COMMERCIAL METALS CO - 10-Q Quarterly Report

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FORM 10-Q

SECURITIES AND EXCHANGE COMMISSION
Washington, D. C. 20549

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

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For the quarterly period ended May 31, 2002
Commission File Number 1-4304

COMMERCIAL METALS COMPANY
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(Exact Name of registrant as specified in its charter)

Delaware 75-0725338
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(State or other Jurisdiction of (I.R.S. Employer
incorporation of organization) Identification Number)

7800 Stemmons Freeway
Dallas, Texas 75247
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(Address of principal executive offices)
(Zip Code)

(214) 689-4300
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(Registrant's telephone number, including area code)

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Former name, former address and former fiscal year,
If changed since last report

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 X No
--- ---

As of July 1, 2002 there were 28,452,908 shares of the Company's common stock
issued and outstanding excluding 3,812,258 shares held in the Company's
treasury.

COMMERCIAL METALS COMPANY AND SUBSIDIARIES

INDEX

ITEM 1 - FINANCIAL STATEMENTS

COMMERCIAL METALS COMPANY AND SUBSIDIARIES

CONSOLIDATED BALANCE SHEETS

ASSETS
(In thousands except share data)

See notes to consolidated financial statements.

Page 2

COMMERCIAL METALS COMPANY AND SUBSIDIARIES

CONSOLIDATED BALANCE SHEETS

LIABILITIES AND STOCKHOLDERS' EQUITY
(In thousands except share data)

See notes to consolidated financial statements.

Page 3

COMMERCIAL METALS COMPANY AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF EARNINGS
(In thousands except share data)
(Unaudited)

See notes to consolidated financial statements.

Page 4

COMMERCIAL METALS COMPANY AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF CASH FLOWS
(In thousands)
(Unaudited)

See notes to consolidated financial statements.

Page 5

COMMERCIAL METALS COMPANY AND SUBSIDIARIES

CONSOLIDATED STATEMENT OF STOCKHOLDERS' EQUITY
(in thousands except share data)
(Unaudited)

See notes to consolidated financial statements.

Page 6

COMMERCIAL METALS COMPANY AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

NOTE A - QUARTERLY FINANCIAL DATA

In the opinion of management, the accompanying unaudited consolidated
financial statements contain all adjustments (consisting of only normal
recurring accruals, except for the tax provision reduction referred to in Note
D, Income Taxes) necessary to present fairly the financial position as of May
31, 2002 and 2001, the results of operations for the three and nine months then
ended, and the cash flows for the nine months then ended. The results of
operations for the three and nine month periods are not necessarily indicative
of the results to be expected for a full year.

NOTE B - SALES OF ACCOUNTS RECEIVABLE

As a cost effective short-term financing program, the Company and
several of its subsidiaries periodically sell trade accounts receivable
substantially to the Company's wholly-owned unconsolidated special purpose
affiliate. Depending on the level of financing needs, the affiliate receives
funds from third party financial institutions. The key components were as
follows as of May 31, 2002 (in thousands):

Total accounts receivable sold $ 142,261
Less notes receivable from affiliate 125,102
----------

Net proceeds from financial institutions $ 17,159
==========

The notes receivable from affiliate are presented net of allowance of $2.7
million at May 31, 2002. These notes represent amounts withheld for credit and
other reserves, as well as excess funding capacity not currently needed by the
Company. Discounts (which aggregated $69 thousand and $699 thousand for the
three and nine months ended May 31, 2002, respectively) represented primarily
the costs of funds and were included in selling, general and administrative
expenses.

NOTE C - LONG-TERM DEBT

Long-term debt (in thousands) was as follows:

Page 7

COMMERCIAL METALS COMPANY AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

On April 9, 2002, the Company entered into two interest rate swaps to convert a
portion of the fixed interest long-term debt commitment of the Company to a
floating interest commitment. These arrangements adjust the Company's fixed to
floating interest rate mix as well as reduce overall financing costs. The swaps
effectively convert interest on the $100 million debt due July 2005 from a fixed
rate of 7.20% to a six month LIBOR (determined in arrears) plus a spread of
2.02%. The total fair value of swaps was $1,597,000 at May 31, 2002 and is
recorded in other long-term assets, with a corresponding increase in the 7.20%
long-term notes, representing the change in fair value of the hedged debt.

NOTE D - INCOME TAXES

During 2002, the Company favorably resolved all issues for its federal
income tax returns through 1999. Due to the lack of any material adjustments,
management has reevaluated the tax accruals and consequently has reduced the net
tax provision $1,000,000 during the third quarter 2002.

NOTE E - EARNINGS PER SHARE

On May 20, 2002, the Company's Board of Directors declared a
two-for-one stock split in the form of a 100% stock dividend on its common stock
payable June 28, 2002 to its shareholders of record on June 7, 2002. This
resulted at the record date in the issuance of 16,132,583 additional shares of
common stock and a transfer of $17,354,000 from paid in capital and $63,309,000
from retained earnings. All per share and weighted average share amounts in the
accompanying consolidated financial statements have been restated to reflect
this stock split. The Company also announced its intent to institute a quarterly
cash dividend of eight cents per share on the increased number of shares
resulting from the stock dividend.

In calculating earnings per share, there were no adjustments to net
earnings to arrive at income for the three or nine months ended May 31, 2002 or
2001. The reconciliation of the denominators of earnings per share calculations
are as follows:

All stock options at May 31, 2002 were dilutive based on the average share price
for the quarter of $21.145. The options expire by 2009.

NOTE F - DERIVATIVES AND RISK MANAGEMENT

The Company's worldwide operations and product lines expose it to risks
from fluctuations in foreign currency exchange rates and metals commodity
prices. The objective of the Company's risk management program is to mitigate
these risks using futures or forward contracts (derivative instruments). The
Company enters into metal commodity forward contracts to mitigate the risk of
unanticipated declines in gross margin due to the volatility of the commodities'
prices, and enters into foreign currency forward contracts which match the
expected settlements for purchases and sales denominated in foreign currencies.
The Company designates only those contracts as hedges for accounting purposes
which closely match the terms of the underlying transaction. These hedges
resulted in substantially no ineffectiveness in the statements of earnings for
quarters or nine months ended May 31, 2002 and 2001. However, during the third
quarter 2002, the Company incurred approximately $600 thousand in foreign
exchange losses primary due to lack of performance by certain suppliers. Certain
of the foreign currency and all of the commodity contracts were not designated
as hedges for accounting purposes, although management believes they are
essential economic hedges. The changes in fair value of these instruments
resulted in a $199 thousand decrease and a $143 thousand decrease in cost of
goods sold for the quarters ended May 31, 2002 and 2001, respectively. Also,
cost of goods sold decreased by $546 thousand and decreased by $63 thousand for
the nine months ended May 31, 2002 and 2001, respectively, due to changes in
fair value of these instruments. All of the instruments are highly liquid, and
none are entered into for trading purposes or speculation.

See Note C, Long-Term Debt, regarding the Company's interest rate risk
management strategy.

Page 8

COMMERCIAL METALS COMPANY AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

NOTE G - CONTINGENCIES

As indicated in Note 10, Commitments and Contingencies, included in the
notes to the consolidated financial statements for the year ended August 31,
2001, a subsidiary of the Company entered into a fixed price contract with a
design/builder general contractor (D/B) to furnish, erect and install structural
steel, hollow core pre-cast concrete planks, fireproofing and certain concrete
slabs along with related design and engineering work for the construction of a
large hotel and casino complex. In connection with the contract, the D/B secured
insurance under a subcontractor/vendor default protection policy which named the
Company as an insured in lieu of performance and payment bonds. A large
subcontractor to the Company defaulted, and the Company incurred unanticipated
costs to complete the work. The Company made a claim against the insurance
company for all losses, costs and expenses incurred or arising from the default.
A portion of the claim, $6.6 million, was included as a claim receivable in
other assets at August 31, 2001. During May 2002, the Company and the insurance
company settled litigation filed by the Company following the insurer's refusal
to pay the claim. The settlement included the recovery of the $6.6 million claim
receivable, receipt of an additional amount ($7.4 million) and, subject to
certain contingencies, reimbursement of an additional amount (up to $3 million).
The settlement proceeds in excess of the claim receivable were recorded as
deferred insurance proceeds (in other long-term liabilities at May 31, 2002)
pending final resolution of the Company's disputes with the D/B.

During the nine months ended May 31, 2001, the Company increased its
litigation accrual by $10.7 million due to unanticipated adverse findings of
fact and conclusions of law from a trial. In the prior year fourth quarter, the
Court entered judgment in an amount which was $2.5 million less than originally
anticipated. At May 31, 2002 and August 31, 2001, $9.5 million and $9.4 million
respectively, were accrued (including interest). The Company has appealed the
judgment.

There were no other material developments relating to the Company's
construction disputes or other contingencies since August 31, 2001.

NOTE H - SALES OF ASSETS

On March 28, 2002, the Company sold substantially all of the assets of
SMI Owen Steel Company's heavy structural steel fabrication and installation
operations located in Columbia, South Carolina, to a subsidiary of ADF Group,
Inc. Cash proceeds of $19.7 million were received from the sale. The pre-tax
gain from the sale of $5.2 million was included in net sales for the quarter
ended May 31, 2002.

Page 9

COMMERCIAL METALS COMPANY AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

NOTE I - BUSINESS SEGMENTS

The following is a summary of certain financial information by reportable
segment (in thousands):

Page 10

COMMERCIAL METALS COMPANY AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

NOTE J - RECLASSIFICATIONS

Certain reclassifications have been made in prior year financial
statements to conform to the classifications used in the current year.

Page 11

ITEM 2.

MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS

CONSOLIDATED RESULTS OF OPERATIONS

(in millions)

The Company's well-executed diversification strategy demonstrated its benefits
again through challenging market conditions. Significant events that affected
the Company's third quarter included:

- - Ferrous scrap prices rose, prompting a recovery for the recycling
segment, while creating a near-term squeeze in mill product margins.

- - The manufacturing segment realized a $3.4 million (after-tax) gain from
the sale of the assets of SMI-Owen Steel Company.

- - Steel minimill earnings improved significantly due to higher production
and shipments in spite of lower selling prices and higher scrap costs.

- - Copper tube profits decreased due to softer market conditions and start
up of the new production line.

- - The recycling segment recorded its highest operating profit since the
2000 third quarter due to the improved ferrous scrap market.

- - Marketing and trading's operating profit was higher than last year's
third quarter, but some markets were still weak.

- - Financing costs decreased due to lower borrowing requirements and
reduced interest rates.

- - A lower effective income tax rate due primarily to the favorable
completion of IRS audits added $1.0 million to net earnings in the
third quarter of 2002.

Page 12

CONSOLIDATED DATA -

The LIFO method of inventory valuation increased net earnings by $137 thousand
and $377 thousand (no effect and 1 cent per diluted share) for the 2002 and 2001
third quarters, respectively. LIFO increased net earnings by $101 thousand and
$974 thousand (no effect and 4 cents per diluted share) for the nine months
ended May 31, 2002 and 2001, respectively. The per share numbers have been
restated to reflect the stock split referred to in Note E, Earnings per Share,
in the consolidated financial statements.

SEGMENT OPERATING DATA -
(in thousands)

All dollars below are pre-tax, unless otherwise indicated.

Net sales and operating profit (loss) by business segment are shown in the
following table. Operating profit (loss), as presented, is the sum of earnings
(loss) before income taxes, outside interest expense and discounts on the sales
of accounts receivable.

MANUFACTURING -

The Company's manufacturing segment consists of the steel group and the copper
tube division. Operating profit for the segment increased $4.9 million (23%)
from the third quarter last year on $2.7 million (1%) more net sales. $5.2
million of the increase in operating profit was due to a gain from the sale of
SMI-Owen (the steel group's heavy structural fabrication operation). Excluding
this item, the manufacturing segment's operating profit was 2% below last year's
third quarter. Increased production and shipments at the steel group's minimills
significantly offset lower unit margins, lower selling prices, and lower copper
tube earnings. The steel group's downstream operations continued to contribute
as well, in spite of lower volumes and selling prices. Operating profit from the
copper tube business, although still solid, was less than last year's third
quarter.

Page 13

Steel and scrap prices per ton are as reflected in the table below:

During this year's third quarter, operating profit for the Company's four steel
minimills rose 28% compared with a year earlier despite lower selling prices.
Operating profit for the mills was also up 38% from this year's second quarter.
Profits at SMI Texas, SMI Alabama and SMI Arkansas were significantly better
than last year, while SMI South Carolina was lower. The primary reason for the
overall improved minimill profitability was a 17% increase in shipments, which
were 612,000 tons in the current quarter compared to 523,000 last year. 501,000
tons were shipped in the current year second quarter. Mill production increased
as well over last year with tons rolled up 22% to 556,000, and tons melted up
21% to 565,000. Even though demand was strong, the average total mill selling
price at $267 per ton was $14 (5%) below last year and substantially unchanged
from this year's second quarter. Average scrap purchase costs were $11 per ton
higher than last year, resulting in compressed mill product margins. Utility
expenses declined by $568 thousand compared with the third quarter last year
with decreases in natural gas more than offsetting higher electricity costs.
Also, depreciation and amortization decreased by $1.6 million, primarily because
mill rolls and guides and certain casting equipment at SMI South Carolina were
fully depreciated in the third quarter of 2002.

Operating profit in the steel group's fabrication and related businesses
increased by $3.5 million (33%) from the prior year period. Excluding the gain
on the sale of SMI-Owen, operating profits decreased by $1.7 million (16%).
Fabricated steel shipments totaled 248,000 tons, a 3% decrease from the prior
year period. The average fabrication selling price decreased $29 per ton (5%).
The rebar fabrication, concrete related products and steel post plants continued
to perform well, although combined profits were less than last year. Despite
reduced operating costs and shop efficiencies, steel joist and cellular beam
manufacturing operations reported lower profits due to considerably lower
selling prices and shipments. Also, during the third quarter 2002, cellular beam
inventory was written down by $627,000 primarily due to the default of a
customer. During the 2001 third quarter, steel joist and cellular beam
manufacturing incurred $2.1 million of nonrecurring start-up costs. Structural
steel fabrication (excluding the gain on the sale of SMI-Owen) was substantially
break even in 2002 compared with a small profit in the prior year.

The Copper tube division's operating profit decreased 28% from the same period
last year, on 11% more net sales. Copper tube shipments increased 18% from the
third quarter last year to 17.0 million pounds, while production increased 8% to
14.7 million pounds. Average sales prices dropped 6%. Housing starts declined,
and hotel/motel construction continued at a much reduced level. Consequently,
demand for plumbing and refrigeration tube was not as strong. Metal spreads
declined but were mitigated due to lower raw material purchase costs. Operating
costs, however, increased due to the startup of the new production line.

RECYCLING -

The recycling segment reported an operating profit of $2.2 million in the 2002
third quarter compared with an operating profit of $264 thousand for the third
quarter last year, on 3% higher net sales. Gross margins were significantly
above last year. Both domestic and international demand for scrap improved.
Ferrous scrap tonnage processed and shipped rose 12% to 385,000 tons, and
ferrous sales prices were on average $86 per ton or 18% higher than a year ago.
Nonferrous tons shipped were substantially unchanged, and the average nonferrous
scrap price was 4% lower than the prior year period. However, both ferrous and
non-ferrous selling

Page 14

prices were higher than the second quarter of this year. Total volume of scrap
processed, including the steel group processing plants, was 667,000 tons, an
increase of 15% from the 580,000 tons processed during the prior year period.

MARKETING AND TRADING -

Net sales for the marketing and trading segment increased 7% from the prior
year's third quarter to $203 million, and operating profit increased 52% to $3.3
million. Markets in the current period were still weak, though better than last
year's third quarter. Volumes were up in Australia and China, level in Europe,
but down for imports into the United States. Prices for a number of products
improved during the 2002 third quarter. The U. S. dollar weakened by up to 10%
against major currencies. Margins were better for most steel products, but did
not improve for nonferrous metal products and industrial raw materials and
products. During the third quarter 2002, the Australian operations incurred
approximately $600 thousand in foreign exchange losses primarily due to lack of
performance by Japanese suppliers, in spite of which overall performance was
still profitable. The Company's recent strategy of growing its downstream
marketing and distribution business mitigated the continuing very difficult
trading conditions.

OTHER -

The Company's selling, general and administrative as well as employee's
retirement plan expenses were higher in the current year third quarter due to
discretionary items consistent with the improvement in operating profitability.
The Company's pre-tax interest expense decreased by $2.8 million (38%) from the
prior year's third quarter primarily due to lower interest rates and much lower
average short-term debt levels. Also, during the third quarter 2002, the Company
entered into two interest rate swaps, (see Note F, Derivatives and Risk
Management, to the consolidated financial statements) which resulted in interest
expense savings. During 2002, the Company favorably resolved all issues for its
federal income tax returns through 1999. Due to the lack of any material
adjustments, management has reevaluated the tax accruals and consequently
reduced the net tax provision by $1.0 million during the third quarter 2002.

CONTINGENCIES -

See footnote G, Contingencies, in the Company's consolidated financial
statements.

In the ordinary course of conducting its business, the Company becomes involved
in litigation, administrative proceedings, governmental investigations,
including environmental matters, and contract disputes. Some of these matters
may result in settlements, fines, penalties or judgments being assessed against
the Company. While the Company is unable to estimate precisely the ultimate
dollar amount of exposure to loss in connection with the above-referenced
matters, it makes accruals as warranted. Due to evolving remediation technology,
changing regulations, possible third-party contributions, the inherent
shortcomings of the estimation process, the uncertainties involved in litigation
and other factors, amounts accrued could vary significantly from amounts paid.
Accordingly, it is not possible to estimate a meaningful range of possible
exposure. Management believes that adequate provision has been made in the
financial statements for the estimable potential impact of these contingencies,
and that the outcomes will not significantly impact the long-term results of
operations or the financial position of the Company, although they may have a
material impact on earnings for a particular period.

The Company is subject to federal, state and local pollution control laws and
regulations in all locations where it has operating facilities. It anticipates
that compliance with these laws and regulations will involve continuing capital
expenditures and operating costs.

Page 15

OUTLOOK -

Management believes that the fourth quarter of fiscal year 2002 will be
relatively strong, although slightly less than the prior year's fourth quarter.

The world economy grew robustly during the first calendar quarter of 2002,
primarily due to the turn of the inventory cycle; however, growth slowed in the
second calendar quarter. The U.S. economy continued its modest recovery,
although the upturn to-date has been uneven and tentative. The Company's biggest
near-term challenge is the drop in private nonresidential construction. The
European and Asian (especially Chinese) economies have rebounded some. The
Company's customers' inventory levels have mostly been reduced. Management
believes that the weaker U.S. dollar will be beneficial. Also, the positive
impact from the Section 201 trade remedy on steel imports into the U.S. should
begin during the fourth quarter. Management expects steel mill operating levels
to continue to rise, prices to strengthen moderately, and scrap costs to
flatten. Fabrication operations, however, will continue to be hurt by the
falloff in commercial construction, although public and institutional building
should remain solid. Copper tube profits are likely to be around recent levels,
because new home sales continue to be strong. Recycling results should improve
further during the fourth quarter due to the more favorable ferrous scrap
market, although the segment's markets are neither robust nor uniformly upbeat.
In the marketing and trading segment, order intake generally has shown an
improvement, and global markets are more active, albeit still intensely
competitive.

The Company anticipates further improvements in fiscal 2003 due to both internal
and external factors, including a stronger demand for its products. Moderate
increases in volume and prices in most of its businesses combined with
controlled operating costs should benefit the Company's earnings. New product
lines should be a benefit as well. Longer term, management expects vibrant
demand for construction related products and services including strong spending
under the Federal Transportation Program. The Company anticipates relatively
high consumption of steel bar and structural steel in the public sector during
the next few years. The outlook for institutional building continues to look
promising. Also, management is optimistic that manufacturing sector, service
center, and commercial construction demand will improve.

Strategically, management's focus remains on creating economic value through
internal growth, by participating in industry consolidation, forming strategic
alliances, growing added value businesses, redeploying assets, thereby
increasing the Company's earnings, cash flows and return on capital.

This outlook section contains forward-looking statements regarding the outlook
for the Company's financial results including net earnings, product pricing and
demand, production rates, manufacturing costs, interest rates, inventory levels,
results of litigation and general market conditions. These forward-looking
statements can generally be identified by phrases such as the Company or
management "expects", "anticipates", "believes", "plans to", "should", "likely",
"appears", "projects", or other words or phrases of similar impact. There is
inherent risk and uncertainty in any forward-looking statements. Variances will
occur and some could be materially different from management's current opinion.
Developments that could impact the Company's expectations include interest rate
changes, construction activity, difficulties or delays in the execution of
construction contracts resulting in cost overruns or contract disputes, metals
pricing over which the Company exerts little influence, increased capacity and
product availability from competing steel minimills and other steel suppliers
including import quantities and pricing, global factors including credit
availability, currency fluctuations, energy prices, and decisions by governments
impacting the level and pace of overall economic activity.

Page 16

LIQUIDITY AND CAPITAL RESOURCES -

The following discussion of liquidity and capital resources is on a consolidated
basis, noting the sources and uses of the three operating segments and
centralized corporate functions. The Company provides a centralized treasury
function and uses inter-company loans to efficiently manage the short-term cash
needs of its operating divisions. Any excess funds are invested centrally.

The Company and its subsidiaries rely upon cash flows from operating activities,
and to the extent necessary, external short-term financing sources including the
issuance of commercial paper, sales of certain accounts receivable and bank
credit facilities. Also, from time to time, the Company has issued long-term
public debt. The Company's continuing cost-effective access to external
financing is dependent on maintaining the Company's investment grade credit
ratings, and general business conditions. Depending on the market valuation of
its common stock, the Company may realize significant cash flows from the
exercise of stock options.

The Company's $135 million commercial paper program is rated in the second
highest category by Moody's Investors Service (P-2), Standard & Poor's
Corporation (A-2) and Fitch (F-2). To back up its commercial paper program, the
Company has unsecured revolving credit agreements with a group of five banks
consisting of a $90 million facility expiring in August 2002 and a $45 million
facility expiring in August 2004. The Company anticipates maintaining its
commercial paper program supported by the revolving credit agreements in
comparable amounts. For added flexibility, the Company has a program to provide
financing through sales of customer accounts receivable allowing for funding of
up to $130 million. Under these facilities, the Company continually sells
accounts receivable on an ongoing basis to replace those receivables that have
been collected. Because the Company's long-term public debt ($252 million at May
31, 2002) is investment grade rated by Standard & Poors' Corporation (BBB),
Fitch (BBB) and by Moody's Investors Services (Baa1), it has access to the
public markets for potential refinancing and/or issuance of additional long-term
debt.

Credit ratings impact the Company's ability to obtain short- and long-term
financing and the cost of such financing. In determining the Company's credit
ratings, the rating agencies consider a number of both quantitative and
qualitative factors. These 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. Also considered are predictability of cash flows, business strategy,
industry condition and contingencies. Management is committed to maintaining the
Company's investment grade ratings.

Certain of the Company's financing agreements include various covenants. The
most restrictive of these requires maintenance of an interest coverage ratio of
greater than three times and a debt to capitalization ratio of 55% (as defined).
Some of the agreements contain cross-default provisions as well. As of, and for
the nine months ended May 31, 2002, the Company was in compliance with these
requirements.

There is a ratings trigger within the Company's revolving credit agreements and
one within its accounts receivable securitization agreement. The trigger in the
revolving credit agreements is solely a means to reset pricing for facility fees
and loans if a borrowing occurs. Within the accounts receivable securitization
agreement, the ratings trigger is contained in a termination event, but one that
has been targeted at catastrophic levels. It requires a combination of ratings
actions on behalf of two independent rating agencies and is set at levels seven
ratings categories below the Company's current rating.

Page 17

The Company's businesses in the manufacturing and recycling segments are capital
intensive. A significant amount of capital resources are used to fund these
capital requirements, including construction, purchases of equipment and
maintenance capital at existing facilities. The Company's business plan also
calls for investments in new operations. Additionally, the Company must fund
additional working capital requirements to support the growth of its businesses
in all segments and maintain its ability to repay maturing long-term debt
(earliest maturity in 2005) and pay dividends to its stockholders.

The Company continues to assess other alternative means of raising capital,
including potential dispositions of under-performing or non-strategic assets.
Any potential future major acquisitions could require additional external
financing, including the issuance of common stock.

Cash Flows

The Company's cash flows from operating activities primarily result from sales
of steel and related products, although all segments include sales of nonferrous
metal products as well. The Company's customer base is diverse and generally
stable. The Company uses futures or forward contracts as needed to mitigate the
risks from fluctuations in foreign currency exchange rates and metals commodity
prices (see footnote F, Derivatives and Risk Management in the consolidated
financial statements).

The Company's cash flows from operating activities are impacted by the volume
and pricing of orders from its customers, who are primarily in the manufacturing
and construction sectors of the United States, although international operations
are significant. Product shipment volumes can be impacted by weather, and
volumes and prices by the general economy, the strength of the U.S. dollar,
governmental action, and various other factors. Periodic fluctuations in prices
and volumes can result in variations in cash flows from operations, however
these have historically been a reliable and steady source of cash.

Cash flows from operations before changes in operating assets and liabilities
for the nine months ended May 31, 2002 increased to $77.4 million from $63.2
million in the prior year due mostly to higher earnings. Depreciation and
amortization decreased during fiscal 2002 primarily because mill rolls and
guides as well as certain melt shop equipment at SMI South Carolina were fully
depreciated. Due to the level of bankrupt and financially troubled customers,
the Company's provision for losses on receivables increased $1.1 million during
the nine months ended May 31, 2002 from the prior year period. The Company also
realized a $4.3 million increase in the tax benefits from stock issued under
option and purchase plans during fiscal 2002.

Net cash flows of $45.2 million were provided by operating activities for the
nine months ended May 31, 2002 compared with $48.4 million in the prior year
period; the decrease was due primarily to increases in accounts receivable as
well as decreased funding from sales of accounts receivable. Net working capital
increased to $384 million at May 31, 2002 from $288 million at August 31, 2001.
The increase was primarily due to more temporary investments and higher
receivables, as the increases in inventories and payables offset each other. The
current ratio was 2.0 at May 31, 2002, up from 1.8 at August 31, 2001. Accounts
and notes receivable at May 31, 2002 were $46.2 million more than at August 31,
2001 due to higher sales and less accounts receivable sold to financial
institutions. Inventories and accounts payable, accrued expenses, other payables
and income taxes at May 31, 2002 increased by $36.7 million and $35.7 million,
respectively, from the prior year-end. Inventories in the steel group (excluding

Page 18

SMI-Owen) were up $31.3 million, the majority of which was at the minimills
because of increased scrap purchase costs and higher quantities. Steel
fabrication inventories increased as well. Inventories in marketing and trading
(excluding Coil Steels Group) were up mostly due to shipments in transit.
Accounts payable increased in marketing and trading (excluding Coil Steels
Group) due to higher inventory purchases and extended terms with vendors.
Accounts payable in the steel group decreased, with increases at the minimills
more than offset by decreases in fabrication (excluding the effect of the sale
of SMI-Owen). Accrued expenses and other payables decreased due to the payment
in the current year of incentive compensation and the funding of employee
benefit plans that were accrued at August 31, 2001. Also, during the third
quarter fiscal 2002, the Company received $14.0 million from a litigation
settlement (see Note G, Contingencies, to the consolidated financial
statements). Income taxes payable increased mostly due to increased profits and
the reduction in deferred taxes. During the 2002 third quarter, the Company
received $5.2 million for the contract balance and settlement of disputed change
orders on an old large structural steel fabrication contract at SMI-Owen.

The Company invested $28.2 million in property, plant and equipment during the
nine months ended May 31, 2002, which was $11.9 million less than the prior
year. In addition, in 2002 the Company acquired the remaining shares of the Coil
Steels Group (CSG) for $6.8 million (net of cash). During 2002, $19.7 million
was provided from the sale of the assets of SMI-Owen. Capital spending for
fiscal 2002 is expected to be $70 million, including CSG and both greenfield and
acquisitions to expand the downstream businesses in steel fabrication.
Year-to-date May 31, 2002, the Company invested $39.0 million in temporary cash
instruments, compared to none in the prior year period.

Short-term financing needs were dramatically lower during the current year than
the prior year period mostly due to better management of working capital, higher
earnings, the litigation settlement and the sale of SMI-Owen which enabled the
Company to repay all of its short-term borrowings. The Company made its final
payment on the 8.49% long-term notes in fiscal 2002.

On May 20, 2002, the Company's Board of Directors declared a two-for-one stock
split in the form of a stock dividend on its common stock payable June 28, 2002
to its shareholders of record on June 7, 2002. See Note E, Earnings per Share,
to the consolidated financial statements. At May 31, 2002, there were 28,437,910
common shares issued and outstanding with 3,827,256 held in the Company's
treasury. Excluding the effect of the stock split, outstanding shares increased
by 1,140,361 since August 31, 2001. An increased number of employee stock option
exercises resulting from the significant increase in the Company's average
market price per share and issuance of shares pursuant to the Company's employee
stock purchase plan account for the additional outstanding shares. All shares
issued were from treasury shares previously purchased by the Company. This
activity resulted in $29.1 million of cash flows year to date 2002 versus $2.0
million from such activity in the prior year period. Dividends of $5.2 million
were paid during the first nine months of 2002, slightly more than the $5.1
million paid during 2001. On May 20, 2002, the Company's directors declared a
quarterly cash dividend of eight cents per share on common stock to be paid July
19 to stockholders of record July 5, 2002. This new cash dividend rate on the
after-split shares represents a 23% increase in the cash dividend. This will be
the 151st consecutive quarterly cash dividend paid by the Company.

Page 19

Contractual Obligations

The Company's contractual obligations as of May 31, 2002 are summarized in the
table below (dollars in thousands):

* Cash obligations herein are not discounted.

(1) Total amounts are included in the May 31, 2002 consolidated balance
sheet.

(2) Includes minimum lease payment obligations for noncancelable equipment
and real-estate leases in effect as of May 31, 2002.

(3) About 55% of these purchase obligations are for inventory items to be
sold in the ordinary course of business; most of the remainder are for
freight and supplies associated with normal revenue-producing
activities.

At May 31, 2002, the Company had received $17,159,000 of net proceeds from the
sales of accounts receivable, See Note B, Sales of Accounts Receivable, to the
consolidated financial statements. If the program was terminated, the first
$17,159,000 of collections from these accounts would be paid to the third party
financial institutions. At May 31, 2002, the Company had overall 41 days sales
in accounts receivable (excluding its international division and retention on
long-term contracts). The Company was in compliance with the terms of this
program as of, and for the nine months ended May 31, 2002.

Other Commercial Commitments

The Company maintains stand-by letters of credit to provide support for certain
transactions as requested by third parties. At May 31, 2002, $19.8 million was
committed under these arrangements, $6 million of which was collateralized by a
cash deposit included in current other assets on the consolidated balance sheet.
All of commitments expire within one year.

To satisfy customer requirements, the Company guarantees the performance of a
subcontractor at one of its fabrication locations. Total amounts guaranteed as
of May 31, 2002 were $453,000.

ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

The information required hereunder for the Company is not significantly
different from the information set forth in Item 7a. Quantitative and
Qualitative Disclosures About Market Risk included in the Company's Annual
Report of Form 10-K for the year ended August 31, 2001, filed November 19, 2001
with the Securities Exchange Commission, and is therefore not presented herein.

Also, see footnote F, Derivatives and Risk Management, to the Company's
consolidated financial statements.

Page 20

PART II OTHER INFORMATION

ITEM 1. LEGAL PROCEEDINGS

Reference is made to the information incorporated by reference from
Item 3. Legal Proceedings in the Company's Annual Report on Form 10-K for the
year ended August 31, 2001, filed November 21, 2001. In May, 2002, the Company's
subsidiary, SMI-Owen Steel Company, Inc., settled litigation against St. Paul
Fire & Marine Insurance Company related to the Aladdin hotel and casino complex
arising under a subcontractor/vendor default protection insurance policy. The
Company received $14 million and, subject to certain contingencies, may receive
reimbursement of an additional amount of up to $3 million. The litigation
against J & H Marsh McClennan, Inc., continues as do arbitration proceedings
involving other disputes concerning the Aladdin project. See also Note G of the
Notes To Consolidated Financial Statements in Part I, Item I.

ITEM 2. CHANGES IN SECURITIES

Not Applicable

ITEM 3. DEFAULTS UPON SENIOR SECURITIES

Not Applicable

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

Not Applicable

ITEM 5. OTHER INFORMATION

Not Applicable

Page 21

ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K

A. Exhibits required by Item 601 of Regulation S-K.

Exhibit 10.(iii)e - Employment and Consulting
Agreement of Marvin Selig dated June 7, 2002

B. No reports on Form 8-K were filed during the quarter
ended May 31, 2002.

Page 22

SIGNATURES

Pursuant to the requirements of the Securities Exchange Act of 1934,
the registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.

COMMERCIAL METALS COMPANY

/s/ William B. Larson
---------------------------------
July 11, 2002 William B. Larson
Vice President
& Chief Financial Officer

/s/ Malinda G. Passmore
----------------------------------
July 11, 2002 Malinda G. Passmore
Controller

Page 23

INDEX TO EXHIBITS