended February 28, 2006.

Asset Retirement Obligations

In March 2005, the FASB issued Interpretation No. 47, Accounting for Conditional Asset Retirement Obligations—an interpretation of FASB Statement No. 143 (FIN 47). FIN 47 clarifies that an asset retirement obligation for which the timing and (or) the method of settlement are conditional on a future event that may or may not be within the Company’s control must be recognized as a liability incurred or acquired if it can be reasonably estimated. FIN 47 also clarifies when an entity would have sufficient information to reasonably estimate the fair value of an asset

7

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

retirement obligation. The Company adopted FIN 47 effective September 1, 2005 and its adoption did not materially impact the Company’s financial position as of February 28, 2006 or its results of operations for the three or six months then ended.

NOTE C – ACQUISITIONS

On November 14, 2005, the Company acquired substantially all of the operating assets of Hall-Hodges Company, a reinforcing steel fabricator in Norfolk, Virginia for $5.1 million cash and a note payable of $300 thousand. The acquisition is expected to strengthen the Company’s presence and improve its opportunity to grow in the eastern Virginia area. The following summarizes the allocation of the purchase price (subject to change following management’s evaluation of fair value assumptions).

(in thousands)
Inventories	$	1,659
Property, plant and equipment		2,635
Intangible assets		1,177
Liabilities		(31	)
	$	5,440

The pro forma impact from this acquisition on consolidated net earnings would not have been materially different than reported.

NOTE D – SALES OF ACCOUNTS RECEIVABLE

The Company has an accounts receivable securitization program which it utilizes as a cost-effective, short-term financing alternative. Under this program, the Company and several of its subsidiaries periodically sell certain eligible trade accounts receivable to the Company’s wholly-owned consolidated special purpose subsidiary (CMCRV). CMCRV is structured to be a bankruptcy-remote entity. CMCRV, in turn, sells undivided percentage ownership interests in the pool of receivables to affiliates of two third-party financial institutions. CMCRV may sell undivided interests of up to $130 million, depending on the Company’s level of financing needs.

At February 28, 2006 and August 31, 2005, accounts receivable of $291 million and $275 million, respectively, had been sold to CMCRV. The Company’s undivided interest in these receivables (representing the Company’s retained interest) was 97% and 100% at February 28, 2006 and August 31, 2005, respectively. At February 28, 2006, the financial institution buyers owned $10 million in undivided interests in CMCRV’s accounts receivable pool, which was reflected as a reduction in accounts receivable on the Company’s condensed consolidated balance sheets. The average monthly amount of undivided interests owned by the financial institution buyers was $1.7 million and $37.3 million for the six months ended February 28, 2006 and 2005, respectively.

In addition to the securitization program described above, the Company’s international subsidiaries periodically sell accounts receivable without recourse. Uncollected accounts receivable that had been sold under these arrangements and removed from the condensed consolidated balance sheets were $48.0 million and $63.2 million at February 28, 2006 and August 31, 2005, respectively. The average monthly amounts of outstanding international accounts receivable sold were $57.8 million and $60.9 million for the six months ended February 28, 2006 and 2005, respectively.

Discounts (losses) on domestic and international sales of accounts receivable were $797 thousand and $1.0 million for the three months ended February 28, 2006 and 2005, respectively. For the six months ended February 28, 2006 and 2005, these discounts were $1.6 million and $1.8 million, respectively. These losses primarily represented the costs of funds and were included in selling, general and administrative expenses.

8

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

NOTE E – INVENTORIES

Before deduction of last-in, first-out (LIFO) inventory valuation reserves of $129.1 million and $111.4 million at February 28, 2006 and August 31, 2005, respectively, inventories valued under the first-in, first-out method approximated replacement cost. The majority of the Company’s inventories are in finished goods, with minimal work in process. Approximately $45.7 million and $39.9 million were in raw materials at February 28, 2006 and August 31, 2005, respectively.

NOTE F – CREDIT ARRANGEMENTS

At February 28, 2006 and August 31, 2005, no borrowings were outstanding under the Company’s commercial paper program or the related revolving credit agreement. The Company was in compliance with all covenants at February 28, 2006.

The Company has numerous informal credit facilities available from domestic and international banks. These credit facilities are available to support documentary letters of credit (including those with extended terms), foreign exchange transactions and, in certain instances, short-term working capital loans and are priced at bankers’ acceptance rates or on a cost of funds basis. Amounts outstanding on these facilities relate to accounts payable settled under documentary letters of credit.

Long-term debt was as follows:

	February 28,		August 31,
(in thousands)	2006		2005
6.80% notes due 2007	$	50,000	$	50,000
6.75% notes due 2009		100,000		100,000
CMCZ term note due 2009		35,489		39,773
5.625% notes due 2013		200,000		200,000
Other, including equipment notes		16,227		4,191
		401,716		393,964
Less current maturities		9,743		7,223
	$	391,973	$	386,741

Interest on CMCZ’s term note is accrued at the Warsaw Interbank Offered Rate (WIBOR) plus 1.25% and was fixed at 5.55% for the three months ended March 29, 2006. The term note has scheduled semi-annual payments beginning in September 2005 and is collateralized by CMCZ’s property, plant and equipment. CMCZ’s revolving credit facility with maximum borrowings of 120 million PLN ($37.9 million) expired March 2, 2006. At February 28, 2006, no amounts were outstanding under this facility. The term note and the revolving credit facility contain certain financial covenants for CMCZ. CMCZ was in compliance with these covenants at February 28, 2006. There are no guarantees by the Company of CMCZ’s debt.

CMC – Poland, a wholly-owned subsidiary of CMC, owns and operates equipment at the CMCZ mill site. In connection with the equipment purchase, CMC – Poland issued equipment notes under a term agreement dated September 2005 with $12.4 million (39.2 million PLN) outstanding at February 28, 2006. Installment payments under these notes are due from 2006 through 2010. Interest rates are variable based on the Poland Monetary Policy Council’s rediscount rate, plus an applicable margin. The weighted average rate as of February 28, 2006 was 4.14%. The notes are substantially secured by the shredder equipment.

Interest of $14.8 million and $16.0 million was paid in the six months ended February 28, 2006 and 2005, respectively.

NOTE G – INCOME TAXES

The Company paid $74.1 million and $43.0 million in income taxes during the six months ended February 28, 2006 and 2005, respectively.

9

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

Reconciliations of the United States statutory rates to the Company’s effective tax rates were as follows:

	Three Months Ended						Six Months Ended
	February 28,						February 28,
(in thousands, except share data)	2006			2005			2006			2005
Statutory rate		35.0	%		35.0	%		35.0	%		35.0	%
State and local taxes		1.4			2.6			1.3			2.1
Extraterritorial Income Exclusion (ETI)		(.2	)		(0.3	)		(.2	)		(0.4	)
Foreign rate differential		.4			(1.2	)		(.2	)		(2.2	)
Domestic production activity deduction		(.5	)		—			(.5	)		—
Other		.3			0.6			.3			0.6
Effective rate		36.4	%		36.7	%		35.7	%		35.1	%

The American Jobs Creation Act of 2004 (AJCA) would allow the Company a one-time opportunity to repatriate undistributed foreign earnings through its fiscal year ended August 31, 2006 at a 5.25% tax rate (without consideration of possible foreign withholding taxes) rather than the normal U.S. tax rate of 35%, provided that certain criteria, including qualified U.S. reinvestment, are met. Available tax credits related to the repatriation would be reduced under provisions of the AJCA. Based on analysis to date, it is reasonably possible that the Company may repatriate some amount up to $19 million, with the respective U.S. tax liability ranging up to $1.6 million for which the Company has recorded $3.3 million of deferred taxes. The Company’s analysis was based on the statute as currently enacted. Technical corrections, clarifications and regulations related to the statute could impact the Company’s estimate of the tax liability associated with the repatriation.

NOTE H – STOCKHOLDERS’ EQUITY AND EARNINGS PER SHARE

On January 26, 2006 the shareholders of the Company voted to increase the authorized shares of common stock from 100,000,000 to 200,000,000 shares. The shareholders also voted to change the par value of the Company’s common stock from $5.00 to $.01 per share. As a result, $322 million was transferred from common stock to additional paid in capital.

In calculating earnings per share, there were no adjustments to net earnings to arrive at earnings for the three or six months ended February 28, 2006 or 2005. The reconciliation of the denominators of the earnings per share calculations is as follows:

	Three Months Ended				Six Months Ended
	February 28,				February 28,
	2006		2005		2006		2005
Average shares outstanding for basic earnings per share		58,775,891		59,489,851		58,371,850		59,097,619
Effect of dilutive securities-stock based incentive/purchase plans		3,139,423		2,938,106		3,057,230		2,566,713
Average shares outstanding for diluted earnings per share		61,915,314		62,427,957		61,429,080		61,664,332

Restricted stock with total share commitments of 16,000 were anti-dilutive at February 28, 2006 based on the average share price for the quarter of $41.32. All of the Company’s outstanding stock options and restricted stock with total share commitments of 5,504,039 at February 28, 2005, were dilutive based on the average share price for the quarter then ended of $27.91. All stock options and Stock Appreciation Rights (SARs) expire by 2012.

The Company’s restricted stock is included in the number of shares of common stock issued and outstanding, but omitted from the basic earnings per share calculation until the shares vest as required by Financial Accounting Standards.

At February 28, 2006, the Company had authorization to purchase 905,500 of its common shares.

10

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

NOTE I – 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 changes 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. Also, when its sales commitments to customers include a fixed price freight component, the Company occasionally enters into freight forward contracts to minimize the effect of the volatility of ocean freight rates. The Company designates only those contracts which closely match the terms of the underlying transaction as hedges for accounting purposes. These hedges resulted in an immaterial amount of ineffectiveness in the statements of earnings and there were no components excluded from the assessment of hedge effectiveness for the three or six months ended February 28, 2006 and 2005. Certain of the foreign currency and commodity contracts were not designated as hedges for accounting purposes, although management believes they are essential economic hedges.

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

	Three Months Ended					Six Months Ended
	February 28,					February 28,
	2006			2005		2006			2005
(in thousands)	Earnings (Expense)					Earnings (Expense)
Net sales (foreign currency instruments)	$	(180	)	$	965	$	(87	)	$	(1,262	)
Cost of goods sold (commodity instruments)		1,926			555		49			(1,078	)

The Company’s derivative instruments were recorded as follows on the condensed consolidated balance sheets:

	February 28,		August 31,
(in thousands)	2006		2005
Derivative assets (other current assets)	$	4,575	$	2,563
Derivative liabilities (other payables)		4,358		2,151

The following table summarizes activities in other comprehensive income (losses) related to derivatives classified as cash flow hedges held by the Company during the six months ended February 28, 2006 (in thousands):

Change in market value (net of taxes)	$	(128	)
(Gains) losses reclassified into net earnings, net		(56	)
Other comprehensive loss — unrealized loss on derivatives	$	(184	)

During the twelve months following February 28, 2006, negligible losses related to commodity hedges and capital expenditures are anticipated to be reclassified into net earnings as the related transactions mature and the assets are placed into service, respectively. Also, an additional $112 thousand in gains will be reclassified as interest expense related to an interest rate swap.

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

NOTE J – CONTINGENCIES

See Note 11, Commitments and Contingencies, to the consolidated financial statements for the year ended August 31, 2005 relating to environmental and other matters. There have been no significant changes to the matters noted therein. In the ordinary course of conducting its business, the Company becomes involved in litigation, administrative proceedings and governmental investigations, including environmental matters. Management believes

11

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

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.

NOTE K – BUSINESS SEGMENTS

The Company has refined its method of overhead allocation. Prior year period overhead costs of $3.2 million and $6.5 million for the three and six months ended February 28, 2005, respectively, were reclassified from the domestic mills to the domestic fabrication segment to ensure comparability with current year amounts reported.

The following is a summary of certain financial information by reportable segment:

	Three Months Ended February 28, 2006
										Marketing
	Domestic					Domestic				and
(in thousands)	Mills		CMCZ			Fabrication		Recycling		Distribution		Corporate			Eliminations			Consolidated
Net sales–unaffiliated customers	$	257,109	$	106,782		$	408,005	$	245,894	$	619,285	$	2,412		$	—		$	1,639,487
Intersegment sales		109,061		5,802			151		26,119		22,899		—			(164,032	)		—
Net sales		366,170		112,584			408,156		272,013		642,184		2,412			(164,032	)	$	1,639,487
Adjusted operating profit (loss)		70,767		(584	)		38,494		18,592		12,934		(7,425	)		—			132,778

	Three Months Ended February 28, 2005
										Marketing
	Domestic					Domestic				and
(in thousands)	Mills		CMCZ			Fabrication		Recycling		Distribution		Corporate			Eliminations			Consolidated
Net sales–unaffiliated customers	$	222,701	$	105,082		$	330,744	$	200,776	$	734,674	$	3,336		$	—		$	1,597,313
Intersegment sales		61,134		2,562			142		23,734		14,330		—			(101,902	)		—
Net sales		283,835		107,644			330,886		224,510		749,004		3,336			(101,902	)		1,597,313
Adjusted operating profit (loss)		39,248		(4,542	)		21,372		20,073		23,215		(3,465	)		—			95,901

	Six Months Ended February 28, 2006
									Marketing
	Domestic				Domestic				and
(in thousands)	Mills		CMCZ		Fabrication		Recycling		Distribution		Corporate			Eliminations			Consolidated
Net sales–unaffiliated customers	$	525,781	$	213,662	$	808,074	$	459,100	$	1,274,454	$	4,114		$	—		$	3,285,185
Intersegment sales		210,168		6,254		605		49,312		52,288		—			(318,627	)		—
Net sales		735,949		219,916		808,679		508,412		1,326,742		4,114			(318,627	)		3,285,185
Adjusted operating profit (loss)		135,686		948		56,691		32,426		35,989		(13,952	)		—			247,788
Goodwill – February 28, 2006		306		—		27,006		3,230		—		—			—			30,542
Total Assets – February 28, 2006		471,375		274,976		636,329		193,379		800,430		94,881			—			2,471,370

	Six Months Ended February 28, 2005
									Marketing
	Domestic				Domestic				and
(in thousands)	Mills		CMCZ		Fabrication		Recycling		Distribution		Corporate			Eliminations			Consolidated
Net sales–unaffiliated customers	$	462,534	$	225,236	$	657,202	$	405,138	$	1,372,907	$	3,368		$	—		$	3,126,385
Intersegment sales		137,063		5,522		324		39,842		56,692		—			(239,443	)		—
Net sales		599,597		230,758		657,526		444,980		1,429,599		3,368			(239,443	)		3,126,385
Adjusted operating profit (loss)		93,189		7,773		42,706		39,848		46,584		(10,268	)		—			219,832
Goodwill – February 28, 2005		306		—		27,006		3,230		—		—			—			30,542
Total Assets – February 28, 2005		443,422		311,587		548,222		142,721		674,060		84,344			—			2,204,356

12

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

The following table provides a reconciliation of consolidated adjusted operating profit to net earnings:

	Three Months Ended						Six Months Ended
	February 28,						February 28,
(in thousands)	2006			2005			2006			2005
Net earnings	$	80,103		$	56,575		$	149,727		$	130,300
Minority interests		(578	)		(1,910	)		(333	)		948
Income taxes		45,504			31,709			82,945			70,984
Interest expense		6,952			8,517			13,876			15,818
Discounts on sales of accounts receivable		797			1,010			1,573			1,782
Adjusted operating profit	$	132,778		$	95,901		$	247,788		$	219,832

The following presents external net sales by major product and geographic area for the Company:

	Three Months Ended				Six Months Ended
	February 28,				February 28,
(in thousands)	2006		2005		2006		2005
Major product information:
Steel products	$	961,749	$	1,011,617	$	1,922,258	$	2,031,122
Ferrous scrap		82,655		88,057		163,024		186,450
Nonferrous scrap		161,973		109,830		293,519		214,513
Nonferrous products		135,111		114,878		259,900		221,015
Industrial materials		200,840		208,048		445,037		348,761
Construction materials		86,150		42,070		178,165		88,032
Other		11,009		22,813		23,282		36,492
Net sales	$	1,639,487	$	1,597,313	$	3,285,185	$	3,126,385

	Three Months Ended				Six Months Ended
	February 28,				February 28,
(in thousands)	2006		2005		2006		2005
Geographic area:
United States	$	1,059,997	$	939,710	$	2,101,379	$	1,866,262
Europe		255,373		290,387		469,606		583,418
Asia		173,681		221,456		384,222		402,974
Australia/New Zealand		92,958		87,222		217,157		177,553
Other		57,478		58,538		112,821		96,178
Net sales	$	1,639,487	$	1,597,313	$	3,285,185	$	3,126,385

Net sales for Europe and the United States for the three and six months ended February 28, 2005 have been adjusted to properly reflect the net sales in those geographic areas.

NOTE L — RELATED PARTY TRANSACTIONS

One of the Company’s international subsidiaries has an agreement for steel purchases with a key supplier of which the Company owns an 11% interest. The total amounts of purchases from this supplier were $118.4 million and $118.9 million for the six months ended February 28, 2006 and 2005, respectively.

13

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 Securities and Exchange Commission (SEC) for the year ended August 31, 2005.

CRITICAL ACCOUNTING POLICIES

Our critical accounting policies are consistent with 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, 2005 and are, therefore, not presented herein.

CONSOLIDATED RESULTS OF OPERATIONS

	Three Months Ended						Six Months Ended
	February 28,				%		February 28,				%
(in millions)	2006		2005		Change		2006		2005		Change
Net sales	$	1,639.5	$	1,597.3		3	$	3,285.2	$	3,126.4		5
Net earnings		80.1		56.6		42		149.7		130.3		15
EBITDA		153.0		115.5		32		286.2		254.9		12

In the table above, we have included a financial statement measure that was not derived in accordance with GAAP. We use EBITDA (earnings before interest expense, income taxes, depreciation and amortization) as a non-GAAP performance measure. In calculating EBITDA, we exclude our largest recurring non-cash charge, depreciation and amortization. EBITDA provides a core operational performance measurement that compares results without the need to adjust for federal, 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 EBITDA. The results are, therefore, without consideration of financing alternatives of capital employed. We use EBITDA as one guideline to assess our unleveraged performance return on our investments. EBITDA is also the target benchmark for our long-term cash incentive performance plan for management. Reconciliations to net earnings are provided below:

	Three Months Ended							Six Months Ended
	February 28,				%			February 28,				%
(in millions)	2006		2005		Change			2006		2005		Change
Net earnings	$	80.1	$	56.6		42		$	149.7	$	130.3		15
Interest expense		7.0		8.5		(18	)		13.9		15.8		(12	)
Income taxes		45.5		31.7		44			82.9		71.0		17
Depreciation and amortization		20.4		18.7		9			39.7		37.8		5
EBITDA	$	153.0	$	115.5		32		$	286.2	$	254.9		12

Our EBITDA does not include interest expense, income taxes and depreciation and amortization. Because we have borrowed money in order to finance our operations, interest expense is a necessary element of our costs and our ability to generate revenues. Because we use capital assets, depreciation and amortization are also necessary elements of our costs. Also, the payment of income taxes is a necessary element of our operations. Therefore, any measures that exclude these elements have material limitations. To compensate for these limitations, we believe that it is appropriate to consider both net earnings determined under GAAP, as well as EBITDA, to evaluate our performance. Also, we separately analyze any significant fluctuations in interest expense, depreciation and amortization and income taxes.

OverviewStrong operating profits were generated in what is typically our weakest quarter and after a period of declining steel prices in many parts of the world. The following financial events were significant during our second quarter ended February 28, 2006:

• The second quarter adjusted operating profit for our steel minimills was almost 65% greater than a year earlier on the strength of higher selling prices combined with seasonally high finished goods shipments as

14

	well as a lower average cost for scrap utilized.
•	The copper tube mill’s $6.1 million adjusted operating profit was substantially above last year’s second quarter.
•	The CMCZ mill had increased sales and a small adjusted operating loss compared to last year’s second quarter’s significant loss ; however, prices and margins continued to be squeezed.
•	Profitability in our domestic fabrication segment was a record for a second quarter with total shipments up 23% compared with the prior year’s second quarter and realized selling prices were mostly higher.
•	The Recycling segment achieved a near record quarter with net sales up 21% and adjusted operating profit off 7% from last year’s record second quarter, marked by record nonferrous price levels.
•	The marketing and distribution segment’s adjusted operating profit of $12.9 million for the second quarter was significantly below last year’s strong second quarter on lower net sales mostly due to temporary factors.
•	Effective September 1, 2005, we recognized pre-tax compensation expense of $2.5 million and $4.4 million for the three and six months ended February 28, 2006, respectively, as a result of our adoption of Statement of Financial Accounting Standards No. 123(R). See Note B — Accounting Policies, to the condensed consolidated financial statements.

SEGMENT OPERATING DATA

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

We use 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, minority interests and financing costs. The following tables show our net sales and adjusted operating profit (loss) by business segment:

	Three Months Ended									Six Months Ended
	February 28,						%			February 28,						%
(in millions)	2006			2005			Change			2006			2005			Change
NET SALES:
Domestic mills	$	366,170		$	283,835			29		$	735,949		$	599,597			23
CMCZ*		112,584			107,644			5			219,916			230,758			(5	)
Domestic fabrication		408,156			330,886			23			808,679			657,526			23
Recycling		272,013			224,510			21			508,412			444,980			14
Marketing and distribution		642,184			749,004			(14	)		1,326,742			1,429,599			(7	)
Corporate and eliminations		(161,620	)		(98,566	)		(64	)		(314,513	)		(236,075	)		(33	)
	$	1,639,487		$	1,597,313			3		$	3,285,185		$	3,126,385			5

* Before minority interests

	Three Months Ended									Six Months Ended
	February 28,						%			February 28,						%
(in millions)	2006			2005			Change			2006			2005			Change
ADJUSTED OPERATING PROFIT (LOSS):
Domestic mills	$	70,767		$	39,248			80		$	135,686		$	93,189			46
CMCZ*		(584	)		(4,542	)		87			948			7,773			(88	)
Domestic fabrication		38,494			21,372			80			56,691			42,706			33
Recycling		18,592			20,073			(7	)		32,426			39,848			(19	)
Marketing and distribution		12,934			23,215			(44	)		35,989			46,584			(23	)
Corporate and eliminations		(7,425	)		(3,465	)		(114	)		(13,952	)		(10,268	)		(36	)

* Before minority interests

Domestic MillsWe include our four domestic steel and our copper tube minimills in our domestic mills segment. Adjusted operating profit was higher due to higher selling prices, higher tons shipped and relatively stable scrap prices. Increases in metal margin (our average selling price less our average cost of scrap used in production) of

15

11% and 9% for the three and six months ended February 28, 2006, respectively, more than offset an increase of 46%in energy costs.

Selling prices for our domestic steel minimills increased for the three and six months ended February 28, 2006 as compared to 2005 due to strong domestic demand for steel. Our average total mill selling price for the second quarter was $26 per ton above last year’s level. By product line, the price premium of merchant bar over reinforcing bar remained relatively wide at $88 per ton.

The table below reflects steel and ferrous scrap prices per ton:

	Three Months Ended				Increase						Six Months Ended				Increase
	February 28,				(Decrease)						February 28,				(Decrease)
	2006		2005		$			%			2006		2005		$			%
Average mill selling price (finished goods)	$	516	$	490	$	26			5		$	513	$	494	$	19			4
Average mill selling price (total sales)		500		474		26			5			495		479		16			3
Average ferrous scrap production cost		207		210		(3	)		(1	)		205		212		(7	)		(3	)
Average metal margin		293		264		29			11			290		267		23			9
Average ferrous scrap purchase price		184		181		3			2			184		185		(1	)		(1	)

Our mills’ shipments increased for the three and six months ended February 28, 2006 as compared to 2005 due to increased orders from distributor and end-user customers with strong demand and lower inventories. The table below reflects our domestic steel minimills’ operating statistics (short tons in thousands):

	Three Months Ended				Increase				Six Months Ended				Increase
	February 28				(Decrease)				February 28,				(Decrease)
	2006		2005		Amount		%		2006		2005		Amount		%
Tons melted		577		535		42		8		1,151		1,084		67		6
Tons rolled		532		472		60		13		1,054		1,019		35		3
Tons shipped		603		506		97		19		1,227		1,051		176		17

All of our domestic steel minimills were more profitable for the three and six months ended February 28, 2006 as compared to 2005. All of the domestic steel mills also reported higher tons shipped for the three and six months ended 2006 as compared to 2005 and the selling prices at all the domestic steel mills were higher for the same periods in 2006 except for Alabama where the selling prices dropped slightly. During the three months ended February 28, 2005 the domestic steel mills reported a $4.5 million gain from a business interruption insurance recovery and during the prior year six month period, they recorded a $3.9 million gain from a business interruption insurance recovery.

Overall our domestic steel mills had pretax LIFO income (LIFO income or expense amounts in the segment operating data are pretax) of $1.0 million during the three months and LIFO expense of $7.2 million for the six months ended February 28, 2006 as compared to $.1 million LIFO income and $26.0 million LIFO expense for the three and six months ended February 28, 2005, respectively. Our total utility costs increased by $8.7 million and $16.4 million (46%) for the three and six months ended February 28, 2006, respectively, as compared to 2005.

16

The table below reflects our copper tube minimill’s prices per pound and operating statistics:

	Three Months Ended				Increase						Six Months Ended				Increase
	February 28,				(Decrease)						February 28,				(Decrease)
	2006		2005		Amount			%			2006		2005		Amount			%
Pounds shipped (in millions)		15.7		16.0		(.3	)		(2	)		31.9		32.1		(.2	)		(1	)
Pounds produced (in millions)		16.7		16.4		.3			2			32.6		32.3		.3			1
Average selling price	$	2.84	$	1.89	$	.95			50		$	2.63	$	1.86	$	.77			41
Average copper scrap production cost	$	1.73	$	1.21	$	.52			43		$	1.62	$	1.21	$	.41			34
Average metal margin	$	1.11	$	0.68	$	.43			63		$	1.01	$	0.65	$	.36			55
Average copper scrap purchase price	$	2.02	$	1.34	$	.68			51		$	1.87	$	1.31	$	.56			43

Our copper tube minimill’s adjusted operating profit was $6.1 million and $10.3 million for the three and six months ended February 28, 2006, respectively, as compared to $967 thousand and $3.2 million, respectively, in 2005. Demand from our commercial and residential end-users was relatively steady. Better supply/demand conditions in the industry resulted in an increased average selling price for the second quarter of $2.84 per pound and metal spreads widened to $1.11 per pound, up from 68 cents, more than offsetting the pronounced rise in the cost of scrap. Pounds shipped were down 2% and 1% for the three and six months ended February 28, 2006, respectively, as compared to 2005. Our copper tube mill recorded $1.7 million and $3.2 million LIFO expense for the three and six months ended February 28, 2006 as compared to $1.0 million and $2.0 million LIFO expense in 2005, respectively.

CMCZEven though tons shipped in the second quarter of 2006 increased substantially compared to 2005, net sales remained relatively flat due to lower selling prices. The change in foreign currency exchange rates decreased net sales by $6.0 million and increased $4.4 million for the three and six months ended February 28, 2006, respectively, as compared to 2005. CMCZ reported an adjusted operating loss of $0.6 million and an adjusted operating profit of $0.9 million for the three and six months ended February 28, 2006 as compared to an adjusted operating loss of $4.5 million and a $7.8 million adjusted operating profit in 2005, respectively. The following table reflects CMCZ’s operating statistics and average prices per short ton:

	Three Months Ended						Increase						Six Months Ended						Increase
	February 28,						(Decrease)						February 28,						(Decrease)
	2006			2005			Amount			%			2006			2005			Amount			%
Tons melted (thousands)		285			203			82			40			570			531			39			7
Tons rolled (thousands)		261			206			55			27			498			408			90			22
Tons shipped (thousands)		285			208			77			37			542			460			82			18
Average mill selling price (total sales)		1,238	PLN		1,523	PLN		(285	)		(19	)		1,269	PLN		1,602	PLN		(333	)		(21	)
Average ferrous scrap production cost		692	PLN		904	PLN		(212	)		(23	)		683	PLN		944	PLN		(261	)		(28	)
Average metal margin		546	PLN		619	PLN		(73	)		(12	)		586	PLN		658	PLN		(72	)		(11	)
Average ferrous scrap purchase price		580	PLN		641	PLN		(61	)		(10	)		575	PLN		753	PLN		(178	)		(24	)
Average mill selling price (total sales)	$	381		$	494		$	(113	)		(23	)	$	389		$	481		$	(92	)		(19	)
Average ferrous scrap production cost	$	213		$	293		$	(80	)		(27	)	$	206		$	284		$	(78	)		(27	)
Average metal margin	$	168		$	201		$	(33	)		(16	)	$	183		$	197		$	(14	)		(7	)
Average ferrous scrap purchase price	$	179		$	207		$	(28	)		(14	)	$	176		$	227		$	(51	)		(22	)

Selling prices and metal margins decreased significantly in 2006 as compared to 2005. Our selling prices for wire rod were particularly weak in 2006 as compared to 2005 due to world-wide excess supply. Tons melted and rolled increased in 2006 as compared to 2005 as the mill entered this year’s winter months with much stricter inventory control. The change in foreign currency exchange rates had minimal impact on our adjusted operating profit for 2006 as compared to 2005 though the continued strong zloty limited export opportunities.

17

Domestic FabricationOur domestic fabrication plants’ shipments and average selling prices per ton were as follows:

	Three Months Ended				Increase				Six Months Ended				Increase
	February 28,				(Decrease)				February 28,				(Decrease)
	2006		2005		Amount		%		2006		2005		Amount		%
Tons shipped (in thousands)		363		296		67		23		726		624		102		16
Average selling price*	$	871	$	849	$	22		3	$	857	$	835	$	22		3

*excluding stock and buyout sales

We recorded $9.7 million of LIFO income and $4.2 million of LIFO expense in our domestic fabrication segment for the three and six months ended February 28, 2006 as compared to $4.6 million and $9.2 million LIFO expense in 2005, respectively. Overall, market conditions were excellent in all areas, enabling us to obtain higher selling prices and increase overall shipments to meet demand. All operating locations were profitable as the domestic construction markets remained vibrant. The three hurricanes in the U.S. Gulf coast region had minimal disruption on our operations.

RecyclingThe following table reflects our recycling segment’s average selling prices per ton and tons shipped (in thousands):

	Three Months Ended				Increase						Six Months Ended				Increase
	February 28,				(Decrease)						February 28,				(Decrease)
	2006		2005		Amount			%			2006		2005		Amount			%
Ferrous sales price	$	190	$	197	$	(7	)		(4	)	$	192	$	209	$	(17	)		(8	)
Nonferrous sales price	$	2,133	$	1,609	$	524			33		$	1,981	$	1,561	$	420			27
Ferrous tons shipped		490		463		27			6			957		933		24			3
Nonferrous tons shipped		74		72		2			3			144		139		5			4
Total volume processed and shipped*		862		822		40			5			1,701		1,650		51			3

*Includes our processing plants affiliated with our domestic steel mills.

The ferrous scrap market was still strong with continued volatility though not with the extremes seen in earlier months. Demand remained strong as domestic electric arc furnances operated at near capacity. Copper and aluminum prices exhibited greater swings than past quarters but the net upward trend resulted in greater profitability. Total volume of scrap processed increased in 2006 compared to 2005 and inventory turnover across the board remained extremely rapid. Our LIFO expense was $3.2 million and $4.6 million for the three and six months ended February 28, 2006 as compared to $1.0 million LIFO income and $1.2 million LIFO expense for the same periods in 2005, respectively.

Marketing and Distribution With consideration of lead times for order, production, shipment, and delivery, economic conditions in the previous quarter influenced results in the current quarter. Global steel markets were weak during the later half of calendar 2005 leading to decreased prices and sales this quarter, especially in Europe and Asia, with resulting lower profitability for this large product line. One encouraging development was signs of recovery in Germany with sales of specialty steel products. Our Australian markets, both import marketing and domestic service centers, continued strong. Asian markets exhibited a traditional slow period approaching the lunar New Year but activity began to surge later in the quarter. Sales and margins for industrial materials and products were good but down from recent record levels. The margins for aluminum, copper and stainless steel semis decreased over the prior year as fixed margin contracts were eroded by variable higher freight, insurance, and duty costs. Though metal margins on these sales are hedged, some hedging instruments require mark to market accounting, resulting in gain (loss) recognition ahead of the offsetting underlying physical contract. During the six months ended February 28, 2006 a $3 million loss was recorded on these hedging instruments. We had LIFO expense of $1.8 million and LIFO income of $1.5 million for the three and six months ended February 28, 2006 as compared to LIFO income of $0.5 million and $.02 million for 2005, respectively.

Corporate and EliminationsOur corporate expenses for the three and six months ended February 28, 2006 were higher due to greater eliminations of profit on intercompany sales, lower earnings on investments segregated for our nonqualified retirement plan, higher salaries and the recording of share based compensation.

CONSOLIDATED DATA

On a consolidated basis, the LIFO method of inventory valuation increased our net earnings by $2.6 million and decreased net earnings by $11.5 million (4 cents and (19) cents per diluted share) for the three and six months ended February 28, 2006 as compared to decreasing net earnings by $2.6 million and $24.8 million ((4) cents and (40) cents per diluted share) for 2005, respectively.

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Our overall selling, general and administrative expenses increased $5 million and $2 million for the three and six months ended February 28, 2006 as compared to 2005, respectively, because of increases in salary compensation, benefits and professional services offset by lower incentive compensation accruals.

Effective September 1, 2005, we changed our method of accounting for our share-based compensation arrangements when we adopted FASB Statement No. 123 (R) utilizing the modified prospective method (see Note B-Accounting Policies, to the condensed consolidated financial statements). As a result of this adoption, we recorded $2.5 million and $4.4 million for additional compensation costs in selling, general and administrative expenses during the three and six months ended February 28, 2006 as compared to 2005, respectively.

Interest expense for the six months ended February 28, 2006 was $1.9 million less than 2005 due primarily to lower short- and long-term borrowings outstanding.

Our overall effective tax rate for the six months ended February 28, 2006 increased to 35.7% as compared to 35.1% in 2005 due to a shift in profitability from low tax jurisdictions (Poland) to those domestic jurisdictions subject to state taxes. The tax rate for the second quarter 2006 was 36.4% versus 36.7% for 2005.

CONTINGENCIES

See Note J — 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, our financial position or cash flows. However, they may have a material impact on earnings for a particular quarter.

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.

OUTLOOK

During the second quarter of 2006, the global steel market in particular had reversed course, resulting in another price rally. The end of de-stocking in most markets, disciplined production rates by EU mills, and a rapid Asian turnaround all contributed to the upswing. Generally good economic conditions prevail. Manufacturing activity continues to expand. While residential construction in the U.S. has pulled back from its peak, worldwide non-residential construction notably is expected to strengthen. More specifically, construction materials generally are in strong demand. Our domestic steel mill markets continue at relatively strong levels, underpinned by the growing U.S. economy and solid construction markets. Imports of carbon steel bar products recently have increased into the U.S.; although at reasonable levels relative to demand, the situation bears watching. Our mill shipments should accelerate during the third quarter, and steel prices should remain firm. Steel scrap prices remain relatively strong, domestically and internationally, although a continuation of the unprecedented price volatility we have seen in recent quarters appears inevitable. The outlook for nonferrous markets remains favorable, although prices are off from recent highs. Demand for downstream products and services remains vibrant.

Accordingly, total earnings from our domestic steel mills should remain strong during the third quarter. The copper tube business should be steady at the improved level. Results at CMCZ are expected to improve significantly based on increased selling prices and shipments. Our anticipation remains that fabrication profits will expand further, given robust prices and volumes. Our Recycling segment will again post strong results buoyed by relatively firm markets. We expect the Marketing and Distribution segment to pick up again, driven by higher volume and margins in various steel markets, led by firmer market conditions in China.

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Overall, we believe product demand should accelerate further, and volume and prices will remain strong. We anticipate third quarter LIFO diluted net earnings per share between $1.25 and $1.40.

LIQUIDITY AND CAPITAL RESOURCES

See Note F — Credit Arrangements, to the condensed consolidated financial statements.

Our sources, facilities and availability of liquidity and capital resources as of February 28, 2006 (dollars in thousands):

	Total
Source	Facility		Availability
Net cash flows from operating activities	$	25,075		N/A
Commercial paper program*		400,000	$	372,925
Domestic accounts receivable securitization		130,000		120,000
International accounts receivable sales facilities		85,600		37,600
Bank credit facilities — uncommitted		600,000		350,000
Notes due from 2007 to 2013		350,000		**
Trade financing arrangements		—	As required
CMCZ revolving credit facility		37,900	Expired March 2006
CMCZ term note due March 2009		35,489		—
CMCZ & CMC — Poland equipment notes		13,024		—

*	The commercial paper program is supported by our $400 million unsecured revolving credit agreement. The availability under the revolving credit agreement is reduced by $27.1 million of stand-by letters of credit issued as of February 28, 2006.
**	With our investment grade credit ratings and current industry conditions we believe we have access to cost-effective public markets for potential refinancing or the issuance of additional long-term debt.

Certain of our financing agreements, both domestically and at CMCZ, include various covenants, of which we were in compliance at February 28, 2006. There are no guarantees by the Company or any of its subsidiaries for any of CMCZ’s debt.

Off-Balance Sheet ArrangementsFor added flexibility, we may secure financing through securitization and sales of certain accounts receivable both in the U.S. and internationally. See Note D — Sales of Accounts Receivable, to the condensed consolidated financial statements. We may continually sell accounts receivable on an ongoing basis to replace those receivables that have been collected from our customers. Our domestic securitization program contains certain cross-default provisions whereby a termination event could occur should we default under another credit arrangement, and contains covenants that conform to the same requirements contained in our revolving credit agreement.

Cash FlowsOur 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 have a diverse and generally stable customer base.

Significant fluctuations in working capital:

- Accounts receivable — slower turnover in domestic fabrication, recycling, CMCZ, and marketing and distribution

- Inventories — higher in-transit inventory and increased carrying prices

- Accrued expenses — annual incentive compensation paid

We expect our total capital spending for fiscal 2006 to be $160 million, including the completion of our shredder in Poland and our continuous caster project at our Texas melt shop. This is down some $18 million from our original budget due to cancellation of some projects, the largest of which was $10 million for the purchase of 100 rail cars. We invested $59.6 million in property, plant and equipment during the first six months of fiscal 2006. We continuously assess our capital spending and reevaluate our requirements based upon current and expected results.

We did not purchase any of our common shares for our treasury during the six months ended February 28, 2006. During the six months ended February 28, 2006, we issued additional long-term debt for our shredder operation in Poland. Our contractual obligations for the next twelve months of $1.8 billion are typically expenditures with normal revenue processing activities. We believe our cash flows from operating activities and debt facilities are adequate to fund our ongoing operations and planned capital expenditures.

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CONTRACTUAL OBLIGATIONS

The following table represents our contractual obligations as of February 28, 2006:

	Payments Due By Period*
			Less than						More than
(dollars in thousands)	Total		1 Year		1-3 Years		3-5 Years		5 Years
Contractual Obligations:
Long-term debt(1)	$	401,716	$	9,743	$	180,581	$	11,337	$	200,055
Interest(2)		117,741		23,888		40,155		22,744		30,954
Operating leases(3)		88,014		19,365		29,815		21,075		17,759
Purchase obligations(4)		1,182,935		965,443		161,669		18,857		36,966
Total contractual cash obligations	$	1,790,406	$	1,018,439	$	412,220	$	74,013	$	285,734

*We have not discounted the cash obligations in this table.
(1)	Total amounts are included in the February 28, 2006 condensed consolidated balance sheet. See Note F, Credit Arrangements,
	to the condensed consolidated financial statements.
(2)	Interest payments related to our short-term debt are not included in the table as they do not represent a significant obligation as
	of February 28, 2006.
(3)	Includes minimum lease payment obligations for non-cancelable equipment and real-estate leases in effect as of February 28, 2006.
(4)	About 92% of these purchase obligations are for inventory items to be sold in the ordinary course of business. Purchase obligations include all enforceable, legally binding agreements to purchase goods or services that specify all significant terms, regardless of the duration of the agreement. Agreements with variable terms are excluded because we are unable to estimate the minimum amounts.

Other Commercial CommitmentsWe maintain stand-by letters of credit to provide support for certain transactions that our insurance providers and suppliers request. At February 28, 2006, we had committed $31.2 million under these arrangements. All of the commitments expire within one year.

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, currency valuation, production rates, inventory levels, and general market conditions. These forward-looking statements generally can be identified by phrases such as we “expect,” “anticipate” “believe,” “ought,” “should,” “likely,” “appear,”, “project,” “forecast,” 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,

• 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,

• court decisions,

• industry consolidation or changes in production capacity or utilization,

• global factors including political and military uncertainties,

• credit availability,

• currency fluctuations,

• energy prices,

• decisions by governments impacting the level of steel imports, and

• the pace of overall economic activity, particularly China.

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ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

The information required hereunder for the Company is consistent with the information set forth in Item 7a. Quantitative and Qualitative Disclosures about Market Risk included in the Company’s Annual Report on Form 10-K for the year ended August 31, 2005, filed with the Securities Exchange Commission and is, therefore, not presented herein.

Also, see Note I — 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) 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 ended August 31, 2005, filed November 9, 2005, with the Securities and Exchange Commission.

     ITEM 1A. RISK FACTORS

Not Applicable

     ITEM 2. UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS

Issuer Purchases of Equity Securities

						Total
						Number of	Maximum
						Shares	Number of
						Purchased	Shares that
						As Part of	May Yet Be
	Total					Publicly	Purchased
	Number of			Average		Announced	Under the
	Shares			Price Paid		Plans or	Plans or
	Purchased			Per Share		Programs	Programs
As of December 1, 2005								905,500	(1)
December 1— December 31, 2005		240	(2)	$	35.41
January 1 — January 31, 2006		2,096	(2)	$	40.45
February 1 — February 28, 2006		8,533	(2)	$	44.78
As of February 28, 2006		10,869	(2)	$	43.74			905,500	(1)

(1)	Shares available to be purchased under the Company’s Share Repurchase Program publicly announced May 24, 2005.
(2)	Shares tendered to the Company by employee stock option holders in payment of the option purchase price due upon exercise.

     ITEM 3. DEFAULTS UPON SENIOR SECURITIES

Not Applicable

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

At the registrant’s annual meeting of stockholders held January 26, 2006, the three nominees named in the Proxy Statement dated December 12, 2005, were elected to serve as directors until the 2009 annual meeting. There was no solicitation in opposition to the nominees for directors. Additionally, the proposal to amend the Company’s Restated Certificate of Incorporation to increase the number of authorized shares of the Company’s common stock from 100,000,000 to 200,000,000 with no change in the number of authorized shares of preferred stock was approved, and the proposal to amend the Company’s Restated Certificate of Incorporation to decrease the par value of the Company’s common stock from $5.00 per share to $.01 per share was approved. Also, the appointment of Deloitte & Touche LLP as auditors of the registrant for the fiscal year ending August 31, 2006 was ratified.

Of the 58,389,580 shares outstanding on the record date, 52,862,132 were present in person or by proxy constituting approximately 90.5% of the total shares entitled to vote. Information as to the vote on each director standing for election, all matters voted on at the meeting and directors continuing in office is provided below:

Proposal 1 — Election of Directors.

Nominee	For	Withheld
Harold L. Adams	50,577,168	2,284,964
Anthony A. Massaro	50,578,113	2,284,019
Robert D. Neary	50,560,062	2,302,070

Directors continuing in office are:

Moses Feldman
Ralph E. Loewenberg
Dorothy G. Owen
Stanley A. Rabin
J. David Smith
Robert R. Womack

Proposal 2 — Amendment to the Company’s Restated Certificate of Incorporation to increase the number of authorized shares of the Company’s common stock from 100,000,000 to 200,000,000 with no change in the number of authorized shares of preferred stock.

For:	47,851,823
Against:	4,905,018
Abstentions and broker nonvotes:	105,291

Proposal 3— Amendment to the Company’s Restated Certificate of Incorporation to decrease the par value of the Company’s common stock from $5.00 per share to $.01 per share.

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For:	51,757,931
Against:	776,866
Abstentions and broker nonvotes:	327,335

Proposal 4 — Ratification of appointment of Deloitte & Touche LLP as independent auditors for the fiscal year ending August 31, 2006.

For:	51,796,468
Against:	919,449
Abstain	146,215

ITEM 5. OTHER INFORMATION

     Executive Employment Continuity Agreement

Effective as of April 5, 2006, the Board of Directors of the Company authorized the execution of a form of Executive Employment Continuity Agreement (the “Agreement”) with certain key executives, including each of the Company’s executive officers with the exception of its Chairman and Chief Executive Officer and President and Chief Operating Officer. The Agreement is intended to ensure that the Company will have the continued attention and dedication of the executive in the event of a Change in Control of the Company (as defined in the Agreement). Should a Change in Control occur, the Company will continue to employ each executive for a period of two years thereafter (the “Employment Period”). All currently employed executive officers who were among the five highest paid executive officers the prior year or anticipated to be this fiscal year (with the exception of the two excluded positions) are expected to enter into the Agreement.

During the Employment Period, each executive will continue to receive (i) an annual base salary equal to at least the executive’s base salary before the Change in Control; (ii) cash bonus opportunities equivalent to that available to the executive under the Company’s annual and long term cash incentive plans in effect immediately preceding the Change in Control; and (iii) continued participation in all incentive, including equity incentive, savings, deferred compensation, retirement plans, welfare benefit plans and other employee benefits on terms no less favorable than those in effect during the 90-day period immediately preceding the Change in Control.

Should the executive’s employment be terminated during the Employment Period for other than cause or disability (including Constructive Termination as defined in the Agreement) the Agreement requires the Company to pay certain severance benefits to the executive. The severance benefits include an amount equal to either three or four times the employee’s highest base salary in effect at any time during the twelve month period prior to the Change in Control as well as unpaid salary, vacation pay and certain other amounts considered to have been earned prior to termination. Company contributions to retirement plans and participation, including that of the executive’s eligible dependents, in Company provided welfare plan benefits will either be continued for two years following termination or their cash equivalent for such period paid to the executive. All un-exercised and un-vested equity incentives including restricted stock awards, stock appreciation rights and stock options previously granted to such executive will become immediately vested and exercisable.

The Agreement requires the Company to determine if the payments to an executive under the Agreement combined with any other payments or benefits to which the executive may be entitled (in aggregate the “Change in Control Payments”) would result in the imposition on the executive of the excise tax under Section 4999 of the Internal Revenue Code. The Agreement does not provide for a “tax gross up” reimbursement payment by the Company to the executive for taxes, including the Section 4999 excise taxes, the employee may owe as a result of receipt of payments under the Agreement. The Company will either reduce the Change in Control Payments to the maximum amount which would not result in imposition of the Section 4099 excise tax or pay the entire Change in Control Payment to the executive if, even after the executive’s payment of the Section 4099 excise tax, the executive would receive a larger net amount.

The Agreement does not provide for any employment or severance benefit prior to an actual or, in some circumstances shortly before, a contemplated Change in Control. In the event the executive is terminated more than two years following a Change in Control no severance benefits are provided under the Agreement. The Agreement provides that the executive not disclose any confidential information relating to the Company and, for a period of one year following termination of employment, not compete with the business as conducted by the Company within 100 miles of a Company facility nor solicit or hire employees of the Company or knowingly permit (to the extent reasonably within the executive’s control) any business or entity that employs the executive or in which the executive has an ownership interest to hire Company employees. If a court rules than the executive has violated these provisions, the rights of the executive under the Agreement will terminate.

The Agreement is in the form attached hereto as Exhibit 10.1.

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Stock Ownership Guidelines

Effective as of April 5, 2006, the Board of Directors of the Company approved stock ownership guidelines for directors, all officers and certain designated employees of the Company. Many of those covered by the guidelines presently own Company stock in amounts substantially in excess of these minimum requirements. The Board of Directors believes adoption of minimum ownership levels will serve to further align the interests of those covered by the guidelines with the Company’s stockholders. Under the Company’s stock ownership guidelines the following categories of directors, officers and employees are required to own Company common stock (“Company Common Stock”) with a market value, as determined on January 31 of each year, in the following amounts:

• Non-employee Directors — five times the annual retainer paid to all non-employee directors

• Chief Executive Officer — five times base salary

• President and Chief Operating Officer — four times base salary

• Most Vice Presidents including the Chief Financial Officer, each Company business segment President and General Counsel — three times base salary

• Controller, Treasurer and Vice President and Chief Information Officer — two times base salary

• Other executives as may be designated by the Compensation Committee of the Board of Directors — one times base salary.

All current directors, officers and designated employees must be in compliance with the guidelines by April 5, 2009. Individuals who are elected, hired or promoted into positions covered by the guidelines will have three years after such date to attain the minimum ownership level. Unvested restricted shares of Company Common Stock will be included when determining Company Common Stock ownership, but unexercised options, stock appreciation rights or similar equity incentives, vested or unvested, will not be included.

Lead Director

On February 10, 2006, the Board of Directors of the Company established the position of Lead Director and appointed Anthony A. Massaro to serve as Lead Director. On April 5, 2006, the Board of Directors approved an annual retainer of $10,000 for service as Lead Director, with the first year payment of such retainer to be prorated from February 1, 2006.

     ITEM 6. EXHIBITS

Exhibits required by Item 601 of Regulation S-K.

3(i) Certificate of Amendment of Restated Certificate of Incorporation of Commercial Metals Company dated February 17, 1995 (filed herewith).

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10.1	Form of Executive Employment Continuity Agreement (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 to 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).

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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 7, 2006	William B. Larson
	Vice President
	& Chief Financial Officer
	/s/ Leon K. Rusch
April 7, 2006	Leon K. Rusch
	Controller

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