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, 2007

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.

		Yes		No
		þ		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 filer  þ     Accelerated filer  o     Non-Accelerated filer  o

As of July 5, 2007, there were 119,693,752 shares of the Company’s common stock issued and outstanding excluding 9,366,912 shares held in the Company’s treasury.

 

 

TABLE OF CONTENTS

				PAGE NO.
PART I — FINANCIAL INFORMATION
Item 1.		Financial Statements (Unaudited)
		Condensed Consolidated Balance Sheets — May 31, 2007 and August 31, 2006			2 — 3
		Condensed Consolidated Statements of Earnings — Three months and Nine months ended May 31, 2007 and 2006			4
		Condensed Consolidated Statements of Cash Flows — Nine months ended May 31, 2007 and 2006			5
		Condensed Consolidated Statement of Stockholders’ Equity — Nine months ended May 31, 2007			6
		Notes to Condensed Consolidated Financial Statements			7 — 14
Item 2.		Management’s Discussion and Analysis of Financial Condition and Results of Operations			15 — 24
Item 3.		Quantitative and Qualitative Disclosures about Market Risk			25
Item 4.		Controls and Procedures			25
PART II — OTHER INFORMATION
Items 1 — 6					26 — 28
Signatures					27
Index to Exhibits					28
		Certification Pursuant to Section 302
		Certification Pursuant to Section 302
		Certification Pursuant to Section 906
		Certification Pursuant to Section 906
Certification of the CEO Pursuant to Section 302
Certification of the CFO Pursuant to Section 302
Certification of the CEO Pursuant to Section 906
Certification of the CFO Pursuant to Section 906

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)		2007				2006
Current assets:
Cash and cash equivalents		$	73,125			$	180,719
Accounts receivable (less allowance for collection losses of $17,214 and $16,075)			1,153,405				1,134,823
Inventories			1,011,083				762,635
Other			87,379				66,615
Total current assets			2,324,992				2,144,792
Property, plant and equipment:
Land			53,779				44,702
Buildings and improvements			316,072				268,755
Equipment			1,056,300				970,973
Construction in process			90,445				51,184
			1,516,596				1,335,614
Less accumulated depreciation and amortization			(812,342	)			(746,928	)
			704,254				588,686
Goodwill			37,485				35,749
Other assets			197,469				129,641
		$	3,264,200			$	2,898,868

See notes to unaudited condensed consolidated financial statements.

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

LIABILITIES AND STOCKHOLDERS’ EQUITY

		May 31,				August 31,
(in thousands except share data)		2007				2006
Current liabilities:
Commercial paper		$	146,915			$	—
Notes payable			48,244				60,000
Accounts payable-trade			542,341				526,408
Accounts payable-documentary letters of credit			156,429				141,713
Accrued expenses and other payables			370,593				379,764
Income taxes payable and deferred income taxes			7,793				14,258
Current maturities of long-term debt			54,590				60,162
Total current liabilities			1,326,905				1,182,305
Deferred income taxes			33,138				34,550
Other long-term liabilities			108,079				78,789
Long-term debt			309,552				322,086
Total liabilities			1,777,674				1,617,730
Minority interests			5,441				61,034
Commitments and contingencies
Stockholders’ equity:
Capital stock:
Preferred stock			—				—
Common stock, par value $0.01 per share: authorized 200,000,000 shares; issued 129,060,664 shares; outstanding 119,510,208 and 117,881,160 shares			1,290				1,290
Additional paid-in capital			353,259				346,994
Accumulated other comprehensive income			56,894				33,239
Retained earnings			1,202,685				980,454
			1,614,128				1,361,977
Less treasury stock:
9,550,456 and 11,179,504 shares at cost			(133,043	)			(141,873	)
Total stockholders’ equity			1,481,085				1,220,104
		$	3,264,200			$	2,898,868

See notes to unaudited condensed consolidated financial statements.

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)		2007				2006				2007				2006
Net sales		$	2,345,703			$	2,021,299			$	6,348,023			$	5,306,484
Costs and expenses:
Cost of goods sold			2,027,843				1,756,734				5,488,259				4,570,347
Selling, general and administrative expenses			162,887				130,510				439,609				355,867
Interest expense			9,631				6,940				26,711				20,816
			2,200,361				1,894,184				5,954,579				4,947,030
Earnings before income taxes and minority interests			145,342				127,115				393,444				359,454
Income taxes			45,514				46,085				133,069				129,030
Earnings before minority interests			99,828				81,030				260,375				230,424
Minority interests			387				3,070				9,663				2,737
Net earnings		$	99,441			$	77,960			$	250,712			$	227,687
Basic earnings per share		$	0.84			$	0.65			$	2.13			$	1.93
Diluted earnings per share		$	0.82			$	0.62			$	2.06			$	1.84
Cash dividends per share		$	0.09			$	0.05			$	0.24			$	0.11
Average basic shares outstanding			118,623,424				119,708,857				117,773,618				117,732,084
Average diluted shares outstanding			121,956,284				125,085,650				121,600,343				123,550,601

See notes to unaudited condensed consolidated financial statements.

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

		Nine months Ended
		May 31,
(in thousands)		2007				2006
Cash Flows From (Used By) Operating Activities:
Net earnings		$	250,712			$	227,687
Adjustments to reconcile net earnings to cash from (used by) operating activities:
Depreciation and amortization			75,859				61,522
Minority interests			9,663				2,737
Provision for losses on receivables			639				2,162
Share-based compensation			7,381				6,975
Net (gain) loss on sale of assets			169				(1,584	)
Asset impairment			1,390				—
Changes in operating assets and liabilities, net of effect of acquisitions:
Accounts receivable			(59,683	)			(198,540	)
Accounts receivable sold			61,711				10,255
Inventories			(149,093	)			(10,414	)
Other assets			(81,977	)			(40,711	)
Accounts payable, accrued expenses, other payables and income taxes			(17,859	)			26,815
Deferred income taxes			(5,179	)			(2,785	)
Other long-term liabilities			28,629				12,629
Net Cash Flows From Operating Activities			122,362				96,748
Cash Flows From (Used By) Investing Activities:
Purchases of property, plant and equipment			(121,774	)			(92,627	)
Purchase of interests in CMC Zawiercie			(60,049	)			(934	)
Sales of property, plant and equipment			1,264				5,039
Acquisitions, net of cash acquired			(157,994	)			(10,980	)
Net Cash Used By Investing Activities			(338,553	)			(99,502	)
Cash Flows From (Used By) Financing Activities:
Increase (Decrease) in documentary letters of credit			14,716				(39,883	)
Payments on trade financing arrangements			—				(1,667	)
Short-term borrowings, net change			132,787				16,463
Payments on long-term debt			(19,025	)			(9,023	)
Proceeds from issuance of long-term debt			—				14,182
Stock issued under incentive and purchase plans			13,801				26,092
Treasury stock acquired			(17,744	)			—
Dividends paid			(28,481	)			(13,022	)
Tax benefits from stock plans			11,657				10,644
Net Cash From Financing Activities			107,711				3,786
Effect of Exchange Rate Changes on Cash and Cash Equivalents			886				2,742
Increase (Decrease) in Cash and Cash Equivalents			(107,594	)			3,774
Cash and Cash Equivalents at Beginning of Year			180,719				119,404
Cash and Cash Equivalents at End of Period		$	73,125			$	123,178

See notes to unaudited condensed consolidated financial statements.

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

														Accumulated
		Common Stock								Additional				Other								Treasury Stock
		Number of								Paid-In				Comprehensive				Retained				Number of
(in thousands, except share data)		Shares				Amount				Capital				Income				Earnings				Shares				Amount				Total
Balance, September 1, 2006			129,060,664			$	1,290			$	346,994			$	33,239			$	980,454				(11,179,504	)		$	(141,873	)		$	1,220,104
Comprehensive income:
Net earnings for nine months ended May 31, 2007																			250,712												250,712
Other comprehensive income (loss):
Foreign currency translation adjustment, net of taxes of $1,417															22,152																22,152
Unrealized gain on hedges, net of taxes of $811															1,503																1,503
Comprehensive income																															274,367
Cash dividends																			(28,481	)											(28,481	)
Treasury stock acquired																							(699,500	)			(17,744	)			(17,744	)
Restricted stock grant											(479	)											35,112				479				—
Stock issued under incentive and purchase plans											(12,337	)											2,298,868				26,138				13,801
Stock-based compensation											7,424												(5,432	)			(43	)			7,381
Tax benefits from stock plans											11,657																				11,657
Balance, May 31, 2007			129,060,664			$	1,290			$	353,259			$	56,894			$	1,202,685				(9,550,456	)		$	(133,043	)		$	1,481,085

See notes to unaudited condensed consolidated financial statements.

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 (GAAP) on a basis consistent with that used in the Company’s Annual Report on Form 10-K filed with the Securities and Exchange Commission (SEC) for the year ended August 31, 2006, and 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, 2006 filed on Form 10-K with the SEC for a description of the Company’s stock incentive plans.

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, 2006 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 after-tax stock-based compensation expense of $1.3 million and $1.7 million ($0.01 per diluted share, respectively) for the three months ended May 31, 2007 and 2006, respectively and $4.8 million and $4.6 million ($0.04 per diluted share, respectively) for the nine months ended May 31, 2007 and 2006, respectively as a component of selling, general and administrative expenses. The cumulative effect of adoption (primarily arising from the recognition of anticipated forfeitures) was not material. At May 31, 2007, the Company had $4.7 million of total unrecognized compensation cost related to non-vested share-based compensation arrangements. This cost is expected to be recognized over the next 25 months.

Combined information for shares subject to options and SARs for the nine months ended May 31, 2007 was as follows:

						Weighted
						Average				Price
						Exercise				Range
		Number				Price				Per Share
August 31, 2006
Outstanding			7,485,348			$	8.06			$	2.75 — 24.71
Exercisable			6,178,200				5.90				2.75 — 13.58
Granted			—				—				—
Exercised			1,887,449				5.00				2.75 — 24.57
Forfeited			20,988				11.51				2.94 — 24.57
May 31, 2007
Outstanding			5,576,911				9.08				2.94 — 24.71
Exercisable			4,489,237				7.14				2.94 — 24.71

Share information for options and SARs at May 31, 2007:

Outstanding														Exercisable
						Weighted
						Average				Weighted								Weighted
Range of						Remaining				Average								Average
Exercise		Number				Contractual				Exercise				Number				Exercise
Price		Outstanding				Life (Yrs.)				Price				Outstanding				Price
$ 2.94 —   3.78			1,213,732				2.3			$	3.49				1,213,732			$	3.49
4.29 —   5.36			724,363				1.7				4.35				724,363				4.35
7.53 —   7.78			2,039,092				3.8				7.77				2,039,092				7.77
12.31 — 13.58			968,727				5.1				12.33				306,877				12.38
21.81 — 24.71			630,997				6.0				24.53				205,173				24.57
$ 2.94 — 24.71			5,576,911				3.6			$	9.08				4,489,237			$	7.14

Of the Company’s previously granted restricted stock awards 112,833 and 16,000 shares vested during the nine months ended May 31, 2007 and 2006, respectively.

Intangible Assets

The total gross carrying amounts of the Company’s intangible assets that were subject to amortization were $31.1 million and $22.0 million at May 31, 2007 and August 31, 2006, respectively. Aggregate amortization expense for the three months ended May 31, 2007 and 2006 was $1.6 million and $0.8 million, respectively. Aggregate amortization expense for each of the nine months ended May 31, 2007 and 2006 was $3.2 million and $2.0 million, respectively.

SFAS No. 159 — The Fair Value Option for Financial Assets and Financial Liabilities

In February 2007, the FASB issued SFAS No. 159, The Fair Value Option for Financial Assets and Financial Liabilities, including an amendment of FASB Statement No. 115. This statement permits entities to choose to measure many financial instruments and certain other items at fair value that are not currently required to be measured at fair value. SFAS 159 is effective for the Company’s fiscal year beginning September 1, 2008. The Company does not expect the adoption of this Standard to have a material impact on its financial statements.

Staff Accounting Bulletin No. 108

In September 2006, the SEC released SAB No. 108, “Considering the Effects of Prior Year Misstatements when Quantifying Misstatements in Current Year Financial Statements” which is effective for the Company’s fiscal year beginning September 1, 2007. The Standard requires registrants to consider the effects of the carryover or reversal of prior year misstatements in quantifying a current year misstatement and should quantify errors using both a balance sheet and an income statement approach and evaluate whether either approach results in quantifying a misstatement that, when all relevant quantitative and qualitative factors are considered, is material. The Company does not expect the adoption of this Standard to have a material impact on its financial statements.

FASB Staff Position (FSP) No. AUG AIR-1

In September 2006, the FASB issued FASB Staff Position (FSP) No. AUG AIR-1, “Accounting for Planned Major Maintenance Activities” which is effective for the Company’s fiscal year beginning September 1, 2007. The Staff Position prohibits the use of the accrue-in-advance method of accounting for planned major maintenance activities in annual and interim financial reporting periods. The Company does not expect the adoption of this Standard to have a material impact on its financial statements.

NOTE C — ACQUISITIONS

During the nine months ended May 31, 2007, the company made the following acquisitions:

•

On April 17, 2007, the Company completed the acquisition of substantially all the operating assets of the related companies consisting of Nicholas J. Bouras, Inc., United Steel Deck, Inc., The New Columbia Joist Company, and ABA Trucking Corporation. The acquisition establishes CMC as a manufacturer of steel deck and will add to CMC’s joist manufacturing capacity to meet the needs of its customers in the Northeastern United States. The acquisition will also provide geographic and product growth opportunities.

•

On January 4, 2007, the Company completed the acquisition of the operating assets and inventory of Bruhler Stahlhandel GmbH steel fabrication business in Rosslau/Saxony-Anhalt in eastern Germany. The acquisition was made by CMC’s subsidiary Commercial Metals Deutschland GmbH. This acquisition is expected to strengthen the Company’s vertical integration and downstream capability in Central Europe and to complement CMC’s existing fabrication operation in Zawiercie, Poland

The total purchase price for these acquisitions of approximately $159.2 million consisted of $156.5 million in cash consideration and $2.8 million in liabilities assumed. The following table summarizes the preliminary allocation of the purchase prices to the assets acquired and liabilities assumed based on the fair value at the date of the acquisition (subject to change following management’s final evaluation of the fair value):

(in thousands)
Inventories		$	87,581
Property, plant and equipment			60,846
Goodwill			1,304
Intangible assets			9,520
Liabilities			(2,790	)
Net assets acquired		$	156,461

The intangible assets acquired include customer base which will be amortized over 5 years and a backlog, which will be amortized over 9 months.

The pro forma effect of these acquisitions on consolidated net earnings was not material.

On March 2, 2007, the Company purchased all of the shares of CMCZ owned by the Polish Ministry of State Treasury for approximately $59.5 million. The shares acquired represent approximately 26.8% of the total CMCZ shares outstanding. The Company intends to redeem the shares and with this purchase and subsequent redemption, CMC holds approximately 99% of the outstanding shares of CMCZ.

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 $200 million, depending on the Company’s level of financing needs.

At May 31, 2007 and August 31, 2006, accounts receivable of $377 million and $351 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, 2007 and August 31, 2006. 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, 2007 and the average monthly amount of undivided interests owned by the financial institution buyers was $8.2 million and $1.1 million for the nine months ended May 31, 2007 and 2006, 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 $123.6 million and $61.9 million at May 31, 2007 and August 31, 2006, respectively. The average monthly amounts of outstanding international accounts receivable sold were $81.9 million and $60.6 million for the nine months ended May 31, 2007 and 2006, respectively.

Discounts (losses) on domestic and international sales of accounts receivable were $1.5 million and $0.8 million for the three months ended May 31, 2007 and 2006, respectively. For the nine months ended May 31, 2007 and 2006, these discounts were $3.8 million and $2.4 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 $249.3 million and $189.3 million at May 31, 2007 and August 31, 2006, 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 $95.9 million and $54.6 million were in raw materials at May 31, 2007 and August 31, 2006, respectively.

NOTE F — CREDIT ARRANGEMENTS

Borrowings outstanding under the Company’s commercial paper program were $146.9 million and none at May 31, 2007 and August 31, 2006, respectively. No borrowings were outstanding under the related revolving credit agreement at May 31, 2007 and August 31, 2006. The company was in compliance with all covenants at May 31, 2007.

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. The Company has $5.1 million outstanding under such facility at May 31, 2007.

Long-term debt was as follows:

		May 31,				August 31,
(in thousands)		2007				2006
6.80% notes due August 2007		$	50,000			$	50,000
6.75% notes due February 2009			100,000				100,000
CMCZ term note due March 2009			—				18,322
5.625% notes due November 2013			200,000				200,000
Other, including equipment notes			14,142				13,926
			364,142				382,248
Less current maturities			54,590				60,162
		$	309,552			$	322,086

In February 2007, CMCZ entered into a new revolving credit facility agreement. The credit agreement has maximum borrowings of 100 million PLN ($35.3 million) and interest rate of WIBOR plus 0.55%. The credit facility expires on July 31, 2007 and is not collateralized. The short-term credit facility contains certain financial covenants and CMCZ was in compliance with these covenants at May 31, 2007. Under this facility, 100 million PLN ($35.3 million) was outstanding at May 31, 2007.

In May 2007, CMCZ renewed its other revolving credit facility that expired on May 11, 2007. The renewed facility has maximum borrowings of 100 million PLN ($35.3 million) bearing interest at the Warsaw Interbank Offered Rate (WIBOR) plus 0.5%. This facility has an expiration date of May 9, 2008 and is not collateralized. At May 31, 2007, 22.2 million PLN ($7.8 million) was outstanding under this facility. The revolving credit facilities contain certain financial covenants. CMCZ was in compliance with these covenants at May 31, 2007. There are no guarantees by the Company or any of its subsidiaries for any of CMCZ’s debt.

CMC Poland, a wholly-owned subsidiary of the Company, 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 34.0 million PLN ($12.0 million) outstanding at May 31, 2007. Installment payments under these notes are due through 2010. Interest rates are variable based on the Poland Monetary Policy Council’s rediscount rate, plus any applicable margin. The weighted average rate as of May 31, 2007 was 4.25%. The notes are substantially secured by the shredder equipment.

Interest of $27.2 million and $22.4 million was paid in the nine months ended May 31, 2007 and 2006, respectively.

NOTE G — INCOME TAXES

The Company paid $145.0 million and $149.4 million in income taxes during the nine months ended May 31, 2007 and 2006, 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)		2007				2006				2007				2006
Statutory rate			35.0	%			35.0	%			35.0	%			35.0	%
State and local taxes			1.8				3.1				1.8				2.0
Extraterritorial Income Exclusion (ETI)			(0.1	)			(0.3	)			(0.1	)			(0.2	)
Foreign rate differential			(4.4	)			(1.0	)			(3.8	)			(0.5	)
Domestic production activity deduction			(0.5	)			(1.0	)			(0.5	)			(0.7	)
Other			(0.5	)			0.5				1.4				0.3
Effective rate			31.3	%			36.3	%			33.8	%			35.9	%

In June 2006, the FASB issued FIN 48, “Accounting for Uncertainty in Income Taxes — an interpretation of FASB Statement 109,” which clarifies the accounting for uncertainty in income taxes recognized in an enterprise’s financial statements in accordance with FAS No. 109, “Accounting for Income Taxes.” FIN 48 requires that we recognize, in our financial statements, the impact of a tax position, if that position is more likely than not of being sustained on audit, based on the technical merits of the position. In May 2007, the FASB issued Staff Position FIN No. 48-1, “Definition of ‘Settlement’ in FASB Interpretation No. 48”. FSP FIN 48-1 provides guidance on how a company should determine whether a tax position is effectively settled for the purpose of recognizing previously unrecognized tax benefits. The provisions of FIN 48 are effective for the Company’s fiscal year beginning September 1, 2007, with the cumulative effect of the change in accounting principle recorded as an adjustment to opening retained earnings. The Company is currently assessing the impact, if any, that the adoption of FIN 48 will have on the Company’s financial statements.

NOTE H — STOCKHOLDERS’ EQUITY AND EARNINGS PER SHARE

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, 2007 or 2006. The reconciliation of the denominators of the earnings per share calculations is as follows:

		Three Months Ended								Nine months Ended
		May 31,								May 31,
		2007				2006				2007				2006
Average shares outstanding for basic earnings per share			118,623,424				119,708,857				117,773,618				117,732,084
Effect of dilutive securities-stock based incentive/purchase plans			3,332,860				5,376,793				3,826,725				5,818,517
Average shares outstanding for diluted earnings per share			121,956,284				125,085,650				121,600,343				123,550,601

All of the Company’s outstanding stock options, restricted stock and Stock Appreciation Rights (SARs) with total share commitments of 6,130,725 and 8,943,368 at May 31, 2007 and 2006, were dilutive based on the average share price for the quarters then ended of $31.90 and $25.30, 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.

At May 31, 2007, the Company had authorization to purchase 2,642,260 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. Forward contracts on natural gas may also be entered to reduce the price volatility of gas used in production. 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 nine months ended May 31, 2007 and 2006. 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 table 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,
		2007				2006				2007				2006
(in thousands)		Earnings (Expense)								Earnings (Expense)
Net sales (foreign currency instruments)		$	177			$	(421	)		$	46			$	(507	)
Cost of goods sold (commodity instruments)			2,997				3,958				(727	)			4,007

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

		May 31,				August 31,
(in thousands)		2007				2006
Derivative assets (other current assets)		$	7,650			$	5,633
Derivative liabilities (other payables)			6,277				8,323

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, 2007 (in thousands):

Change in market value (net of taxes)		$	3,081
(Gains) losses reclassified into net earnings, net			(1,578	)
Other comprehensive gain — unrealized gain on derivatives		$	1,503

During the twelve months following May 31, 2007, $2.7 million 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 lock.

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, 2006 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.

In February 2007, the Company entered into a guarantee agreement to assist one of the Company’s Chinese coke suppliers to obtain pre-production financing from a bank. In addition, we entered into another guarantee agreement for one of our suppliers of finished goods to obtain working capital financing from a financial institution. In the aggregate, the Company’s maximum exposure under the guarantees at May 31, 2007 is approximately $12.3 million. The fair value of the guarantees is negligible.

NOTE K — BUSINESS SEGMENTS

The Company’s reportable segments are based on strategic business areas, which offer different products and services. These segments have different lines of management responsibility as each business requires different marketing strategies and management expertise.

The Company has five reportable segments: domestic mills, CMCZ, domestic fabrication, recycling and marketing and distribution.

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

		Three Months Ended May 31, 2007
																		Marketing
		Domestic								Domestic								and
(in thousands)		Mills				CMCZ				Fabrication				Recycling				Distribution				Corporate				Eliminations				Consolidated
Net sales-unaffiliated customers		$	328,594			$	235,046			$	487,805			$	436,365			$	853,462			$	4,431			$	—			$	2,345,703
Intersegment sales			118,589				(1,285	)			594				34,731				19,406				84				(172,119	)			—
Net sales			447,183				233,761				488,399				471,096				872,868				4,515				(172,119	)		$	2,345,703
Adjusted operating profit (loss)			73,608				39,752				11,113				24,671				32,977				(25,689	)			—				156,432

		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

		Nine months Ended May 31, 2007
																		Marketing
		Domestic								Domestic								and
(in thousands)		Mills				CMCZ				Fabrication				Recycling				Distribution				Corporate				Eliminations				Consolidated
Net sales-unaffiliated customers		$	840,970			$	592,783			$	1,340,018			$	1,111,246			$	2,451,670			$	11,336			$	—			$	6,348,023
Intersegment sales			328,637				104				1,472				96,459				106,799				—				(533,471	)			—
Net sales			1,169,607				592,887				1,341,490				1,207,705				2,558,469				11,336				(533,471	)			6,348,023
Adjusted operating profit (loss)			207,918				91,372				56,492				63,182				56,108				(51,115	)			—				423,957
Goodwill — May 31, 2007			306				—				28,309				6,961				1,909				—				—				37,485
Total Assets — May 31, 2007			588,365				397,902				887,385				310,740				931,376				148,432				—				3,264,200

		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

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)		2007				2006				2007				2006
Net earnings		$	99,441			$	77,960			$	250,712			$	227,687
Minority interests			387				3,070				9,663				2,737
Income taxes			45,514				46,085				133,069				129,030
Interest expense			9,631				6,940				26,711				20,816
Discounts on sales of accounts receivable			1,459				787				3,802				2,360
Adjusted operating profit		$	156,432			$	134,842			$	423,957			$	382,630

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)		2007				2006				2007				2006
Major product information:
Steel products		$	1,398,354			$	1,235,797			$	3,804,599			$	3,158,055
Nonferrous scrap			261,465				242,104				695,313				535,623
Industrial materials			187,222				187,041				606,663				632,078
Nonferrous products			161,947				127,167				434,933				387,067
Ferrous scrap			173,361				112,647				410,751				275,671
Construction materials			111,491				101,702				308,998				279,867
Other			51,863				14,841				86,766				38,123
Net sales		$	2,345,703			$	2,021,299			$	6,348,023			$	5,306,484

		Three Months Ended								Nine months Ended
		May 31,								May 31,
(in thousands)		2007				2006				2007				2006
Geographic area:
United States		$	1,400,541			$	1,330,527			$	3,793,874			$	3,431,906
Europe			490,230				329,849				1,293,048				799,455
Asia			261,153				181,815				699,166				566,037
Australia/New Zealand			130,669				109,900				351,274				327,057
Other			63,110				69,208				210,661				182,029
Net sales		$	2,345,703			$	2,021,299			$	6,348,023			$	5,306,484

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 $273.1 million and $195.4 million for the nine months ended May 31, 2007 and 2006, 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, 2006.

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, 2006 and are, therefore, not presented herein.

CONSOLIDATED RESULTS OF OPERATIONS

		Three Months Ended												Nine Months Ended
		May 31,								%				May 31,								%
(in millions)		2007				2006				Change				2007				2006				Change
Net sales		$	2,345.7			$	2,021.3				16	%		$	6,348.0			$	5,306.5				20	%
Net earnings			99.4				78.0				27	%			250.7				227.7				10	%
EBITDA			181.4				152.8				19	%			486.4				439.0				11	%

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)		2007				2006				Change				2007				2006				Change
Net earnings		$	99.4			$	78.0				27	%		$	250.7			$	227.7				10	%
Interest expense			9.6				6.9				39	%			26.7				20.8				28	%
Income taxes			45.5				46.1				(1	)%			133.1				129.0				3	%
Depreciation and amortization			26.9				21.8				23	%			75.9				61.5				23	%
EBITDA		$	181.4			$	152.8				19	%		$	486.4			$	439.0				11	%

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.

Overview This is the strongest third quarter ever reported by the Company. We posted record net earnings and EBITDA of $99.4 million and $181.4 million, respectively, for the three months ended May 31, 2007, an increase of 27% and 19% over the same period last year. For the nine months ended May 31, 2007, net earnings increased by 10% to $250.7 million and EBITDA by 11% to $486.4 million as compared to the same period ended May 31, 2006. The Company reported net sales of $2.3 billion and $6.3 billion for the three and nine months ended May 31, 2007 an improvement of $0.3 billion and $1.0 billion, respectively over last year’s results. The record results were helped by a strong U.S. nonresidential construction market, favorable global economic conditions and relatively stable international steel prices. For the quarter just ended, four of our five operating segments set third quarter records with CMCZ, our Polish operation, and Marketing and Distribution setting all time quarterly records. Third quarter results were supported by the strong domestic and international nonresidential projects that kept demand strong for our products and sustained higher prices despite

a slight downward shift in volume shipments and margin squeeze. We expect this pricing trend to continue and to improve as the overall construction market appears to be resilient against the volatility of scrap prices, high construction material costs and softening of the housing construction market. In addition, the demand for our merchant bar and the margin squeeze experienced by our reinforcing bar segment should improve as service center destocking winds down and imports decline as a result of favorable U.S. market conditions and the stabilization of ferrous scrap prices. The following financial events were significant during the third quarter ended May 31, 2007:

	•		Net sales for the three months increased by 16% over last year’s third quarter to $2.3 billion.
	•		After-tax LIFO expense of $20.1 million or $0.16 per diluted share as compared with an expense of $28.6 million or $0.23 per share per last year’s third quarter.
	•		Our Polish (CMCZ) operations achieved record earnings with its adjusted operating profit of $39.8 million, an increase of 187% over last year’s third quarter. Net sales increased $76 million to $234 million.
	•		Our Marketing and Distribution segment had a 66% increase in its adjusted operating profit due primarily to an increase in net sales of 11% and a pre-tax LIFO income of $7.4 million.
	•		Our Recycling segment’s adjusted operating profit of $24.7 million increased 10% over last year’s third quarter.
	•		Adjusted operating profit for the Domestic Mills segment was up by 6% to $73.6 million.
	•		Adjusted operating profit of our Domestic Fabrication segment decreased by 37% to $11.1 million from prior year’s quarter due primarily to a margin squeeze caused by the high volatility of steel prices.
	•		Selling, general and administrative expenses included $13.7 million in costs associated with the investment in the global deployment of SAP software.
	•		On March 2, 2007, the Company purchased all of the minority shares of CMCZ owned by the Polish Ministry of State Treasury for approximately $59.5 million making CMCZ the owner of approximately 99% of the outstanding shares of CMCZ.
	•		On April 17, 2007, the Company completed the acquisition of substantially all the operating assets of Nicholas J. Bouras, Inc. Net assets acquired approximated $145.9 million.

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												Nine Months Ended
		May 31,								%				May 31,								%
(in thousands)		2007				2006				Change				2007				2006				Change
NET SALES:
Domestic mills		$	447,183			$	422,473				6	%		$	1,169,607			$	1,158,422				1	%
CMCZ*			233,761				157,884				48	%			592,887				377,800				57	%
Domestic fabrication			488,399				459,951				6	%			1,341,490				1,268,630				6	%
Recycling			471,096				385,475				22	%			1,207,705				893,887				35	%
Marketing and distribution			872,868				783,553				11	%			2,558,469				2,110,295				21	%
Corporate and eliminations			(167,604	)			(188,037	)			(11	)%			(522,135	)			(502,550	)			4	%
		$	2,345,703			$	2,021,299				16	%		$	6,348,023			$	5,306,484				20	%

		Three Months Ended												Nine Months Ended
		May 31,								%				May 31,								%
(in thousands)		2007				2006				Change				2007				2006				Change
ADJUSTED OPERATING PROFIT (LOSS):
Domestic mills		$	73,608			$	69,663				6	%		$	207,918			$	205,350				1	%
CMCZ*			39,752				13,875				187	%			91,372				14,823				516	%
Domestic fabrication			11,113				17,521				(37	)%			56,492				74,212				(24	)%
Recycling			24,671				22,476				10	%			63,182				54,902				15	%
Marketing and distribution			32,977				19,896				66	%			56,108				55,885				0	%
Corporate and eliminations			(25,689	)			(8,589	)			199	%			(51,115	)			(22,542	)			127	%

LIFO Impact on Adjusted Operating Profit — LIFO is an inventory costing method 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,
(in thousands)		2007				2006				2007				2006
Domestic mills		$	(15,394	)		$	(14,753	)		$	(28,013	)		$	(25,111	)
Domestic fabrication			(12,251	)			(14,674	)			(9,187	)			(18,885	)
Recycling			(10,687	)			(10,067	)			(9,145	)			(14,644	)
Marketing and distribution			7,377				(4,569	)			(13,656	)			(3,051	)
Consolidated (decrease) to adjusted profit before tax		$	(30,955	)		$	(44,063	)		$	(60,001	)		$	(61,691	)

Domestic Mills We include our four domestic steel and our copper tube minimills in our domestic mills segment. Our domestic mills had an adjusted operating profit for the three months ended May 31, 2007 of $73.6 million, up by 6% and a pre-tax LIFO expense increase of 4% to $15.3 million as compared to last year’s third quarter. Net sales for the segment increased by 6% to $447 million as a result of higher average selling prices overcoming a slight decline in tons shipped.

Within the segment, adjusted operating profit for the three months ended May 31, 2007 for our steel minimills was 15% higher than the same period last year on 8% higher net sales or $382 million. Metal margins expanded over $10 a ton third quarter to third quarter though shipments dropped 4%. Rebar sales remained strong. Merchant bar tonnages were lower as buyers continued the pattern of overbuying in periods of anticipated or actual rising price increases and lowering their activity in periods of anticipated or actual price declines as occurred in this year’s third quarter. On a year-to-year basis, tonnage melted for the third quarter increased 7% to 596 thousand tons while tonnage rolled was 534 thousand tons, 7% lower than last year’s third quarter as planned outages at CMC Alabama reacted to the weaker merchant market. Shipments were 613 thousand tons or 4% lower than last year’s third quarter. Our average total selling price was up $60 per ton to $575 per ton, while the average selling price for finished goods was up by $71 per ton to $601 per ton. By product line, the price premium of merchant bar over reinforcing bar was $80 per ton, down $3 from last year. The average scrap purchase cost increased by $45 per ton a year ago to $239 per ton. Total utility costs decreased by $1.2 million compared with the third quarter last year with natural gas and electricity both declining. Year-over-year costs for ferroalloys, graphite electrodes and other supplies were up $2.9 million.

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

		Three Months Ended																Nine Months Ended
		May 31,								Increase								May 31,								Increase
		2007				2006				Amount				%				2007				2006				Amount				%
Average mill selling price (finished goods)		$	601			$	530			$	71				13	%		$	577			$	519			$	58				11	%
Average mill selling price (total sales)			575				515				60				12	%			558				502				56				11	%
Average ferrous scrap production cost			267				217				50				23	%			231				209				22				11	%
Average metal margin			308				298				10				3	%			327				293				34				12	%
Average ferrous scrap purchase price			239				194				45				23	%			209				188				21				11	%

The table below reflects our domestic steel minimills’ operating statistics (short tons in thousands):

		Three Months Ended								Increase								Nine Months Ended
		May 31,								(Decrease)								May 31,								(Decrease)
		2007				2006				Amount				%				2007				2006				Amount				%
Tons melted			596				557				39				7	%			1,659				1,707				(48	)			(3	)%
Tons rolled			534				572				(38	)			(7	)%			1,580				1,627				(47	)			(3	)%
Tons shipped			613				640				(27	)			(4	)%			1,702				1,867				(165	)			(9	)%

Two of our domestic steel minimills were more profitable for the three and nine months ended May 31, 2007 as compared to 2006. On a year-to-year basis, our Alabama mill was more profitable with higher margins resulting in an increase in adjusted operating profit of 25% despite planned outages in reaction to a weak merchant market that contributed to a drop in tons melted and rolled of 3% and 20% from last year’s third quarter. Our Texas mill was also profitable at a 23% and 9% higher adjusted operating profit for the three and nine months ended May 31, 2007 as compared to 2006 as sales and shredder production set record highs for the quarter. Selling prices at all of our domestic steel mills were higher for the quarter just ended as compared to the same period last year.

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)
		2007				2006				Amount				%				2007				2006				Amount				%
Pounds shipped (in millions)			16.7				20.3				(3.60	)			(18	)%			38.6				52.2				(13.60	)			(26	)%
Pounds produced (in millions)			14.9				16.9				(2.00	)			(12	)%			35.4				49.5				(14.10	)			(28	)%
Average selling price		$	3.89			$	3.32			$	0.57				17	%		$	3.85			$	2.90			$	0.95				33	%
Average copper scrap production cost			2.81				2.11				0.70				33	%			2.96				1.81				1.15				64	%
Average metal margin			1.08				1.21				(0.13	)			(11	)%			0.89				1.09				(0.20	)			(18	)%
Average copper scrap purchase price			3.02				2.47				0.55				22	%			2.99				2.06				0.93				45	%