Commercial Metals Co. reported net earnings of $71.7 million on net sales of $1.7 billion for the quarter ended May 31, 2005, ranking it as the strongest third quarter ever for the company.

Third Quarter Results—The $71.7 million net earnings ($1.14 per diluted share) compares with net earnings of $50.9 million ($0.84 per diluted share) for the third quarter last year. Net sales of $1.7 billion compares with net sales of $1.4 billion for the third quarter last year. This year's third quarter included after-tax LIFO income of $1.5 million ($0.02 per diluted share) compared with $16.3 million expense ($0.27 per share) in last year's third quarter.

The effective tax rate for the quarter increased to 40.0% (including catch-up) because of a shift in profitability from low-tax jurisdictions (Poland) to those domestic jurisdictions subject to state taxes. Last year's third quarter effective tax rate of 28% was substantially lower due to proportionately higher income in Poland. The effective tax rate for the year is anticipated to be 36.9%.

Nine Month Results—Net earnings of $202 million ($3.26 per diluted share) for the first nine months, which now exceed last year's record annual net earnings of $132 million, compares with net earnings of $84.7 million ($1.43 per diluted share) for the same period last year. Net sales of $4.9 billion compare to net sales of $3.3 billion for the same period last year. After-tax LIFO expense was $23.4 million ($0.38 per share), which compares with $23.3 million expense ($0.39 per share) last year.

Comments—CMC Chairman, President and CEO Stanley A. Rabin said, "We again generated outstanding profits and returns. As anticipated, our fiscal third quarter reflected a seasonal pickup in construction, offset to some extent by global softening in our markets. Profitability was excellent in all of our segments except for CMCZ, the Polish steel operation.

"While global economic growth moderated in the quarter, our end-use markets in the United States remained healthy, even though the multi-year Transportation Bill still is being negotiated in Congress. Distributor markets, though, still were overstocked. Various fiscal and trade-related steps by the Chinese central government to slow the growth rate of fixed investment in certain sectors and reduce steel exports from China resulted in a near-term softening effect on steel markets; nevertheless, China's economy continued to grow at a brisk pace. The biggest soft spot appeared to have been western Europe, for us particularly Germany and Italy. The U.S. dollar firmed by over 8% against the Euro between mid-March 2005 and the end of May. Conversely, after a prolonged period of strengthening, the Polish Zloty weakened somewhat toward the end of our third quarter."

Rabin added, "Most spot prices in our markets were lower than the second quarter of this year. Ferrous scrap prices — amid extreme volatility — fell sharply during the quarter, especially in May, evidently because of steel production cutbacks and cautious buying by scrap consumers. Our average steel mill selling price in the U.S. was slightly higher compared with the second quarter despite the dampening effect of reduced scrap costs. However, strong metal margins continued. In Poland, our prices and margins exhibited a bigger decline. The largest price drops in the global market, however, were associated with products that we do not manufacture. Mill shipments picked up substantially from the second quarter, although not quite as much as we had expected; it appears that we encountered some further inventory adjustments by distributors as well as deferred purchases by end users in anticipation of lower prices. On the copper tube side, results were affected negatively by narrower metal spreads.

"The downstream businesses continued to benefit from the solid end-use markets, mainly improved construction outlets, resulting in a favorable pricing environment. The various fabrication businesses also began to experience a leveling of input costs, which was helpful to gross margins."

Rabin added, "Our Domestic Mills segment's adjusted operating profit at $57.0 million was more than double last year's third quarter. Net sales were up 6%. This quarter LIFO income was $8.0 million pre-tax compared with an expense of $9.1 million last year. There were no amounts recognized on either business interruption claim. Within the segment, adjusted operating profit for our steel minimills was 167% greater than a year earlier on the strength of improved metal margins, which more than offset a decline in finished goods shipments. Compared with last year's third quarter, the metal spread increased by $55 per ton to $276 per ton. On a year-to-year basis, tonnage melted for the third quarter was down 4% to 587 thousand tons; tonnage rolled was 544 thousand tons, 6% below last year's third quarter. Shipments decreased 4% to 607 thousand tons, but increased 20% over the second quarter of this year. Our average total mill selling price at $476 per ton was $67 per ton above last year's level. By product line, the price premium of merchant bar over reinforcing bar narrowed from the second quarter to about $75 per ton. The average scrap purchase cost rose by $4 per ton versus a year ago to $175 per ton. Year-over-year changes for utility costs, ferroalloys, graphite electrodes and other supplies were generally higher. The copper tube mill recorded an adjusted operating profit modestly less than that of last year's third quarter including LIFO income this year.

"Despite good demand from commercial as well as residential users, metal spreads declined by 12 cents per pound to 51 cents per pound because of the proportionately greater increase in the cost of copper scrap versus the average selling price of our tubular products. Against the same period last year, copper tube production declined 15% while shipments decreased 8% to 18.0 million pounds."

Rabin continued, "It was a difficult quarter for CMCZ. The Polish operation recorded an adjusted operating loss of $9.8 million on a 100%-owned basis compared with the extraordinary adjusted operating profit of $32.6 million the previous year. While the weather improved, aiding construction activity in Central Europe, effects of weak construction activity in Western Europe again spilled over into Poland. Selling prices fell significantly and operating levels and shipments were down substantially compared with the third quarter of fiscal 2004. March 2005 was a particularly weak month. Exports remained limited because of the relatively strong Polish Zloty, especially against the Euro. For the quarter, tons melted equaled 219 thousand, rolled tons equaled 198 thousand, and shipments totaled 244 thousand tons including billets. For the prior year the numbers were 402 thousand, 311 thousand, and 328 thousand, respectively. Meanwhile, the average selling price fell to PLN 1,313 per ton (including 11% billets) from PLN 1,774 per ton (including 14% billets) while the average scrap purchase cost decreased to PLN 607 per ton from PLN 765 per ton. On a positive note, operating levels improved as the quarter progressed."

Rabin said, "As expected, the substantial turnaround in the Fabrication segment continued, buoyed by very good demand. Net sales surged versus the prior year. We recorded an adjusted operating profit of $43.3 million compared with a small profit last year. This year LIFO had a negligible impact while last year's LIFO charge was $10.3 million pre-tax. Within the segment, prices were up across-the-board and volumes within the segment were mostly higher. All product areas — rebar fabrication, construction-related products (CRP), steel fence posts, steel joist manufacturing, cellular beam manufacturing, structural steel fabrication, and heat treating — participated in the improved profitability. Shipments from our fab plants totaled 347 thousand tons, 2% above the prior year's third quarter and well above this year's second quarter. Meanwhile the composite average fab selling price (excluding stock and buyouts) increased by $239 per ton from last year."

According to Rabin, "The Recycling segment recorded its second-best third quarter following last year's record third quarter on comparable net sales. The adjusted operating profit of $15.7 million, though exceptional, was 30% below the previous year. LIFO expense was $1.8 million pre-tax this quarter versus an expense of $600 thousand the prior year. Gross margins were 10% lower than last year. The ferrous scrap market was extraordinarily volatile during the quarter with the net result being a sharp drop in price from the beginning to the end of the quarter. Nonferrous markets remained volatile as well, but our average selling prices for aluminum, copper, brass and stainless steel scrap did not vary as much during the quarter. Export demand was mixed.

"Versus last year, the average ferrous scrap sales price for the quarter decreased by 4% to $184 per short ton while shipments fell 14% to 491 thousand short tons. The average nonferrous scrap sales price for the quarter was approximately 11% above a year ago while nonferrous shipments were 6% higher. Inventory turnover across the board remained extremely high. The total volume of scrap processed, including all our domestic processing plants, equaled 869 thousand tons against 972 thousand tons last year."

"Adjusted operating profit for the Marketing and Distribution segment of $21.8 million was 75% above last year's already strong third quarter on much higher net sales," Rabin said. "Our business was good in the United States, Australia, China, elsewhere in Asia, and in Europe, although our steel sales declined in certain markets. A broad array of product lines contributed to the overall high sales and increased gross margins. This segment recorded LIFO expense of $4.0 million pre-tax compared with an expense of $5.0 million the year before. The margins and shipments in aluminum, copper and brass, and stainless steel increased significantly over the prior year. Sales and gross margins for a number of industrial materials and products surpassed previous record levels; included among the active product lines were minerals, ores, refractories, ferroalloys, and various metals and alloys. Our value-added downstream and processing businesses continued to perform very well."

Outlook—Rabin continued, "We are in one of those periods where numerous observers again hold a negative outlook on the steel and nonferrous sectors. The ultimate arbiter will be the strength of the end-use markets and the supply into those markets. If there is an economic consensus it is that growth in the U.S. and much of Asia remains relatively strong, but below extremely high levels registered one year ago, and that Western Europe is suffering most from its slowdown. China will continue to be a key factor; recent data show the Chinese economy remains strong. In any event, we believe that our diversification will continue to serve us well as we adapt to ever-changing market conditions.

"Overall, our outlook for the fourth quarter remains very positive although varied by segment. More specifically, total earnings from our domestic steel mills should continue to be strong during the fourth quarter on account of still high metal margins, although there will be some downtime at the mills during the quarter to control inventories. The copper tube business should be steady. Results at CMCZ should improve albeit hindered by weaker steel market conditions in Europe. Our anticipation remains that fabrication profits will expand further as we continue to benefit from strong selling prices, stabilized material costs, and robust shipments. Profits from our Recycling segment will not be as strong as recent quarters because of a further drop in the price of ferrous scrap. We expect the Marketing and Distribution segment to continue to perform well based on healthy volume and margins in diversified markets and product lines to compensate for weakness in certain products."