**U.S. Securities and Exchange Commission**

**Washington, D.C. 20549**

 

**FORM 10-Q**

 

**x**         QUARTERLY REPORT PURSUANTTO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

 

**For the quarterly period ended**

**May 31, 2006**

 

**o**            TRANSITION REPORTUNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

 

**For the transition period from  *  *N/A* *  to  *  *N/A**

 

**Commission file no. 1-7755**

 

**Summa Industries**

(Name of registrant as specified in its charter)

 

| **Delaware**                     |   | **95-1240978**                           |
|----------------------------------|--------|------------------------------------------|
| (State or other  jurisdiction of |   | (I.R.S. employer  identification number) |
| incorporation or  organization)  |   |                                     |

 

**21250Hawthorne Boulevard, Suite 500, Torrance, California 90503**

**www.summaindustries.com**

(Address ofprinciple executive offices, including zip code)

Registrant’s telephonenumber:  **(310) 792-7024**

Indicate by checkmark whether the registrant (1) has filed all reports required to be filedby Section 13 or 15(d) of the Exchange Act during the preceding 12months (or for such shorter period that the registrant was required to filesuch reports), and (2) has been subject to such filing requirements forthe past 90 days.

Yes  x       No o

Indicate by check mark whether the registrant is a large acceleratedfiler, an accelerated filer, or a non-accelerated filer (as “large acceleratedfiler” and “accelerated filer” are defined in Rule 12b-2 of theExchange Act).
| Large Accelerated Filer      o | Accelerated Filer      o | Non-Accelerated Filer      x |
|---------------------------------------------------------|---------------------------------------------------|-------------------------------------------------------|

 

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

Yes o     No x

The number of shares ofcommon stock outstanding as of June 30, 2006 was 3,876,213.

 

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**SummaIndustries**

**INDEX**
| PART I - FINANCIAL INFORMATION |                                                                                                                               |
|-------------------------------------|------------------------------------------------------------------------------------------------------------------------------------|
|                                |                                                                                                                               |
| Item 1.                             | Financial Statements:                                                                                                              |   |
|                                |                                                                                                                               |   |
|                                | Condensed Consolidated Balance Sheets (unaudited) -  May 31, 2005, August 31, 2005 and May 31, 2006                 |   |
|                                |                                                                                                                               |   |
|                                | Condensed Consolidated Income Statements (unaudited) -  three months and nine months ended May 31, 2005 and May 31, 2006 |   |
|                                |                                                                                                                               |   |
|                                | Consolidated Statement of Stockholders’ Equity  (unaudited) -  nine months ended May 31, 2006                            |   |
|                                |                                                                                                                               |   |
|                                | Condensed Consolidated Statements of Cash Flows  (unaudited) -  nine months ended May 31, 2005 and May 31, 2006          |   |
|                                |                                                                                                                               |   |
|                                | Notes to Condensed Consolidated Financial Statements  (unaudited)                                                                  |   |
|                                |                                                                                                                               |   |
| Item 2.                             | Management’s  Discussion and Analysis of  Financial Condition and Results of Operations                                       |   |
|                                |                                                                                                                               |   |
| Item 3.                             | Quantitative  and Qualitative Disclosure about Market Risk                                                                         |   |
|                                |                                                                                                                               |   |
| Item  4.                            | Controls  and Procedures                                                                                                           |   |
|                                |                                                                                                                               |   |
| PART II  - OTHER INFORMATION   |                                                                                                                               |
|                                |                                                                                                                               |
| Item 1.                             | Legal Proceedings                                                                                                                  |   |
| Item  1A.                           | Risk  Factors                                                                                                                      |   |
| Item 2.                             | Unregistered  Sales of Equity Securities and Use of Proceeds                                                                       |   |
| Item 3.                             | Defaults upon  Senior Securities                                                                                                   |   |
| Item 4.                             | Submission of  Matters to a Vote of Security Holders                                                                               |   |
| Item 5.                             | Other Information                                                                                                                  |   |
| Item  6.                            | Exhibits                                                                                                                           |   |
|                                |                                                                                                                               |   |
| Signature Page                      |                                                                                                                               |

 

2

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**Summa Industries**CONDENSEDCONSOLIDATED BALANCE SHEETS(unaudited)
| ** **                                                                                                                                                                                   | ** ** | **May 31, 2005** | ** ** | **August 31, 2005** | ** ** | **May 31, 2006** | ** ** |
|----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|------------|----------------------------|------------|-------------------------------|------------|----------------------------|------------|
| **ASSETS**                                                                                                                                                                                   |       |                       |       |                          |       |                       |       |
| Current assets:                                                                                                                                                                              | ** ** | ** **                 | ** ** | ** **                    | ** ** | ** **                 | ** ** |
| Cash and cash  equivalents                                                                                                                                                                   |       | $                          | 1,027,000  |                          | $          | 1,233,000                  |       | $ | 1,680,000 |   |
| Accounts  receivable                                                                                                                                                                         |       | 18,761,000                 |       | 16,919,000                    |       | 18,736,000                 |       |
| Inventories                                                                                                                                                                                  |       | 15,638,000                 |       | 12,665,000                    |       | 16,029,000                 |       |
| Prepaid expenses  and other                                                                                                                                                                  |       | 3,895,000                  |       | 3,471,000                     |       | 3,350,000                  |       |
| Assets held for  sale                                                                                                                                                                        |       | —                     |       | 3,641,000                     |       | —                     |       |
| Total current  assets                                                                                                                                                                        |       | 39,321,000                 |       | 37,929,000                    |       | 39,795,000                 |       |
| Property, plant and equipment                                                                                                                                                                |       | 67,450,000                 |       | 62,629,000                    |       | 59,016,000                 |       |
| Less accumulated  depreciation                                                                                                                                                               |       | (35,223,000                | )          | (33,416,000                   | )          | (34,096,000                | )          |
| Net property,  plant and equipment                                                                                                                                                           |       | 32,227,000                 |       | 29,213,000                    |       | 24,920,000                 |       |
| Other assets                                                                                                                                                                                 |       | 1,844,000                  |       | 1,454,000                     |       | 1,950,000                  |       |
| Goodwill and other  intangibles, net                                                                                                                                                         |       | 9,050,000                  |       | 8,981,000                     |       | 8,850,000                  |       |
| Assets held for sale                                                                                                                                                                         |       | —                     |       | 2,458,000                     |       | 1,961,000                  |       |
| Total assets                                                                                                                                                                                 |       | $                          | 82,442,000 |                          | $          | 80,035,000                 |       | $ | 77,476,000 |   |
| **LIABILITIES AND STOCKHOLDERS’  EQUITY**                                                                                                                                               | ** ** | ** **                 | ** ** | ** **                    | ** ** | ** **                 | ** ** |
| Current liabilities:                                                                                                                                                                         |       |                       |       |                          |       |                       |       |
| Accounts payable                                                                                                                                                                             |       | $                          | 9,909,000  |                          | $          | 8,731,000                  |       | $ | 9,928,000 |   |
| Accrued  liabilities                                                                                                                                                                         |       | 5,429,000                  |       | 5,774,000                     |       | 7,362,000                  |       |
| Current  maturities of long-term debt                                                                                                                                                        |       | 4,178,000                  |       | 3,069,000                     |       | 2,783,000                  |       |
| Bank line of  credit                                                                                                                                                                         |       | —                     |       | —                        |       | 12,282,000                 |       |
| Liabilities held  for sale                                                                                                                                                                   |       | —                     |       | 1,280,000                     |       | —                     |       |
| Total current  liabilities                                                                                                                                                                   |       | 19,516,000                 |       | 18,854,000                    |       | 32,355,000                 |       |
| Long-term debt, net of  current maturities                                                                                                                                                   |       | 29,157,000                 |       | 27,520,000                    |       | 9,902,000                  |       |
| Other long-term  liabilities                                                                                                                                                                 |       | 2,448,000                  |       | 2,441,000                     |       | 3,128,000                  |       |
| Total long-term  liabilities                                                                                                                                                                 |       | 31,605,000                 |       | 29,961,000                    |       | 13,030,000                 |       |
| Minority interest in  subsidiary                                                                                                                                                             |       | 155,000                    |       | 132,000                       |       | 91,000                     |       |
| Stockholders’ equity:                                                                                                                                                                   |       |                       |       |                          |       |                       |       |
| Common stock,  par value $.001; 10,000,000 shares authorized; issued and outstanding:  3,970,757 at May 31, 2005, 3,940,041 at August 31, 2005 and  3,885,830 at May 31, 2006 |       | 15,288,000                 |       | 15,046,000                    |       | 14,621,000                 |       |
| Retained  earnings                                                                                                                                                                           |       | 15,878,000                 |       | 16,042,000                    |       | 17,379,000                 |       |
| Total  stockholders’ equity                                                                                                                                                             |       | 31,166,000                 |       | 31,088,000                    |       | 32,000,000                 |       |
| Total liabilities and  stockholders’ equity                                                                                                                                             |       | $                          | 82,442,000 |                          | $          | 80,035,000                 |       | $ | 77,476,000 |   |

See accompanying notes tocondensed consolidated financial statements*.*

3

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**Summa Industries**CONDENSEDCONSOLIDATED INCOME STATEMENTS(unaudited)
| ** **                                                                                            | ** ** | **Three months ended May 31** | ** ** | **Nine months ended May 31** | ** ** |
|-------------------------------------------------------------------------------------------------------|------------|---------------------------------------------------|------------|--------------------------------------------------|------------|
| ** **                                                                                            | ** ** | **2005**                                          | ** ** | **2006**                                         | ** ** | **2005** | ** ** | **2006** | ** ** |
| Net sales                                                                                             |       | $                                                 | 28,808,000 |                                             | $          | 30,407,000 |   | $ | 80,982,000 |   | $ | 85,657,000 |   |
| Cost of sales                                                                                         |       | 22,178,000                                        |       | 23,217,000                                       |       | 61,968,000 |   | 65,128,000 |   |
| Gross profit                                                                                          |       | 6,630,000                                         |       | 7,190,000                                        |       | 19,014,000 |   | 20,529,000 |   |
| Selling,  general, administrative and other expenses                                                  |       | 4,888,000                                         |       | 5,200,000                                        |       | 14,243,000 |   | 15,092,000 |   |
| (Gain) on sale  of real estate                                                                        |       | —                                            |       | —                                           |       | (43,000 | ) | (205,000 | ) |
| Operating income                                                                                      |       | 1,742,000                                         |       | 1,990,000                                        |       | 4,814,000 |   | 5,642,000 |   |
| Interest expense                                                                                      |       | 407,000                                           |       | 534,000                                          |       | 1,124,000 |   | 1,506,000 |   |
| Income from  continuing operations before income taxes and minority interest                          |       | 1,335,000                                         |       | 1,456,000                                        |       | 3,690,000 |   | 4,136,000 |   |
| Provision for  income taxes                                                                           |       | 469,000                                           |       | 533,000                                          |       | 1,305,000 |   | 1,496,000 |   |
| Income from  continuing operations before minority interest                                           |       | 866,000                                           |       | 923,000                                          |       | 2,385,000 |   | 2,640,000 |   |
| Minority  interest in net loss of subsidiary                                                          |       | 17,000                                            |       | 4,000                                            |       | 50,000 |   | 41,000 |   |
| Income from  continuing operations                                                                    |       | 883,000                                           |       | 927,000                                          |       | 2,435,000 |   | 2,681,000 |   |
| (Loss) from  discontinued operations, net of tax benefit of  $191,000, $—, $532,000 and $208,000 |       | (375,000                                          | )          | —                                           |       | (1,041,000 | ) | (405,000 | ) |
| Net income                                                                                            |       | $                                                 | 508,000    |                                             | $          | 927,000 |   | $ | 1,394,000 |   | $ | 2,276,000 |   |
| Earnings (loss)  per common share:                                                                    |       |                                              |       |                                             |       |   |   |   |   |
| Basic                                                                                                 |       |                                              |       |                                             |       |   |   |   |   |
| Continuing operations                                                                                 |       | $                                                 | 0.22       |                                             | $          | 0.24 |   | $ | 0.61 |   | $ | 0.68 |   |
| Discontinued operations                                                                               |       | $                                                 | (0.09      | )                                                | —     |   | $ | (0.26 | ) | $ | (0.10 | ) |
| Net income                                                                                            |       | $                                                 | 0.13       |                                             | $          | 0.24 |   | $ | 0.35 |   | $ | 0.58 |   |
| Diluted                                                                                               |       |                                              |       |                                             |       |   |   |   |   |
| Continuing operations                                                                                 |       | $                                                 | 0.22       |                                             | $          | 0.23 |   | $ | 0.60 |   | $ | 0.68 |   |
| Discontinued operations                                                                               |       | $                                                 | (0.09      | )                                                | —     |   | $ | (0.26 | ) | $ | (0.10 | ) |
| Net income                                                                                            |       | $                                                 | 0.13       |                                             | $          | 0.23 |   | $ | 0.34 |   | $ | 0.58 |   |
| Weighted average  common shares outstanding:                                                          |       |                                              |       |                                             |       |   |   |   |   |
| Basic                                                                                                 |       | 3,984,000                                         |       | 3,895,000                                        |       | 3,990,000 |   | 3,905,000 |   |
| Diluted                                                                                               |       | 4,038,000                                         |       | 3,950,000                                        |       | 4,060,000 |   | 3,943,000 |   |

See accompanying notes tocondensed consolidated financial statements*.*

4

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**Summa Industries**CONDENSED CONSOLIDATED STATEMENT OF STOCKHOLDERS’EQUITYfor the nine months ended May 31, 2006(unaudited)
| ** **                                                   | ** ** | **Common  Shares** | ** ** | **Common  Stock** | ** ** | **Retained  Earnings** | ** ** | **Total**  | ** ** |
|--------------------------------------------------------------|------------|--------------------|------------|-------------------|------------|------------------------|------------|------------|------------|
| Balance at  August 31, 2005                             |       | 3,940,041          |       | $                 | 15,046,000 |                   | $          | 16,042,000 |       | $ | 31,088,000 |   |
| Exercise of  stock options, including tax benefit of $37,000 |       | 37,000             |       | 239,000           |       | —                 |       | 239,000    |       |
| Repurchases of  common stock                                 |       | (91,211            | )          | (764,000          | )          | —                 |       | (764,000   | )          |
| Net income                                                   |       | —             |       | —            |       | 2,276,000              |       | 2,276,000  |       |
| Stock-based  compensation                                    |       | —             |       | 100,000           |       | —                 |       | 100,000    |       |
| Payment of  dividends                                        |       | —             |       | —            |       | (706,000               | )          | (706,000   | )          |
| Declaration of  pending dividend                             |       | —             |       | —            |       | (233,000               | )          | (233,000   | )          |
| Balance at May 31,  2006                                |       | 3,885,830          |       | $                 | 14,621,000 |                   | $          | 17,379,000 |       | $ | 32,000,000 |   |

See accompanying notes tocondensed consolidated financial statements*.*

5

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**Summa Industries**CONDENSEDCONSOLIDATED STATEMENTS OF CASH FLOWS(unaudited)
| ** **                                                                         | ** ** | **Nine months ended  May 31, 2005** | ** ** | **Nine months ended  May 31, 2006** | ** ** |
|------------------------------------------------------------------------------------|------------|---------------------------------------------------------|------------|---------------------------------------------------------|------------|
| Operating  activities:                                                             |       |                                                    |       |                                                    |       |
| Net income                                                                         |       | $                                                       | 1,394,000  |                                                    | $          | 2,276,000 |   |
| Adjustments to  reconcile net income to net cash provided by operating activities: |       |                                                    |       |                                                    |       |
| Depreciation                                                                       |       | 3,887,000                                               |       | 3,465,000                                               |       |
| Amortization                                                                       |       | 204,000                                                 |       | 131,000                                                 |       |
| Deferred tax provision                                                             |       | —                                                  |       | (527,000                                                | )          |
| (Gain) on disposition of property, plant and  equipment                            |       | (33,000                                                 | )          | (302,000                                                | )          |
| Minority interest in net loss of subsidiary                                        |       | (50,000                                                 | )          | (41,000                                                 | )          |
| Stock-based compensation                                                           |       | —                                                  |       | 100,000                                                 |       |
| Net changes in assets and liabilities:                                             |       |                                                    |       |                                                    |       |
| Accounts receivable                                                                |       | (534,000                                                | )          | (1,817,000                                              | )          |
| Inventories                                                                        |       | (889,000                                                | )          | (3,364,000                                              | )          |
| Prepaid expenses and other assets                                                  |       | (153,000                                                | )          | (67,000                                                 | )          |
| Accounts payable                                                                   |       | 821,000                                                 |       | 1,197,000                                               |       |
| Accrued liabilities                                                                |       | (1,799,000                                              | )          | 2,041,000                                               |       |
| Total adjustments                                                                  |       | 1,454,000                                               |       | 816,000                                                 |       |
| Net cash provided by operating activities                                          |       | 2,848,000                                               |       | 3,092,000                                               |       |
| Investing  activities:                                                             |       |                                                    |       |                                                    |       |
| Purchases of  property and equipment                                               |       | (6,166,000                                              | )          | (2,644,000                                              | )          |
| Proceeds from  sale of property and equipment                                      |       | 1,138,000                                               |       | 4,272,000                                               |       |
| Proceeds from  sale of note receivable                                             |       | —                                                  |       | 2,280,000                                               |       |
| Proceeds from  sale of business                                                    |       | —                                                  |       | 300,000                                                 |       |
| Net cash provided by (used in) investing activities                                |       | (5,028,000                                              | )          | 4,208,000                                               |       |
| Financing  activities:                                                             |       |                                                    |       |                                                    |       |
| Net proceeds  from line of credit                                                  |       | 481,000                                                 |       | 99,000                                                  |       |
| Proceeds from  issuance of long-term debt                                          |       | 6,231,000                                               |       | 2,952,000                                               |       |
| Payments on  long-term debt                                                        |       | (4,235,000                                              | )          | (8,673,000                                              | )          |
| Proceeds from  the exercise of stock options, net                                  |       | —                                                  |       | 239,000                                                 |       |
| Purchases of  common stock                                                         |       | (278,000                                                | )          | (764,000                                                | )          |
| Payments of cash  dividends                                                        |       | (240,000                                                | )          | (706,000                                                | )          |
| Net cash provided by (used in) financing activities                                |       | 1,959,000                                               |       | (6,853,000                                              | )          |
| Net increase  (decrease) in cash and cash equivalents                              |       | (221,000                                                | )          | 447,000                                                 |       |
| Cash and cash  equivalents, beginning of period                                    |       | 1,248,000                                               |       | 1,233,000                                               |       |
| Cash and cash  equivalents, end of period                                          |       | $                                                       | 1,027,000  |                                                    | $          | 1,680,000 |   |

See accompanyingnotes to condensed consolidated financial statements.

 

6

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**Summa IndustriesNOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS**(unaudited)May 31, 2006

 

**1.             Basis of presentation**

 

The accompanying unaudited condensed consolidated financial statementsof Summa Industries (the “Company”) have been condensed in certain respects andshould, therefore, be read in conjunction with the audited consolidatedfinancial statements and notes related thereto contained in the Company’sAnnual Report on Form 10-K for the year ended August 31, 2005. Inthe opinion of the Company, these financial statements contain all adjustmentsnecessary for a fair presentation for the interim period, all of which werenormal recurring adjustments. The results of operations for the three month andnine month periods ended May 31, 2006 are not necessarily indicative ofthe results to be expected for the full year ending August 31, 2006.

 

**Recent accounting pronouncements**

 

In December 2004, the Financial Accounting StandardsBoard (“FASB”) issued Statement of Financial Accounting Standards (“SFAS”) No. 123R,“Share-Based Payments,” which requires companies to recognize in the incomestatement the grant-date fair value of stock options and equity-basedcompensation issued to employees. Prior to its adoption in the first quarter offiscal 2006, the Company reported equity based compensation in accordance withAccounting Principles Board (“APB”) Opinion No. 25 and FinancialInterpretation No. 44, and accordingly, no compensation expense wasrecognized in the financial statements prior to September 1, 2005. The proforma effect of equity-based compensation under SFAS No. 123, “Accountingfor Stock-Based Compensation,” for the period prior to the adoption of SFAS No. 123Rand the expense charged to earnings since its adoption are disclosed in Note 5,below.

 

In June 2005, the FASB issued SFAS No. 154, “AccountingChanges and Error Corrections, a Replacement of APB No. 20 and FAS No.3”.SFAS No. 154 provides guidance on the accounting for and reporting ofaccounting changes and error calculations. It establishes, unlessimpracticable, retrospective application as the required method for reporting a change in accountingprinciple in the absence of explicit transition requirements specific to thenewly adopted accounting principle. SFAS No. 154 also provides guidancefor determining whether retrospectiveapplication is impracticable. The correction of an error in previously issuedfinancial statements is not an accounting change. However, the reporting of anerror correction involves adjustments to previously issued financial statementssimilar to those generally applicable to reporting an accounting change retrospectively. Therefore, the reporting of a correction of anerror by restating previously issued financial statements is also addressed bySFAS No. 154. The Company adopted the provisions of SFAS No. 154effective March 1, 2006. The adoption did not have an impact on theCompany’s financial position or results of operations.

 

InOctober 2005, the FASB issued Staff Position Financial Accounting Standard(“FAS”) 13-1, “Accounting for Rental Costs Incurred during a ConstructionPeriod,” (FAS 13-1) which requires rental costs associated with ground orbuilding operating leases that are incurred during a construction period to berecognized as rental expense. The Companyadopted the provisions of FAS 13-1 effective March 1, 2006. Theadoption did not have an impact on the Company’s financial position or resultsof operations.

 

7

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**2.             Inventories**

 

Inventories were asfollows:

 

|                      | ** ** | **May 31, 2005** | ** ** | **August 31, 2005** | ** ** | **May 31, 2006** | ** ** |
|----------------------|------------|----------------------------|------------|-------------------------------|------------|----------------------------|------------|
|                 |       |                       |       |                          |       |                       |       |
| Finished goods       |       | $                          | 7,600,000  |                          | $          | 6,097,000                  |       | $ | 7,446,000 |   |
| Work in process      |       | 207,000                    |       | 199,000                       |       | 299,000                    |       |
| Materials and  parts |       | 7,831,000                  |       | 6,369,000                     |       | 8,284,000                  |       |
|                 |       |                       |       |                          |       |                       |       |
|                 |       | $                          | 15,638,000 |                          | $          | 12,665,000                 |       | $ | 16,029,000 |   |

 

**3.             Assets held for sale**

 

The net bookvalues of assets held for sale were:

 

|                                             | ** ** | **August 31, 2005** | ** ** | **May 31, 2006** | ** ** |
|---------------------------------------------|------------|-------------------------------|------------|----------------------------|------------|
|                                        |       |                          |       |                       |       |
| Vacant real  estate                         |       | $                             | 2,373,000  |                       | $          | 1,961,000 |   |
| Machinery &  equipment             |       | 85,000                        |       | —                     |       |
| Working capital  of discontinued operations |       | 2,361,000                     |       | —                     |       |
|                                        |       |                          |       |                       |       |
| Total assets held for  sale                 |       | $                             | 4,819,000  |                       | $          | 1,961,000 |   |

 

Theworking capital of discontinued operations at August 31, 2005 was net ofliabilities held for sale of $1,280,000. See Note 6 below.

 

**4.             Earnings per share**

 

Basic earnings per share (“EPS”) was computed by dividing net income bythe weighted average number of common shares outstanding during each period.

 

Diluted EPS reflects the potential dilution that could occur ifsecurities or other contracts to issue common stock were exercised or convertedinto common stock. Diluted EPS was calculated using the “treasury stock” methodas if dilutive options had been exercised and the funds were used to purchasecommon shares at the average market price during the period. Options topurchase 773,000 shares of common stock as of May 31, 2005 and 410,000shares of common stock as of May 31, 2006 were excluded from thecalculation of equivalent shares, as they would have been anti-dilutive.

 

The following is a reconciliation of the numerators and denominators ofthe basic and diluted EPS computations for “income available to commonstockholders” and other disclosures required by FASB Statement of AccountingStandards No. 128, “Earnings per Share”:

 

|                                                                        | ** ** | **Three months ended May 31** | ** ** | **Nine months ended May 31** | ** ** |
|------------------------------------------------------------------------|------------|---------------------------------------------------|------------|--------------------------------------------------|------------|
| ** **                                                             | ** ** | **2005**                                          | ** ** | **2006**                                         | ** ** | **2005** | ** ** | **2006** | ** ** |
| Numerators:                                                            |       |                                              |       |                                             |       |   |   |   |   |
|                                                                   |       |                                              |       |                                             |       |   |   |   |   |
| Net income                                                             |       | $                                                 | 508,000    |                                             | $          | 927,000 |   | $ | 1,394,000 |   | $ | 2,276,000 |   |
|                                                                   |       |                                              |       |                                             |       |   |   |   |   |
| Denominators:                                                          |       |                                              |       |                                             |       |   |   |   |   |
|                                                                   |       |                                              |       |                                             |       |   |   |   |   |
| Weighted average  shares outstanding- basic                            |       | 3,984,000                                         |       | 3,895,000                                        |       | 3,990,000 |   | 3,905,000 |   |
| Impact of common shares assumed to be issued under  stock option plans |       | 54,000                                            |       | 55,000                                           |       | 70,000 |   | 38,000 |   |
| Weighted average shares  outstanding- diluted                          |       | 4,038,000                                         |       | 3,950,000                                        |       | 4,060,000 |   | 3,943,000 |   |
|                                                                        |            |                                                   |            |                                                  |            |  |  |  |  |  |  |  |  |

 

8

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**5.            ****Stock-based compensation**

 

Effective September 1, 2005, the Company adopted SFAS No. 123R,“Share-Based Payment,” which revised SFAS No. 123, “Accounting forStock-Based Compensation”, and superseded Accounting Principals Board Opinion (“APB”)No. 25 “Accounting for Stock Issued to Employees”, and its relatedinterpretations. SFAS 123R requires that new, modified and unvested share-basedpayment transactions with employees, such as stock options, be recognized inthe financial statements based on their fair value and recognized ascompensation expense over the vesting period.  The Company has elected to use the modifiedprospective method, under which previously reported financial results are notrestated to reflect the stock-based compensation formerly recognized in therequired pro forma footnote disclosures.

 

The Company deemed it to be in the best interests of the Company andits stockholders to minimize the compensation expense that would be required tobe recognized under SFAS No. 123R for “out-of -the-money” or “underwater”stock options. Consequently, in the fiscal year ended August 31, 2005, theCompany accelerated the vesting of most of the then outstanding stock optionsthat contained exercise prices greater than the market trading price at thattime. As a result of this early vesting, employee compensation expense of$380,000, net of tax, was recognized in the pro forma footnote disclosure forthe year ended August 31, 2005 and will not be recognized in the reportedresults of operations in the periods following the adoption of SFAS No. 123R.

 

As a result of adopting SFAS 123R, the Company recognized compensationexpense for stock options of $19,000 in the three month period ended May 31,2006 and $ 62,000 in the nine month period ended May 31, 2006, net of taxbenefit. Prior to the adoption of SFAS 123R, the Company applied the provisionsof APB No. 25 and Financial Interpretation No. 44. Consequently, nocompensation expense was recognized for stock options in the three-month andnine-month periods ended May 31, 2005.

 

The following table illustrates the effect on net earnings and netearnings per share if the Company had applied the fair value recognitionprovisions of SFAS No. 123 as of September 1, 2004. The fair valueestimate was computed using the Black-Scholes option pricing model.

 

|                                                                                              | ** ** | **Three months ended** | ** ** | **Nine months ended** | ** ** |
|----------------------------------------------------------------------------------------------|------------|----------------------------------|------------|---------------------------------|------------|
| ** **                                                                                   | ** ** | **May 31, 2005**       | ** ** | **May 31, 2005**      | ** ** |
| Net income                                                                                   |       | $                                | 508,000    |                            | $          | 1,394,000 |   |
| Share-based  compensation included in net income                                             |       | —                           |       | —                          |       |
| Pro forma impact  of expensing stock options net of the effect of tax of $42,000 and $22,000 |       | 41,000                           |       | 35,000                          |       |
|                                                                                         |       | $                                | 467,000    |                            | $          | 1,359,000 |   |
|                                                                                         |       |                             |       |                            |       |
| Earnings per  share:                                                                         |       |                             |       |                            |       |
|                                                                                         |       |                             |       |                            |       |
| As reported:                                                                                 |       |                             |       |                            |       |
| Basic                                                                                        |       | $                                | .13        |                            | $          | .35 |   |
| Diluted                                                                                      |       | $                                | .13        |                            | $          | .34 |   |
|                                                                                         |       |                             |       |                            |       |
| Pro forma:                                                                                   |       |                             |       |                            |       |
| Basic                                                                                        |       | $                                | .12        |                            | $          | .34 |   |
| Diluted                                                                                      |       | $                                | .12        |                            | $          | .33 |   |

 

**6.             Discontinued operations**

 

In September 2005, the Company sold certain assets and liabilitiesof its former Electrical Components segment at their book value to an investorgroup for $300,000 cash and a $2,280,000 note due in August 2006, andleased related equipment and facilities to the investor group for five years.In February 2006, the Company sold the note, the leased fixed assets andsubstantially all of the remaining assets of the segment, other than realestate, for $5,698,000, the aggregate book value. The proceeds were used to payoff related equipment financing and other debt. Additional assets, principallyreal estate located in Illinois, are reported in assets held for sale. Thefinancial results which were formerly reported as the Electrical Componentssegment have been excluded from results of operations for the periods presentedherein and have been presented as a discontinued operation.

 

9

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**7.             Supplemental cash flow information**

 

|                                         | ** ** | **Nine months ended May 31** | ** ** |
|-----------------------------------------|------------|--------------------------------------------------|------------|
| ** **                              | ** ** | **2005**                                         | ** ** | **2006** | ** ** |
| Cash paid during  the period:           |       |                                             |       |   |   |
| Interest                                |       | $                                                | 1,312,000  |   | $ | 1,564,000 |   |
| Income taxes                            |       | $                                                | 1,559,000  |   | $ | 1,112,000 |   |
|                                    |       |                                             |       |   |   |
| Non-cash  financing activity:           |       |                                             |       |   |   |
| Common stock issued to 401(k) Plan |       | $                                                | 261,000    |   | $ | — |   |
| Dividend  declared                      |       | $                                                | —     |   | $ | (233,000) |   |

 

**8*.*             Segment information**

 

The Company has threereportable segments identified by differences in products and distributionchannels. The accounting policies of the segments are the same as thosedescribed in the summary of significant accounting polices described in theCompany’s Annual Report on Form 10-K for the year ended August 31,2005. The primary measure of each reportable segment’s profit used by theCompany to assess performance and allocate resources is operating income. TheCompany’s operations are reported in the following business segments:

 

***OpticalComponents.***In its Optical Components segment, Summadesigns and manufactures plastic prismatic lenses, reflectors and diffusers andother plastic products, which are used in commercial and industrial lightingfixtures and other applications.

 

***MaterialHandling Components.***In its Material Handling Componentssegment, Summa designs and manufactures engineered plastic components, whichform conveyer belts and chains and other plastic products for use in foodprocessing.

 

***IrrigationComponents.*** In itsIrrigation Components segment, Summa designs and manufactures plasticinjection-molded fittings, micro-sprinklers, emitters, valves, filters andaccessories, extruded tubing and other plastic products for drip irrigationsystems used in agriculture, commercial landscape and other applications.

 

Formerly, the Companyalso operated in an Electrical Components segment which was discontinued in thefirst quarter of fiscal 2006 and has been reported as discontinued operationsat August 31, 2005 and for the periods ended May 31, 2005 and May 31,2006.

 

10

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Financial information byreportable business segment follows:

 
| ** **                                                                   | ** ** | **Three months ended May 31** | ** ** | **Nine months ended May 31** | ** ** |
|------------------------------------------------------------------------------|------------|---------------------------------------------------|------------|--------------------------------------------------|------------|
| ** **                                                                   | ** ** | **2005**                                          | ** ** | **2006**                                         | ** ** | **2005** | ** ** | **2006** | ** ** |
| External sales                                                               |       |                                              |       |                                             |       |   |   |   |   |
| Optical components                                                           |       | $                                                 | 13,151,000 |                                             | $          | 14,232,000 |   | $ | 41,019,000 |   | $ | 42,728,000 |   |
| Material handling components                                                 |       | 7,259,000                                         |       | 7,770,000                                        |       | 19,874,000 |   | 21,482,000 |   |
| Irrigation components                                                        |       | 8,398,000                                         |       | 8,405,000                                        |       | 20,089,000 |   | 21,447,000 |   |
| Consolidated                                                                 |       | $                                                 | 28,808,000 |                                             | $          | 30,407,000 |   | $ | 80,982,000 |   | $ | 85,657,000 |   |
|                                                                         |       |                                              |       |                                             |       |   |   |   |   |
| Inter-segment  sales                                                         |       |                                              |       |                                             |       |   |   |   |   |
| Optical components                                                           |       | $                                                 | 32,000     |                                             | $          | 4,000 |   | $ | 341,000 |   | $ | 38,000 |   |
| Material handling components                                                 |       | —                                            |       | —                                           |       | — |   | — |   |
| Irrigation components                                                        |       | —                                            |       | —                                           |       | — |   | — |   |
| Other                                                                        |       | (32,000                                           | )          | (4,000                                           | )          | (341,000 | ) | (38,000 | ) |
| Consolidated                                                                 |       | $                                                 | —     |                                             | $          | — |   | $ | — |   | $ | — |   |
|                                                                         |       |                                              |       |                                             |       |   |   |   |   |
| Total sales                                                                  |       |                                              |       |                                             |       |   |   |   |   |
| Optical components                                                           |       | $                                                 | 13,183,000 |                                             | $          | 14,236,000 |   | $ | 41,360,000 |   | $ | 42,766,000 |   |
| Material handling components                                                 |       | 7,259,000                                         |       | 7,770,000                                        |       | 19,874,000 |   | 21,482,000 |   |
| Irrigation components                                                        |       | 8,398,000                                         |       | 8,405,000                                        |       | 20,089,000 |   | 21,447,000 |   |
| Other                                                                        |       | (32,000                                           | )          | (4,000                                           | )          | (341,000 | ) | (38,000 | ) |
| Consolidated                                                                 |       | $                                                 | 28,808,000 |                                             | $          | 30,407,000 |   | $ | 80,982,000 |   | $ | 85,657,000 |   |
|                                                                         |       |                                              |       |                                             |       |   |   |   |   |
| Operating income  (loss)                                                     |       |                                              |       |                                             |       |   |   |   |   |
| Optical components                                                           |       | $                                                 | 808,000    |                                             | $          | 868,000 |   | $ | 3,318,000 |   | $ | 3,580,000 |   |
| Material handling components                                                 |       | 976,000                                           |       | 1,305,000                                        |       | 2,056,000 |   | 3,100,000 |   |
| Irrigation components                                                        |       | 579,000                                           |       | 392,000                                          |       | 997,000 |   | 878,000 |   |
| Other                                                                        |       | (621,000                                          | )          | (575,000                                         | )          | (1,557,000 | ) | (1,916,000 | ) |
| Consolidated                                                                 |       | 1,742,000                                         |       | 1,990,000                                        |       | 4,814,000 |   | 5,642,000 |   |
| Interest expense                                                             |       | 407,000                                           |       | 534,000                                          |       | 1,124,000 |   | 1,506,000 |   |
| Income from  continuing operations before income taxes and minority interest |       | $                                                 | 1,335,000  |                                             | $          | 1,456,000 |   | $ | 3,690,000 |   | $ | 4,136,000 |   |

 

|                              | ** ** | **May 31, 2005** | ** ** | **August 31, 2005** | ** ** | **May 31, 2006** | ** ** |
|------------------------------|------------|----------------------------|------------|-------------------------------|------------|----------------------------|------------|
| Assets                       |       |                       |       |                          |       |                       |       |
| Optical components           |       | $                          | 28,844,000 |                          | $          | 28,668,000                 |       | $ | 29,975,000 |   |
| Material handling components |       | 22,394,000                 |       | 23,270,000                    |       | 25,654,000                 |       |
| Irrigation components        |       | 15,473,000                 |       | 13,046,000                    |       | 13,388,000                 |       |
| Assets held for sale         |       | —                     |       | 6,099,000                     |       | 1,961,000                  |       |
| Other                        |       | 15,731,000                 |       | 8,952,000                     |       | 6,498,000                  |       |
|                         |       |                       |       |                          |       |                       |       |
| Consolidated                 |       | $                          | 82,442,000 |                          | $          | 80,035,000                 |       | $ | 77,476,000 |   |

 

Interest expense andincome taxes are not shown in the preceding table, as they are not fully allocatedby segment. “Other” operating income (loss) primarily includes corporateadministrative expenses and the net expense of non-segment related real estateleased or held for sale. “Other” assets primarily includes cash, deferred taxassets and retained, leased real estate of the former Electrical Componentssegment.

 

**MANAGEMENT’SDISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS**

 

Statements contained inthis Quarterly Report on Form 10-Q, which are not purely historical,are forward-looking statements within the meaning of Section 27A of theSecurities Act of 1933 and Section 21E of the Securities Exchange Act of1934, including but not limited to statements regarding Summa’s expectations,hopes, beliefs, intentions or strategies regarding the future, such as thoseset forth in Part II, Item 1 “Legal Proceedings” below. Actual resultscould differ materially from those projected in any forward-looking statementsas a result of a number of factors, including those detailed in this “Management’sDiscussion and Analysis” section and elsewhere herein and in the Company’s

 

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Annual Report onForm 10-K for the fiscal year ended August 31, 2005. Theforward-looking statements are made as of the date hereof, and the Companyassumes no obligation to update the forward-looking statements, or to updatethe reasons why actual results could differ materially from those projected inthe forward-looking statements. For a discussion of risks and uncertaintiesthat should be considered and which could materially adversely affect theCompany, please see “Risk Factors” in the “Management Discussion and Analysis”section of the Company’s Annual Report on Form 10-K for the fiscalyear ended August 31, 2005.

Summa manufacturesplastic products for diverse commercial and industrial markets. Through itsthree reportable segments, Summa designs and manufactures injection-molded andformed plastic optical components for OEM customers in the lighting industry;modular plastic conveyor belt and chain for the food processing industry;engineered plastic fittings, micro-sprinklers, emitters, valves, filters andtubing for irrigation systems used in agriculture, commercial landscape andother applications; and other molded and extruded plastic components fordiverse industries.

***Resultsof Operations***

The followingtable sets forth certain information regarding continuing operations, derivedfrom Summa’s unaudited condensed consolidated statements of income, as apercent of sales for the three month and nine month periods ended May 31,2005 and May 31, 2006, and the Company’s effective income tax rate duringthose periods:

|                                          | ** ** | **Three months ended May 31** | ** ** | **Nine months ended May 31** | ** ** |
|------------------------------------------|------------|---------------------------------------------------|------------|--------------------------------------------------|------------|
| ** **                               | ** ** | **2005**                                          | ** ** | **2006**                                         | ** ** | **2005** | ** ** | **2006** | ** ** |
| Net sales                                |       | 100.0                                             | %          | 100.0                                            | %          | 100.0 | % | 100.0 | % |
| Cost of sales                            |       | 77.0                                              | %          | 76.4                                             | %          | 76.5 | % | 76.0 | % |
|                                     |       |                                              |       |                                             |       |   |   |   |   |
| Gross profit                             |       | 23.0                                              | %          | 23.6                                             | %          | 23.5 | % | 24.0 | % |
| S,G & A  and other expenses     |       | 17.0                                              | %          | 17.1                                             | %          | 17.6 | % | 17.6 | % |
| (Gain) on sale  of real estate           |       | —                                            | %          | —                                           | %          | (0.1 | )% | (0.2 | )% |
| Operating income                         |       | 6.0                                               | %          | 6.5                                              | %          | 5.9 | % | 6.6 | % |
| Interest  expense, net                   |       | 1.4                                               | %          | 1.7                                              | %          | 1.4 | % | 1.8 | % |
| Income before  tax and minority interest |       | 4.6                                               | %          | 4.8                                              | %          | 4.6 | % | 4.8 | % |
|                                     |       |                                              |       |                                             |       |   |   |   |   |
| Effective tax rate                       |       | 35.1                                              | %          | 36.6                                             | %          | 35.4 | % | 36.2 | % |

 

**Quarterended May 31, 2006 compared to the quarter ended May 31, 2005**

Sales for thethird quarter, ended May 31, 2006, increased by $1,599,000, or 6%, from$28,808,000 to $30,407,000, primarily due to the effects of price increases(approximately $900,000), new projects and market growth, partially offset byintentionally discontinued unprofitable business (approximately $300,000).Sales in the Optical Components segment increased by $1,081,000, or 8%, from$13,151,000 to $14,232,000, primarily due to new business, and price increases(approximately $300,000), partially offset by softness in demand for high-bay,high intensity lighting products. Sales in the Material Handling Componentssegment increased $511,000, or 7%, from $7,259,000 to $7,770,000, primarily dueto price increases (approximately $600,000), offset by lower unit sales as aresult of timing of purchases by a strategic distributor who relocated theiroperations during the quarter. Sales in the Irrigation Components segment werevirtually unchanged at $8,405,000, due to 4% unit sales growth offset by a 4%decrease due to intentionally discontinued unprofitable business (approximately$300,000). Record rainfall in California delayed the agricultural plantingseason that normally peaks in the third fiscal quarter. Sales growth istherefore anticipated in the Irrigation Components segment in the fourthquarter.

Cost of sales for thethird quarter, ended May 31, 2006, increased by $1,039,000, or 5%, from$22,178,000 to $23,217,000, primarily due to increased volume, manufacturinginefficiencies, an unfavorable change in sales mix and higher resin costs. Costof sales in the Optical Components segment increased by $1,079,000, or 10%,from $10,703,000 to $11,782,000, primarily due to increased volume,manufacturing inefficiencies, sales mix and higher resin costs. Cost of salesin the Material Handling Components segment decreased by $156,000, or 3%, from$4,769,000 to $4,613,000, primarily due to improved efficiency in themanufacturing process and supply chain related to recent productivityinvestments and benefits of the previous facility consolidation. Cost of salesin the Irrigation Components segment increased $134,000 primarily due tomanufacturing inefficiencies and an unfavorable change in sales mix.

 

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Gross profit forthe third quarter increased $560,000, or 8%, from $6,630,000 to $7,190,000,from the comparable prior year period, primarily due to increased sellingprices, partially offset by increased cost of sales as described above. Grossmargin increased from 23.0% to 23.6%, primarily due the effects of higherselling prices, partially offset by increased cost of sales. Gross profit inthe Optical Components segment was virtually unchanged at $2,450,000. Increasedsales were offset by increased cost of sales due to higher volume, increasedraw material costs, sales mix and manufacturing inefficiencies. Gross margin inthe Optical Components segment decreased from 18.6% to 17.2%. Gross profit inthe Material Handling Components segment increased $667,000, or 27%, from$2,490,000 to $3,157,000, primarily due to price increases and manufacturingefficiency improvements. Gross margin in the Material Handling Componentssegment increased from 34.3% to 40.6%. Gross profit in the IrrigationComponents segment decreased $127,000, or 8%, from $1,678,000 to $1,551,000,primarily due to the change in cost of sales described above. Gross margin inthe Irrigation Components segment decreased from 20.0% to 18.5%.

Operating expensesfor the third quarter increased $312,000, or 6%, from the comparable prior yearperiod, despite the benefit of $202,000 from partial collection of a fullyreserved note receivable, due to increased variable selling and variablecompensation expense, unusually high recruiting expense, stock-basedcompensation and increased accounting fees, partially offset by management costreduction initiatives. As a percent of sales, operating expenses increasedslightly from 17.0% to 17.1%. Operating expenses in the Optical Componentssegment decreased $58,000, or 4%, from $1,640,000 to $1,582,000, primarily dueto cost reduction initiatives. Operating expenses in the Material HandlingComponents segment increased $338,000, or 22%, from $1,514,000 to $1,852,000,primarily due to increased variable selling and variable compensation expenseand unusually high recruiting expense of $97,000. Operating expenses in theIrrigation Components segment increased $60,000, or 5%, from $1,099,000 to$1,159,000, primarily due to increased variable compensation expense andrecruiting costs.

Operating incomefor the third quarter was $1,990,000, which was $248,000, or 14%, higher thanin the comparable prior year period. Operating margin for the quarter increasedfrom 6.0% in the third quarter of fiscal 2005 to 6.5% in the third quarter offiscal 2006, due to the factors discussed above. Operating income in theOptical Components segment increased $60,000, from $808,000 to $868,000.Operating margin in the Optical Components segment was unchanged at 6.1%.Operating income in the Material Handling Components segment increased $329,000from $976,000 to $1,305,000. Operating margin in the Material HandlingComponents segment increased from 13.4% to 16.8%. Operating income in theIrrigation Components segment decreased $187,000, from $579,000 to $392,000.Operating margin in the Irrigation Components segment decreased from 6.9% to4.7%.

Net interestexpense for the quarter ended May 31, 2006 was $534,000, $127,000 higherthan in the prior year third quarter, primarily due to the effects of higheraverage interest rates in the most recent period, partially offset by loweraverage debt levels during the most recent quarter. The weighted averageinterest rate was 6.4% on $25.0 million in debt at May 31, 2006, versus5.1% on $33.3 million in debt a year earlier.

The provision forincome taxes in the third quarter of fiscal 2006 was $533,000, $64,000 higherthan in the prior year third quarter, due to higher income before taxes and ahigher tax rate. The effective income tax rate was 36.6% in the most recentquarter versus 35.1% a year earlier, due to the distribution of business amongvarious tax jurisdictions.

**Ninemonths ended May 31, 2006 compared to the nine months ended May 31,2005**

Sales for the ninemonths ended May 31, 2006 increased $4,675,000, or 6%, from $80,982,000 to$85,657,000, primarily due to price increases (approximately $3,300,000) andincreases in unit sales, partially offset by intentionally eliminatedunprofitable sales (approximately $600,000). Sales in the Optical Componentssegment increased by $1,709,000, or 4%, from $41,019,000 to $42,728,000,primarily due to price increases (approximately $1,500,000). Sales in theMaterial Handling Components segment increased by $1,608,000, or 8%, from$19,874,000 to $21,482,000 primarily due to strength in core markets and priceincreases (approximately $800,000). Sales in the Irrigation Components segmentincreased by $1,358,000, or 7%, from $20,089,000 to $21,447,000, primarily dueto price increases (approximately $1,000,000), increased sales to existingcustomers and favorable market conditions, partially offset by intentionallyeliminated unprofitable sales (approximately $600,000).

Cost of sales for thenine months, ended May 31, 2006, increased by $3,160,000, or 5%, from$61,968,000 to $65,128,000, primarily due to increased volume, manufacturinginefficiencies, sales mix and higher resin costs. Cost of sales in the OpticalComponents segment increased by $1,670,000, or 5%, from $32,909,000 to$34,579,000, primarily due to higher resin costs, manufacturing inefficienciesand sales mix. Cost of sales in the Material Handling Components segmentincreased by just $28,000, or 0.2%, from $13,220,000 to $13,248,000, primarilydue to improved efficiency in the manufacturing process and supply chainrelated to recent productivity investments and benefits of the

 

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previous facilityconsolidation. Cost of sales in the Irrigation Components segment increased$1,345,000, or 8%, primarily due to a change in sales mix and increased salesvolume.

Gross profit forthe nine months ended May 31, 2006 increased by $1,515,000, or 8%, from$19,014,000 to $20,529,000, primarily due to increased sales. Gross marginincreased from 23.5% to 24.0%, primarily due to the effects of higher sellingprices, partially offset by higher resin costs. Gross profit in the Optical Componentssegment was virtually unchanged at $8,149,000. Increased sales were offset byincreased cost of sales due to volume, higher raw material costs, sales mix andmanufacturing inefficiencies. Gross margin in the Optical Components segmentdecreased from 19.6% to 19.1%**.**Gross profitin the Material Handling Components segment increased $1,580,000, or 24%, from$6,654,000 to $8,234,000, primarily due to price increases and manufacturingefficiency improvements. Gross margin in the Material Handling Componentssegment increased from 33.5% to 38.3%. Gross profit in the IrrigationComponents segment was virtually unchanged at $4,154,000, primarily due to dueto the change in cost of sales described above. Gross margin in the IrrigationComponents segment decreased from 20.6% to 19.4%.

Operating expensesfor the nine months ended May 31, 2006 increased $687,000, or 5%, from$14,200,000 to $14, 887,000, primarily due to increased variable sales expenseand variable compensation expense, unusually high recruiting and consultingexpense in the most recent nine month period and the inclusion of stock basedcompensation in the most recent nine month period, partially offset by a highergain from the sale of excess real estate in the most recent nine month period andmanagement cost reduction initiatives. As a percent of sales, operatingexpenses were virtually unchanged at 17.4%. Operating expenses in the OpticalComponents segment decreased $223,000, or 5%, from $4,792,000, to $4,569,000,primarily due to a gain on the sale of real estate in the most recent period of$205,000. Operating expenses in the Material Handling Components segmentincreased $536,000, or 12%, from $4,598,000 to $5,134,000, primarily due toincreased variable selling and variable compensation expense and unusually highrecruiting expense. Operating expenses in the Irrigation Components segmentincreased $132,000, or 4%, from $3,144,000 to $3,276,000, primarily due toincreased variable compensation expense and recruiting costs.

Operating incomefor the nine months ended May 31, 2006, including a gain on sales of realestate which was $162,000 greater than in the prior year nine month period, was$5,642,000, which was $828,000, or 17%, higher than in the comparable prioryear period. Operating margin increased to 6.6% in the nine months endedMay 31, 2006 from 5.9% in the comparable prior year period, due to thefactors discussed above. Operating income in the Optical Components segmentincreased $262,000, primarily due to a gain of $205,000 on the sale of anexcess building, implementation of price increases and management costreduction initiatives, partially offset by increased material costs andunusually high recruiting and consulting expenses. Operating margin in theOptical Components segment increased from 8.0% to 8.4%. Operating income in theMaterial Handling Components segment increased $1,044,000, primarily due to theeffects of higher sales volume and continuing benefits of a previous facilityconsolidation, partially offset by unusually high recruiting costs. Operatingmargin in the Material Handling Components segment increased from 10.3% to14.4%. Operating income in the Irrigation Components segment decreased$119,000, primarily due to several operational issues in the most recent quarterand higher recruiting costs, partially offset by the effects of higher salesvolume. Operating margin in the Irrigation Components segment decreased from5.0% to 4.1%.

Net interestexpense for the nine months ended May 31, 2006 was $1,506,000, $382,000higher than in the comparable prior year period, due to the effects of higheraverage interest rates in the most recent period and note prepayment costsrelated to the previously reported sale of the assets of the former ElectricalComponents segment, partially offset by lower average debt levels during themost recent period.

The provision forincome taxes for the nine months ended May 31, 2006 was $1,496,000,$191,000 higher than in the comparable prior year period, due to higher incomebefore taxes. The effective income tax rate was 36.2% in the most recent ninemonth period versus 35.4% a year earlier, due to the distribution of businessamong various tax jurisdictions.

The Company’sbacklog of unfilled orders, believed to be firm, was $6,795,000 at May 31,2005, $5,592,000 at August 31, 2005 and $7,703,000 at May 31, 2006.Because the time between entering an order and shipping the product andrecording a sale is typically shorter than one month, backlog levels are not areliable indicator of future sales volume.

***Liquidity and Capital Resources***

*Working Capital.*TheCompany’s working capital was $19,805,000 at May 31, 2005; $19,075,000 atAugust 31, 2005 and $7,440,000 at May 31, 2006. Working capital was$11,635,000 lower at the end of the third quarter than at August 31, 2005primarily because borrowings of $12,282,000 on a bank line of credit werereported as a current liability at May 31, 2006, as it is due to mature in2007, whereas the balance of the bank line was previously reported as long termdebt.

 

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The Company is currentlynegotiating a renewal of the line of credit. Offsetting factors which affectedworking capital were an increase in accounts receivable and inventory, together$5,181,000, primarily related to increased sales, partially offset by anincrease in accounts payable and accrued liabilities, together $2,785,000, andfurther offset by a decrease in net assets held for sale of $2,361,000.

Summary of theCompany’s debt at May 31, 2006:
| ** **                        | ** ** | ** **  | ** ** | **Weighted ** | ** ** | ** **       | ** ** | ** **                    | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** **                    | ** ** |
|-----------------------------------|------------|-------------|------------|--------------------|------------|------------------|------------|-------------------------------|------------|------------|------------|------------|------------|------------|------------|-------------------------------|------------|
| ** **                        | ** ** | ** **  | ** ** | **Average**        | ** ** | ** **       | ** ** | ** **                    | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** **                    | ** ** |
| ** **                        | ** ** | ** **  | ** ** | **Interest**       | ** ** | **Additional**   | ** ** | ** **                    | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** **                    | ** ** |
| **Description of Debt** | ** ** | **Balance** | ** ** | **Rate**           | ** ** | **Availability** | ** ** | **Fiscal Year Due** | ** ** |
| ** **                        | ** ** | ** **  | ** ** | ** **         | ** ** | ** **       | ** ** | **2006**                      | ** ** | **2007**   | ** ** | **2008**   | ** ** | **2009**   | ** ** | **2010 and  thereafter** | ** ** |
| Revolving line of credit          |       | $           | 12,282,000 |               | 6.4        | %                | $          | 7,783,000                     |       | $          | —     |       | $          | 12,282,000 |       | $                             | —     |   | $ | — |   | $ | — |   |
| Bank term loan                    |       | 2,820,000   |       | 4.7                | %          | —           |       | 248,000                       |       | 1,022,000  |       | 1,071,000  |       | 479,000    |       | —                        |       |
| Real estate and other loans       |       | 9,865,000   |       | 6.6                | %          | —           |       | 152,000                       |       | 1,775,000  |       | 617,000    |       | 414,000    |       | 6,907,000                     |       |
| Total debt                        |       | $           | 24,967,000 |               | 6.4        | %                | $          | 7,783,000                     |       | $          | 400,000    |       | $          | 15,079,000 |       | $                             | 1,688,000  |   | $ | 893,000 |   | $ | 6,907,000 |   |

 

The interest rateon the bank term loan is fixed for five years. Interest rates on the bank lineof credit are subject to market fluctuation and are subject to reduction as theCompany achieves certain financial milestones. Interest rates on most of thereal estate and other loans are subject to market fluctuation.

*Sources and Uses of Funds*.Net cash provided by operating activities for the first nine months of fiscal2006 was $3,092,000, compared to $2,848,000 provided by operating activities inthe first nine months of fiscal 2005. The increase was primarily due to anincrease in net income partially offset by changes in the components of workingcapital. The increases in accounts receivable and inventory are primarilyseasonal and greater than last year due to sales growth. Inventory alsoincreased due to selected increases to improve customer service levels, theaccumulation of excess regrind at an extrusion plant, and sales growth and newproducts. The increase to accounts payable and accrued liabilities wasprimarily seasonal. Net cash of $4,208,000 was provided by investing activitiesin the first nine months of fiscal 2006, versus $5,028,000 used in investingactivities in the first nine months of fiscal 2005, primarily due tosubstantially higher proceeds from sales of assets in the current period thanin the prior period, the sale of the note receivable in the current period andan unusually large investment in a new facility in the prior period. Net cashof $6,853,000 was used in financing in the first nine months of fiscal 2006versus $1,959,000 provided in the first nine months of fiscal 2005. The changeprimarily represents retirement of debt in the most recent period, versus anincrease in debt in the prior period to finance construction of the newfacility. Additionally, the Company used $952,000 more in the current periodfor stock repurchases and dividends than in the prior year nine month period.

In October 2004, the Company announced a plan torepurchase up to $2,000,000 of its Common Stock with no time limit (the “2005Buy Back”). As of May 31, 2006, the status of the 2005 Buy Back was asfollows:

|                          | ** ** | **Shares ** | ** ** | **Average cost** | ** ** | **Repurchase** | ** ** |
|--------------------------|------------|------------------|------------|-----------------------|------------|----------------|------------|
| ** **               | ** ** | **repurchased**  | ** ** | **per share**    | ** ** | **cost**       | ** ** |
| Prior to March 2006 |       | 119,894          |       | $                     | 8.07       |           | $          | 967,000 |   |
|                     |       |             |       |                  |       |           |       |
| March 2006          |       | 13,175           |       | $                     | 8.76       |           | 115,000    |   |
| April 2006          |       | 9,000            |       | $                     | 9.83       |           | 89,000     |   |
| May 2006            |       | 11,623           |       | $                     | 9.69       |           | 113,000    |   |
| Total for the  quarter   |       | 33,798           |       | $                     | 9.36       |           | 317,000    |   |
|                     |       |             |       |                  |       |           |       |
| Total for the plan       |       | 153,692          |       | 8.35                  |       | $              | 1,284,000  |   |

 

The cost per share includes commissions where applicable.

Summa believesthat cash flows from operations and existing credit facilities will besufficient to fund working capital requirements, planned investments and debtservice for the next twelve months. In addition, funds may be generated from alimited number of sales of certain non-core assets of the Company. The Companyhas a strategy which includes growth by acquisition. In the event anacquisition plan is adopted which requires funds exceeding the availabilitydescribed above, an alternate source of funds to accomplish the acquisitionwould have to be developed. The Company

 

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has 10,000,000 shares of common stock authorized, of which 3,885,830shares were outstanding at May 31, 2006 and 5,000,000 shares of “blankcheck” preferred stock authorized, of which none was outstanding atMay 31, 2006. The Company could issue additional shares of common orpreferred stock or enter into new or revised borrowing arrangements to raisefunds.

### ***Off-Balance Sheet Arrangements***

TheCompany’s material off-balance sheet arrangements are as follows:

*FutureLease Payments.*The Company leases offices and manufacturingfacilities and certain equipment under non-cancelable operating leases. Futurepayments under these leases at May 31, 2006 are approximately as follows:

| Fiscal Year    | ** ** | **Amount** | ** ** |
|---------------------|------------|------------|------------|
| 2006                |       | $          | 285,000    |   |
| 2007                |       | $          | 986,000    |   |
| 2008                |       | $          | 858,000    |   |
| 2009                |       | $          | 612,000    |   |
| 2010                |       | $          | 18,000     |   |
| 2011 and thereafter |       | —     |       |

 

***CriticalAccounting Policies and Estimates***

The foregoing discussion and analysis of theCompany’s financial condition and results of operations are based upon theconsolidated financial statements of the Company, which have been prepared inaccordance with accounting principles generally accepted in the United Statesof America. The preparation of such financial statements requires management tomake estimates and assumptions in applying certain critical accountingpolicies. Certain accounting estimates are particularly sensitive because of theirsignificance to the Company’s consolidated financial statements and because ofthe possibility that future events affecting the estimates could differmarkedly from current expectations. The Company believes that the following aresome of the more critical judgment areas in the application of its accountingpolicies that affect the Company’s financial statements:

###### *Impairment of Long-Lived Assets and Long-Lived Assets to be Disposed of*. The Company reviews its long-lived assets andcertain identifiable intangibles for impairment whenever events or changes incircumstances indicate that the carrying amount of an asset may not berecoverable. Recoverability of assets to be held and used is measured by acomparison of the carrying amount of an asset to the undiscounted futureoperating cash flows expected to be generated by the asset. If such assets areconsidered to be impaired, the impairment to be recognized is measured by theamount by which the carrying amount of the assets exceeds the fair value of theassets. Assets to be disposed of by sale are reported at the lower of thecarrying amount or fair value less costs to sell.

The Company has a significant amount ofproperty and equipment and intangible assets. The determination as to whetherevents or changes in circumstances indicate that the carrying amount of anasset may not be recoverable involves management’s judgment. In addition,should the Company conclude that recoverability of an asset is in question, theestimate of undiscounted future operating cash flows to determine whether anasset is recoverable and, if not, the final determination of the fair value ofthe asset, is also based on the judgment of management. These judgments can beimpacted by a variety of underlying assumptions, such as the general businessclimate, effectiveness of competition and supply and cost of resources.Accordingly, actual results can differ significantly from the assumptions madeby management in making its estimates. Future changes in management’s estimatescould result in indicators of impairment and future impairment charges.

###### *Valuation of Inventory.* The Company values its inventories at the lower of cost or market usingthe first-in, first-out (FIFO) method. The Company records adjustments to thevalue of inventory based upon obsolescence and changes in market value aspermanent changes in the carrying amount of such inventory until its ultimatesale or other disposition. The Company has evaluated the current level ofinventories considering historical sales and other factors and, based on thisevaluation, has recorded adjustments to cost of goods sold to adjust inventoryto net realizable value. These adjustments are estimates, which could varysignificantly, either favorably or unfavorably, from actual requirements iffuture economic conditions, customer demand or competition differ fromexpectations.

*Accounts Receivable.*The Companyperforms ongoing evaluations of customers and adjusts credit limits based uponeach customer’s payment history and credit worthiness, as determined by creditinformation available at that time. The

 

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Company monitorscollections and payments from customers and maintains allowances for doubtfulaccounts for the inability of customers to make required payments. If thefinancial condition of customers were to deteriorate resulting in an impairmentof their ability to make payments, additional allowances may be required.

*Goodwill.*Goodwill represents the excess of purchase price over fairvalue of net assets acquired. Goodwill is tested for impairment annually in thefourth quarter, after completion of an annual planning process, or earlier ifevents occur which require an impairment analysis to be performed. With respectto each reporting unit which has any goodwill, the fair value is determinedusing traditional valuation methodology, and compared with its carrying value.If the fair value exceeds the unit’s carrying value, goodwill of the reportingunit is considered not to be impaired. If the unit’s carrying value exceeds itsfair value, assets of the unit are individually valued to determine the impliedfair value of the reporting unit goodwill. Impairment loss is recognized to theextent that the carrying value of the goodwill exceeds its implied fair value. Significant management judgment is involved indetermining the fair value of assets. Future changes in management’s estimatescould result in additional impairment charges to goodwill.

*IncomeTaxes.*Deferred tax assets and liabilities are recognized forthe future tax consequences attributable to temporary differences between thefinancial statement carrying amounts of assets and liabilities and theirrespective tax bases. Deferred tax assets are also recognized for tax creditcarryforwards and then assessed (including the anticipation of future income)to determine the likelihood of realization. Deferred tax assets and liabilitiesare measured using the rates expected to apply to taxable income in the yearsin which the temporary differences are expected to reverse and the credits areexpected to be used. The effect of a change in tax rates on deferred tax assetsand liabilities is recognized in income in the period that includes theenactment date.

*Accounting for Stock Options.*TheCompany accounts for stock-based compensation in accordance with SFASNo. 123(R), Share-Based Payment. Under the fair value recognitionprovisions of this statement, share-based compensation cost is measured at thegrant date based on the value of the award and is recognized as expense overthe vesting period. The Company uses the Black-Scholes model to calculate thefair value and is required to exercise judgment and make assumptions concerningthe expected term, the expected volatility, and the expected dividends. Ifactual results differ significantly from these estimates, stock-basedcompensation expense and results of operations could be impacted. The Companyhas elected to use the modified prospective method, under which previouslyreported financial results are not restated to reflect the stock-based compensationexpense formerly recognized in pro forma footnote disclosures and could affectcomparability of historical results to results reported subsequent to theadoption of SFAS No. 123R.

**QUANTITATIVEAND QUALITATIVE DISCLOSURES ABOUT MARKET RISK**

Except for theoutstanding debt and related variable interest rates set forth in “Management’sDiscussion and Analysis of Financial Condition and Results of Operations –Liquidity and Capital Resources” above, there are no material changes to thedisclosure set forth in Item 7A of the Company’s Annual Report on Form 10-Kfor the fiscal year ended August 31, 2005. The Company has no market risksensitive instruments entered into for trading purposes.

## **CONTROLSAND PROCEDURES**

As of the end ofthe period covered by this report, the Company carried out an evaluation, underthe supervision and with the participation of the Company’s management,including the Company’s Chief Executive Officer and Chief Financial Officer, ofthe effectiveness of the design and operation of the Company’s disclosurecontrols and procedures pursuant to Exchange Act Rules 13a-14 and13a-15. Based upon that evaluation, the Chief Executive Officer and ChiefFinancial Officer concluded that the Company’s disclosure controls andprocedures are effective. There were no significant changes in the Company’sinternal controls that could significantly affect these controls subsequent tothe date of their evaluation.

The Company iscurrently not an accelerated filer under applicable rules and regulationsof the Securities and Exchange Commission and, as such, has not been requiredto comply with all of the regulations recently adopted by the Commission,particularly the requirement that the Company include in its Annual Report onForm 10-K a report of management and accompanying auditor’s reporton the Company’s internal control over financial reporting (“404 reporting”).Compliance with the 404 reporting rules and regulations has been extendedfor non-accelerated filers to fiscal years ending on or after July 15,2007.

 

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**PART II - OTHER INFORMATION**

### ***Item 1. Legal Proceedings***

The Companyencounters lawsuits from time to time in the ordinary course of business and,at May 31, 2006, the Company and/or its affiliates were parties to severalcivil lawsuits. Summa does not expect that the resolution of these lawsuitswill have a material adverse impact on future results of operations orfinancial position.  Certain lawsuitsfiled against the Company from time to time contain claims not covered byinsurance, or seek damages in excess of policy limits, and such claims could befiled in the future.

###### ***Item 1A. Risk Factors***

As of the date ofthis filing, there has been no material change to the risk factors previouslydisclosed in the Company’s Annual Report on Form 10-K.

###### ***Item 2. Unregistered Sales of Equity Securities and Use of Proceeds***

In October 2004, the Company announced a plan to repurchase up to$2,000,000 of its Common Stock with no time limit (the “2005 Buy Back”). As ofMay 31, 2006, the status of the 2005 Buy Back was as follows:

|                           | ** ** | **Shares ** | ** ** | **Average cost** | ** ** | **Repurchase** | ** ** |
|---------------------------|------------|------------------|------------|-----------------------|------------|----------------|------------|
| ** **                | ** ** | **repurchased**  | ** ** | **per share**    | ** ** | **cost**       | ** ** |
| Prior to  March 2006 |       | 119,894          |       | $                     | 8.07       |           | $          | 967,000 |   |
|                      |       |             |       |                  |       |           |       |
| March 2006           |       | 13,175           |       | $                     | 8.76       |           | 115,000    |   |
| April 2006           |       | 9,000            |       | $                     | 9.83       |           | 89,000     |   |
| May 2006             |       | 11,623           |       | $                     | 9.69       |           | 113,000    |   |
| Total for the  quarter    |       | 33,798           |       | $                     | 9.36       |           | 317,000    |   |
|                      |       |             |       |                  |       |           |       |
| Total for the plan        |       | 153,692          |       | $                     | 8.35       |           | $          | 1,284,000 |   |

 

The cost per share includes commissions where applicable.

#### ***Item 3. Defaults upon Senior Securities***

None.

***Item4. Submission of Matters to a Vote of Security Holders***

None.

***Item5.  Other Information***

None.

***Item6. Exhibits***

31.1         Section 302 Certification

32.1         Section 906 Certification

 

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**SIGNATURES**

Pursuant to therequirements of the Securities Exchange Act of 1934, the Registrant has dulycaused this report to be signed on its behalf by the undersigned thereunto dulyauthorized on July 12, 2006.

**Summa Industries**
| /s/ James R. Swartwout                 |   |                         | /s/ Trygve M. Thoresen |   |
|----------------------------------------|--------|------------------------------|------------------------|--------|
| James R.  Swartwout                    |   | Trygve M. Thoresen           |
| President and  Chief Financial Officer |   | Vice President and Secretary |

 

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