UNITED STATES SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

 

 

Form 10-K

 

 

Commission file number 1-4304

 

 

Commercial Metals Company

(Exact name of registrant as specified in its charter)

 

 

Registrant’s telephone number, including area code:

(214) 689-4300

 

Securities registered pursuant to Section 12(b) of the Act:

 

 

Securities registered pursuant to Section 12(g) of the Act:

None

 

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.  Yes þ     No o

 

Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K (Section 229.405 of this chapter) is not contained herein, and will not be contained herein, to the best of registrant’s knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or amendment to this Form 10-K  o

 

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 under the Exchange Act.

 

Large accelerated filer þ     Accelerated filer o     Non-accelerated filer o

 

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Act).  Yes o     No þ

 

Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 under the Securities Act.  Yes þ     No o

 

Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 of Section 15(d) of the Act.  Yes o     No þ

 

The aggregate market value of the common stock on November 3, 2006, held by non-affiliates of the registrant, based on the closing price of $26.81 per share on November 3, 2006 on the New York Stock Exchange, was approximately $3,032,000,000. (For purposes of determination of this amount, only directors, executive officers, and 10% or greater stockholders have been deemed affiliates.)

 

The number of shares outstanding of common stock as of November 3, 2006, was 118,244,823

 

DOCUMENTS INCORPORATED BY REFERENCE:

 

Portions of the following document are incorporated by reference into the listed Part of Form 10-K:

 

Registrant’s definitive proxy statement for the annual meeting of stockholders to be held January 25, 2007 — Part III

 

COMMERCIAL METALS COMPANY
TABLE OF CONTENTS

PART I
Item 1:		Business
Item 1A:		Risk Factors
Item 1B:		Unresolved Staff Comments
Item 2:		Properties
Item 3:		Legal Proceedings
Item 4:		Submission of Matters to a Vote of Security Holders
PART II
Item 5:		Market for Registrant’s Common Equity and Related Stockholder Matters and Issuer Purchases of Equity Securities
Item 6:		Selected Financial Data
Item 7:		Management’s Discussion and Analysis of Financial Condition and Results of Operation
Item 7A:		Quantitative and Qualitative Disclosures about Market Risk
Item 8:		Financial Statements and Supplementary Data
Item 9:		Changes in and Disagreements with Accountants on Accounting and Financial Disclosure
Item 9A:		Controls and Procedures
Item 9B:		Other Information
PART III
Item 10:		Directors and Executive Officers of the Registrant
Item 11:		Executive Compensation
Item 12:		Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters
Item 13:		Certain Relationships and Related Transactions
Item 14:		Principal Accountant Fees and Services
PART IV
Item 15:		Exhibits, Financial Statement Schedules
		Signatures
		Index to Exhibits
Statement re Computation of Earnings to Fixed Charges
Subsidiaries
Consent of Independent Registered Public Accounting Firm
Certification of President and CEO Pursuant to Section 302
Certification of VP and CFO Pursuant to Section 302
Certification of President and CEO Pursuant to Section 906
Certification of VP and CFO Pursuant to Section 906

PART I

ITEM 1. BUSINESS

GENERAL

     We manufacture, recycle, market and distribute steel and metal products and related materials and services through a network of locations located throughout the United States and internationally. We consider our business to be organized into five segments: domestic mills, CMCZ (our Polish mill CMC Zawiercie S.A. and related operations), domestic fabrication, recycling and marketing and distribution.

     We were incorporated in 1946 in the State of Delaware. Our predecessor company, a metals recycling business, has existed since approximately 1915. We maintain our executive offices at 6565 MacArthur Boulevard in Irving, Texas, telephone number (214) 689-4300. Our fiscal year ends August 31 and all references in this Form 10-K to years refer to the fiscal year ended August 31 of that year unless otherwise noted. Financial information for the last three fiscal years concerning our five business segments and the geographic areas of our operations is incorporated herein by reference from “Note 14 Business Segments” of the notes to consolidated financial statements which are in Part II, Item 8 of this Form 10-K.

     Our Annual Report on Form 10-K, quarterly reports on Form 10-Q, current reports on Form 8-K and all amendments to these reports will be made available free of charge through the Investor Relations section of our Internet website, http://www.commercialmetals.com, as soon as practicable after such material is electronically filed with, or furnished to, the Securities and Exchange Commission. Except as otherwise stated in these reports, the information contained on our website or available by hyperlink from our website is not incorporated into this Annual Report on Form 10-K or other documents we file with, or furnish to, the Securities and Exchange Commission.

DOMESTIC MILLS SEGMENT

     We conduct our domestic mills operations through a network of:

	—		4 steel mills, commonly referred to as “minimills”, that produce reinforcing bar, angles, flats, rounds, small beams, fence-post sections and other shapes;
	—		scrap metal processing facilities that directly support these minimills; and
	—		a copper tube minimill.

     Minimills. We operate four steel minimills which are located in Texas, Alabama, South Carolina and Arkansas. We utilize a fleet of trucks that we own and private haulers to transport finished products from the minimills to our customers and our fabricating shops. To minimize the cost of our products, we try to operate all four minimills at full capacity. Market conditions such as increases in quantities of competing imported steel, production rates at domestic competitors, customer inventory levels or a decrease in construction activity may reduce demand for our products and limit our ability to operate the minimills at full capacity. Through our operations and capital improvements, we strive to increase productivity and capacity at the minimills and enhance our product mix. Since the steel minimill business is capital intensive, we make substantial capital expenditures on a regular basis to remain competitive with other low cost producers. Over the past three fiscal years we have spent approximately $128 million or 32% of our total capital expenditures on projects at our domestic steel minimills.

     The following table compares the amount of steel (in tons) melted, rolled and shipped by our four steel minimills in the past three fiscal years:

		2004				2005				2006
Tons Melted			2,265,000				2,173,000				2,324,000
Tons Rolled			2,195,000				2,024,000				2,198,000
Tons Shipped			2,401,000				2,266,000				2,492,000

     We acquired our largest steel minimill in 1963. It is located in Seguin, Texas, near San Antonio. In 1983, we acquired our minimill in Birmingham, Alabama. As part of the acquisition of Owen Steel Company, Inc. and its affiliates in 1995, we acquired our minimill in Cayce, South Carolina. We have operated our smallest mill since 1987, and it is located near Magnolia, Arkansas.

     The Texas, Alabama and South Carolina minimills each consist of:

	—		melt shop with electric arc furnace that melts ferrous scrap metal;
	—		continuous casting equipment that shape the molten metal into billets;
	—		reheating furnace that prepares billets for rolling;
	—		rolling mill that forms products from heated billets;
	—		mechanical cooling bed that receives hot product from the rolling mill;
	—		finishing facilities that cut, straighten, bundle and prepare products for shipping; and
	—		supporting facilities such as maintenance, warehouse and office areas.

     Descriptions of minimill capacity, particularly rolling capacity, are highly dependent on the specific product mix manufactured. Each of our minimills can and do roll many different types and sizes of products in their range depending on pricing and demand. Therefore our capacity estimates assume a typical product mix and will vary with the products actually produced. Our Texas minimill has annual capacity of approximately 900,000 tons melted and 800,000 tons rolled. Our Alabama minimill’s annual capacity is approximately 650,000 tons melted and 575,000 tons rolled. We have annual capacity at our South Carolina minimill of approximately 700,000 tons melted and 800,000 tons rolled.

     Our Texas minimill manufactures a full line of bar size products including reinforcing bar, angles, rounds, channels, flats, and special sections used primarily in building highways, reinforcing concrete structures and manufacturing. Our Texas minimill sells primarily to the construction, service center, energy, petrochemical, and original equipment manufacturing industries. The Texas minimill primarily ships its products to customers located in Texas, Louisiana, Arkansas, Oklahoma and New Mexico. It also ships products to approximately 22 other states and to Mexico. Our Texas minimill melted 905,000 tons during 2006 compared to 870,000 tons during 2005, and rolled 806,000 tons, an increase of 44,000 tons from 2005.

     The Alabama minimill recorded 2006 melt shop production of 693,000 tons, an increase of 66,000 tons from 2005. The Alabama minimill rolled 522,000 tons, an increase of 49,000 tons from 2005. Our Alabama minimill primarily manufactures products that are larger in size as compared to products manufactured by our other three minimills. Such larger size products include mid-size structural steel products including angles, channels, wide flange beams of up to eight inches and special bar quality rounds and flats. Our Alabama minimill sells primarily to service centers, as well as to the construction, manufacturing, and fabricating industries. The Alabama minimill primarily ships its products to customers located in Alabama, Georgia, Tennessee, North and South Carolina, and Mississippi.

     Our South Carolina minimill manufactures a full line of bar size products which primarily include steel reinforcing bar. The minimill also manufactures angles, rounds, squares, fence post sections and flats. The South Carolina minimill ships its products to customers located in the Southeast and mid-Atlantic areas which include the states from Florida through southern New England. During 2006, the South Carolina minimill melted 725,000 tons and rolled 724,000 tons compared to 674,000 tons melted and 655,000 tons rolled during 2005.

     The primary raw material for our Texas, Alabama and South Carolina minimills is ferrous scrap metal. We purchase the raw material from suppliers generally within a 300 mile radius of each minimill. Ten scrap metals recycling plants located in Texas, South Carolina and Georgia are operated by our steel group due to the predominance of ferrous scrap metal sales to the nearby steel group operated minimills. Two of the segment’s ten recycling plants operate automobile shredders. The eight smaller facilities assist the two larger locations with shredders and our nearby minimills with the acquisition of ferrous scrap metal. These metal recycling plants processed and shipped 1,218,000 tons of scrap metals, primarily ferrous, during 2006. We believe the supply of ferrous scrap metal is adequate to meet our future needs, but it has historically been subject to significant price fluctuations which have occurred more rapidly during the last three years. All three minimills also consume large amounts of electricity and natural gas. Although we have not had any significant curtailments and believe that supplies are adequate, the price we pay for both electricity and natural gas has

increased substantially during recent years. Regional and national energy supply, demand and the extent of applicable regulatory oversight of rates charged by providers affect the prices we pay for electricity and natural gas.

     The smaller Arkansas minimill does not have a melt shop or continuous casting equipment. The Arkansas minimill manufacturing process begins with a reheating furnace utilizing used rail acquired primarily salvaged from railroad abandonments and excess billets acquired from either our other mills or unrelated suppliers as its raw material. The remainder of the manufacturing process utilizes rolling mill, cooling bed and finishing equipment and support facilities similar to, but on a smaller scale, than those at our other minimills. The Arkansas minimill primarily manufactures metal fence post stock, small diameter reinforcing bar, sign posts and bed frame angles with some flats, angles and squares. At our Arkansas minimill and at our facilities in San Marcos, Texas, Brigham City, Utah, and West Columbia, South Carolina, we fabricate fence post stock into studded “T” metal fence posts. The product is finished at facilities similar to, but smaller than, the other minimills. Since our Arkansas minimill does not have melting facilities, the minimill depends on an adequate supply of competitively priced used rail or billets. The availability of these raw materials fluctuates with the pace of railroad abandonments, rail replacement by railroads, demand for used rail from domestic and foreign rail rerolling mills and the level of excess billet production offered for sale at steel producers. We have annual capacity at our Arkansas minimill of approximately 150,000 tons rolled.

     CMC Howell. Our subsidiary, CMC Howell Metal,, operates a copper tube minimill in New Market, Virginia. The minimill manufactures copper tube, primarily water tubing, for the plumbing, air conditioning and refrigeration industries. Both high quality copper scrap and occasionally virgin copper ingot are melted, cast, extruded and drawn into tubing. The minimill supplies tubing in straight lengths and coils for use in commercial, industrial and residential construction and by original equipment manufacturers. Our customers, largely equipment manufacturers, wholesale plumbing supply firms and large home improvement retailers, are located primarily east of the Mississippi River and supplied directly from the minimill or three warehouses located along the east coast. The demand for copper tube depends on the level of new apartment, hotel/motel and residential construction and renovation. Copper scrap is readily available, but subject to rapid price fluctuations. The price or supply of virgin copper causes the price of copper scrap to fluctuate rapidly. Our recycling segment supplies a small portion of the copper scrap. CMC Howell’s facilities include melting, casting, piercing, extruding, drawing, finishing and office facilities. During 2006, the facility produced approximately 63 million pounds of copper tube. CMC Howell has annual manufacturing capacity of approximately 80 million pounds.

     No single customer purchases 10% or more of our domestic mills segment’s production. Due to the nature of certain stock products we sell in the domestic mills segment, we do not have a long lead time between receipt of a purchase order and delivery. We generally fill orders for stock products from inventory or with products near completion. As a result, we do not believe that backlog levels are a significant factor in the evaluation of our operations. Backlog for our four domestic steel mills at August 31, 2006 was approximately $329.1 million as compared to $169.8 million at August 31, 2005.

CMCZ SEGMENT

     In December 2003, our Swiss subsidiary acquired 71.1% of the outstanding shares of Huta Zawiercie, S.A. (CMCZ), of Zawiercie, Poland for 200 million Polish Zlotys (PLN), $51.9 million on the acquisition date. In connection with the acquisition, we also assumed debt of 176 million PLN ($45.7 million). Since the initial acquisition we have acquired approximately 1.5% of the shares outstanding. The Polish State Treasury owns approximately 26.4% of the remaining outstanding shares. CMCZ is a steel minimill with equipment similar to our domestic steel minimills but also includes a second rolling mill which produces wire rod. CMCZ owns a majority interest in several smaller metals related operations, including two scrap metals processing facilities that directly support CMCZ. CMCZ has annual melting capacity of approximately 1,400,000 tons with annual rolling capacity of approximately 1,100,000 tons. During 2006, the facility melted 1,283,000 tons, rolled 1,121,000 tons and shipped 1,250,000 tons of steel. Principal products manufactured include rebar and wire rod as well as smaller quantities of merchant bar. With this acquisition, we have become a significant manufacturer of rebar and wire rod in Central Europe. We presented CMCZ, its subsidiaries and related operations as a separate segment because the economic characteristics of their markets and the regulatory environment in which they operate are not similar to that of our domestic minimills.

     CMCZ sells rebar primarily to fabricators, distributors and construction companies. Principal customers for wire rod are meshmakers, endusers and distributors. CMCZ’s products are generally sold to customers located within a market area of 400 miles of the mill. The majority of sales are to customers within Poland with the Czech Republic, Slovakia, Hungary and Germany being the major export markets. Ferrous scrap metal is the principal raw material for CMCZ and is generally obtained from scrap metal processors and generators within 400 miles of the mill. Ferrous scrap metal, electricity, natural gas and other necessary raw materials for the steel manufacturing process are generally

readily available although subject to periodic significant price fluctuations. During 2006 we spent $36.5 million or 28% of our total capital expenditures on projects at CMCZ and its subsidiaries. Included in these projects were the installation of a large capacity metal shredder facility similar to the largest automobile shredder we operate in the United States and the construction of a reinforcing bar fabrication facility. This shredder is wholly owned by a subsidiary and is located at leased premises at the CMC Zawiercie mill with its output of shredded ferrous scrap consumed by the CMC Zawiercie mill’s melt shop. The shredder commenced production late in the fiscal year. The reinforcing bar fabrication facility is also located on property leased from CMCZ and is wholly owned. The rebar fabrication facility is similar to those operated by our domestic fabrication segment and will sell fabricated rebar to contractors for incorporation into construction projects generally within 150 miles of the facility.

DOMESTIC FABRICATION SEGMENT

     We conduct our domestic fabrication operations through a network of:

	—		steel plants that bend, cut, weld and fabricate steel, primarily reinforcing bar and angles;
	—		warehouses that sell or rent products for the installation of concrete;
	—		plants that produce special sections for floors and ceiling support;
	—		plants that produce steel fence posts;
	—		plants that treat steel with heat to strengthen and provide flexibility; and
	—		a railroad rail salvage company.

     Our domestic fabrication segment operates facilities that we consider to be engaged in the various related aspects of steel fabrication. Most of the facilities engage in general fabrication of reinforcing and structural steel with 7 locations specializing in fabricating joists and special beams for floor and ceiling support and 4 facilities fabricating only steel fence post. We obtain steel for these facilities from our own domestic minimills, purchases through our marketing and distribution segment and unrelated vendors. In 2006, we shipped 1,645,000 tons of fabricated steel, an increase of 303,000 tons from 2005. We conduct these activities in facilities located in Texas at Beaumont, Buda, Corpus Christi, Dallas (2), Fort Worth, Harlingen, Houston (3), Melissa, San Marcos, San Antonio, Seguin, Victoria, Waco and Waxahachie; Louisiana at Baton Rouge, Keithville and Slidell; Arkansas at Little Rock, Magnolia, Hope (2) and Springdale; Utah in Brigham City; Florida at Fort Myers, Jacksonville and Starke; Nevada at Fallon; South Carolina at Cayce, Columbia, Eastover, Taylors and West Columbia; in Georgia at Atlanta and Lawrenceville; North Carolina at Gastonia (2); Virginia at Farmville, Fredericksburg and Norfolk; California at Bloomington, Emeryville, Etiwanda, Fontana, Fresno, Rialto, San Bernadino and Stockton; Iowa at Iowa Falls; Arizona at Chandler; Oklahoma at Oklahoma City and Tulsa; New Mexico at Albuquerque; and Mississippi at Lumberton. The Norfolk Virginia facility was acquired in November, 2005 from Hall-Hodges Company. Fabricated steel products are used primarily in the construction of commercial and non-commercial buildings, hospitals, convention centers, industrial plants, power plants, highways, bridges, arenas, stadiums, and dams. Generally, we sell fabricated steel in response to a bid solicitation from a construction contractor or the project owner. Typically, the contractor or owner of the project awards the job based on the competitive prices of the bids and does not individually negotiate with the bidders.

     Our joist manufacturing operations headquartered in Hope, Arkansas, manufacture steel joists for roof supports. The joist manufacturing operations fabricate joists from steel obtained primarily from our steel group’s minimills at facilities in Hope, Arkansas; Starke, Florida; Cayce, South Carolina; Fallon, Nevada; Iowa Falls, Iowa; and Juarez, Mexico. Our typical joist customer is a construction contractor or large chain store owner. Joists are generally made to order and sales may include custom design, fabrication and painting. We obtain our sales primarily on a competitive bid basis. We also manufacture and sell castellated and cellular steel beams. These beams, recognizable by their hexagonal or circular pattern of voids, permit greater design flexibility in steel construction, especially floor structures. We fabricate these beams at a facility adjacent to our Hope, Arkansas, joist plant.

     Construction Related Products. We sell and rent construction related products and equipment to concrete installers and other construction businesses. We have 41 locations in Texas, Louisiana, Mississippi, South Carolina, Florida, Colorado, Arkansas, Arizona, Oklahoma and California where we store and sell these products which, with the exception of a small portion of steel products, are purchased for resale from unrelated suppliers. The facilities in Arkansas, Arizona, Oklahoma and California were acquired during the fiscal year in a series of asset acquisitions.

     Heat Treating Operation. Our heat treating operation is Allegheny Heat Treating, Inc., with locations in Chicora, Pennsylvania and Struthers, Ohio. Allegheny Heat Treating works closely with our Alabama minimill and other steel mills that sell specialized heat-treated steel for customer specific use. Such steel is primarily used in original or special equipment manufacturing. We have annual operating capacity in our heat treating operation of approximately 30,000 tons. We also operate a warehousing and distribution operation known as Impact Metals which distributes not only the specialized products provided by Allegheny Heat Treating but also similar products obtained from other similar specialty processors located around the world. During the year we commenced renovation of an existing building which we purchased in Pell City, Alabama, near Birmingham, where we intend to construct a new heat treating facility.

     Railroad Salvage and Dismantling. We also operate a business that purchases and removes rail and other materials from abandoned railroads. Most of the salvaged rail is utilized by our Arkansas minimill.

     Backlog in our domestic fabrication segment was approximately $673.5 million at August 31, 2006 as compared to $624.0 million at August 31, 2005. No single customer purchases 10% or more of our domestic fabrication segment’s production.

RECYCLING SEGMENT

     Our recycling segment processes scrap metals for use as a raw material by manufacturers of new metal products. This segment operates approximately thirty nine scrap metal processing facilities not including the ten scrap metal recycling facilities operated as part of our domestic mills segment. In June, 2006 we closed the acquisition of substantially all the operating assets of Yonack Iron & Metal Co. and related companies adding six locations including four in Texas and one each in Arkansas and Oklahoma to the segment’s network of scrap metals facilities. With this expansion the segment now operates from 20 locations in Texas, 8 in Florida, 3 in Oklahoma, 2 in Missouri,and Tennessee and one each in Arkansas, Kansas, Louisiana, and North Carolina.

     We purchase ferrous and nonferrous scrap metals, processed and unprocessed, from a variety of sources in a variety of forms for our metals recycling plants. Sources of metal for recycling include manufacturing and industrial plants, metal fabrication plants, electric utilities, machine shops, factories, railroads, refineries, shipyards, ordinance depots, demolition businesses, automobile salvage and wrecking firms. Collectively, small scrap metal collection firms are a major supplier.

     In 2006, our scrap metal recycling segment’s plants processed and shipped approximately 2,474,000 tons of scrap metal compared to 2,163,000 tons in 2005. Ferrous scrap metals comprised the largest tonnage of metals recycled at approximately 2,147,000 tons, an increase of approximately 276,000 tons as compared to 2005. We shipped approximately 327,000 tons of nonferrous scrap metals, primarily aluminum, copper and stainless steel, an increase of approximately 35,000 tons as compared to 2005. With the exception of precious metals, our scrap metal recycling plants recycle and process practically all types of metal. In addition ten scrap metal recycling facilities operated by our domestic mills segment processed and shipped approximately 1,218,000 tons of primarily ferrous scrap metal during 2006.

     Our scrap metal recycling plants consist of an office and warehouse building equipped with specialized equipment for processing both ferrous and nonferrous metal. A typical recycling plant also includes several acres of land that we use for receiving, sorting, processing and storing metals. Several of our scrap metal recycling plants use a small portion of their site or a nearby location to display and sell metal products that may be reused for their original purpose without further processing. We equip our larger plants with scales, shears, baling presses, briquetting machines, conveyors and magnetic separators which enable these plants to efficiently process large volumes of scrap metals. Two plants have extensive equipment that segregates metallic content from large quantities of insulated wire. To facilitate processing, shipping and receiving, we equip our ferrous metal processing centers with either presses, shredders or hydraulic shears to prepare and compress scrap metal for easier handling. Cranes are utilized to handle scrap metals for processing and to load material for shipment. Many facilities have rail access as ferrous scrap is primarily shipped by open gondola railcar or barge when water access is available.

     We operate five large shredding machines, four in Texas with one in Florida, capable of pulverizing obsolete automobiles or other sources of scrap metal. We have three additional shredders, two operated by our domestic mills segment and the third by our CMCZ segment.

     We sell scrap metals to steel mills and foundries, aluminum sheet and ingot manufacturers, brass and bronze ingot makers, copper refineries and mills, secondary lead smelters, specialty steel mills, high temperature alloy manufacturers and other consumers. Ferrous scrap metal is the primary raw material for electric arc furnaces such as those operated by our steel minimills. Some minimills periodically supplement purchases of ferrous scrap metal with direct reduced iron and pig iron for certain product lines. Our Dallas

office coordinates the sales of scrap metals from our scrap metal processing plants to our customers. We negotiate export sales through our network of foreign offices as well as our Dallas office.

     We do not purchase a material amount of scrap metal from one source. One customer represented 10% of our recycling segment’s revenues. Our recycling segment competes with other scrap metals processors and primary nonferrous metals producers, both domestic and foreign, for sales of nonferrous materials. Consumers of nonferrous scrap metals frequently can utilize primary or “virgin” ingot processed by mining companies instead of nonferrous scrap metals. The prices of nonferrous scrap metals are closely related to but generally less than, the prices of primary or “virgin” ingot.

     MARKETING AND DISTRIBUTION SEGMENT

     Our marketing and distribution segment buys and sells primary and secondary metals, fabricated metals and other industrial products. During the past year, our marketing and distribution segment sold approximately 2.9 million tons of steel products. We market and distribute these products through a network of offices, processing facilities and joint venture offices located around the world. We purchase steel, nonferrous metals including copper and aluminum coil, sheet and tubing, chemicals, industrial minerals, ores, metal concentrates and ferroalloys from producers in domestic and foreign markets. Occasionally, we purchase these materials from suppliers, such as trading companies or industrial consumers, who have a surplus of these materials. We utilize long-term contracts, spot market purchases and trading or barter transactions to purchase materials. To obtain favorable long term supply agreements we occasionally offer assistance to producers by arranging structured finance transactions to suit their objectives.

     We sell our products to customers, primarily manufacturers, in the steel, nonferrous metals, metal fabrication, chemical, refractory and transportation businesses. We sell directly to our customers through and with the assistance of our offices in Irving, Texas; Fort Lee, New Jersey; Arcadia, California; Mexico City, Mexico; Sydney, Perth, Melbourne, Brisbane and Adelaide, Australia; Singapore; Zug, Switzerland; Sandbach, United Kingdom; Kohl, Germany, and Hong Kong, Beijing, Guangzhou and Shanghai China. We have a representative office in Moscow. We have agents or joint venture partners in additional offices located in significant international markets. Our network of offices shares information regarding demand for our materials, assists with negotiation and performance of contracts and other services for our customers, and identifies and maintains relationships with our sources of supply.

     In most transactions, we act as principal by taking title and ownership of the products. We are also designated as a marketing representative, sometimes exclusively, by product suppliers. We utilize agents when appropriate, and on occasion we act as a broker for these products. We buy and sell these products in almost all major markets throughout the world where trade by American-owned companies is permitted.

     We market physical products as compared to companies that trade commodity futures contracts and frequently do not take delivery of the commodity. As a result of sophisticated global communications, our customers and suppliers often have easy access to quoted market prices, although such price quotes are not always indicative of actual transaction prices. Therefore, to distinguish ourselves we focus on creative service functions for both sellers and buyers. Our services include actual physical market pricing and trend information, as compared to more speculative metal exchange futures market information, technical information and assistance, financing, transportation and shipping (including chartering of vessels), storage, warehousing, just-in-time delivery, insurance, hedging and the ability to consolidate smaller purchases and sales into larger, more cost efficient transactions. We attempt to limit exposure to price fluctuations by offsetting purchases with concurrent sales. We also enter into currency exchange contracts as economic hedges of sales and purchase commitments denominated in currencies other than the United States dollar or, if the transaction involves our Australian, United Kingdom or German subsidiaries, their local currency. We do not, as a matter of policy, speculate on changes in the markets.

     We have previously made investments to acquire approximately 11% of the outstanding stock of a Czech Republic steel mill and 24% of a Belgium business that processes and pickles hot rolled steel coil. These investments allow us to expand our marketing and distribution activities.

     Our Australian operations have eleven warehousing facilities for just-in-time delivery of steel and industrial products. Our Coil Steels Group is the third largest distributor of steel sheet and coil products in Australia and has processing facilities in Brisbane, Sydney and Melbourne and warehouses in Adelaide, Perth, Darwin and Toowoomba. In March, 2006 we acquired Southmet Pty Ltd., a plate and long products processor in Adelaide expanding our Australian operations.

SEASONALITY

     Many of our domestic mills, CMCZ and domestic fabrication segments’ customers are in the construction business. Due to the increase in construction during the spring and summer months, our sales in these segments are generally higher in the third and fourth quarters than in the first and second quarters of our fiscal year.

COMPETITION

     Our domestic mills compete with regional, national and foreign manufacturers of steel and copper. We do not produce a significant percentage of the total domestic output of most of our products. However, we are considered a substantial supplier in the markets near our facilities. We compete primarily on the price and quality of our products and our service. See “Risk Factors — Risks Related to Our Industry”.

     We believe that CMCZ is the largest supplier of wire rod and the second largest supplier of reinforcing bar in the Polish market. It competes with several large manufacturers of rebar and wire rod in central and eastern Europe, primarily on the basis of price and product availability.

     Our domestic fabrication businesses compete with regional and national suppliers. We believe that we are the largest fabricator of reinforcing bar in the United States and our joist facilities are the second largest manufacturer of joists in the United States, although significantly smaller than the largest joist supplier. We believe that we are the largest manufacturer of steel fence posts in the United States.

     We believe our recycling segment is one of the largest entities engaged in the recycling of nonferrous scrap metals in the United States. We are also a major regional processor of ferrous scrap metal. The scrap metal recycling business is subject to cyclical fluctuations based upon the availability and price of unprocessed scrap metal and the demand for steel and nonferrous metals. Buying prices and service to scrap suppliers and generators are the principal competitive factors for the segment. The price offered for scrap metal is the principal competitive factor in acquiring material from smaller scrap metals collection firms while industrial generators of scrap metal may also consider the importance of other factors such as supplying appropriate collection containers, timely removal, reliable documentation including accurate and detailed purchase records with customized reports, the ability to service multiple locations, insurance coverage, and the buyer’s financial strength.

     Our marketing and distribution business is highly competitive. Our products in the marketing and distribution segment are standard commodity items. We compete primarily on the price, quality and reliability of our products, our financing alternatives and our additional services. In this segment, we compete with other domestic and foreign trading companies, some of which are larger and may have access to greater financial resources. In addition, some of our competitors may be able to pursue business without being restricted by the laws of the United States. We also compete with industrial consumers, who purchase directly from suppliers, and importers and manufacturers of semi-finished ferrous and nonferrous products. Our Coil Steels Group, a distributor of steel sheet and coil in Australia, is believed to be the third largest distributor of those products in Australia.

ENVIRONMENTAL MATTERS

     A significant factor in our business is our compliance with environmental laws and regulations. See “Risk Factors- Risks Related to Our Industry” below. Compliance with and changes in various environmental requirements and environmental risks applicable to our industry may adversely affect our results of operations and financial condition.

     Occasionally, we may be required to clean up or take certain remediation action with regard to sites we formerly used in our operations. We may also be required to pay for a portion of the costs of clean up or remediation at sites we never owned or on which we never operated if we are found to have treated or disposed of hazardous substances on the sites. The United States Environmental Protection Agency, or EPA, has named us a potentially responsible party or PRP, at several federal Superfund sites. The EPA alleges that we and other PRP scrap metal suppliers are responsible for the cleanup of those sites solely because we sold scrap metal to unrelated manufacturers for recycling as a raw material in the manufacturing of new products. We contend that an arms length sale of valuable scrap metal for use as a raw material in a manufacturing process that we have no control of should not constitute “an arrangement for disposal or treatment of hazardous substances” as defined under Federal law. In 2000 the Superfund Recycling Equity Act was signed into law which, subject to the satisfaction of certain conditions, provides legitimate sellers of scrap metal for recycling with some relief from Superfund liability under Federal law. Despite Congress’ clarification of the intent of the Federal law, some state laws and environmental agencies still seek to impose such liability. We believe efforts to impose such liability are contrary to

public policy objectives and legislation encouraging recycling and promoting the use of recycled materials and we continue to support clarification of state laws and regulations consistent with Congress’s action.

     New Federal, state and local laws, regulations and the varying interpretations of such laws by regulatory agencies and the judiciary impact how much money we spend on environmental compliance. In addition, uncertainty regarding adequate control levels, testing and sampling procedures, new pollution control technology and cost benefit analysis based on market conditions impact our future expenditures in order to comply with environmental requirements. We cannot predict the total amount of capital expenditures or increases in operating costs or other expenses that may be required as a result of environmental compliance. We also do not know if we can pass such costs on to our customers through product price increases. During 2006, we incurred environmental costs including disposal, permits, license fees, tests, studies, remediation, consultant fees and environmental personnel expense of approximately $18.6 million. In addition, we estimate that we spent approximately $6.2 million during 2006 on capital expenditures for environmental projects. We believe that our facilities are in material compliance with currently applicable environmental laws and regulations. We anticipate capital expenditures for new environmental control facilities during 2007 of approximately $11.7 million.

EMPLOYEES

     As of September 2006, we had approximately 11,734 employees. Our domestic mills segment employed approximately 2,439 people, our CMCZ segment employed approximately 2,041 people, and our fabrication segment employed approximately 5,108 people. Our recycling segment employed 1,377 people, and our marketing and distribution segment employed 668 people. We have 53 employees in general corporate management and administration and 48 employees who provide services to our divisions and subsidiaries. Production employees at one metals recycling plant and two fabrication facilities are represented by unions for collective bargaining purposes. Approximately one half of CMCZ’s employees are represented by unions. We believe that our labor relations are generally good to excellent and our work force is highly motivated.

ITEM 1A. RISK FACTORS

     Before making an investment in our company, you should be aware of various risks, including those described below. You should carefully consider these risk factors together with all of the other information included in this annual report on Form 10-K. The risks described below are not the only risks facing us. Additional risks and uncertainties not currently known to us or those we currently deem to be immaterial may also materially and adversely affect our business, financial condition, results of operations or cash flows. If any of these risks actually occur, our business, financial condition, results of operations or cash flows could be materially adversely affected and you may lose all or part of your investment.

RISKS RELATED TO OUR INDUSTRY

A SIGNIFICANT REDUCTION IN CHINA’S STEEL CONSUMPTION OR INCREASED CHINESE STEEL PRODUCTION SUBSTANTIALLY EXCEEDING LOCAL DEMAND MAY RESULT IN CHINA BECOMING A LARGE EXPORTER OF STEEL AND DISRUPTION TO WORLD STEEL MARKETS.

     Chinese economic expansion has affected the availability and heightened the volatility of many commodities that we market and use in our manufacturing process, including steel. It is reported that in calendar year 2005 China became a net exporter of steel, albeit only by 600,000 tons out of a total estimated production capacity of 349 million tons. China now accounts for approximately one third of the world’s raw steel production and one third of the world’s steel consumption. Expansions and contractions in China’s economy can have major effects on the pricing of not only the price of our finished steel products but also many commodities that affect us such as secondary metals, energy, marine freight rates, steel making supplies such as ferroalloys and graphite electrodes and materials we market such as iron ore and coke. Should Chinese demand weaken or Chinese steel production be allowed to expand unchecked to the point that it significantly exceeds the country’s consumption, prices for many of the products that we both sell to and export from China may fall causing erosion in our gross margins and subjecting us to possible renegotiation of contracts or increases in bad debts. Significant exports from China of steel in the product lines we manufacture in the United States would cause selling prices in the United States to decline and negatively impact our gross margins.

RAPID AND SIGNIFICANT CHANGES IN THE PRICE OF METALS COULD NEGATIVELY IMPACT OUR INDUSTRY.

     Prices for most metals in which we deal have experienced large increases and increased volatility in recent years. With a few exceptions, our markets have been able to adapt to this changing pricing environment. However, should metals prices experience

further unanticipated and even more substantial rapid increases or be subjected to sudden substantial decreases it would impact us in several ways. Some of our operations, the domestic fabrication segment for example, may benefit from rapidly decreasing steel prices as their material cost decline while others, such as our domestic mill and CMCZ segments, would likely experience reduced margins until prices stabilized. Sudden increases could have the opposite effect. Overall we believe that rapid substantial price changes, should they occur, will not be to our industry’s benefit. Our customer and supplier base would be impacted due to uncertainty as to future prices. A reluctance to purchase inventory in the face of extreme price decreases or sell quickly during a period of rapid price increases would likely reduce our volume of business. Marginal industry participants or speculators may attempt to participate to an unhealthy extent during a period of rapid price escalation with a substantial risk of contract default should prices suddenly reverse. Risks of default in contract performance by customers or suppliers as well as a increased risk of bad debts and customer credit exposure would increase during periods of rapid and substantial price changes.

EXCESS CAPACITY IN OUR INDUSTRY COULD INCREASE THE LEVEL OF STEEL IMPORTS INTO THE U.S. RESULTING IN LOWER DOMESTIC PRICES WHICH WOULD ADVERSELY AFFECT OUR SALES, MARGINS AND PROFITABILITY.

     Steel-making capacity exceeds demand for steel products in some countries. Rather than reducing employment by rationalizing capacity with consumption, steel manufacturers in these countries (often with local government assistance or subsidies in various forms) have traditionally periodically exported steel at prices that are significantly below their home market prices and which may not reflect their costs of production or capital. This supply of imports can decrease the sensitivity of domestic steel prices to increases in demand or our ability to recover increased manufacturing costs.

OUR INDUSTRY IS AFFECTED BY CYCLICAL AND REGIONAL ECONOMIC FACTORS INCLUDING THE RISK OF A SLOW DOWN IN ECONOMIC ACTIVITY OR RECESSION.

     Many of our products are commodities subject to cyclical fluctuations in supply and demand in metal consuming industries. Metals industries have historically been vulnerable to significant declines in consumption and product pricing during prolong periods of economic downturn. A recession in either the United States or the European Union or the public perception that a slowdown or recession may occur, could decrease the demand for our products and adversely affect our business. Our overall financial results will be dependent substantially upon the extent to which economic conditions in both the United States and the European Union remain strong. Overall economic activity has historically been susceptible to declines following periods of rapidly increased energy costs or interest rates. A slower expansion or recession will adversely affect our financial results. Our geographic concentration in the southern and southwestern United States as well as Central Europe, Australia and China exposes us to the local market conditions in these regions. Economic downturns in these areas or decisions by governments that have an impact on the level and pace of overall economic activity could adversely affect our sales and profitability.

     Our business supports cyclical industries such as commercial construction, energy, service center, petrochemical and original equipment manufacturing. These industries may experience significant fluctuations in demand for our products based on economic conditions, energy prices, consumer demand and decisions by governments to fund infrastructure projects such as highways, schools, energy plants and airports. Many of these factors are beyond our control. As a result of the volatility in the industries we serve, we may have difficulty increasing or maintaining our level of sales or profitability. If the industries we serve suffer a prolonged downturn, then our business may be adversely affected.

     Our industry is characterized by low backlogs, which means that our results of operations are promptly affected by short-term economic fluctuations.

COMPLIANCE WITH AND CHANGES IN ENVIRONMENTAL AND REMEDIATION REQUIREMENTS COULD RESULT IN SUSTANTIALLY INCREASED CAPITAL REQUIREMENTS AND OPERATING COSTS.

     Existing laws or regulations, as currently interpreted or reinterpreted in the future, or future laws or regulations, may have a material adverse effect on our results of operations and financial condition. Compliance with environmental laws and regulations is a significant factor in our business. We are subject to local, state, federal and international environmental laws and regulations concerning, among other matters, waste disposal, air emissions, waste and storm water effluent and disposal and employee health. Our manufacturing and recycling operations produce significant amounts of by-products, some of which are handled as industrial waste or

hazardous waste. For example, our minimills generate electric arc furnace dust (EAF dust), which the EPA, and other regulatory authorities classify as hazardous waste. EAF dust requires special handling, recycling or disposal.

     In addition, the primary feed materials for the shredders operated by our scrap metal recycling facilities are automobile hulks and obsolete household appliances. Approximately 20% of the weight of an automobile hulk consists of unrecyclable material known as shredder fluff. After the segregation of ferrous and saleable non-ferrous metals, shredder fluff remains. We, along with others in the recycling industry, interpret Federal regulations to require shredder fluff to meet certain criteria and pass a toxic leaching test to avoid classification as a hazardous waste. We also endeavor to remove hazardous contaminants from the feed material prior to shredding. As a result, we believe the shredder fluff we generate is not normally considered or properly classified as hazardous waste. If the laws, regulations or testing methods change with regard to EAF dust or shredder fluff, we may incur additional significant expenditures.

     Although we believe that we are in substantial compliance with all applicable laws and regulations, legal requirements are changing frequently and are subject to interpretation. New laws, regulations and changing interpretations by regulatory authorities, together with uncertainty regarding adequate pollution control levels, testing and sampling procedures, new pollution control technology and cost benefit analysis based on market conditions are all factors that may increase our future expenditures to comply with environmental requirements. Accordingly, we are unable to predict the ultimate cost of future compliance with these requirements or their effect on our operations. We cannot predict whether such costs can be passed on to customers through product price increases. Competitors in various regions or countries where environmental regulation might not be so restrictive, subject to different interpretation or generally not enforced may enjoy a competitive advantage.

     We may also be required to conduct additional clean up at sites where we have already participated in remediation efforts or to take remediation action with regard to sites formerly used in connection with our operations. We may be required to pay for a portion of the costs of clean up or remediation at sites we never owned or on which we never operated if we are found to have arranged for treatment or disposal of hazardous substances on the sites.

RISKS RELATED TO OUR COMPANY

FLUCTUATIONS IN THE VALUE OF THE UNITED STATES DOLLAR RELATIVE TO OTHER CURRENCIES MAY ADVERSELY AFFECT OUR BUSINESS.

     Fluctuations in the value of the dollar can be expected to affect our business. In particular major changes in the rate of exchange of China’s Renminbi or substantial increases in the value of the Euro to the U.S. Dollar could negatively impact our business. A strong U.S. dollar makes imported metal products less expensive, resulting in more imports of steel products into the U.S. by our foreign competitors. Past economic difficulties in Eastern Europe, Asia and Latin America have resulted in lower local demand for steel products and have encouraged greater steel exports to the U.S. at depressed prices. As a result, our products which are made in the U.S., may become relatively more expensive as compared to imported steel, which has had and in the future could have a negative impact on our sales, revenues and profitability.

     A strong U.S. dollar hampers our international marketing and distribution business. Weak local currencies limit the amount of U.S. dollar denominated products that we can import for our international operations and limits our ability to be competitive against local producers selling in local currencies.

OPERATING INTERNATIONALLY CARRIES RISKS AND UNCERTANTIES WHICH COULD NEGATIVELY EFFECT OUR RESULTS OF OPERATIONS.

     We have our heaviest concentration of manufacturing operations in the United States but also have significant facilities in Europe and Australia. Our marketing and trading offices are located in most major markets of the world with our suppliers and our customers located throughout the world. Our marketing and distribution segment relies on substantial international shipments of materials and products in the ordinary course of its business. Our stability, growth and profitability are subject to a number of risks inherent in doing business internationally in addition to the currency exchange risk discussed above, including:

	•		Political, military, terrorist or major pandemic events;
	•		Legal and regulatory requirements or limitations imposed by foreign governments (particularly those with significant steel consumption or steel related production including China, Brazil, Russia and India) including quotas, tariffs or other protectionist trade barriers, adverse tax law changes, nationalization or currency restrictions;

	•		Disruptions or delays in shipments caused by customs compliance or government agencies; and
	•		Potential difficulties in staffing and managing local operations.

WE RELY ON THE AVAILABILITY OF LARGE AMOUNTS OF ELECTRICITY AND NATURAL GAS FOR OUR MINIMILL OPERATIONS. DISRUPTIONS IN DELIVERY OR SUBSTANTIAL INCREASES IN ENERGY COSTS, INCLUDING CRUDE OIL PRICES, COULD ADVERSLY EFFECT ON OUR FINANCIAL PERFORMANCE.

Minimills melt steel scrap in electric arc furnaces and use natural gas to heat steel billets for rolling into finished products. As large consumers of electricity and gas, often the largest in the geographic area where our minimills are located, we must have dependable delivery of electricity and natural gas in order to operate. Accordingly, we are at risk in the event of an energy disruption. Prolonged black-outs or brown-outs or disruptions caused by natural disasters such as hurricanes would substantially disrupt our production. While we have not suffered prolonged production delays due to our inability to access electricity or natural gas several of our competitors have experienced such occurrences. Prolonged substantial increases in energy costs would have an adverse effect on the costs of operating our minimills and would negatively impact our gross margins unless we were able to fully pass through the additional expense. Our finished steel products are typically delivered by truck. Rapid increases in the price of fuel attributable to increases in crude oil prices will have a negative impact on our costs and many of our customers financial results which could result in reduced margins and declining demand for our products. Rapid increases in fuel costs may also negatively impact our ability to charter ships for international deliveries at anticipated freight rates thereby decreasing our margins on those transactions or causing our customers to look for alternative sources.

IF WE LOSE THE SERVICES OF KEY EMPLOYEES WE MAY NOT BE ABLE TO SUCCESSFULLY MANAGE OUR OPERATIONS AND MEET OUR STRATEGIC OBJECTIVES.

     Our future success depends, in large part, on the continued service of our officers and other key employees and our ability to continue to attract and retain additional highly qualified personnel. These employees are integral to our success based on their expertise and knowledge of our business and products. We compete for such personnel with other companies including public and private company competitors who may periodically offer more favorable terms of employment. While we have an employment agreement with our Chief Executive Officer, we typically do not have employment agreements with other key employees. The loss or interruption of the services of a number of our key employees would reduce our ability to effectively manage our operations due to the fact that we may not be able to find in a timely manner, appropriate replacement personnel should the need arise.

WE HAVE INITIATED IMPLEMENTATION OF AN ENTERPRISE RESOURCE PLANNING SYSTEM WHICH, IF NOT EFFECTIVELY MANAGED AND CONTROLLED, COULD THREATEN THE ACHIEVEMENT OF OPERATION AND FINANCIAL GOALS.

     Planning and design of a new enterprise resource planning system commenced in 2006 and will continue through 2007 with phased implementation scheduled commencing in 2008. There are risks that this effort may not result in a successful implementation resulting in resources being inappropriately diverted, untimely completion and substantial cost overruns.

WE MAY HAVE DIFFICULTY COMPETING WITH COMPANIES THAT HAVE A LOWER COST STRUCTURE THAN OURS.

     We compete with regional, national and foreign manufacturers and traders. Some of these competitors are larger, have greater financial resources and more diverse businesses than us. Some of our foreign competitors may be able to pursue business opportunities without regard for the laws and regulations with which we must comply, such as environmental regulations. These companies may have a lower cost structure, more operating flexibility and consequently they may be able to offer better prices and more services than we can. We cannot assure you that we will be able to compete successfully with these companies.

     Furthermore, over the past several years, many integrated domestic steel producers and scrap metal recyclers have entered bankruptcy proceedings. The companies that reorganize and emerge from bankruptcy may have a more competitive capital cost structures. In addition, asset sales by these companies during the reorganization process tended to be at depressed prices, enabling some purchasers to acquire greater capacity at a lower cost.

OUR STEEL MINIMILL BUSINESS REQUIRES CONTINUOUS CAPITAL INVESTMENTS THAT WE MAY NOT BE ABLE TO SUSTAIN.

     We must make regular substantial capital investments in our steel minimills to lower production costs and remain competitive. We cannot be certain that we will have sufficient internally generated cash or acceptable external financing to make necessary substantial capital expenditures in the future. The availability of external financing depends on many factors outside of our control, including capital market conditions and the overall performance of the economy. If funding is insufficient, we may be unable to develop or enhance our minimills, take advantage of business opportunities and respond to competitive pressures.

SCRAP AND OTHER SUPPLIES FOR OUR BUSINESSES ARE SUBJECT TO SIGNIFICANT PRICE FLUCTUATIONS, WHICH MAY ADVERSELY AFFECT OUR BUSINESS.

     We depend on ferrous scrap, the primary feedstock for our steel minimills and other supplies such as graphite electrodes and ferroalloys for our steel minimill operations. Although we believe that the supply of scrap is adequate to meet future needs, the price of scrap and other supplies have historically been subject to significant fluctuation. Our future profitability will be adversely affected if we are unable to pass on to our customers increased raw material and supplies costs. We may not be able to adjust our product prices to recover the costs of rapid increases in material prices, especially over the short-term and in our domestic fabrication segment’s fixed price fabrication contracts.

     The raw material used in manufacturing copper tubing is copper scrap, supplemented occasionally by virgin copper ingot. Copper scrap has generally been readily available, and a small portion of our copper scrap comes from our metal recycling yards. However, copper scrap is subject to rapid price fluctuations related to the price and supply of virgin copper. Price increases for high quality copper scrap could adversely affect our business. Finally, our Arkansas mill does not have melting capacity, so it is dependent on an adequate supply of competitively priced used rail. The availability of used rail fluctuates with the pace of railroad abandonments, rail replacement by railroads in the United States and abroad and demand for used rail from other domestic and foreign rail rerolling mills. Price increases for used rail could adversely affect our business.

UNEXPECTED EQUIPMENT FAILURES MAY LEAD TO PRODUCTION CURTAILMENTS OR SHUTDOWNS.

     Interruptions in our production capabilities will adversely affect our production costs, steel available for sales and earnings for the affected period. In addition to equipment failures, our facilities are also subject to the risk of catastrophic loss due to unanticipated events such as fires, explosions or violent weather conditions. Our manufacturing processes are dependent upon critical pieces of steel-making equipment, such as our furnaces, continuous casters and rolling equipment, as well as electrical equipment, such as transformers, and this equipment may, on occasion, be out of service as a result of unanticipated failures. We have experienced and may in the future experience material plant shutdowns or periods of reduced production as a result of such equipment failures.

HEDGING TRANSACTIONS MAY LIMIT OUR POTENTIAL GAINS OR EXPOSE US TO LOSS.

     Our product lines and worldwide operations expose us to risks associated with fluctuations in foreign currency exchange, commodity prices and interest rates. As part of our risk management program, we use financial instruments, including commodity futures or forwards, foreign currency exchange forward contracts and interest rate swaps. While intended to reduce the effects of the fluctuations, these transactions may limit our potential gains or expose us to loss. Should our counterparties to such transactions or the sponsors of the exchanges through which these transactions are offered, such as the London Metal Exchange, fail to honor their obligations due to financial distress we would be exposed to potential losses or the inability to recover anticipated gains from these transactions.

     We enter into the foreign currency exchange forwards as economic hedges of trade commitments or anticipated commitments denominated in currencies other than the functional currency to mitigate the effects of changes in currency rates. Although we do not enter into these instruments for trading purposes or speculation, and although our management believes all of these instruments are economically effective as hedges of underlying physical transactions, these foreign exchange commitments are dependent on timely performance by our counterparties. Their failure to perform could result in our having to close these hedges without the anticipated underlying transaction and could result in losses if foreign currency exchange rates have changed.

WE ARE INVOLVED AND MAY IN THE FUTURE BECOME INVOLVED IN VARIOUS ENVIRONMENTAL MATTERS THAT MAY RESULT IN FINES, PENALTIES OR JUDGMENTS BEING ASSESSED AGAINST US OR LIABILITY IMPOSED UPON US WHICH WE CANNOT PRESENTLY ESTIMATE OR REASONABLY FORESEE AND WHICH MAY HAVE A MATERIAL IMPACT ON OUR EARNINGS AND CASH FLOWS.

     Under the Comprehensive Environmental Response, Compensation and Liability Act of 1980, called CERCLA, or similar state statutes, we may have obligations to conduct investigation and remediation activities associated with alleged releases of hazardous substances or to reimburse the EPA (or state agencies as applicable) for such activities and to pay for natural resource damages associated with alleged releases. We have been named a potentially responsible party at several federal and state Superfund sites because the EPA or an equivalent state agency contends that we and other potentially responsible scrap metal suppliers are liable for the cleanup of those sites as a result of having sold scrap metal to unrelated manufacturers for recycling as a raw material in the manufacture of new products. We are involved in litigation or administrative proceedings with regard to several of these sites in which

we are contesting, or at the appropriate time may contest, our liability at the sites. In addition, we have received information requests with regard to other sites which may be under consideration by the EPA as potential CERCLA sites.

     Although we are unable to estimate precisely the ultimate dollar amount of exposure to loss in connection with various environmental matters or the effect on our consolidated financial position, we make accruals as warranted. Due to inherent uncertainties, including evolving remediation technology, changing regulations, possible third-party contributions, the inherent shortcomings of the estimation process, the uncertainties involved in litigation and other factors, the amounts we accrue could vary significantly from the amounts we ultimately are required to pay.

AN INABILITY TO FULLY AND EFFECTIVELY INTEGRATE FUTURE ACQUISITIONS COULD RESULT IN INCREASED COSTS WHILE DIVERTING MANAGEMENT’S ATTENTION FROM OUR CORE OPERATIONS, AND WE CANNOT ASSURE YOU THAT WE WILL REALIZE THEIR FULL BENEFITS OR SUCCESSFULLY MANAGE OUR COMBINED COMPANY, AND FUTURE ACQUISITIONS MAY RESULT IN DILUTIVE EQUITY ISSUANCES OR INCREASES IN DEBT.

     As part of our ongoing business strategy we regularly evaluate and may pursue acquisitions of and investments in complementary companies. We cannot assure you that we will be able to fully or successfully integrate recent or future acquisitions in a timely manner or at all. If we are unable to successfully integrate acquisitions, we may incur costs and delays or other operational, technical or financial problems, any of which could adversely affect our business. In addition, management’s attention may be diverted from core operations which could harm our ability to timely meet the needs of our customers and damage our relationships with those customers. To finance future acquisitions, we may need to raise funds either by issuing equity securities or incurring or assuming debt. If we incur additional debt, the related interest expense may significantly reduce our profitability.

WE ARE SUBJECT TO LITIGATION WHICH COULD ADVERSELY AFFECT OUR PROFITABILITY.

     We are involved in various litigation matters, including regulatory proceedings, administrative proceedings, governmental investigations, environmental matters and construction contract disputes. The nature of our operations also expose us to possible litigation claims in the future. Although we make every effort to avoid litigation, these matters are not totally within our control. We will contest these matters vigorously and have made insurance claims where appropriate, but because of the uncertain nature of litigation and coverage decisions, we cannot predict the outcome of these matters. These matters could have a material adverse effect on our financial condition and profitability. Litigation is very costly, and the costs associated with prosecuting and defending litigation matters could have a material adverse effect on our financial condition and profitability. Although we are unable to estimate precisely the ultimate dollar amount of exposure to loss in connection with litigation matters, we make accruals as warranted. However, the amounts that we accrue could vary significantly from the amounts we actually pay, due to inherent uncertainties and the inherent shortcomings of the estimation process, the uncertainties involved in litigation and other factors.

SOME OF OUR CUSTOMERS MAY DEFAULT ON THE DEBTS THEY OWE TO US.

     Economic conditions are not consistent in all the markets we serve. Some areas are still weak, and our customers may struggle to meet their obligations, especially if a significant customer of theirs defaults. We regularly maintain a substantial amount of accounts receivable – at year end over $1.1 billion. We charged off accounts receivable net of recoveries of $3.8 million during the past fiscal year and at year end our allowance for collection losses was $16 million. Other factors such as management and accounting irregularities have forced some companies into bankruptcy. A weakening of the general economy and corporate failures could result in higher bad debt costs. In certain markets we have experienced a consolidation among those entities to whom we sell. This consolidation, along with substantially higher metals and other commodity prices, has resulted in an increased credit risk spread among fewer customers without a corresponding strengthening of their financial status. Although we have expanded our use of credit insurance for accounts receivable in our marketing and distribution segment and require letters of credit from reputable financial institutions in many international sales transactions, the majority of our receivables in our other segments are considered to be open account uninsured accounts receivable.

CREDIT RATINGS AFFECT OUR ABILITY TO OBTAIN FINANCING AND THE COST OF SUCH FINANCING.

     Credit ratings affect our ability to obtain financing and the cost of such financing. Our commercial paper program is ranked in the second highest category by Moody’s Investors Service (P-2) and Standard & Poor’s Corporation (A-2). Our senior unsecured debt is investment grade rated by Standard & Poor’s Corporation (BBB) and Moody’s Investors Service (Baa2). In determining our credit ratings, the rating agencies consider a number of both quantitative and qualitative factors. These factors include earnings, fixed charges such as interest, cash flows, total debt outstanding, off balance sheet obligations and other commitments, total capitalization

and various ratios calculated from these factors. The rating agencies also consider predictability of cash flows, business strategy and diversity, industry conditions and contingencies. Lower ratings on our commercial paper program or our senior unsecured debt could impair our ability to obtain additional financing and will increase the cost of the financing that we do obtain.

THE AGREEMENTS GOVERNING THE NOTES AND OUR OTHER DEBT CONTAIN FINANCIAL COVENANTS AND IMPOSE RESTRICTIONS ON OUR BUSINESS.

     The indenture governing our 6.80% notes due 2007, 6.75% notes due 2009 and 5.625% notes due 2013 contains restrictions on our ability to create liens, sell assets, enter into sale and leaseback transactions and consolidate or merge. In addition, our credit facility contains covenants that place restrictions on our ability to, among other things:

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

     Our credit facility also requires that we meet certain financial tests and maintain certain financial ratios, including a maximum debt to capitalization and interest coverage ratios.

     Although the debt owed by CMCZ under a five-year term note is without recourse to Commercial Metals Company, our Swiss subsidiary that owns the CMCZ shares or any other of our subsidiaries, the note does contain certain covenants including minimum debt to EBITDA, debt to equity and tangible net worth requirements (as defined only by reference to CMCZ’s financial statements).

     Other agreements that we may enter into in the future may contain covenants imposing significant restrictions on our business that are similar to, or in addition to, the covenants under our existing agreements. These restrictions may affect our ability to operate our business and may limit our ability to take advantage of potential business opportunities as they arise.

     Our ability to comply with these covenants may be affected by events beyond our control, including prevailing economic, financial and industry conditions. The breach of any of these restrictions could result in a default under the indenture governing the notes or under our other debt agreements. An event of default under our debt agreements would permit some of our lenders to declare all amounts borrowed from them to be due and payable, together with accrued and unpaid interest. If we were unable to repay debt to our secured lenders if we incur secured debt in the future, these lenders could proceed against the collateral securing that debt. In addition, acceleration of our other indebtedness may cause us to be unable to make interest payments on the notes.

OUR SYSTEM OF INTERNAL CONTROLS MUST BE AUDITED ANNUALLY AND THE OCCURRENCE OF A MATERIAL WEAKNESS MAY NEGATIVELY IMPACT OUR BUSINESS REPUTATION, CREDIT RATINGS AND PARTICIPATION IN CAPITAL MARKETS

     Under the Sarbanes-Oxley Act management must now assess the design and functioning of our system of financial internal control. Our registered independent accountants must then certify such representation. Discovery and disclosure of a material weakness, by definition, may have a material adverse impact on our financial statements. Such an occurrence may discourage certain customers or suppliers from doing business with us, may cause downgrades in our debt ratings leading to higher borrowing costs, and may affect how our stock trades. This may in turn negatively affect our ability to access public debt or equity markets for capital.

ITEM 1B. UNRESOLVED STAFF COMMENTS

     Not applicable.

ITEM 2. PROPERTIES

     Our Texas steel minimill is located on approximately 600 acres of land that we own. Our Texas minimill facilities include several buildings that occupy approximately 806,000 square feet. Our Alabama steel minimill is located on approximately 65 acres of land, and it includes several buildings that occupy approximately 487,000 square feet. We utilize our facilities at the Texas and Alabama steel minimills for manufacturing, storage, office and other related uses. Our South Carolina steel minimill is located on approximately 101 acres of land, and the buildings occupy approximately 628,000 square feet. Our Arkansas steel minimill is located on approximately 135 acres of land, and the buildings occupy approximately 217,000 square feet. We lease approximately 30 acres of land at the Alabama minimill and all the land at the Arkansas and South Carolina minimills in connection with revenue bond financing or property tax incentives. We may purchase the land at the termination of the leases or earlier for a nominal sum. Howell Metal Company owns approximately 76 acres of land in New Market, Virginia, with buildings occupying approximately 400,560 square feet.

     The facilities of our domestic fabrication segment utilize approximately 1,446 acres of land which we own and lease approximately 95 acres of land at various locations in Texas, Louisiana, Arkansas, Utah, South Carolina, Florida, Virginia, Georgia, North Carolina, Nevada, Iowa, California, Pennsylvania, Mississippi, Arizona, New Mexico, Arkansas, Oklahoma and Juarez, Mexico.

     CMCZ’s steel manufacturing operations are located in Zawiercie in south central Poland about 40 kilometers from Katowice. CMCZ and subsidiaries lease approximately 98% of the 2 million square meters of land utilized by the principal operations with a small balance owned. The land is leased from the State of Poland under contracts with 99 year durations and are considered to create a right of perpetual usufruct. The leases expire beginning in 2089 through 2100. The principal operations are conducted in buildings having an area of approximately 234,000 square meters. The 7 major buildings in use have all been constructed on or after 1974. The real estate is also developed with approximately 133 other buildings including warehouses, administrative offices, workshops, garage, transformer stations, pumping stations, gas stations, boiler houses, gate houses and contains some structures leased to unrelated parties, CMCZ subsidiaries and affiliated companies. Other much smaller tracts of land are leased or owned in nearby communities including those utilized by 6 affiliated scrap processing facilities.

     Our recycling segment’s plants occupy approximately 544 acres of land that we own in Beaumont, Clute, Corpus Christi, Dallas, El Paso, Fort Worth, Galveston, Houston, Lubbock, Lufkin, Midland, Odessa, Victoria and Vinton, Texas; Apopka, Gainesville, Jacksonville, Lake City, Ocala, Palm Bay, and Tampa, Florida; Shreveport, Louisiana; Chattanooga, Tennessee; Springfield and Joplin, Missouri; Burlington, North Carolina; Frontenac and Independence, Kansas; Miami and Stroud, Oklahoma; and Lonoke, Arkansas. The recycling segment’s other scrap metal processing locations are on leased land.

     We lease the office space where our corporate headquarters and all of our domestic marketing and distribution offices are located. We own two warehouse buildings in Australia, one of which is located on leased real estate. We lease the other warehouse facilities located in Australia.

     The leases on the leased properties described above will expire on various dates and with the exception of the CMCZ leases described above, generally over the next nine years. Several of the leases have renewal options. We have had little difficulty renewing such leases as they expire. We estimate our minimum annual rental obligation for real estate operating leases in effect at August 31, 2006, to be paid during fiscal 2007, to be approximately $12.7 million. We also lease a portion of the equipment we use in our plants. We estimate our minimum annual rental obligation for equipment operating leases in effect at August 31, 2006, to be paid during fiscal 2007, to be approximately $12.9 million.

ITEM 3. LEGAL PROCEEDINGS

     We have received notices from the EPA or state agencies with similar responsibility that we and numerous other parties are considered potentially responsible parties, or PRPs, and may be obligated under the Comprehensive Environmental Response Compensation and Liability Act of 1980, or CERCLA, or similar state statute to pay for the cost of remedial investigation, feasibility studies and ultimately remediation to correct alleged releases of hazardous substances at 13 locations. We may contest our designation as a PRP with regard to certain sites, while at other sites we are participating with other named PRPs in agreements or negotiations that we expect will result in agreements to remediate the sites. The EPA or respective state agency refers to these locations, none of which involve real estate we ever owned or conducted operations upon, as the Sapp Battery Site in Cottondale, Florida, the Interstate Lead Company Site in Leeds, Alabama, the Ross Metals Site in Rossville, Tennessee, the Li Tungsten Site in Glen Cove, New York,

the American Brass site in Headland, Alabama, the Delatte Metals site in Ponchatoula, Louisiana, the Palmetto Recycling site in Columbia, South Carolina, the Peak Oil Site in Tampa, Florida, the R&H Oil Site in San Antonio, Texas, the SoGreen/Parramore Site in Tifton, Georgia, the Stoller Site in Jericho, South Carolina, the Jensen Drive site in Houston, Texas and the Industrial Salvage site in Corpus Christi, Texas. We have periodically received information requests from government environmental agencies with regard to other sites that are apparently under consideration for designation as listed sites under CERCLA or similar state statutes. Often we do not receive any further communication with regard to these sites. We do not know if any of these inquires will ultimately result in a demand for payment from us.

     The EPA notified us and other alleged PRPs that under Sec. 106 of CERCLA we and the other PRPs could be subject to a maximum fine of $25,000 per day and the imposition of treble damages if we and the other PRPs refuse to clean up the Peak Oil, Sapp Battery, SoGreen/Parramore and Stoller site as ordered by the EPA. We are presently participating in PRP organizations at these sites which are paying for certain site remediation expenses. We do not believe that the EPA will pursue any fines against us if we continue to participate in the PRP groups or if we have adequate defenses to the EPA’s imposition of fines against us in these matters.

     In 1993, the Federal Energy Regulatory Commission entered an order against our wholly-owned subsidiary CMC Oil Company, or CMC Oil, which has been inactive since 1985. As a result of the order, CMC Oil is subject to a judgment which the Federal District Court upheld in 1994 and the Court of Appeals affirmed in 1995. The order found CMC Oil liable for overcharges constituting violations of crude oil reseller regulations from December 1977 to January 1979. The alleged overcharges occurred in connection with our joint venture transactions with RFB Petroleum, Inc. The overcharges total approximately $1,330,000 plus interest calculated from the transaction dates to the date of the District Court judgment under the Department of Energy’s interest rate policy, and with interest thereafter at the rate of 6.48% per annum. Although CMC Oil accrued a liability on its books during 1995, it does not have sufficient assets to satisfy the judgment. No claim has ever been asserted against us as a result of the CMC Oil litigation. We will vigorously defend ourselves if any such claim is asserted.

     We are unable to estimate the ultimate dollar amount of any loss in connection with the above-described legal proceedings, environmental matters, government proceedings, and disputes that could result in additional litigation, some of which may have a material impact on earnings and cash flows for a particular quarter. Management believes that the outcome of the suits and proceedings mentioned, and other miscellaneous litigation and proceedings now pending, will not have a material adverse effect on our business or consolidated financial position.

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

     Not Applicable.

PART II

ITEM 5. MARKET FOR REGISTRANT’S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS AND ISSUER PURCHASES OF EQUITY SECURITIES

PURCHASES OF STOCK

														(d) Maximum Number
										(c) Total Number of				(or Approximate
										Shares (or Units)				Dollar Value) of
										Purchased as Part				Shares (or Units)
		(a) Total Number of				(b) Average Price				of Publicly				that May Yet Be
		Shares (or Units)				Paid per Share (or				Announced Plans or				Purchased Under the
Period		Purchased				Unit)				Programs				Plans or Programs
June 1, 2006 — June 30, 2006			1,131,700			$	22.85				1,123,500				687,500	shares
July 1, 2006 — July 31, 2006			1,481,183				22.69				1,461,700				4,225,800	shares(1)
August 1, 2006 — August 31, 2006			905,298				22.42				884,040				3,341,760	shares
Total			3,518,181			$	22.67				3,469,240				3,341,760

MARKET AND DIVIDEND INFORMATION

     The table below summarizes the high and low sales prices reported on the New York Stock Exchange for our common stock and the quarterly cash dividends we paid for the past two fiscal years.

PRICE RANGE
OF COMMON STOCK

2005
FISCAL
QUARTER		HIGH				LOW				CASH DIVIDENDS
1st		$	11.46			$	8.17			3 cents
2nd			18.08				10.03			3 cents
3rd			19.50				11.37			3 cents
4th			15.35				11.50			3 cents

PRICE RANGE
OF COMMON STOCK

2006
FISCAL
QUARTER		HIGH				LOW				CASH DIVIDENDS
1st		$	17.63			$	13.54			3 cents
2nd			24.59				17.11			3 cents
3rd			31.69				21.72			5 cents
4th			26.39				20.04			6 cents

     Since 1982, our common stock has been listed and traded on the New York Stock Exchange. From 1959 until the NYSE listing in 1982, our common stock was traded on the American Stock Exchange. The number of shareholders of record of our common stock at November 1, 2006, was approximately 3,500.

EQUITY COMPENSATION PLANS

     Information about our equity compensation plans as of August 31, 2006 that were either approved or not approved by our stockholders is as follows:

A.

B.

C.

NUMBER OF SECURITIES

NUMBER OF

REMAINING FOR FUTURE

SECURITIES TO BE

WEIGHTED-AVERAGE

ISSUANCE UNDER

ISSUED UPON

EXERCISE

EQUITY COMPENSATION

EXERCISE OF

PRICE OF OUTSTANDING

PLANS

OUTSTANDING

OPTIONS, WARRANTS

(EXCLUDING SECURITIES

OPTIONS,

AND

REFLECTED IN COLUMN

PLAN CATEGORY

WARRANTS AND RIGHTS

RIGHTS

(A)

Equity compensation plans approved by security holders

7,485,348

$

8.06

2,961,458

Equity compensation plans not approved by security holders

0

0

0

TOTAL

7,485,348

$

8.06

2,961,458

ITEM 6. SELECTED FINANCIAL DATA

     The table below sets forth a summary of our selected consolidated financial information for the periods indicated. The per share amounts have been adjusted to reflect two-for-one stock splits in the form of a stock dividends on our common stock paid June 28, 2002, January 10, 2005 and May 22, 2006.

FOR THE YEARS ENDED AUGUST 31,
(DOLLARS IN THOUSANDS EXCEPT PER SHARE AMOUNTS)

		2006				2005				2004				2003				2002
Net Sales		$	7,555,924			$	6,592,697			$	4,768,327			$	2,875,885			$	2,479,941
Net Earnings			356,347				285,781				132,021				18,904				40,525
Diluted Earnings Per Share			2.89				2.32				1.11				0.17				0.36
Total Assets			2,898,868				2,332,922				1,988,046				1,283,255				1,247,373
Stockholders’ Equity			1,220,104				899,561				660,627				506,933				501,306
Long-term Debt			322,086				386,741				393,368				254,997				255,969
Cash Dividends Per Share			0.17				0.12				0.09				0.08				0.07
Ratio of Earnings to Fixed Charges			14.80				12.43				7.30				2.57				3.77

ITEM 7. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

     This annual report on Form 10-K contains “forward-looking statements” within the meaning of Section 27A of the Securities Act, Section 21E of the Exchange Act and the Private Securities Litigation Reform Act of 1995, with respect to our financial condition, results of operations, cash flows and business, and our expectations or beliefs concerning future events, including net earnings, product pricing and demand, production rates, energy expense, insurance expense, interest rates, inventory levels, acquisitions and general market conditions. These forward-looking statements can generally be identified by phrases such as we or our management “expects,” “anticipates,” “believes,” “plans to,” “ought,” “could,” “will,” “should,” “likely,” “appears,” “projects,” “forecasts” or other similar words or phrases. 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:

	•		construction activity;
	•		decisions by governments affecting the level of steel imports, including tariffs and duties;
	•		litigation claims and settlements;
	•		difficulties or delays in the execution of construction contracts resulting in cost overruns or contract disputes;

	•		metals pricing over which we exert little influence;
	•		increased capacity and product availability from competing steel minimills and other steel suppliers including import quantities and pricing;
	•		court decisions;
	•		industry consolidation or changes in production capacity or utilization;
	•		global factors including credit availability;
	•		currency fluctuations;
	•		scrap metal, energy, insurance and supply prices; and
	•		the pace of overall economic activity.

     See the section entitled “Risk Factors” in this annual report for a more complete discussion of these risks and uncertainties and for other risks and uncertainties. These factors and the other risk factors described in this annual report are not necessarily all of the important factors that could cause actual results to differ materially from those expressed in any of our forward-looking statements. Other unknown or unpredictable factors also could harm our results. Consequently, we cannot assure you that the actual results or developments we anticipate will be realized or, even if substantially realized, that they will have the expected consequences to, or effects on, us. Given these uncertainties, we caution prospective investors not to place undue reliance on such forward-looking statements. We undertake no obligation to publicly update or revise any forward-looking statements, whether as a result of new information, future events or otherwise.

     This Management’s Discussion and Analysis of Financial Condition and Results of Operation should be read in conjunction with our consolidated financial statements and the accompanying notes contained in this annual report.

     We manufacture, recycle, market and distribute steel and metal products through a network of over 150 locations in the United States and internationally.

     Our segment reporting includes five reportable segments: domestic mills, CMC Zawiercie (CMCZ), domestic fabrication, recycling and marketing and distribution. The domestic mills segment includes the Company’s domestic steel minimills (including the scrap processing facilities which directly support these mills) and the copper tube minimill. The copper tube minimill is aggregated with the Company’s steel minimills because it has similar economic characteristics. The CMCZ minimill and related operations in Poland have been presented as a separate segment because the economic characteristics of their markets and the regulatory environment in which they operate are different from the Company’s domestic minimills. The domestic fabrication segment consists of the Company’s rebar and joist fabrication operations, fence post manufacturing plants, construction-related and other products facilities. The recycling segment consists of the CMC Recycling division’s scrap processing and sales operations primarily in Texas, Florida and the southern United States. Marketing and distribution includes both domestic and international operations for the sales, distribution and processing of both ferrous and nonferrous metals and other industrial products. The segment’s activities consist only of physical transactions and not speculation.

Domestic Mills Operations

We conduct our domestic mills operations through a network of:

	•		steel mills, commonly referred to as “minimills,” that produce reinforcing bar, angles, flats, rounds, fence post sections and other shapes;
	•		scrap processing facilities that directly support these minimills; and
	•		a copper tube minimill.

CMCZ Operations

We conduct our CMCZ operations through:

	•		a rolling mill that produces primarily reinforcing bar and some merchant products;
	•		a rolling mill that produces primarily wire rod;
	•		our scrap processing facilities that directly support the CMCZ minimill; and
	•		steel fabrication plant primarily for reinforcing bar.

Domestic Fabrication Operations

We conduct our domestic fabrication operations through a network of:

	•		steel fabrication and processing plants that bend, weld, cut, fabricate, distribute and place steel, primarily reinforcing bar and angles;
	•		warehouses that sell or rent products for the installation of concrete;
	•		plants that produce special sections for floors and ceiling support;
	•		plants that produce steel fence posts;
	•		plants that treat steel with heat to strengthen and provide flexibility; and
	•		a railroad rail salvage company.

Recycling Operations

     We conduct our recycling operations through metal processing plants located in the states of Texas, Oklahoma, Kansas, Louisiana, Arkansas, Missouri, Georgia, Tennessee, Florida , South Carolina, and North Carolina.

Marketing and Distribution Operations

     We market and distribute steel, copper and aluminum coil, sheet and tubing, ores, metal concentrates, industrial minerals, ferroalloys and chemicals through our network of marketing and distribution offices, processing facilities and joint ventures around the world. Our customers use these products in a variety of industries.

     You should read this management’s discussion and analysis in connection with your review of our consolidated audited financial statements and the accompanying footnotes.

Critical Accounting Policies and Estimates

     The following are important accounting policies, estimates and assumptions that you should understand as you review our financial statements. We apply these accounting policies and make these estimates and assumptions to prepare financial statements under accounting principles generally accepted in the United States (GAAP). Our use of these accounting policies, estimates and assumptions affects our results of operations and our reported amounts of assets and liabilities. Where we have used estimates or assumptions, actual results could differ significantly from our estimates.

Revenue Recognition We recognize sales when title passes to the customer either when goods are shipped or when they are received based on the terms of the sale. When we estimate that a contract with one of our customers will result in a loss, we accrue the entire loss as soon as it is probable and estimable.

Contingencies We make accruals as needed for litigation, administrative proceedings, government investigations (including environmental matters), and contract disputes. We base our environmental liabilities on estimates regarding the number of sites for which we will be responsible, the scope and cost of work to be performed at each site, the portion of costs that we expect we will share with other parties and the timing of the remediation. Where timing of expenditures can be reliably estimated, we discount amounts to reflect our cost of capital over time. We record these and other contingent liabilities when they are probable and when we can reasonably estimate the amount of loss. Where timing and amounts cannot be precisely estimated, we estimate a range, and we recognize the low end of the range without discounting. Also, see Note 11, Commitments and Contingencies, to the consolidated financial statements.

Inventory Cost We determine inventory cost for most domestic inventories by the last-in, first-out method, or LIFO. Beginning fiscal 2005, we refined our method of estimating our interim LIFO reserve by using quantities and costs at quarter end and recording the resulting LIFO expense in its entirety. At the end of each quarter in 2004, we estimated both inventory quantities and costs that we expected at the end of the fiscal year for the LIFO calculations, and we recorded an amount on a pro-rata basis. These estimates could vary substantially from the actual year-end results, causing an adjustment to cost of goods sold in our fourth quarter. See Note 15, Quarterly Financial Data, to the consolidated financial statements. We record all inventories at the lower of their cost or market value.

Property, Plant and Equipment Our domestic mills, CMCZ, domestic fabrication and recycling businesses are capital intensive. We evaluate the value of these assets and other long-lived assets whenever a change in circumstances indicates that their carrying value may not be recoverable. Some of the estimated values for assets that we currently use in our operations utilize judgments and assumptions of future undiscounted cash flows that the assets will produce. If these assets were for sale, our estimates of their values could be significantly different because of market conditions, specific transaction terms and a buyer’s different viewpoint of future cash flows. Also, we depreciate property, plant and equipment on a straight-line basis over the estimated useful lives of the assets. Depreciable lives are based on our estimate of the assets’ economically useful lives and are evaluated annually. To the extent that an asset’s actual life differs from our estimate, there could be an impact on depreciation expense or a gain/loss on the disposal of the asset in a later period. We expense major maintenance costs as incurred.

Other Accounting Policies and New Accounting Pronouncements See Note 1, Summary of Significant Accounting Policies, to our consolidated financial statements.

Consolidated Results of Operations

		Year ended August 31,
(in millions except share data)		2006				2005				2004
Net sales		$	7,556			$	6,593			$	4,768
Net earnings			356.3				285.8				132.0
Per diluted share			2.89				2.32				1.11
EBITDA			659.2				551.6				296.2
International net sales			2,753				2,716				1,778
As % of total sales			36	%			41	%			37	%
LIFO* effect on net earnings expense			50.6				12.5				48.6
Per diluted share			0.41				0.10				0.41

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 for the year ended August 31:

(in millions)		2006				2005				2004
Net earnings		$	356.3			$	285.8			$	132.0
Interest expense			29.6				31.2				28.1
Income taxes			187.9				158.0				65.1
Depreciation and amortization			85.4				76.6				71.0
EBITDA		$	659.2			$	551.6			$	296.2

EBITDA does not include interest expense, income taxes and depreciation and amortization. Because we have borrowed money in order to partially 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.

The following events had a significant financial impact during our fiscal year ended August 31, 2006 as compared to our 2005 fiscal year:

	1.		We reported our highest net sales and net earnings ever for the third straight year.
	2.		Increased selling prices, margins and volumes resulted in significantly higher adjusted operating profits in our Domestic Mills, CMCZ and Recycling segments.
	3.		Increased sales prices at our copper tube mill offset the dramatic jump in the cost of copper scrap, giving significantly greater metal spreads and record adjusted operating profits.
	4.		Sales price gains at CMCZ exceeded the increase in the cost of scrap and together with volume increases allowed the operation to go from break-even in 2005 to $52.8 million adjusted operating profit in 2006.
	5.		Domestic Fabrication had a 23% increase in volume, but the cost of steel was up considerably resulting in some margin squeeze and a slight decrease in adjusted operating profit.
	6.		We had successful start ups of the new continuous caster at the Texas mill and the new scrap mega-shredder at the CMCZ mill.
	7.		A 14% volume increase, strong ferrous prices and historically high nonferrous prices helped our Recycling segment to achieve a record adjusted operating profit.
	8.		We recorded a $50.6 million after-tax LIFO expense ($0.41 per diluted share) compared to $12.5 million LIFO expense ($0.10 per diluted share) in 2005.
	9.		Our overall effective tax rate decreased to 33.9% as compared to 35.7% in 2005 due to shifts in profitability among tax jurisdictions, the manufacturing deduction and tax repatriation benefit.

In 2006, our net earnings reached all-time record levels as a result of the combination of higher selling prices, margins and volume in most of our segments. Non ferrous selling prices and margins reached historically high levels. These positive factors more than offset increased purchase prices and other input costs. We continued to benefit from favorable market conditions for most of our businesses and achieved excellent performance in all of our segments. Strong global expansion has helped, and the improved economic situation in Central and Western Europe has helped our Polish operations achieve much improved net earnings. Our net earnings in the fourth quarter of fiscal 2006 exceeded those for any previous fiscal quarter that we have ever reported.

Segments

Unless otherwise indicated, all dollars below are before minority interests and income taxes. Financial results for our reportable segments are consistent with the basis and manner in which we internally disaggregate financial information for making operating decisions. See Note 14, Business Segments, to the 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. Adjusted operating profit is equal to earnings before income taxes for our domestic mills and domestic fabrication segments because these segments require minimal outside financing. The following table shows net sales and adjusted operating profit (loss) by business segment:

		Year ended August 31,
(in millions)		2006				2005				2004
Net sales:
Domestic mills		$	1,600			$	1,298			$	1,109
CMCZ*			574				478				427
Domestic fabrication			1,772				1,474				1,047
Recycling			1,360				897				774
Marketing and distribution			2,954				2,926				1,882
Corporate and eliminations			(704	)			(480	)			(471	)
Adjusted operating profit (loss):
Domestic mills			301.1				232.8				94.9
CMCZ*			52.8				(0.2	)			69.3
Domestic fabrication			96.0				101.9				(3.4	)
Recycling			100.0				70.8				67.9
Marketing and distribution			69.8				90.4				39.4
Corporate and eliminations			(32.4	)			(17.5	)			(26.4	)

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								Twelve Months Ended
		August 31,								August 31,
		2006				2005				2006				2005
Domestic mills		$	(3,722	)		$	11,948			$	(28,833	)		$	(8,155	)
Domestic fabrication			(1,086	)			2,491				(19,972	)			(6,562	)
Recycling			2,139				(23	)			(12,505	)			(3,033	)
Marketing and distribution			(13,536	)			2,235				(16,585	)			(1,526	)
Consolidated increase (decrease) to adjusted profit before tax		$	(16,205	)		$	16,651			$	(77,895	)		$	(19,276	)

2006 Compared to 2005

Domestic Mills We include our four domestic steel minimills and our copper tube minimill in our domestic mills segment. In 2006, our domestic mills segment set another all-time annual record for adjusted operating profits. Higher selling prices, metal margins and volumes at our domestic steel mills in 2006 as compared to 2005 helped net sales and adjusted operating profit continue to grow. Metal margins (the difference between the average selling price and cost of scrap consumed) for the segment increased in 2006 as compared to 2005 because increases in selling prices at our domestic steel mills more than offset the increases in scrap purchase and other input costs. In addition, historically high sales prices and metal margins helped our copper tube minimill achieve record adjusted operating profit. The high prices of steel and copper scrap caused LIFO expense for 2006 to be at a very high $28.8 million as compared to $8.2 million in 2005.

Within the segment adjusted operating profit for our four domestic steel minimills was $264.1 million for the year ended August 31, 2006 as compared to $227.7 million for 2005. This $36.4 million increase in adjusted operating profit is even more remarkable considering 2005 contained $20.1 million of insurance recoveries. Selling prices and metal margins increased in 2006 as compared to 2005 due to continued strong global demand for steel. Volumes shipped were also up at all four mills compared to 2005. Average scrap purchase costs were higher than last year as the world demand for ferrous scrap also remained strong. Our overall metal margins increased, resulting in higher total adjusted operating profits for the four steel minimills in 2006 as compared to 2005. The table below reflects domestic steel and ferrous scrap prices per ton for the year ended August 31:

										Increase
		2006				2005				$				%
Average mill selling price (finished goods)		$	530			$	489			$	41				8	%
Average mill selling price (total sales)			513				473				40				8	%
Average cost of ferrous scrap consumed			214				199				15				8	%
Average FIFO metal margin			299				274				25				9	%
Average ferrous scrap purchase price			191				171				20				12	%

The table below reflects our domestic steel minimills’ operating statistics for the year ended August 31:

										Increase
(short tons in thousands)		2006				2005				Amount				%
Tons melted			2,324				2,173				151				7	%
Tons rolled			2,198				2,024				174				9	%
Tons shipped			2,492				2,266				226				10	%

Overall, our domestic steel minimills recorded $15.5 million LIFO expense in 2006 as compared to $7.7 million in 2005. Our utility expenses increased by $25.8 million (36%) in 2006 as compared to 2005. Electricity increased by $16.2 million (34%) and natural gas costs increased by $9.6 million (41%) due primarily to higher rates. Year-over-year costs for ferroalloys, graphite electrodes and other supplies increased, while transportation rates rose significantly. We had a successful startup of the new continuous caster at the Texas mill during the fourth quarter of 2006.

Our copper tube minimill’s adjusted operating profit was a record $37.0 million for the year ended August 31, 2006 as compared to $5.1 million for 2005. The record adjusted operating profit was achieved on volume slightly less than 2005, but much higher selling prices and metal margins. The decline in housing starts coupled with the extraordinary high price of copper reduced the demand for copper plumbing tube across the U.S. Our sales of plumbing tube were lower, but sales of high value-added products increased disproportionately. We matched production and inventory levels to coincide with order intake levels. We were able to increase the average selling price for the year to $3.35 per pound, an historical high, and metal spreads widened significantly to $1.39 per pound, up from $0.64 per pound, more than offsetting the dramatic jump in the cost of copper scrap. The table below reflects our copper tube minimill’s prices per pound and operating statistics for the year ended August 31:

										Increase (Decrease)
(pounds in millions)		2006				2005				Amount				%
Pounds shipped			65.7				66.6				(.9	)			(1	%)
Pounds produced			63.3				62.0				1.3				2	%
Average selling price		$	3.35			$	1.94			$	1.41				73	%
Average scrap purchase cost		$	2.29			$	1.38			$	0.91				66	%
Average FIFO metal margin		$	1.39			$	0.64			$	0.75				117	%

Our copper tube minimill recorded $13.4 million LIFO expense for the year ended August 31, 2006 as compared to $0.4 million in 2005.

CMCZ The table below reflects CMCZ’s operating statistics (in thousands) and average prices per short ton:

										Increase(Decrease)
		2006				2005				Amount				%
Tons melted			1,283				1,101				182				17	%
Tons rolled			1,121				871				250				29	%
Tons shipped			1,250				1,092				158				14	%
Average mill selling price (total sales)		1,388		PLN*		1,376		PLN			12				1	%
Averaged cost of ferrous scrap consumed		728		PLN		790		PLN			(62	)			(8	%)
Average metal margin		660		PLN		586		PLN			74				13	%
Average ferrous scrap purchase price		629		PLN		650		PLN			(21	)			(3	%)
Average mill selling price (total sales)		$	437			$	418			$	19				5	%
Average cost of ferrous scrap consumed		$	229			$	240			$	(11	)			(5	%)
Average metal margin		$	208			$	178			$	30				17	%
Average ferrous scrap purchase price		$	197			$	198			$	(1	)			(1	%)

CMCZ benefited from the improved economic situation in Central and Western Europe and especially from stepped-up construction in Poland and Germany. Prices and margins were improved for the year with metal margins increasing 13% over 2005 as the cost of ferrous scrap decreased slightly. Operating levels and shipments were also up compared to 2005, including a 14% increase in shipments. Functional currency fluctuations did not have a significant impact on adjusted operating profits. The startup and operation of the new mega-shredder during the fourth quarter of 2006 was successful, and the greenfield rebar fabrication plant in Zawiercie had a successful start in July 2006.

Domestic Fabrication Tons shipped in 2006 were up 23% and sales were up 20% compared to 2005; however, adjusted operating profit was down 6% because the cost of steel was up considerably resulting in some margin squeeze and LIFO expense increased 204% over 2005. LIFO expense increased dramatically because of the higher steel price and more inventories on hand. During fiscal 2006, we acquired the operating assets of Concrete Formtek Services, Inc., Cherokee Supply, Brost Forming Supply and Hall-Hodges Company. These acquisitions did not significantly impact our 2006 adjusted operating profit. See Note 2, Acquisitions, to the consolidated financial statements. The table below shows our average fabrication selling prices per short ton (excluding stock and buyout sales) and total fabrication plant shipments for the years ended August 31:

										Increase(Decrease)
Average selling price*		2006				2005				Amount				%
Rebar		$	771			$	738			$	33				4	%
Joist			1,115				1,112				3				0	%
Structural			2,058				1,785				273				15	%
Post			696				698				(2	)			0	%

										Increase
Tons shipped (in thousands)		2006				2005				Amount				%
Rebar			1,076				874				202				23	%
Joist			357				282				75				27	%
Structural			87				85				2				2	%
Post			125				101				24				24	%

Recycling Gross margins in 2006 were 39% higher as compared to 2005. The average selling price of ferrous scrap remained strong with a 9% increase over 2005. The average selling price of nonferrous for 2006 increased 52% over 2005 prices. Volume was also up in fiscal 2006 with a 15% increase in ferrous tons shipped and a 12% increase in nonferrous tons shipped. LIFO expense for fiscal 2006 had a significant increase of $9.5 million over 2005 caused primarily by the higher prices. During July 2006, CMC acquired the operating assets of Yonack Iron & Metal Co., which operates scrap metal processing facilities in Texas, Oklahoma and Arkansas. See Note 2, Acquisitions, to the consolidated financial statements. The following table reflects our recycling segment’s average selling prices per short ton and tons shipped (in thousands) for the year ended August 31:

										Increase
		2006				2005				Amount				%
Average ferrous selling price		$	203			$	186			$	17				9	%
Average nonferrous selling price		$	2,476			$	1,634			$	842				52	%
Ferrous tons shipped			2,147				1,871				276				15	%
Nonferrous tons shipped			327				292				35				12	%
Total volume processed and shipped*			3,697				3,331				366				11	%

Marketing and Distribution The primary reason for the decrease in adjusted operating profit was a significant $15 million LIFO expense increase in fiscal 2006 as compared to 2005. The increase in LIFO expense was caused mainly by higher prices for aluminum, copper and stainless steel inventories and increased prices and inventory levels of long and flat-rolled steel product. Market conditions varied by product and geography, but overall were favorable. Steel tonnage was up in most of our markets, especially sales into the U.S., although sales dollars were mixed in various markets. Aluminum, Copper and stainless semis were characterized by higher prices but lower volumes, which on balance resulted in higher gross margins, but higher transaction costs as well. Sales and margins for industrial materials and products, though solid, were off the peaks of last year reflecting mostly weaker market conditions and volatile prices. Our value-added downstream and processing businesses continued to perform well. During 2006, we received a dividend of CZK 89.2 million ($4.1 million) from Trinecke Zelezarny, a Czech steel mill in which we own 11% of the outstanding shares as compared to a dividend of CZK 62.4 million ($2.6 million) received in 2005.

Corporate and Eliminations We recognized income of $4.0 million on investment assets in our segregated trust for our benefit restoration plan during the year ended August 31, 2006, as compared to $4.8 million for 2005. See Note 10, Employees’ Retirement Plans, to the consolidated financial statements. During fiscal 2006, professional services expense increased $9.6 million over 2005, primarily for information technology.

Consolidated Data On a consolidated basis, the LIFO method of inventory valuation decreased our net earnings by $50.6 million and $12.5 million (41 cents and 10 cents per diluted share) for the years ended August 31, 2006 and 2005, respectively.

Our overall selling, general and administrative expenses increased by $70.0 million (16%) for the year ended August 31, 2006 as compared to 2005. Most of this increase was due to higher discretionary incentive compensation and profit sharing accruals during the year ended August 31, 2006 as compared to 2005 due to increased earnings. Foreign currency fluctuations resulted in decreases in selling, general and administrative expenses of $0.3 million for the year ended August 31, 2006 as compared to 2005.

Our interest expense decreased by $1.6 million during 2006 as compared to 2005 as our average borrowings decreased though short-term interest rates increased more than 1.5% on an annualized basis in 2006.

Our effective tax rate for the year ended August 31, 2006 decreased to 33.9% as compared to 35.7% in 2005 due to shifts in profitability among tax jurisdictions, the manufacturing deduction and tax repatriation benefit.

Near-Term Outlook

The prospects are excellent for another strong year for CMC. It should exhibit the traditional seasonal pattern of a good start, seasonal slowdown, and strong pickup in our third and fourth quarter. If CMCZ can weather the winter in good order, the year may well approach fiscal 2006 though LIFO’s impact is always difficult to quantify.

We see solid demand during the first quarter in most of our global markets and inventories of most products appear in line with sales. Although some economists point to a slowing global economy, the overall level of activity remains robust and broad-based. Worldwide manufacturing activity continues to expand. While residential construction in the U.S. has weakened, non-residential construction remains strong in the U.S., Asia and South America, and has picked up in Europe. More pointedly, construction materials generally are in strong demand. Our domestic steel mill markets remain vibrant and Central Europe has strengthened. While imports of carbon steel bar products in recent months 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 first quarter of fiscal 2007, and realized steel prices should remain high. There is good news on the energy cost side, especially the fall in natural gas prices. Ferrous scrap prices will remain at high levels, although likely to be down for the quarter. Nonferrous markets continue at historically high levels. Demand for downstream products and services remains vibrant, and the current short-term margin compression should abate.

Net income from our domestic steel mills should remain strong during the first quarter, above the first quarter of last year although down from the fourth quarter of fiscal 2006. In addition, we have scheduled shutdowns at each of our domestic steel mills during the first two quarters for routine maintenance or budgeted capital projects. Earnings from the copper tube business will be lower than the fourth quarter of fiscal 2006. Results at CMCZ are expected to remain excellent. Our anticipation is that fabrication profits will improve as finished goods steel prices remain relatively flat. Our Recycling segment will again post strong results, both from ferrous and nonferrous areas, although down from the fourth quarter of fiscal 2006. 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. Accordingly, we estimate that our first quarter LIFO diluted earnings per share will be between $0.65 and $0.75.

We anticipate that our capital spending for 2007 will be $201 million, including the start of implementing a new wire rod block line at CMCZ and new mill stands and reheat furnace at our Alabama mill. We believe that we will derive benefits from reduced operating costs and increased productivity in 2007 from the new large capacity shredder at CMCZ and the continuous caster project at our CMC Texas mill which became operational in the fourth quarter of 2006, and from other capital projects to be completed in fiscal 2007.

Long-Term Outlook

The rapid expansion of a number of emerging economies, including China and India, has been a major catalyst for the strong steel and nonferrous markets around the world. The magnitude of the growth in these economies has been a new dynamic in the global marketplace. Therefore, we believe that there is an enhanced prospect of significant long-term growth in demand for the global materials sector. We believe that we are well-positioned to exploit long-term opportunities. We expect strong demand for our products due to demand throughout the major global economies as well as continued growth in developing countries. Emerging countries often have a higher growth rate for steel and nonferrous metals consumption. We believe that the demand will increase in Asia, particularly in China and India, as well as in Central and Eastern Europe.

We believe that there will be further consolidation in our industries, and we plan to continue to participate in a prudent way. The reasons for further consolidation include a historically inadequate return on capital for many companies, a high degree of fragmentation, the need to eliminate non-competitive capacity and more effective marketing.

We also believe our aggressive capital expenditure plan will allow us to improve efficiency and cost effectiveness and help us meet our customers’ demand for our products currently and in future years. We are undertaking a 5-year enterprise resource planning system implementation program to improve our operating systems.

2005 Compared to 2004

Domestic Mills Net sales and adjusted operating profit were higher in 2005 due primarily to higher selling prices and metal margins at our domestic steel mills as compared to 2004. Metal margins for the segment increased significantly in 2005 as compared to 2004 because increases in selling prices at our domestic steel mills more than offset the increases in scrap purchase and other input costs. Although our copper tube minimill increased its selling prices during 2005 as compared to 2004, purchase prices of copper scrap increased even more. As a result, our metal margin declined for this mill. Also, expenses related to valuing our inventories under the LIFO method decreased as compared to 2004 primarily because scrap purchase and other input costs did not increase as rapidly in 2005 as compared to 2004. During the year ended August 31, 2005, we recorded $20.1 million recoveries for the settlement of insurance claims relating to prior year transformer failures at our steel minimills.

Adjusted operating profit for our four domestic steel minimills was $227.7 million for the year ended August 31, 2005 as compared to $85.8 million for 2004. Selling prices and metal margins increased in 2005 as compared to 2004 due to strong global demand for steel. Also, the competition from foreign steel imports was less as a result of the weaker U.S. dollar and stronger global markets. Average scrap purchase costs were higher than last year due primarily to increased world demand for ferrous scrap. Our overall metal margins increased, resulting in significantly higher total adjusted operating profits for the four steel minimills in 2005 as compared to 2004. The table below reflects domestic steel and ferrous scrap prices per ton for the year ended August 31:

										Increase
		2005				2004				$				%
Average mill selling price (finished goods)		$	489			$	385			$	104				27	%
Average mill selling price (total sales)			473				379				94				25	%
Average cost of ferrous scrap consumed			199				164				35				21	%
Average FIFO metal margin			274				215				59				27	%
Average ferrous scrap purchase price			171				149				22				15	%

The domestic steel minimills’ production and shipment levels (tons melted, rolled and shipped) for the year ended August 31, 2005 decreased slightly as compared to the at all-time record levels set in 2004 as our customers worked through excess inventories. During 2005, we scheduled our maintenance and lowered our production in order to most effectively manage our inventory levels. The table below reflects our domestic steel minimills’ operating statistics for the year ended August 31:

										Decrease
(short tons in thousands)		2005				2004				Amount				%
Tons melted			2,173				2,265				(92	)			(4	)%
Tons rolled			2,024				2,195				(171	)			(8	)%
Tons shipped			2,266				2,401				(135	)			(6	)%

Overall, our domestic steel minimills recorded $7.7 million LIFO expense in 2005 as compared to $24.1 million in 2004. Our utility expenses increased by $924 thousand (1%) in 2005 as compared to 2004. Electricity decreased by $664 thousand (1%) due to both lower usage from decreased overall production and rate decreases due to refunds. Natural gas costs increased by $1.6 million (7%) due to higher rates which more than offset lower usage. Costs for ferroalloys increased by $11.6 million in 2005 as compared to 2004 largely due to more demand from U.S. mills, the impact of the weaker U.S. dollar and higher ocean freight costs on these imported items. Also, in 2005, all of our domestic steel minimills focused on controlling costs and improving productivity, quality and safety. The Texas highway building program provided good business opportunities for CMC Texas. A new scrap yard was established at CMC Alabama to improve scrap flow and reduce congestion inside the mill and reduce scrap handling costs. The installation of a new electric arc furnace transformer and expansion of the baghouse at CMC South Carolina increased our steel melting capacity. During the year ended August 31, 2005, CMC Texas and CMC South Carolina recorded $10.3 million and $9.8 million, respectively, from insurance recoveries (see Note 11 — Commitments and Contingencies, to the consolidated financial statements).

Our copper tube minimill’s adjusted operating profit was $5.1 million during the year ended August 31, 2005 as compared to an adjusted operating profit of $9.0 million for 2004. Although our average selling price for copper tube increased, our average copper scrap purchase cost increased more than our average selling price resulting in decreased metal margins in 2005 as compared to 2004. Copper scrap purchase prices increased because global demand for copper scrap exceeded supply. However, we could not increase our selling prices for copper tube because of pressure from alternative competing products such as plastic water tubing and consolidation among our customers. The table below reflects our copper tube minimill’s prices per pound and operating statistics for the year ended August 31:

										Increase (Decrease)
(pounds in millions)		2005				2004				Amount				%
Pounds shipped			66.6				68.4				(1.8	)			(3	)%
Pounds produced			62.0				66.3				(4.3	)			(6	)%
Average selling price		$	1.94			$	1.69			$	0.25				15	%
Average scrap purchase cost		$	1.38			$	1.08			$	0.30				28	%
Average FIFO metal margin		$	0.64			$	0.72			$	(0.08	)			(11	)%

Our copper tube minimill recorded $436 thousand LIFO expense for the year ended August 31, 2005 as compared to $5.5 million in 2004.

CMCZ On December 3, 2003, our Swiss subsidiary acquired 71.1% of the outstanding shares of Huta Zawiercie, S.A. (CMCZ), a steel minimill in Zawiercie, Poland. The table below reflects CMCZ’s operating statistics (in thousands) and average prices per short ton:

		Year				Nine Months
		Ended August 31,				Ended August 31,
(in thousands)		2005				2004
Tons melted			1,101				1,159
Tons rolled			871				863
Tons shipped			1,092				1,082
Average mill selling price (total sales)		1,376		PLN*		1,466		PLN
Average cost of ferrous scrap consumed		790		PLN		761		PLN
Average metal margin		586		PLN		705		PLN
Average ferrous scrap purchase price		650		PLN		690		PLN
Average mill selling price(total sales)		$	418			$	380
Average cost of ferrous scrap consumed		$	240			$	179
Average metal margin		$	178			$	201
Average ferrous scrap purchase price		$	198			$	179

Our average selling prices and metal margins decreased significantly in 2005 as compared to 2004. Weaker markets in Europe during our 2005 second and third fiscal quarters led to greater competition in Poland. Also, our ability to export CMCZ’s products from Poland to other key international markets was limited in 2005 due to the strong Polish Zloty, especially relative to the Euro. However, we reported an adjusted operating profit from CMCZ of $1.85 million during our 2005 fourth quarter as market conditions improved. Functional currency fluctuations did not have a significant impact on adjusted operating profits.

Domestic Fabrication During the year ended August 31, 2005, we acquired the operating assets of J.L. Davidson Company’s rebar fabricating facility in California and a joist manufacturing plant in Juarez, Mexico. These acquisitions did not significantly impact our 2005 adjusted operating profit. On December 23, 2003, we acquired 100% of the stock of Lofland Acquisition, Inc. (Lofland) which operates steel reinforcing bar fabrication and construction-related product sales facilities in Texas, Arkansas, Louisiana, Oklahoma, New Mexico and Mississippi. During the first four months of 2005, this acquisition accounted for $38 million and $1.6 million in net sales and adjusted operating profit, respectively, and also accounted for 56 thousand tons shipped during the same period. See Note 2, Acquisitions, to the consolidated financial statements. Our domestic fabrication segment’s overall adjusted operating profit increased in 2005 as compared to 2004 due to our overall higher average selling prices and higher shipments which more than offset increases in our steel purchase costs. Market conditions were favorable, resulting in higher gross margins in all of our product lines including rebar fabrication, construction-related products, steel fence posts, steel joists, castellated beams and structural steel fabrication. The table below shows our average fabrication selling prices per short ton (excluding stock and buyout sales) and total fabrication plant shipments for the years ended August 31:

										Increase
Average selling price*		2005				2004				Amount				%
Rebar		$	738			$	586			$	152				26	%
Joist			1,112				871				241				28	%
Structural			1,785				1,272				513				40	%
Post			698				538				160				30	%

										Increase
Tons shipped		2005				2004				Amount				%
Rebar			874				803				71				9	%
Joist			282				236				46				19	%
Structural			85				85								0	%
Post			101				126				(25	)			(20	%)

We recorded $6.6 million of LIFO expense in our domestic fabrication segment for the year ended August 31, 2005, due to the higher cost of steel and more inventories on hand. During the year ended August 31, 2004, we recorded $26.3 million of LIFO expense. During the year ended August 31, 2004, we recorded impairment charges of $6.6 million. See Note 5, Asset Impairment Charges, to the consolidated financial statements.

Recycling Gross margins in 2005 were 5% higher as compared to 2004. Our ferrous and nonferrous scrap selling prices increased because demand from Far Eastern buyers, especially China, and the weaker U.S. dollar resulted in more scrap exports by our competitors, especially early in fiscal 2005. The ferrous scrap market was extremely volatile during 2005, and scrap prices generally decreased after our first quarter. Our ferrous sales volumes decreased slightly during 2005 as compared to 2004 due to production cutbacks and cautious buying by our steel mill customers. However, by the end of the 2005 fourth quarter, global demand for ferrous scrap increased which resulted in increased prices. During 2005, our nonferrous scrap shipments increased as compared to 2004 due to higher demand for aluminum, copper and stainless steel scrap, although demand for stainless weakened in our fourth quarter. The following table reflects our recycling segment’s average selling prices per short ton and tons shipped (in thousands) for the year ended August 31:

										Increase (Decrease)
		2005				2004				Amount				%
Average ferrous selling price		$	186			$	172			$	14				8	%
Average nonferrous selling price		$	1,634			$	1,382			$	252				18	%
Ferrous tons shipped			1,871				1,979				(108	)			(5	)%
Nonferrous tons shipped			292				258				34				13	%
Total volume processed and shipped*			3,331				3,411				(80	)			(2	)%

Also, we recorded $3.0 million LIFO expense for the year ended August 31, 2005 as compared to $5.2 million in 2004, due primarily to increased average material purchase costs for the fiscal year.

Marketing and Distribution Net sales in our marketing and distribution segment increased by $1 billion (55%) for the year ended August 31, 2005 to $2.9 billion as compared to 2004, $55 million of which resulted from functional currency fluctuations. Our adjusted operating profit for the year ended August 31, 2005 was $90.4 million as compared to $39.4 million in 2004, an increase of 129%. Our increased profitability in marketing and distribution was largely the result of our strategy in recent years to build up our regional business around the world and to increase our downstream presence. The net effect of functional currency fluctuations on our adjusted operating profit was immaterial. The majority of the increases in net sales and adjusted operating profit were due to higher shipments and selling prices in 2005 as compared to 2004. The effect of these increases was partially offset by $1.5 million LIFO expense in 2005. LIFO expense of $13.8 million was recorded in 2004. Markets were favorable in most geographic regions around the world. We imported more steel, aluminum, copper and stainless steel semi-finished products into the United States, and gross margins for these products were higher in 2005 as compared to 2004. Our net sales to and within Europe, Asia (including China) and Australia increased significantly in 2005 as compared to 2004 due mainly to significant selling price increases which more than offset increases in purchases costs for our products and higher freight costs. Our 2005 sales and adjusted operating profits for industrial materials and products (including minerals, ores, refractories, ferroalloys and various metals and alloys) were at record levels because of strong global demand from the metals industry and short supply. Also, we added several new products. However, during our fourth quarter, prices decreased for some industrial materials and products, returning to more historical levels. During 2005, we received a dividend of CZK 62.4 million ($2.6 million) from our 11% investee, Trinecke Zelezarny, a Czech steel mill, as compared to a dividend of CZK 34.1 million ($1.6 million) received in 2005.

Corporate and Eliminations We recognized income of $4.8 million on investment assets in our segregated trust for our benefit restoration plan during the year ended August 31, 2005. See Note 10, Employees’ Retirement Plans, to the consolidated financial statements. During the year ended August 31, 2004, we incurred a $3.1 million charge from the repurchase of $90 million of our notes payable otherwise due in 2005.

Consolidated Data On a consolidated basis, the LIFO method of inventory valuation decreased our net earnings by $12.5 million and $48.6 million ($0.10 and $0.41 per diluted share) for the years ended August 31, 2005 and 2004, respectively.

Our overall selling, general and administrative expenses increased by $57.4 million (16%) for the year ended August 31, 2005 as compared to 2004. Most of this increase was due to higher discretionary incentive compensation and profit sharing accruals during the year ended August 31, 2005 as compared to 2004 due to increased earnings. Our acquisitions of CMCZ and Lofland accounted for

$10.0 million of the increase for the year ended August 31, 2005. Our selling, general and administrative expenses for the year ended August 31, 2004 included asset impairment charges of $6.6 million and losses on reacquisition of debt of $3.1 million. Foreign currency fluctuations resulted in increases in selling, general and administrative expenses of $1.3 million for the year ended August 31, 2005 as compared to 2004.

Our interest expense increased by $3.1 million during 2005 as compared to 2004 due primarily to increased discount costs on extended term documentary letters of credit. In addition, short-term interest rates increased more than 1% on an annualized basis during the year ended August 31, 2005 as compared to 2004.

Our effective tax rate for the year ended August 31, 2005 increased to 35.7% as compared to 30.7% in 2004 due to a shift in profitability from low tax jurisdictions (Poland) to those domestic jurisdictions subject to state taxes.

2006 Liquidity and Capital Resources

See Note 6, Credit Arrangements, to the consolidated financial statements.

Our sources, facilities and availability of liquidity and capital resources as of August 31, 2006 (dollars in thousands):

		Total Facility				Availability
Net cash flows from operating activities		$	233,383			$	N/A
Commercial paper program*			400,000				375,425
Domestic accounts receivable securitization			130,000				130,000
International accounts receivable sales facilities			90,980				29,075
Bank credit facilities — uncommitted			997,980				448,679
Notes due from 2007 to 2013			350,000				**
Trade financing arrangements			**			As required
CMC international short-term credit facility			112,000				52,000
CMCZ revolving credit facility			32,573				32,573
CMCZ term note due March 2009			18,322				—
CMCZ & CMC Poland equipment notes			11,898				—

Certain of our financing agreements, both domestically and at CMCZ, include various covenants, of which we were in compliance at August 31, 2006. There are no guarantees by the Company or any of its subsidiaries for any of CMCZ’s debt.

Off-Balance Sheet Arrangements For added flexibility, we may secure financing through securitization and sales of certain accounts receivable both in the U.S. and internationally. See Note 3, Sales of Accounts Receivable, to the 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 Flows Our cash flows from operating activities primarily result from sales of steel and related products, and to a lesser extent, sales of nonferrous metal products. We also sell and rent construction-related products and accessories. We have a diverse and generally stable customer base. We use futures or forward contracts as needed to mitigate the risks from fluctuations in foreign currency exchange rates and metals commodity prices. See Note 7, Financial Instruments, Market and Credit Risk, to the consolidated financial statements.

During the year ended August 31, 2006, we generated $233.4 million of net cash flows from our operating activities as compared to the $188.4 million of net cash flows provided by our operating activities for the year ended August 31, 2005. Significant fluctuations in working capital were as follows:

	•		Increased accounts receivable — higher selling prices and increased volume.
	•		Increased inventories — higher carrying costs, increased volume and more in-transit inventory, offset by a much higher LIFO reserve.
	•		Increased other assets — increase in segregated assets held in trust related to deferred compensation liability and higher inventory of construction related rental assets.
	•		Increased accounts payable and accrued expenses — higher purchase costs, increased volume and higher profit sharing and incentive compensation accrued.

We invested $131.2 million in property, plant and equipment during the year ended August 31, 2006, which was more than the $110.2 million spent during 2005. During 2006, we spent $44.4 million for the acquisitions of businesses as compared to $12.3 million in 2005 and $99.4 million in 2004.

In May 2006, we paid a two-for-one stock split in the form of a 100% stock dividend on our common stock and also increased our quarterly cash dividend to 6 cents per share on the increased number of shares resulting from the stock dividend. During the year ended August 31, 2006, we received $23.7 million from stock issued under our employee incentive and stock purchase plans as compared to $18.7 million in 2005 and $19.5 million in 2004. We purchased 3,469,240 shares of our common stock during the year ended August 31, 2006 at $22.67 per share for a total of $78.7 million. During 2005 and 2004, we spent $77.1 million and $4.6 million, respectively, to acquire our common stock. We paid dividends of $20.2 million during the year ended August 31, 2006 as compared to $13.7 million and $9.8 million in 2005 and 2004, respectively.

Our contractual obligations for the next twelve months of $1.1 billion are typically expenditures to be paid in the ordinary course of revenue generatiang 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 August 31, 2006 (dollars in thousands):

		Payments Due By Period*
						Less than												More than
		Total				1 Year				1-3 Years				3-5 Years				5 Years
Contractual Obligations:
Long-term debt(1)		$	382,248			$	60,162			$	119,150			$	2,884			$	200,052
Notes payable			60,000				60,000				—				—				—
Interest(2)			103,425				22,744				33,205				22,620				24,856
Operating leases(3)			99,379				25,614				37,415				21,284				15,066
Purchase obligations(4)			1,201,795				922,848				186,504				72,430				20,013
Total contractual cash obligations		$	1,846,847			$	1,091,368			$	376,274			$	119,218			$	259,987

Other Commercial Commitments

We maintain stand-by letters of credit to provide support for certain transactions that our customers or suppliers request. At August 31, 2006, we had committed $32.3 million under these arrangements. All commitments expire within one year.

In January 2005, we entered into a guarantee agreement to assist one of our Chinese coke suppliers to obtain pre-production financing from a bank. In May 2006, we entered into another guarantee agreement for one of our suppliers’ financing. Our maximum exposure under the guarantees at August 31, 2006 was $2.9 million. See Note 11, Commitments and Contingencies, to the consolidated financial statements.

Contingencies

In the ordinary course of conducting our business, we become involved in litigation, administrative proceedings and government investigations, including environmental matters. We may incur settlements, fines, penalties or judgments because of some of these matters. While we are unable to estimate precisely the ultimate dollar amount of exposure or loss in connection with these matters, we make accruals as warranted. 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 consolidated financial statements for the estimable probable impact of these contingencies. We also believe that the outcomes will not significantly affect the long-term results of operations or our financial position. However, they may have a material impact on earnings for a particular quarter.

Environmental and Other Matters

See Note 11, Commitments and Contingencies, to the consolidated financial statements.

General We are subject to federal, state and local pollution control laws and regulations. We anticipate that compliance with these laws and regulations will involve continuing capital expenditures and operating costs.

Our original business and one of our core businesses for over nine decades is metals recycling. In the present era of conservation of natural resources and ecological concerns, we are committed to sound ecological and business conduct. Certain governmental regulations regarding environmental concerns, however well intentioned, are contrary to the goal of greater recycling. Such regulations expose us and the industry to potentially significant risks.

We believe that recycled materials are commodities that are diverted by recyclers, such as us, from the solid waste streams because of their inherent value. Commodities are materials that are purchased and sold in public and private markets and commodities exchanges every day around the world. They are identified, purchased, sorted, processed and sold in accordance with carefully established industry specifications.

Environmental agencies at various federal and state levels classify certain recycled materials as hazardous substances and subject recyclers to material remediation costs, fines and penalties. Taken to extremes, such actions could cripple the recycling industry and undermine any national goal of material conservation. Enforcement, interpretation, and litigation involving these regulations are not well developed.

Solid and Hazardous Waste We currently own or lease, and in the past owned or leased, properties that have been used in our operations. Although we used operating and disposal practices that were standard in the industry at the time, wastes may have been disposed or released on or under the properties or on or under locations where such wastes have been taken for disposal. We are currently involved in the investigation and remediation of several such properties. State and federal laws applicable to wastes and contaminated properties have gradually become stricter over time. Under new laws, we could be required to remediate properties impacted by previously disposed wastes. We have been named as a potentially responsible party (PRP) at a number of contaminated sites.

We generate wastes, including hazardous wastes, that are subject to the federal Resource Conservation and Recovery Act (RCRA) and comparable state and/or local statutes where we operate. These statutes, regulations and laws may have limited disposal options for certain wastes.

Superfund The U.S. Environmental Protection Agency (EPA) or an equivalent state agency notified us that we are considered a PRP at thirteen sites, none owned by us. We may be obligated under the Comprehensive Environmental Response, Compensation, and Liability Act of 1980 (CERCLA) or a similar state statute to conduct remedial investigation, feasibility studies, remediation and/or removal of alleged releases of hazardous substances or to reimburse the EPA for such activities. We are involved in litigation or administrative proceedings with regard to several of these sites in which we are contesting, or at the appropriate time we may contest, our liability at the sites. In addition, we have received information requests with regard to other sites which may be under consideration by the EPA as potential CERCLA sites. Because of various factors, including the ambiguity of the regulations, the difficulty of identifying the responsible parties for any particular site, the complexity of determining the relative liability among them, the uncertainty as to the most desirable remediation techniques and the amount of damages and cleanup costs and the extended time periods over which such costs may be incurred, we cannot reasonably estimate our ultimate costs of compliance with CERCLA. At August 31, 2006, based on currently available information, which is in many cases preliminary and incomplete, we believe that our aggregate liability for cleanup and remediation costs in connection with nine of the thirteen sites will be between $2.2 million and $2.8 million. We have accrued for these liabilities based upon our best estimates. We are not able to estimate the possible range of loss on the other sites. The amounts paid and the expenses incurred on these thirteen sites for the year ended August 31, 2006, 2005 and 2004 were not material. Historically, the amounts that we have ultimately paid for such remediation activities have not been material.

Clean Water Act The Clean Water Act (CWA) imposes restrictions and strict controls regarding the discharge of wastes into waters of the United States, a term broadly defined. These controls have become more stringent over time and it is probable that additional restrictions will be imposed in the future. Permits must generally be obtained to discharge pollutants into federal waters; comparable permits may be required at the state level. The CWA and many state agencies provide for civil, criminal and administrative penalties for unauthorized discharges of pollutants. In addition, the EPA has promulgated regulations that may require us to obtain permits to discharge storm water runoff. In the event of an unauthorized discharge, we may be liable for penalties and costs.

Clean Air Act Our operations are subject to regulations at the federal, state and local level for the control of emissions from sources of air pollution. New and modified sources of air pollutants are often required to obtain permits prior to commencing construction, modification and/or operations. Major sources of air pollutants are subject to more stringent requirements, including the potential need for additional permits and to increased scrutiny in the context of enforcement. The EPA has been implementing its stationary emission control program through expanded enforcement of the New Source Review Program. Under this program, new or modified sources are required to construct what is referred to as the Best Available Control Technology. Additionally, the EPA is implementing new, more stringent standards for ozone and fine particulate matter. The EPA recently has promulgated new national emission standards for hazardous air pollutants for steel mills which will require all major sources in this category to meet the standards by reflecting application of maximum achievable control technology. Compliance with the new standards could require additional expenditures.

In fiscal 2006, we incurred environmental expenses of $18.6 million. The expenses included the cost of environmental personnel at various divisions, permit and license fees, accruals and payments for studies, tests, assessments, remediation, consultant fees, baghouse dust removal and various other expenses. Approximately $6.2 million of our capital expenditures for 2006 related to costs directly associated with environmental compliance. At August 31, 2006, $6.3 million was accrued for environmental liabilities of which $3.7 million was classified as other long-term liabilities.

Business Interruption Insurance Claims and Unclaimed Property

See Note 11, Commitments and Contingencies to the consolidated financial statements.

Dividends

We have paid quarterly cash dividends in each of the past 168 consecutive quarters. We paid dividends in our fiscal year 2006 at the rate of 3 cents per share in the first two quarters, 5 cents for the third quarter and 6 cents for the fourth quarter.

ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

Market Risk

Approach to Minimizing Market Risk See Note 7, Financial Instruments, Market and Credit Risk, to the consolidated financial statements for disclosure regarding our approach to minimizing market risk. Also, see Note 1, Summary of Significant Accounting Policies, to the consolidated financial statements. The following types of derivative instruments were outstanding at August 31, 2006, in accordance with our risk management program.

Currency Exchange Forwards We enter into currency exchange forward contracts as economic hedges of international trade commitments denominated in currencies other than the United States dollar, or, if the transaction involves our Australian or European subsidiaries, their local currency. No single foreign currency poses a primary risk to us. Fluctuations that cause temporary disruptions in one market segment tend to open opportunities in other segments.

Commodity Prices We base pricing in some of our sales and purchase contracts on forward metal commodity exchange quotes which we determine at the beginning of the contract. Due to the volatility of the metal commodity indexes, we enter into metal commodity forward or futures contracts for copper, aluminum, nickel and zinc. These forwards or futures mitigate the risk of unanticipated declines in gross margins on these contractual commitments. Physical transaction quantities will not match exactly with standard commodity lot sizes, leading to small gains and losses from ineffectiveness.

Interest Rates If interest rates increased or decreased by one percentage point, the effect on interest expense related to our variable-rate debt and the fair value of our long-term debt would be approximately $221 thousand and $13 million, respectively.

The following table provides certain information regarding the foreign exchange and commodity financial instruments discussed above.

Foreign Currency Exchange Contract Commitments as of August 31, 2006:

Functional Currency						Foreign Currency												U.S. $
		Amount								Amount				Range of				Equivalent
Type		(in thousands)				Type				(in thousands)				Hedge Rates				(in thousands)
AUD			149,666			USD					113,068				0.7152-0.7740			$	113,068
PLN			84,262			EUR					21,367				0.2461-0.2573				26,154
EUR			46,679			USD					60,132				1.2580-1.2942				60,132
GBP			23,859			USD					41,456				1.8775-1.9096				41,456
GBP			116			EUR					172				1.4837				211
AUD			845			JPY**					72,385				82.55-89.06				627
AUD			1,271			EUR					754				0.5698-0.5966				923
AUD			269			GBP					109				0.4033-0.4082				61
USD			10,725			PLN					33,000				3.0659-3.0750				10,725
USD			287			EUR					225				0.7753-0.7907				287
																			253,644
Revaluation as of August 31, 2006, at quoted market																			253,367
Unrealized loss																		$	277

As of August 31, 2005 (in thousands):
Revaluation at quoted market		$	204,727
Unrealized gain		$	165

Metal Commodity Contract Commitments as of August 31, 2006:

Range or

Total Contract

Amount of

Value at

Long/

# of

Standard

Total

Hedge Rates

Inception

Terminal Exchange

Metal

Short

Lots

Lot Size

Weight

Per MT/lb.

(in thousands)

London Metal

Exchange (LME)

Aluminum

Long

643

25 MT

16,075 MT

$

2,139.00-2,803.00

$

15,659

Aluminum

Short

357

25 MT

8,925 MT

2,390.50-2,940.00

22,901

Copper

Long

58

25 MT

1,450 MT

6,725.00-7,898.00

10,982

Copper

Short

111

25 MT

2,775 MT

6,800.00-7,903.50

21,288

Nickel

Long

20

6 MT

120 MT

30,743.64

3,689

Nickel

Short

170

6 MT

1,020 MT

19,450.00-29,525.00

25,054

Zinc

Short

3

55,000 lbs.

165,000 lbs.

2,880.00-3,405.00

241

New York Mercantile

Exchange

Copper

Long

522

25,000 lbs.

14.0 MM lbs.

136.00-365.85

43,778

Commodities Division (Comex)

Copper

Short

319

25,000 lbs.

8.0 MM lbs.

309.50-371.00

27,728

171,320

Revaluation as of August 31, 2006, at quoted market

168,259

Unrealized gain

$

3,061

As of August 31, 2005 (in thousands):
Revaluation at quoted market		$	72,069
Unrealized gain		$	261

ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTAL DATA

REPORT OF MANAGEMENT ON INTERNAL CONTROL OVER FINANCIAL REPORTING

     Our management is responsible for establishing and maintaining adequate internal control over financial reporting for the company. Internal control over financial reporting is a process to provide reasonable assurance regarding the reliability of our financial reporting for external purposes in accordance with accounting principles generally accepted in the United States of America. Internal control over financial reporting includes maintaining records that in reasonable detail accurately and fairly reflect our transactions; providing reasonable assurance that transactions are recorded as necessary for preparation of our financial statements; providing reasonable assurance that receipts and expenditures of company assets are made in accordance with management authorization; and providing reasonable assurance that unauthorized acquisition, use or disposition of company assets that could have a material effect on our financial statements would be prevented or detected on a timely basis. Because of its inherent limitations, internal control over financial reporting is not intended to provide absolute assurance that a misstatement of our financial statements would be prevented or detected.

     Management conducted an evaluation of the effectiveness of our internal control over financial reporting based on the framework in Internal Control — Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission. Based on this evaluation, management concluded that the company’s internal control over financial reporting was effective as of August 31, 2006. Deloitte & Touche LLP has audited this assessment of our internal control over financial reporting; their report is included on page 40 of this Form 10-K.

REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM

To the Board of Directors and Stockholders of Commercial Metals Company
Irving, Texas

We have audited the accompanying consolidated balance sheets of Commercial Metals Company and subsidiaries (the “Company”) as of August 31, 2006 and 2005, and the related consolidated statements of earnings, stockholders’ equity, and cash flows for each of the three years in the period ended August 31, 2006. These financial statements are the responsibility of the Company’s management. Our responsibility is to express an opinion on these financial statements based on our audits.

We conducted our audits in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion.

In our opinion, such consolidated financial statements present fairly, in all material respects, the financial position of the Company at August 31, 2006 and 2005, and the results of their operations and their cash flows for each of the three years in the period ended August 31, 2006, in conformity with accounting principles generally accepted in the United States of America.

As discussed in Note 1 to the consolidated financial statements, the Company changed its method of accounting for stock-based compensation with the adoption of Statement of Financial Accounting Standards No. 123 (revised 2004) Share Based Payment, effective September 1, 2005.

We have also audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States), the effectiveness of the Company’s internal control over financial reporting as of August 31, 2006, based on the criteria established in Internal Control—Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission and our report dated November 6, 2006 expressed an unqualified opinion on management’s assessment of the effectiveness of the Company’s internal control over financial reporting and an unqualified opinion on the effectiveness of the Company’s internal control over financial reporting.

/s/ DELOITTE & TOUCHE LLP

Dallas, Texas
November 6, 2006

REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM

To the Board of Directors and Stockholders of Commercial Metals Company
Irving, Texas

We have audited management’s assessment, included in the accompanying Report of Management on Internal Control Over Financial Reporting, that Commercial Metals Company and subsidiaries (the “Company”) maintained effective internal control over financial reporting as of August 31, 2006, based on criteria established in Internal Control—Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission. The Company’s management is responsible for maintaining effective internal control over financial reporting and for its assessment of the effectiveness of internal control over financial reporting. Our responsibility is to express an opinion on management’s assessment and an opinion on the effectiveness of the Company’s internal control over financial reporting based on our audit.

We conducted our audit in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether effective internal control over financial reporting was maintained in all material respects. Our audit included obtaining an understanding of internal control over financial reporting, evaluating management’s assessment, testing and evaluating the design and operating effectiveness of internal control, and performing such other procedures as we considered necessary in the circumstances. We believe that our audit provides a reasonable basis for our opinions.

A company’s internal control over financial reporting is a process designed by, or under the supervision of, the company’s principal executive and principal financial officers, or persons performing similar functions, and effected by the company’s board of directors, management, and other personnel to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles. A company’s internal control over financial reporting includes those policies and procedures that (1) pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of the assets of the company; (2) provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with generally accepted accounting principles, and that receipts and expenditures of the company are being made only in accordance with authorizations of management and directors of the company; and (3) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use, or disposition of the company’s assets that could have a material effect on the financial statements.

Because of the inherent limitations of internal control over financial reporting, including the possibility of collusion or improper management override of controls, material misstatements due to error or fraud may not be prevented or detected on a timely basis. Also, projections of any evaluation of the effectiveness of the internal control over financial reporting to future periods are subject to the risk that the controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate.

In our opinion, management’s assessment that the Company maintained effective internal control over financial reporting as of August 31, 2006, is fairly stated, in all material respects, based on the criteria established in Internal Control—Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission. Also in our opinion, the Company maintained, in all material respects, effective internal control over financial reporting as of August 31, 2006, based on the criteria established in Internal Control—Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission.

We have also audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States), the consolidated financial statements as of and for the year ended August 31, 2006 of the Company and our report dated November 6, 2006 expressed an unqualified opinion on those financial statements with an explanatory paragraph related to the Company’s adoption of Statement of Financial Standards No. 123 (revised 2004) Share Based Payment, effective September 1, 2005.

/s/ DELOITTE & TOUCHE LLP

Dallas, Texas
November 6, 2006

Commercial Metals Company and Subsidiaries
CONSOLIDATED STATEMENTS OF EARNINGS

		Year ended August 31,
(in thousands, except share data)		2006				2005				2004
Net sales		$	7,555,924			$	6,592,697			$	4,768,327
Costs and expenses:
Cost of goods sold			6,476,832				5,693,483				4,160,726
Selling, general and administrative expenses			495,030				424,994				367,550
Interest expense			29,569				31,187				28,104
			7,001,431				6,149,664				4,556,380
Earnings before income taxes and minority interests			554,493				443,033				211,947
Income taxes			187,937				157,996				65,055
Earnings before minority interests			366,556				285,037				146,892
Minority interests (benefit)			10,209				(744	)			14,871
Net earnings		$	356,347			$	285,781			$	132,021
Basic earnings per share		$	3.02			$	2.42			$	1.15
Diluted earnings per share		$	2.89			$	2.32			$	1.11

See notes to consolidated financial statements.

Commercial Metals Company and Subsidiaries
CONSOLIDATED BALANCE SHEETS

		August 31,
(in thousands)		2006				2005
Assets
Current assets:
Cash and cash equivalents		$	180,719			$	119,404
Accounts receivable (less allowance for collection losses of $16,075 and $17,167)			1,134,823				829,192
Inventories			762,635				706,951
Other			66,615				45,370
Total current assets			2,144,792				1,700,917
Property, plant and equipment:
Land			44,702				41,887
Buildings and improvements			268,755				245,924
Equipment			970,973				863,748
Construction in process			51,184				49,183
			1,335,614				1,200,742
Less accumulated depreciation and amortization			(746,928	)			(695,158	)
			588,686				505,584
Goodwill			35,749				30,542
Other assets			129,641				95,879
		$	2,898,868			$	2,332,922

See notes to consolidated financial statements.

		August 31,
(in thousands, except share data)		2006				2005
Liabilities and Stockholders’ Equity
Current liabilities:
Accounts payable-trade		$	526,408			$	408,342
Accounts payable-documentary letters of credit			141,713				140,986
Accrued expenses and other payables			379,764				293,598
Income taxes payable and deferred income taxes			14,258				40,126
Short-term trade financing arrangements			—				1,667
Notes payable — CMC International			60,000				—
Current maturities of long-term debt			60,162				7,223
Total current liabilities			1,182,305				891,942
Deferred income taxes			34,550				45,629
Other long-term liabilities			78,789				58,627
Long-term debt			322,086				386,741
Total liabilities			1,617,730				1,382,939
Minority interests			61,034				50,422
Commitments and contingencies
Stockholders’ equity:
Capital stock:
Preferred stock			—				—
Common stock, par value $0.01and $5.00 per share: authorized 200,000,000 shares; issued 129,060,664 and 64,530,332 shares; outstanding 117,881,160 and 58,130,723 shares			1,290				322,652
Additional paid-in capital			346,994				14,813
Accumulated other comprehensive income			33,239				24,594
Unearned stock compensation			—				(5,901	)
Retained earnings			980,454				644,319
			1,361,977				1,000,477
Less treasury stock 11,179,504 and 6,399,609 shares at cost			(141,873	)			(100,916	)
Total stockholders’ equity			1,220,104				899,561
		$	2,898,868			$	2,332,922

See notes to consolidated financial statements.

Commercial Metals Company and Subsidiaries
CONSOLIDATED STATEMENTS OF CASH FLOWS

		Year ended August 31,
(in thousands)		2006				2005				2004
Cash Flows From (Used By) Operating Activities:
Net earnings		$	356,347			$	285,781			$	132,021
Adjustments to reconcile net earnings to cash from operating activities:
Depreciation and amortization			85,378				76,610				71,044
Minority interests (benefit)			10,209				(744	)			14,871
Asset impairment charges			—				300				6,583
Provision for losses on receivables			2,676				6,604				6,154
Share-based compensation			9,526				1,115				—
Loss on reacquisition of debt			—				—				3,072
Net gain on sale of assets			(2,518	)			(877	)			(1,319	)
Changes in operating assets and liabilities, net of effect of acquisitions:
Accounts receivable			(297,924	)			(217,398	)			(223,845	)
Accounts receivable sold			—				—				77,925
Inventories			(36,196	)			(49,313	)			(290,474	)
Other assets			(48,498	)			(6,997	)			10,001
Accounts payable, accrued expenses, other payables and income taxes			171,045				83,757				223,968
Deferred income taxes			(34,459	)			(8,934	)			2,142
Other long-term liabilities			17,797				18,499				11,403
Net Cash Flows From Operating Activities			233,383				188,403				43,546
Cash Flows From (Used By) Investing Activities:
Purchases of property, plant and equipment			(131,235	)			(110,214	)			(51,889	)
Purchase of interests in CMC Zawiercie and subsidiaries			(1,165	)			—				—
Sales of property, plant and equipment and other			11,290				5,034				3,192
Acquisitions of CMC Zawiercie and Lofland, net of cash acquired			—				—				(99,401	)
Acquisitions of other businesses, net of cash acquired			(44,391	)			(12,310	)			(2,110	)
Net Cash Used By Investing Activities			(165,501	)			(117,490	)			(150,208	)
Cash Flows From (Used By) Financing Activities:
Increase in documentary letters of credit			727				24,288				41,916
Proceeds from trade financing arrangements			—				—				35,307
Payments on trade financing arrangements			(1,667	)			(22,322	)			(34,343	)
Short-term borrowings, net change			60,000				(586	)			(702	)
Proceeds from issuance of long-term debt			14,495				—				238,400
Payments on long-term debt			(28,800	)			(17,222	)			(132,680	)
Stock issued under incentive and purchase plans			23,659				18,703				19,530
Tax benefits from stock plans			21,240				12,183				6,148
Treasury stock acquired			(78,662	)			(77,077	)			(4,586	)
Dividends paid			(20,212	)			(13,652	)			(9,764	)
Debt reacquisition and issuance costs			—				—				(4,989	)
Net Cash From (Used By) Financing Activities			(9,220	)			(75,685	)			154,237
Effect of Exchange Rate Changes on Cash and Cash Equivalents			2,653				617				926
Increase (Decrease) in Cash and Cash Equivalents			61,315				(4,155	)			48,501
Cash and Cash Equivalents at Beginning of Year			119,404				123,559				75,058
Cash and Cash Equivalents at End of Year		$	180,719			$	119,404			$	123,559