Commercial Metals (CMC) 10-Q 2006 Q3 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 May 31, 2006

Commission File Number 1-4304

COMMERCIAL METALS COMPANY

(Exact Name of registrant as specified in its charter)

Delaware
(State or other Jurisdiction of incorporation of organization) 75-0725338
(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.

Yesþ       Noo

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

Yeso       Noþ

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 filerR      Accelerated filer£      Non-Accelerated filer£

As of July 6, 2006, there were 119,834,106 shares of the Company’s common stock issued and outstanding excluding 9,226,558 shares held in the Company’s treasury.

TABLE OF CONTENTS

2

PART 1. FINANCIAL INFORMATION

ITEM 1. FINANCIAL STATEMENTS

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

ASSETS

	May 31,			August 31,
(in thousands)	2006			2005
Current assets:
Cash and cash equivalents	$	123,178		$	119,404
Accounts receivable (less allowance for collection losses of $17,091 and $17,167)		1,025,734			829,192
Inventories		730,399			706,951
Other		66,759			45,370
Total current assets		1,946,070			1,700,917
Property, plant and equipment:
Land		43,992			41,887
Buildings and improvements		260,366			245,924
Equipment		927,608			863,748
Construction in process		48,498			49,183
		1,280,464			1,200,742
Less accumulated depreciation and amortization		(733,809	)		(695,158	)
		546,655			505,584
Goodwill		32,307			30,542
Other assets		121,099			95,879
	$	2,646,131		$	2,332,922

See notes to unaudited condensed consolidated financial statements.

3

LIABILITIES AND STOCKHOLDERS’ EQUITY

	May 31,			August 31,
(in thousands except share data)	2006			2005
Current liabilities:
Accounts payable-trade	$	473,781		$	408,342
Accounts payable-documentary letters of credit		101,103			140,986
Accrued expenses and other payables		302,194			293,598
Income taxes payable and deferred income taxes		8,516			40,126
Short-term trade financing arrangements		—			1,667
Notes payable — CMCZ		16,463			—
Current maturities of long-term debt		15,496			7,223
Total current liabilities		917,553			891,942
Deferred income taxes		45,181			45,629
Other long-term liabilities		72,808			58,627
Long-term debt		387,337			386,741
Total liabilities		1,422,879			1,382,939
Minority interests		53,900			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 129,060,664 and 64,530,332 shares; outstanding 120,864,218 and 58,130,723 shares		1,290			322,652
Additional paid-in capital		339,019			14,813
Accumulated other comprehensive income		36,009			24,594
Unearned stock compensation		—			(5,901	)
Retained earnings		858,984			644,319
		1,235,302			1,000,477
Less treasury stock:
8,196,446 and 6,399,609 shares at cost		(65,950	)		(100,916	)
Total stockholders’ equity		1,169,352			899,561
	$	2,646,131		$	2,332,922

See notes to unaudited condensed consolidated financial statements.

4

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

	Three Months Ended					Nine months Ended
	May 31,					May 31,
(in thousands, except share data)	2006		2005			2006		2005
Net sales	$	2,021,299	$	1,726,251		$	5,306,484	$	4,852,636
Costs and expenses:
Cost of goods sold		1,756,734		1,496,719			4,570,347		4,181,619
Selling, general and administrative expenses		130,510		106,192			355,867		329,627
Interest expense		6,940		7,608			20,816		23,426
		1,894,184		1,610,519			4,947,030		4,534,672
Earnings before income taxes and minority interests		127,115		115,732			359,454		317,964
Income taxes		46,085		46,345			129,030		117,329
Earnings before minority interests		81,030		69,387			230,424		200,635
Minority interests		3,070		(2,354	)		2,737		(1,406	)
Net earnings	$	77,960	$	71,741		$	227,687	$	202,041
Basic earnings per share	$	0.65	$	0.60		$	1.93	$	1.70
Diluted earnings per share	$	0.62	$	0.57		$	1.84	$	1.63
Cash dividends per share	$	0.05	$	0.03		$	0.11	$	0.09
Average basic shares outstanding		119,708,857		119,603,498			117,732,084		118,664,658
Average diluted shares outstanding		125,085,650		125,471,648			123,550,601		124,042,992

See notes to unaudited condensed consolidated financial statements.

5

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

	Nine months Ended
	May 31,
(in thousands)	2006			2005
Cash Flows From (Used By) Operating Activities:
Net earnings	$	227,687		$	202,041
Adjustments to reconcile net earnings to cash from (used by) operating activities:
Depreciation and amortization		61,522			56,756
Minority interests		2,737			(1,406	)
Provision for losses on receivables		2,162			3,574
Share-based compensation		6,975			—
Net gain on sale of assets and other		(1,584	)		(1,200	)
Changes in operating assets and liabilities, net of effect of acquisitions:
Accounts receivable		(198,540	)		(212,701	)
Accounts receivable sold		10,255			41,063
Inventories		(10,414	)		(84,414	)
Other assets		(40,711	)		(6,029	)
Accounts payable, accrued expenses, other payables and income taxes		26,815			12,503
Deferred income taxes		(2,785	)		(45	)
Other long-term liabilities		12,629			12,282
Net Cash Flows From Operating Activities		96,748			22,424
Cash Flows From (Used By) Investing Activities:
Purchases of property, plant and equipment		(92,627	)		(67,884	)
Purchase of interests in CMC Zawiercie		(934	)		—
Sales of property, plant and equipment		5,039			4,913
Acquisitions, net of cash acquired		(10,980	)		(2,950	)
Net Cash Used By Investing Activities		(99,502	)		(65,921	)
Cash Flows From (Used By) Financing Activities:
Increase (Decrease) in documentary letters of credit		(39,883	)		38,734
Payments on trade financing arrangements		(1,667	)		(16,311	)
Short-term borrowings, net change		16,463			(581	)
Payments on long-term debt		(9,023	)		(1,441	)
Proceeds from issuance of long-term debt		14,182			—
Stock issued under incentive and purchase plans		26,092			17,007
Dividends paid		(13,022	)		(10,146	)
Tax benefits from stock plans		10,644			10,809
Treasury stock acquired		—			(50,675	)
Net Cash From (Used By) Financing Activities		3,786			(12,604	)
Effect of Exchange Rate Changes on Cash		2,742			749
Increase (Decrease) in Cash and Cash Equivalents		3,774			(55,352	)
Cash and Cash Equivalents at Beginning of Year		119,404			123,559
Cash and Cash Equivalents at End of Period	$	123,178		$	68,207

See notes to unaudited condensed consolidated financial statements.

6

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

									Accumulated
	Common Stock					Additional			Other			Unearned						Treasury Stock
	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 nine months ended May 31, 2006																227,687									227,687
Other comprehensive income (loss):
Foreign currency translation adjustment, net of taxes of $1,285										12,962															12,962
Unrealized loss on hedges, net of taxes of $(641)										(1,547	)														(1,547	)
Comprehensive income																									239,102
Cash dividends																(13,022	)								(13,022	)
Change in par value of common stock				(322,007	)		322,007																		—
Restricted stock grant							(2,227	)											261,350			2,227			—
Stock issued under incentive and purchase plans							(6,783	)											2,220,835			32,875			26,092
Stock-based compensation							1,210						5,901						(8,700	)		(136	)		6,975
Tax benefits from stock plans							10,644																		10,644
Two-for-one stock split		64,530,332		645			(645	)											(4,270,322	)					—
Balance, May 31, 2006		129,060,664	$	1,290		$	339,019		$	36,009		$	—		$	858,984			(8,196,446	)	$	(65,950	)	$	1,169,352

See notes to unaudited condensed consolidated financial statements.

7

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.123(R), Share-Based Payment 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 nine 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 $2.6 million ($.01 per diluted share) and $7.0 million ($.04 per diluted share) as a component of selling, general and administrative expenses for the three and nine months ended May 31, 2006, respectively. The cumulative effect of adoption (primarily arising from the recognition of anticipated forfeitures) was not material. At May 31, 2006, the Company had $13.1 million of total unrecognized compensation cost related to non-vested share-based compensation arrangements. This cost is expected to be recognized over the next 35 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 nine months ended May 31, 2005 would have been adjusted to the pro forma amounts listed in the table below.

	Three Months Ended			Nine months Ended
	May 31,			May 31,
(in thousands, except share data)	2005			2005
Net earnings, as reported	$	71,741		$	202,041
Add: Stock-based compensation expense recognized		49			68
Less: Pro forma stock-based compensation cost		(538	)		(1,787	)
Net earnings — pro forma	$	71,252		$	200,322
Net earnings per share, as reported:
Basic	$	0.60		$	1.70
Diluted	$	0.57		$	1.63
Net earnings per share — pro forma:
Basic	$	0.60		$	1.69
Diluted	$	0.57		$	1.61

8

Combined information for shares subject to options and SARs for the nine months ended May 31, 2006 was as follows:

			Weighted
			Average		Price
			Exercise		Range
	Number		Price		Per Share
August 31, 2005
Outstanding		10,748,258	$	5.82	$	2.74 -13.58
Exercisable		7,959,758		4.54		2.74 -13.58
Granted		628,630		24.57		24.57 -24.71
Exercised		3,150,870		4.65		2.74 - 7.78
Forfeited		67,200		9.51		3.41 -12.31
May 31, 2006
Outstanding		8,158,818		7.68		2.75 - 24.71
Exercisable		6,519,688		5.34		2.75 - 13.58

Share information for options and SARs at May 31, 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
	$	2.75-3.99		2,706,928		2.6	$	3.48		2,706,928		$	3.48
	$	4.29-5.36		1,266,228		2.7		4.33		1,266,228			4.33
	$	7.53-7.78		2,528,042		4.8		7.77		2,528,042			7.77
	$	12.31-13.58		1,028,990		6.1		12.33		18,490			13.44
	$	24.57-24.71		628,630		7.0		24.57		0			—
	$	2.75-24.71		8,158,818		4.0	$	7.68		6,519,688		$	5.34

Of the Company’s previously granted restricted stock awards, 16,000 shares vested during the nine months ended May 31, 2006.

Intangible Assets

The total gross carrying amounts of the Company’s intangible assets that were subject to amortization were $18.6 million and $15.7 million at May 31, 2006 and August 31, 2005, respectively. Aggregate amortization expense for the three months ended May 31, 2006 and 2005 was $807 thousand and $331 thousand, respectively. Aggregate amortization expense for the nine months ended May 31, 2006 and 2005 was $2.0 million and $1.4 million, respectively.

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 nine months ended May 31, 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 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 May 31, 2006 or its results of operations for the three or nine months then ended.

9

NOTE C – ACQUISITIONS

During the nine months ended May 31, 2006, the Company acquired 3 businesses:

• On March 6, 2006, the Company acquired 100% of the shares of Southmet Pty Ltd, a plate and long products processor in Adelaide, Australia. The acquisition is expected to strengthen the Company’s marketing position in southern Australia.

• On March 1, 2006, the Company acquired substantially all of the operating assets of Brost Forming Supply, Inc., with facilities in Tucson and Phoenix, Arizona. Brost Forming Supply, Inc. specializes in concrete framework, tilt-up and concrete-related products. The acquisition is expected to strengthen the Company’s construction services presence in Arizona.

• On November 14, 2005, the Company acquired substantially all of the operating assets of Hall-Hodges Company, a reinforcing steel fabricator in Norfolk, Virginia. The acquisition is expected to strengthen the Company’s presence and improve its opportunity to grow in the eastern Virginia area.

The total purchase price of $18.0 million ($11.0 million in cash, $.4 million in notes payable, and $6.6 million in liabilities assumed) for these acquisitions was allocated to the acquired assets and assumed liabilities based upon estimates of their respective fair values. The following is a summary of the preliminary allocation of the total purchase price as of the date of the respective acquisitions presented in conformity with U.S. GAAP, subject to change following management’s final evaluation of the fair value:

(in thousands)
Accounts receivable	$	4,255
Inventories		7,477
Other current assets		72
Property, plant and equipment		3,075
Intangible assets		1,427
Goodwill		1,710
Liabilities		(6,586	)
	$	11,430

The intangible assets acquired include customer base and non-compete agreements, which will be amortized over 5 years and a backlog, which will be amortized over 12 months.

On June 7, 2006, the Company purchased substantially all of the operating assets of Yonack Iron & Metal Co. and related companies, which operate scrap and metal processing facilities in Dallas and Forney, Texas; Stroud, Oklahoma and Lonoke, Arkansas and a plastic scrap recycling facility in Grand Prairie, Texas. The acquisition is expected to strengthen the Company’s metal recycling presence in the Southwestern United States. The purchase price of $31.3 million ($31.2 million in cash, $.06 million in liabilities assumed) will be allocated to the acquired assets and assumed liabilities based upon estimates of their respective fair values. The following is a summary of the preliminary allocation of the purchase price as of the date of the acquisition presented in conformity with U.S. GAAP, subject to change following management’s final evaluation of the fair value:

(in thousands)
Inventories	$	6,343
Other current assets		53
Property, plant and equipment		22,294
Intangible assets		2,600
Other long-term assets		36
Liabilities		(57	)
	$	31,269

The pro forma impact of these acquisitions on consolidated net earnings would not have been materially different than reported net earnings.

10

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 May 31, 2006 and August 31, 2005, accounts receivable of $384 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 100% at May 31, 2006 and August 31, 2005. The Company did not sell any undivided interests in the pool of receivables to the financial institution buyers during the three months ended May 31, 2006. The average monthly amount of undivided interests owned by the financial institution buyers was $1.1 million and $34.9 million for the nine months ended May 31, 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 $73.5 million and $63.2 million at May 31, 2006 and August 31, 2005, respectively. The average monthly amounts of outstanding international accounts receivable sold were $60.6 million and $63.8 million for the nine months ended May 31, 2006 and 2005, respectively.

Discounts (losses) on domestic and international sales of accounts receivable were $787 thousand and $1.2 million for the three months ended May 31, 2006 and 2005, respectively. For the nine months ended May 31, 2006 and 2005, these discounts were $2.4 million and $3.0 million, respectively. These losses primarily represented the costs of funds and were included in selling, general and administrative expenses.

NOTE E – INVENTORIES

Before deduction of last-in, first-out (LIFO) inventory valuation reserves of $173.1 million and $111.4 million at May 31, 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 $61.4 million and $39.9 million were in raw materials at May 31, 2006 and August 31, 2005, respectively.

NOTE F – CREDIT ARRANGEMENTS

At May 31, 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 May 31, 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:

	May 31,		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		36,765		39,773
5.625% notes due 2013		200,000		200,000
Other, including equipment notes		16,068		4,191
		402,833		393,964
Less current maturities		15,496		7,223
	$	387,337	$	386,741

Interest on CMCZ’s term note is accrued at the Warsaw Interbank Offered Rate (WIBOR) plus 1.1% and was fixed at 5.22% for the three months ended May 31, 2006. The term note has scheduled semi-annual payments beginning in September 2005 and is collateralized by CMCZ’s property, plant and equipment. On May 12, 2006, CMCZ entered into a revolving credit facility agreement

11

with maximum borrowings of 100 million PLN ($32.7 million) and secured by CMCZ receivables. It has an expiration date of May 11, 2007 and interest is accrued at the WIBOR plus 0.55%. At May 31, 2006, 50.4 million PLN ($16.5 million) was 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 May 31, 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 40.0 million PLN ($13.1 million) outstanding at May 31, 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 May 31, 2006 was 4.25%. The notes are substantially secured by the shredder equipment.

Interest of $22.4 million and $23.7 million was paid in the nine months ended May 31, 2006 and 2005, respectively.

NOTE G – INCOME TAXES

The Company paid $149.4 million and $85.2 million in income taxes during the nine months ended May 31, 2006 and 2005, respectively.

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

	Three Months Ended						Nine months Ended
	May 31,						May 31,
(in thousands, except share data)	2006			2005			2006			2005
Statutory rate		35.0	%		35.0	%		35.0	%		35.0	%
State and local taxes		3.1			2.8			2.0			2.3
Extraterritorial Income Exclusion (ETI)		(0.3	)		(0.2	)		(0.2	)		(0.3	)
Foreign rate differential		(1.0	)		2.1			(0.5	)		(0.6	)
Domestic production activity deduction		(1.0	)		—			(0.7	)		—
Other		0.5			0.3			0.3			0.5
Effective rate		36.3	%		40.0	%		35.9	%		36.9	%

The American Jobs Creation Act of 2004 (AJCA) would allow the Company a one-time opportunity to repatriate undistributed foreign earnings by 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. The Company continues to evaluate whether it will repatriate foreign earnings under this provision of the AJCA. Up to $20 million is being considered for possible repatriation. The Company estimates that the U.S. tax liability incurred on the possible repatriation could range up to $1.8 million for which the Company has recorded $3 million of deferred taxes. On May 18, 2006 the State of Texas passed a bill to replace the current franchise tax with a new margin tax to be effective January 1, 2008. The Company estimates the new margin tax will not have a significant impact on tax expense or deferred tax assets and liabilities.

NOTE H – STOCKHOLDERS’ EQUITY AND EARNINGS PER SHARE

On April 24, 2006, the Company declared a two-for-one stock split in the form of a 100% stock dividend on the Company’s common stock payable May 22, 2006 to shareholders of record on May 8, 2006. The stock dividend resulted in the issuance of 64,530,332 additional shares of common stock and a transfer of $0.6 million from additional paid-in capital at the record date. All per share and weighted average share amounts in the accompanying condensed consolidated financial statements have been restated to reflect the stock split. The Company also instituted a quarterly cash dividend of six cents per share on the increased number of shares resulting from the stock dividend effective with the July, 2006 dividend payment.

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 nine months ended May 31, 2006 or 2005. The reconciliation of the denominators of the earnings per share calculations is as follows:

12

	Three Months Ended				Nine months Ended
	May 31,				May 31,
	2006		2005		2006		2005
Average shares outstanding for basic earnings per share		119,708,857		119,603,498		117,732,084		118,664,658
Effect of dilutive securities-stock based incentive/purchase plans		5,376,793		5,868,150		5,818,517		5,378,334
Average shares outstanding for diluted earnings per share		125,085,650		125,471,648		123,550,601		124,042,992

All of the Company’s outstanding stock options, restricted stock and Stock Appreciation Rights (SARs) with total share commitments of 8,943,368 and 10,214,404 at May 31, 2006 and 2005, were dilutive based on the average share price for the quarters then ended of $25.30 and $15.05, respectively. All stock options and SARs expire by 2013.

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 May 31, 2006, the Company had authorization to purchase 1,811,000 of its common shares.

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 recorded in the statements of earnings; and additionally, there were no components excluded from the assessment of hedge effectiveness for the three or nine months ended May 31, 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					Nine months Ended
	May 31,					May 31,
	2006			2005		2006			2005
(in thousands)	Earnings (Expense)					Earnings (Expense)
Net sales (foreign currency instruments)	$	(421	)	$	1,020	$	(507	)	$	(242	)
Cost of goods sold (commodity instruments)		3,958			997		4,007			(81	)

13

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

	May 31,		August 31,
(in thousands)	2006		2005
Derivative assets (other current assets)	$	8,880	$	2,563
Derivative liabilities (other payables)		6,675		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 nine months ended May 31, 2006 (in thousands):

Change in market value (net of taxes)	$	(1,473	)
(Gains) losses reclassified into net earnings, net		(74	)
Other comprehensive loss — unrealized loss on derivatives	$	(1,547	)

During the twelve months following May 31, 2006, $114 thousand in 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 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 $3.6 million and $10.1 million for the three and nine months ended May 31, 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 May 31, 2006
									Marketing
	Domestic				Domestic				and
(in thousands)	Mills		CMCZ		Fabrication		Recycling		Distribution		Corporate			Eliminations			Consolidated
Net sales-unaffiliated customers	$	311,815	$	149,496	$	459,496	$	357,269	$	743,356	$	(133	)	$	—		$	2,021,299
Intersegment sales		110,658		8,388		455		28,206		40,197		—			(187,904	)		—
Net sales		422,473		157,884		459,951		385,475		783,553		(133	)		(187,904	)	$	2,021,299
Adjusted operating profit (loss)		69,663		13,875		17,521		22,476		19,896		(8,589	)		—			134,842

	Three Months Ended May 31, 2005
										Marketing
	Domestic					Domestic				and
(in thousands)	Mills		CMCZ			Fabrication		Recycling		Distribution		Corporate			Eliminations			Consolidated
Net sales-unaffiliated customers	$	266,926	$	105,501		$	391,986	$	217,589	$	744,777	$	(528	)	$	—		$	1,726,251
Intersegment sales		77,071		4,476			243		21,299		26,460					(129,549	)		—
Net sales		343,997		109,977			392,229		238,888		771,237		(528	)		(129,549	)		1,726,251
Adjusted operating profit (loss)		60,661		(9,811	)		39,681		15,712		21,834		(3,541	)		—			124,536

14

	Nine months Ended May 31, 2006
									Marketing
	Domestic				Domestic				and
(in thousands)	Mills		CMCZ		Fabrication		Recycling		Distribution		Corporate			Eliminations			Consolidated
Net sales-unaffiliated customers	$	837,596	$	363,158	$	1,267,570	$	816,369	$	2,017,810	$	3,981		$	—		$	5,306,484
Intersegment sales		320,826		14,642		1,060		77,518		92,485		—			(506,531	)		—
Net sales		1,158,422		377,800		1,268,630		893,887		2,110,295		3,981			(506,531	)		5,306,484
Adjusted operating profit (loss)		205,350		14,823		74,212		54,902		55,885		(22,542	)		—			382,630
Goodwill – May 31, 2006		306		—		27,006		3,230		1,765		—			—			32,307
Total Assets – May 31, 2006		507,946		305,531		669,142		261,291		759,131		143,090			—			2,646,131

	Nine months Ended May 31, 2005
										Marketing
	Domestic					Domestic				and
(in thousands)	Mills		CMCZ			Fabrication		Recycling		Distribution		Corporate			Eliminations			Consolidated
Net sales-unaffiliated customers	$	729,460	$	330,737		$	1,049,188	$	622,727	$	2,117,684	$	2,840		$	—		$	4,852,636
Intersegment sales		214,134		9,998			567		61,141		83,152		—			(368,992	)		—
Net sales		943,594		340,735			1,049,755		683,868		2,200,836		2,840			(368,992	)		4,852,636
Adjusted operating profit (loss)		153,850		(2,038	)		82,387		55,560		68,418		(13,809	)		—			344,368
Goodwill – May 31, 2005		306		—			27,006		3,230		—		—			—			30,542
Total Assets – May 31, 2005		453,938		253,143			590,304		144,562		727,012		69,369			—			2,238,328

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

	Three Months Ended					Nine months Ended
	May 31,					May 31,
(in thousands)	2006		2005			2006		2005
Net earnings	$	77,960	$	71,741		$	227,687	$	202,041
Minority interests		3,070		(2,354	)		2,737		(1,406	)
Income taxes		46,085		46,345			129,030		117,329
Interest expense		6,940		7,608			20,816		23,426
Discounts on sales of accounts receivable		787		1,196			2,360		2,978
Adjusted operating profit	$	134,842	$	124,536		$	382,630	$	344,368

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

	Three Months Ended				Nine months Ended
	May 31,				May 31,
(in thousands)	2006		2005		2006		2005
Major product information:
Steel products	$	1,197,672	$	1,077,411	$	3,158,055	$	3,124,467
Ferrous scrap		112,647		78,701		275,671		265,151
Nonferrous scrap		242,405		138,137		535,623		352,650
Nonferrous products		166,536		135,641		387,067		356,656
Industrial materials		187,041		240,527		632,078		589,288
Construction materials		101,702		51,239		279,867		139,272
Other		13,296		4,595		38,123		25,152
Net sales	$	2,021,299	$	1,726,251	$	5,306,484	$	4,852,636

15

	Three Months Ended				Nine months Ended
	May 31,				May 31,
(in thousands)	2006		2005		2006		2005
Geographic area:
United States	$	1,330,527	$	1,040,687	$	3,431,906	$	2,906,949
Europe		329,849		277,607		799,455		861,025
Asia		181,815		235,228		566,037		638,202
Australia/New Zealand		109,900		122,386		327,057		299,939
Other		69,208		50,343		182,029		146,521
Net sales	$	2,021,299	$	1,726,251	$	5,306,484	$	4,852,636

Net sales for Europe and the United States for the nine months ended May 31, 2005 have been changed 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 $195.4 million and $188.8 million for the nine months ended May 31, 2006 and 2005, respectively.

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						Nine months Ended
	May 31,				%		May 31,				%
(in millions)	2006		2005		Change		2006		2005		Change
Net sales	$	2,021.3	$	1,726.3		17	$	5,306.5	$	4,852.6		9
Net earnings		78.0		71.7		9		227.7		202.0		13
EBITDA		152.8		144.6		6		439.0		399.5		10

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							Nine months Ended
	May 31,				%			May 31,				%
(in millions)	2006		2005		Change			2006		2005		Change
Net earnings	$	78.0	$	71.7		9		$	227.7	$	202.0		13
Interest expense		6.9		7.6		(9	)		20.8		23.4		(11	)
Income taxes		46.1		46.3		—			129.0		117.3		10
Depreciation and amortization		21.8		19.0		15			61.5		56.8		8
EBITDA	$	152.8	$	144.6		6		$	439.0	$	399.5		10

16

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.

OverviewReported net earnings of $78.0 million or $0.62 per diluted share for the third quarter ended May 31, 2006, ranks it as the strongest third quarter ever reported for the Company. The following financial events were significant during our 2006 third quarter compared to last year’s third quarter:

• This year’s third quarter included after-tax LIFO expense of $28.6 million or $0.23 per diluted share, the largest quarterly charge in the Company’s history. The prior year’s third quarter had after-tax LIFO income of $1.5 million, a difference of $30.1 million to this year’s third quarter.

• Net sales increased 17%, led by Recycling (61%), CMCZ (44%), and Domestic Mills (23%).

• Tons shipped increased at the steel minimills (14%), Domestic Fabrication (26%) and Recycling (12%).

• Non-ferrous metal prices hit all-time highs before undergoing some correction.

• Metal spreads improved 8% at domestic steel mills and 7% at CMCZ.

• CMCZ had an adjusted operating profit on a 100% owned basis of $13.9 million as compared to an adjusted operating loss of $9.8 million last year.

• Domestic Fabrication’s adjusted operating profit decreased to $17.5 million as compared to last year’s profit of $39.7 million, caused mainly by $14.7 million pre-tax LIFO expense.

• The Marketing and Distribution segment’s adjusted operating profit of $19.9 million was 9% below last year’s very strong third quarter on 2% higher net sales. Aluminum, copper, stainless steel semis and industrial products had tighter margins.

• During the quarter, we started the new continuous caster at CMC Steel Texas and the new shredder at CMCZ. Both are major capital projects.

• Effective September 1, 2005, we recognized pre-tax compensation expense of $2.6 million and $7.0 million for the three and nine months ended May 31, 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:

17

	Three Months Ended									Nine months Ended
	May 31,						%			May 31,						%
(in millions)	2006			2005			Change			2006			2005			Change
NET SALES:
Domestic mills	$	422,473		$	343,997			23		$	1,158,422		$	943,594			23
CMCZ*		157,884			109,977			44			377,800			340,735			11
Domestic fabrication		459,951			392,229			17			1,268,630			1,049,755			21
Recycling		385,475			238,888			61			893,887			683,868			31
Marketing and distribution		783,553			771,237			2			2,110,295			2,200,836			(4	)
Corporate and eliminations		(188,037	)		(130,077	)		(45	)		(502,550	)		(366,152	)		(37	)
	$	2,021,299		$	1,726,251			17		$	5,306,484		$	4,852,636			9

* Before minority interests

	Three Months Ended									Nine months Ended
	May 31,						%			May 31,						%
(in millions)	2006			2005			Change			2006			2005			Change
ADJUSTED OPERATING PROFIT (LOSS):
Domestic mills	$	69,663		$	60,661			15		$	205,350		$	153,850			33
CMCZ*		13,875			(9,811	)		241			14,823			(2,038	)		827
Domestic fabrication		17,521			39,681			(56	)		74,212			82,387			(10	)
Recycling		22,476			15,712			43			54,902			55,560			1
Marketing and distribution		19,896			21,834			(9	)		55,885			68,418			(18	)
Corporate and eliminations		(8,589	)		(3,541	)		(143	)		(22,542	)		(13,809	)		(63	)

* Before minority interests

LIFO Impact on Adjusted Operating Profit— LIFO is an inventory costing assumption that assumes the most recent inventory purchases or goods manufactured are sold first. This results in current sales prices offset against current inventory costs. In periods of rising prices it has the effect of eliminating inflationary profits from net income. In periods of declining prices it has the effect of eliminating deflationary losses from net income. In either case the goal is to reflect economic profit. The table below reflects LIFO income or (expense) representing decreases or (increases) in the LIFO inventory reserve. CMCZ is not included in this table as it uses FIFO valuation exclusively for its inventory:

	Three Months Ended						Nine Months Ended
	May 31,						May 31,
	2006			2005			2006			2005
Domestic mills	$	(14,753	)	$	7,962		$	(25,111	)	$	(20,103	)
Domestic fabrication		(14,674	)		149			(18,885	)		(9,053	)
Recycling		(10,067	)		(1,845	)		(14,644	)		(3,010	)
Marketing and distribution		(4,569	)		(3,999	)		(3,051	)		(3,762	)
Consolidated increase (decrease) to adjusted profit before tax		(44,063	)		2,267			(61,691	)		(35,928	)

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 steel metal margins (our average selling price less our average cost of scrap used in production) of 8% and 9% for the three and nine months ended May 31, 2006, respectively, more than offset an increase of 19% in energy costs.

Selling prices for our domestic steel minimills increased for the three and nine months ended May 31, 2006 as compared to 2005 due to strong domestic demand for steel including public works and commercial construction. Our average total mill selling price for the third quarter was $39 per ton above last year’s level. By product line, the price premium of merchant bar over reinforcing bar remained unchanged at $81 per ton.

18

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

	Three Months Ended				Increase				Nine months Ended				Increase
	May 31,				(Decrease)				May 31,				(Decrease)
	2006		2005		$		%		2006		2005		$		%
Average mill selling price (finished goods)	$	530	$	490	$	40		8	$	519	$	493	$	26		5
Average mill selling price (total sales)		515		476		39		8		502		478		24		5
Average ferrous scrap production cost		217		200		17		9		209		208		1		0
Average metal margin		298		276		22		8		293		270		23		9
Average ferrous scrap purchase price		194		175		19		11		188		182		6		3

Our mills’ shipments increased for the three and nine months ended May 31, 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						Nine months Ended				Increase
	May 31,				(Decrease)						May 31,				(Decrease)
	2006		2005		Amount			%			2006		2005		Amount		%
Tons melted		557		587		(30	)		(5	)		1,707		1,671		36		2
Tons rolled		572		544		28			5			1,627		1,562		65		4
Tons shipped		640		607		33			5			1,867		1,659		208		13

Three of our domestic steel minimills were more profitable for the three and nine months ended May 31, 2006 as compared to 2005; CMC Steel Arkansas recorded a loss before tax and a 39% reduction of profit before tax, respectively, primarily due to LIFO expense and higher material cost. Selling prices at all domestic steel mills were higher for the same periods in 2006. Tons shipped were higher for all domestic steel minimills for the three and nine months ended May 31, 2006 as compared to 2005, except for CMC Steel Texas where tons shipped were down slightly due to the successful start up of the new continuous caster during the third quarter of 2006. The commissioning of the caster will continue over the next several months. During the three and nine months ended May 31, 2005, the domestic steel mills reported gains of $4.5 million and $8.5 million from business interruption insurance recovery.

Overall our domestic steel mills had pretax LIFO expense of $10.9 million during the three months and $18.1 million for the nine months ended May 31, 2006 as compared to $6.3 million LIFO income and $19.7 million LIFO expense for the three and nine months ended May 31, 2005, respectively. Our total utility costs increased by $3.6 million (19%) and $20.0 million (38%) for the three and nine months ended May 31, 2006, respectively, as compared to 2005. Year-over-year costs for ferroalloys and graphite electrodes were mixed, while transportation rates rose significantly.

19

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

	Three Months Ended				Increase				Nine months Ended				Increase
	May 31,				(Decrease)				May 31,				(Decrease)
	2006		2005		Amount		%		2006		2005		Amount		%
Pounds shipped (in millions)		20.3		18.0		2.3		13		52.2		50.1		2.1		4
Pounds produced (in millions)		16.9		14.5		2.4		17		49.5		46.8		2.7		6
Average selling price	$	3.32	$	1.93	$	1.39		72	$	2.90	$	1.88	$	1.02		54
Average copper scrap production cost	$	2.11	$	1.37	$	.74		54	$	1.81	$	1.26	$	.55		44
Average metal margin	$	1.21	$	0.56	$	.65		116	$	1.09	$	0.62	$	.47		76
Average copper scrap purchase price	$	2.47	$	1.42	$	1.05		74	$	2.06	$	1.34	$	.72		54

Our copper tube minimill’s adjusted operating profit was $8.4 million and $18.7 million for the three and nine months ended May 31, 2006, respectively, as compared to $1.7 million and $4.9 million, respectively, in 2005. Better market conditions in the industry, particularly stronger commercial demand, resulted in an increased average selling price for the third quarter of $3.32 per pound and metal spreads widened to $1.21 per pound, up from 56 cents, more than offsetting the pronounced rise in the cost of scrap. Pounds shipped were up 13% and 4% for the three and nine months ended May 31, 2006, respectively, as compared to 2005; however, sales revenue increased 94% and 60% for the same periods in 2006 as compared to 2005 caused mainly by selling price increases. Our copper tube mill recorded $3.9 million and $7.1 million LIFO expense for the three and nine months ended May 31, 2006 as compared to $1.7 million LIFO income and $0.4 million LIFO expense in 2005, respectively.

CMCZOperating levels and shipments were up significantly from those of third quarter and year-to-date of fiscal 2005, including higher exports, while prices and margins improved markedly. The end result is that CMCZ went from an adjusted operating loss in the third quarter of 2005, a period of inventory overhang, to an operating profit in 2006. CMCZ reported an adjusted operating profit of $13.9 million and an adjusted operating profit of $14.8 million for the three and nine months ended May 31, 2006 as compared to adjusted operating losses of $9.8 million and $2.0 million in 2005, respectively. The change in foreign currency exchange rates had nominal impact on the reported sales for the aforementioned periods in 2006. During May, 2006 we began the operation of the new mega-shredder; commissioning will continue throughout the fourth quarter with expected benefits of higher melt yields and lower furnace operating costs beginning in fiscal 2007. The following table reflects CMCZ’s operating statistics and average prices per short ton:

20

	Three Months Ended						Increase				Nine months Ended						Increase
	May 31,						(Decrease)				May 31,						(Decrease)
	2006			2005			Amount		%		2006			2005			Amount			%
Tons melted (thousands)		375			219			156		71		945			750			195			26
Tons rolled (thousands)		300			198			102		52		798			606			192			32
Tons shipped (thousands)		330			244			86		35		872			704			168			24
Average mill selling price (total sales)	1,393		PLN	1,313		PLN		80		6	1,317		PLN	1,502		PLN		(185	)		(12	)
Average ferrous scrap production cost	753		PLN	717		PLN		36		5	710		PLN	877		PLN		(167	)		(19	)
Average metal margin	640		PLN	596		PLN		44		7	607		PLN	625		PLN		(18	)		(3	)
Average ferrous scrap purchase price	635		PLN	551		PLN		84		15	599		PLN	713		PLN		(114	)		(16	)
Average mill selling price (total sales)	$	445		$	417		$	28		7	$	412		$	458		$	(46	)		(10	)
Average ferrous scrap production cost	$	241		$	228		$	13		6	$	222		$	267		$	(45	)		(17	)
Average metal margin	$	204		$	189		$	15		8	$	190		$	191		$	(1	)		(1	)
Average ferrous scrap purchase price	$	201		$	182		$	19		10	$	185		$	214		$	(29	)		(14	)

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

	Three Months Ended				Increase				Nine months Ended				Increase
	May 31,				(Decrease)				May 31,				(Decrease)
	2006		2005		Amount		%		2006		2005		Amount		%
Tons shipped (in thousands)		436		347		89		26		1,162		971		191		20
Average selling price*	$	864	$	864	$	0		0	$	859	$	845	$	14		2

* excluding stock and buyout sales

Net sales for the third quarter of 2006 were up 17% over 2005, but reported adjusted operating profit fell to $17.5 million, a substantial decrease compared to last year’s $39.7 million profit; the largest single item was a $14.7 million pre-tax LIFO expense whereas last year’s LIFO impact was negligible. Other costs included higher incentive compensation accruals, administrative expense at new locations, and a larger elimination of profit on intercompany sales awaiting delivery to third parties. Total shipments increased 26% and 20% for the three and nine months ended May 31, 2006, respectively, as compared to last year. Material costs were higher than last year, putting some pressure on margins. The composite fab selling price essentially was unchanged versus the prior year. Construction activity was strong in all sectors, led by public and institutional building and highway construction.

21

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

	Three Months Ended				Increase				Nine months Ended				Increase
	May 31,				(Decrease)				May 31,				(Decrease)
	2006		2005		Amount		%		2006		2005		Amount			%
Ferrous sales price	$	210	$	184	$	26		14	$	199	$	200	$	(1	)		(1	)
Nonferrous sales price	$	2,705	$	1,698	$	1,007		59	$	2,250	$	1,609	$	641			40
Ferrous tons shipped		577		491		86		18		1,535		1,424		111			8
Nonferrous tons shipped		85		76		9		12		229		215		14			7
Total volume processed and shipped*		976		869		107		12		2,677		2,519		158			6

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

The Recycling segment achieved a record third quarter with net sales up 61% compared to one year ago and up 31% year-to-date. The third quarter of 2006 was marked by historically high nonferrous price levels. The adjusted operating profit of $22.5 million was up 43% from last year’s third quarter. LIFO expense was $10.1 million and $14.6 million for the three and nine months ended May 31, 2006, respectively, as compared to $1.8 million and $3.0 million last year. The ferrous scrap market was still strong, less volatile and prices were higher than the third quarter last year. Versus last year, the average ferrous scrap sales price increased 14% for the quarter and decreased 1% year-to-date. The average nonferrous scrap sales price for the third quarter jumped nearly 60% compared with a year ago. The total volume of scrap processed increased 12% over last year’s third quarter and 6% year-to-date. Inventory turnover across the board remained extremely rapid.

On June 7, 2006, the Company completed the previously announced purchase of substantially all of the operating assets of Yonack Iron & Metal and affiliates, which operates scrap and metal processing facilities in Texas, Oklahoma and Arkansas.

Marketing and DistributionAdjusted operating profit for the Marketing and Distribution segment was 9% below last year’s very strong third quarter on 2% higher net sales. For the nine months ended May 31, 2006, adjusted operating profit and sales were down 18% and 4%, respectively, compared to last year. Steel tonnage for the third quarter was up in most of our markets, especially sales into the U.S., although sales dollars were mixed in the various markets. Gross margins overall increased, resulting in increased profitability for this large product line. Conversely, aluminum, copper and stainless semis were characterized by lower volume, tighter margins and higher transaction costs. Sales and margins for industrial materials and products were off the peaks of last year, despite higher volume, reflecting generally lower sales prices. Our value-added downstream and processing business continued to perform well, although not as profitable as recent quarters.

Corporate and EliminationsOur corporate expenses for the three and nine months ended May 31, 2006 were higher than last year due to higher salaries, the recording of share-based compensation and professional consulting services for human resources and information services. Elimination of profit on intercompany sales was also greater for the same periods.

CONSOLIDATED DATA

Our overall selling, general and administrative expenses increased $24.3 million (23%) and $26.2 million (8%) for the three and nine months ended May 31, 2006 as compared to 2005, respectively, because of increases in salary compensation, bonus accruals, stock-based compensation and professional consulting services.

Interest expense for the nine months ended May 31, 2006 was $2.6 million (11%) less than 2005 due primarily to lower short- and long-term borrowings outstanding.

Our overall effective tax rate for the nine months ended May 31, 2006 decreased to 35.9% as compared to 36.9% in 2005. The tax rate for the third quarter 2006 was 36.3% versus 40.0% for 2005. The lower tax rates are primarily caused by the domestic production activity deduction and the foreign tax rate differential where tax rates are lower in some foreign countries.

22

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

Generally robust global economic conditions prevail. Some moderation of economic growth is expected, and in the case of China, welcomed, but our key end-use markets remain strong. The global steel market is firm for virtually all products, reflecting strong demand and low inventories around the world. Manufacturing activity continues to expand. While residential construction in the U.S. has pulled back from its peak, worldwide non-residential construction is expected to strengthen further. More specifically, construction materials generally are in strong demand. Our domestic steel mill markets, if anything, are showing further strengthening. While imports of carbon steel bar products recently have increased sharply into the U.S., strong demand appears to be absorbing the supply. Our mill shipments in the U.S. and Poland will remain strong during the fourth quarter, and realized steel prices should move yet higher. Steel scrap prices are at a 12-month high, both domestically and internationally, and are up again in June. The outlook for nonferrous markets remains favorable, although varying price corrections from the record highs occurred recently. Demand for downstream products and services remains vibrant, but we will experience some short-term margin squeeze because of the recent rise in mill prices.

Accordingly, net income from our domestic steel mills should remain strong during the fourth quarter, and the copper tube business should be stable at the improved earnings level. Results at CMCZ are expected to improve further. Our anticipation is that fabrication profits will improve as long as finished goods prices rise at rates that new contracts can absorb. Our Recycling segment will again post strong results buoyed by relatively firm markets with tonnage augmented by the Yonack acquisition. We expect the Marketing and Distribution segment to have another satisfactory quarter driven by relatively firm volume and margins in various steel markets, improved results in nonferrous semis, and steady performance for industrial materials at a high pace.

Overall, we believe product demand volume and prices will remain strong. We anticipate fourth quarter LIFO diluted net earnings per share between $0.70 and $0.80.

23

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 May 31, 2006 (dollars in thousands):

	Total
Source	Facility		Availability
Net cash flows from operating activities	$	96,748		N/A
Commercial paper program *		400,000	$	372,925
Domestic accounts receivable securitization		130,000		130,000
International accounts receivable sales facilities		90,263		16,813
Bank credit facilities — uncommitted		987,953		511,679
Notes due from 2007 to 2013		350,000		**
Trade financing arrangements		—	As required
CMCZ revolving credit facility		32,680		16,216
CMCZ term note due March 2009		36,765		—
CMCZ & CMC Poland equipment notes		13,744		—

*	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 May 31, 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 May 31, 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, and CMCZ, in addition to significant sales growth in domestic mills and recycling segments

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

- Accounts payable – documentary letters of credit – less documentary letters of credit used for purchases and more standard trade terms used

- Income taxes payable – payment of taxes with return filed in third quarter

We expect our total capital spending for fiscal 2006 to be $150 million, including the completion in the third quarter of our shredder in Poland and our continuous caster project at our Texas melt shop. This is down some $28 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 $93 million in property, plant and equipment during the first nine months of fiscal 2006. We continuously assess our capital spending and reevaluate our requirements based upon current and expected results.

24

We did not purchase any of our common shares for our treasury during the nine months ended May 31, 2006. During the nine months ended May 31, 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.

CONTRACTUAL OBLIGATIONS

The following table represents our contractual obligations as of May 31, 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)	$	402,833	$	15,496	$	181,585	$	5,699	$	200,053
Notes payable — CMCZ		16,463		16,463		—		—		—
Interest(2)		111,558		23,541		37,204		22,673		28,140
Operating leases(3)		87,357		22,349		33,905		18,332		12,771
Purchase obligations(4)		1,161,664		900,123		171,133		69,159		21,249
Total contractual cash obligations	$	1,779,875	$	977,972	$	423,827	$	115,863	$	262,213

*	We have not discounted the cash obligations in this table.
(1)	Total amounts are included in the May 31, 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 May 31, 2006.
(3)	Includes minimum lease payment obligations for non-cancelable equipment and real estate leases in effect as of May 31, 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 May 31, 2006, we had committed $31.1 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, interest rates, energy expense, 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,

25

• 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,

• the pace of overall economic activity, particularly China, and

• difficulties or delays in the execution of construction contracts resulting in cost overruns or contract disputes.

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 and 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.

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.

26

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. SMI-Owen Steel Company, a subsidiary of the Company, filed suit (C.A. No G-00-149 United States District Court Southern District of Texas) in March, 2000, against defendants including J&H Marsh McLennan (now known as Marsh USA, Inc.) seeking the recovery of certain damages related to claims, including insurance coverage and broker’s acts, errors and omissions , arising from work performed on a large hotel and casino construction project. Following a jury trial and verdict, on June 20, 2006, the Court entered final judgment in favor of SMI-Owen Steel Company in the amount of $7,839,000 against Marsh USA, Inc. Marsh USA, Inc. has filed post trial motions for a stay of execution of the final judgment, seeking judgment in its favor as a matter of law, seeking to have the Court alter or amend the judgment and seeking a new trial. The Company intends to vigorously oppose these post trial motions.

     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 March 1, 2006								1,811,000	(1)
March 1 – March 31, 2006		30,066	(2)	$	23.07
April 1 – April 30, 2006		0		$	0.00
May 1 – May 31, 2006		106	(2)	$	29.13
As of May 31, 2006		30,172	(2)	$	23.09			1,811,000	(1)

(1)	Shares available to be purchased under the Company’s Share Repurchase Program publicly announced May 24, 2005, as adjusted for May, 2006 two-for-one stock split.
(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

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

          Not Applicable.

     ITEM 5. OTHER INFORMATION

          Not Applicable.

     ITEM 6. EXHIBITS

Exhibits required by Item 601 of Regulation S-K.

27

10(i)	Amendment to Restated Receivables Purchase and Agreement dated as of April 14, 2006.
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).

28

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

29