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Amir Rosenthal
(203) 598-0397
Vice President, Chief Financial Officer,
General Counsel & Secretary

KATY INDUSTRIES, INC.
REPORTS 2005 THIRD QUARTER RESULTS

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MIDDLEBURY, CT - October 27, 2005 - Katy Industries, Inc. (NYSE: KT) today reported net income in the third quarter of 2005 of $1.7 million [$0.06 per share diluted], versus net income of $1.2 million [$0.16 per share diluted], in the third quarter of 2004, as adjusted to exclude restructuring and other non-recurring or unusual items, which are discussed below. Including these items and payment-in-kind dividends on convertible preferred stock, Katy reported net income attributable to common stockholders of $1.3 million [$0.05 per share diluted], in the third quarter of 2005, versus a net loss attributable to common stockholders of ($2.9) million [($0.37) per share diluted], in the same period of 2004. Operating income, as adjusted to exclude restructuring and other non-recurring or unusual items, was $4.0 million [2.8% of net sales] in the third quarter of 2005, compared to operating income, as adjusted of $3.0 million [2.2 % of net sales] in the same period in 2004. Net income (loss), as adjusted, and operating income as adjusted, are non-GAAP financial measures and are further discussed below.

Katy also reported a net loss for the nine months ended September 30, 2005 of ($2.9) million [($0.37) per share diluted], versus net income of $0.8 million [$0.10 per share diluted], for the nine months ended September 30, 2004, as adjusted to exclude restructuring and other non-recurring or unusual items, which are discussed below. Including these items and payment-in-kind dividends on convertible preferred stock, Katy reported a net loss attributable to common stockholders of ($9.4) million [($1.18) per share diluted], for the nine months ended September 30, 2005, versus a net loss attributable to common stockholders of ($12.9) million [($1.64) per share diluted], in the same period of 2004. The operating loss, as adjusted to exclude restructuring and other non-recurring or unusual items, was ($0.8) million [(0.2%) of net sales] for the nine months ended September 30, 2005, compared to operating income, as adjusted of $3.9 million [1.2% of net sales] for the same period in 2004. Net income (loss), as adjusted, and operating income (loss), as adjusted, are non-GAAP financial measures and are further discussed below.

During the third quarter of 2005, Katy reported severance, restructuring and related charges of ($0.7) million pre-tax [($0.02) per share diluted]. During the third quarter of 2004, Katy reported severance, restructuring and related charges of ($0.2) million pre-tax [($0.02) per share diluted]. Also, during the third quarter of 2004, Katy recorded the impact of payment-in-kind dividends earned on its convertible preferred stock of ($3.8) million [($0.48) per share diluted]. Payment-in-kind dividends on convertible preferred stock ended in December 2004. Details regarding these items are provided in the “Reconciliations of GAAP Results to Results Excluding Certain Unusual Items” accompanying this press release.

For the nine months ended September 30, 2005, Katy reported restructuring and other non-recurring or unusual items of ($3.9) million pre-tax [($0.49) per share diluted], including non-cash stock option expense related to the acceleration of vesting of options of ($2.0) million and severance, restructuring and related charges of ($2.0) million. During the nine months ended September 30, 2004, Katy reported restructuring and other non-recurring or unusual items of ($1.8) million pre-tax [($0.23) per share diluted], including severance, restructuring and related charges of ($2.0) million, costs associated with a proposed financing which Katy chose not to pursue of ($0.4) million, and a gain on the sale of real estate of $0.5 million. Also, during the nine months ended September 30, 2004, Katy recorded the impact of payment-in-kind dividends earned on its convertible preferred stock of ($10.7) million [($1.36) per share diluted]. Details regarding these items are provided in the “Reconciliations of GAAP Results to Results Excluding Certain Unusual Items” accompanying this press release.


Highlights for the third quarter of 2005, as compared to the same period in the prior year, included:

Net sales in the third quarter of 2005 were $140.6 million, up $5.1 million compared to the same period in 2004 primarily due to stronger sales in the Electrical Products Group offset by weaker sales in the Maintenance Products Group. Overall, the increase of 4% resulted from higher pricing of 4% and favorable currency translation of 1% offset by lower volumes of 1%.

Gross margins were 12.6% in the third quarter of 2005, versus 13.2% in the third quarter of 2004. Margins were negatively impacted by higher raw material costs, a portion of which could not be passed on through price increases, and higher operating costs in our Abrasives business.

Selling, general and administrative expenses were $1.0 million lower in the third quarter of 2005 versus the third quarter of 2004. These costs represented 9.9% of sales in the third quarter of 2005, a decrease from 11.0% of sales for the same period of 2004. This decrease was primarily due to cost containment in the Electrical Products Group.

Debt at September 30, 2005 was $58.1 million [49% of total capitalization], versus $58.7 million [46% of total capitalization] at December 31, 2004. Cash on hand at September 30, 2005 was $8.6 million, versus $8.5 million on hand at December 31, 2004.

Katy generated free cash flow of $1.9 million during the nine month period ended September 30, 2005 versus ($29.5) million of free cash flow used during the nine month period ended September 30, 2004. The improvement in free cash flow was primarily attributable to a reduction of working capital in the first nine months of 2005 versus an inventory build in the first nine months of 2004, and lower capital expenditures. Free cash flow, a non-GAAP financial measure, is discussed further below.

Katy expects its debt levels to generally stabilize for the fourth quarter of 2005. Elements of working capital continue to be closely managed. Capital expenditures in the fourth quarter are expected to continue at approximately the same pace as the first three quarters of 2005, but overall are expected to be lower than 2004. Katy was in compliance with the amended covenants in the Bank of America Credit Agreement at September 30, 2005 and expects to be in compliance for the balance of 2005.

Katy expects to substantially complete its current restructuring program in 2005. The remaining severance, restructuring and related costs for these initiatives (mostly related to the consolidation of its abrasives facilities) are expected to be less than $0.5 million.

“The stronger sales in the third quarter were certainly a positive sign as we attempt to capitalize on our leaner, more stabilized facilities”, said Anthony T. Castor III, Katy’s President and Chief Executive Officer. “However, we continue to be challenged by escalating material costs, especially in the wake of the hurricanes in the Gulf, and we appreciate the understanding of our customers as we are forced to pass those increases along,” added Mr. Castor.

Non-GAAP Financial Measures

To provide transparency about measures of Katy’s financial performance which management considers most relevant, we supplement the reporting of Katy’s consolidated financial information under GAAP with certain non-GAAP financial measures, including Net Income (Loss), as adjusted, Net Income (Loss), as adjusted per share, Operating Income (Loss) and Operating Income (Loss) as adjusted, as a percentage of sales; and Free Cash Flow. Details regarding these measures and reconciliations of these non-GAAP measures to comparable GAAP measures are provided in the “Reconciliations of GAAP Results to Results Excluding Certain Unusual Items” and “Statements of Cash Flows” accompanying this press release. These non-GAAP financial measures should be considered in addition to, and not as a substitute or superior to, the other measures of financial performance prepared in accordance with GAAP. Using only the non-GAAP financials measures to analyze our performance would have material limitations because their calculation is based on the subjective determinations of management regarding the nature and classification of events and circumstances that investors may find material. Management compensates for these limitations by utilizing both the GAAP and non-GAAP measure reflected below to understand and analyze the results of its business. Katy believes the presentation of these measures is nonetheless useful to investors for the following reasons:

Net Income (Loss), as adjusted, Net Income (Loss), as adjusted per share, Operating Income (Loss) and Operating Income (Loss) as adjusted, as a percentage of sales: All of these non-GAAP operating measurements adjust the corresponding GAAP measurement to exclude restructuring and other non-recurring and unusual items, as appropriate. Following the recapitalization of the company in 2001, a comprehensive restructuring program became essential to the future viability of Katy. All other non-recurring and unusual items are typically indicative of non-cash impacts to Katy’s results of operations. These non-GAAP measures are used by management as Katy believes that these measures are more indicative of the company’s underlying business performance and that eliminating restructuring and other non-recurring and unusual charges provides more meaningful year-to-year comparison of the company’s operations. Katy believed that the restructuring charges would be non-recurring as the restructuring was expected to be substantially completed in mid-2004 but was delayed due to issues with the consolidation of the company’s abrasives facilities. After the substantial completion of this consolidation in 2005, Katy expects that remaining restructuring charges and all other non-recurring and unusual items will not be material.

Free Cash Flow: Free cash flow is defined by Katy as cash flow from operations less capital expenditures and cash dividends paid. Katy believes that free cash flow is useful to management and investors in measuring cash generated that is available for repayment of debt obligations, investment in growth through acquisitions, new business development and stock repurchases.

This press release may contain various forward-looking statements. The forward-looking statements are based on the beliefs of Katy’s management, as well as assumptions made by, and information currently available to, the company’s management. Additionally, the forward-looking statements are based on Katy’s current expectations and projections about future events and trends affecting the financial condition of its business. The forward-looking statements are subject to risks and uncertainties, detailed from time to time in Katy’s filings with the SEC, that may lead to results that differ materially from those expressed in any forward-looking statement made by the company or on its behalf. Katy undertakes no obligation to revise or update such statements to reflect current events or circumstances after the date hereof or to reflect the occurrence of unanticipated events.

Katy Industries, Inc. is a diversified corporation with interests primarily in Maintenance Products and Electrical Products.





2005 Third Quarter Report


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