KATY INDUSTRIES, INC.
REPORTS
2006
SECOND
QUARTER RESULTS
ARLINGTON
,
VA
–
November
13,
2006
–
Katy
Industries,
Inc.
(NYSE:
KT)
today
reported
net
income
in
the
third
quarter
of
2006
of
$1.8
million
[$0.06
per
diluted
share],
versus
net
income
of
$1.8
million
[$0.07
per
diluted
share],
in
the
third
quarter
of
2005,
as
adjusted
to
exclude
restructuring
and
other
non-recurring
or
unusual
items,
which
are
discussed
below.
Including
these
items,
Katy
reported
a
net
loss
in
the
third
quarter
of
2006
of
($1.8)
million
[($0.07)
per
diluted
share],
versus
net
income
of
$1.3
million
[$0.05
per
diluted
share],
in
the
same
period
of
2005.
The
operating
income,
as
adjusted
to
exclude
all
restructuring
and
other
non-recurring
or
unusual
items,
was
$4.5
million
[3.7%
of
net
sales]
in
the
third
quarter
of
2006,
compared
to
an
operating
income,
as
adjusted,
of
$4.1
million
[3.1%
of
net
sales]
in
the
same
period
in
2005.
Net
income
(loss),
as
adjusted,
and
operating
income
(loss),
as
adjusted,
are
non-GAAP
financial
measures.
Details
regarding
these
items
are
provided
in
the
“Reconciliations
of
GAAP
Results
to
Results
Excluding
Certain
Unusual
Items”
accompanying
this
press
release.
Katy
also
reported
a
net
loss
for
the
nine
months
ended
September
30,
2006
of
($1.2)
million
[($0.15)
per
diluted
share],
versus
a
net
loss
of
($2.7)
million
[($0.34)
per
diluted
share],
for
the
nine
months
ended
September
30,
2005,
as
adjusted
to
exclude
restructuring
and
other
non-recurring
or
unusual
items,
which
are
discussed
below.
Including
these
items,
Katy
reported
a
net
loss
for
the
nine
months
ended
September
30,
2006
of
($9.5)
million
[($1.19)
per
diluted
share],
versus
a
net
loss
of
($9.4)
million
[($1.18)
per
diluted
share],
in
the
same
period
of
2005.
The
operating
income,
as
adjusted
to
exclude
all
restructuring
and
other
non-recurring
or
unusual
items,
was
$2.8
million
[1.0%
of
net
sales]
for
the
nine
months
ended
September
30,
2006,
compared
to
an
operating
loss,
as
adjusted,
of
($0.5)
million
[(0.2%)
of
net
sales]
in
the
same
period
in
2005.
Net
income
(loss),
as
adjusted,
and
operating
income
(loss),
as
adjusted,
are
non-GAAP
financial
measures.
Details
regarding
these
items
are
provided
in
the
“Reconciliations
of
GAAP
Results
to
Results
Excluding
Certain
Unusual
Items”
accompanying
this
press
release.
During
the
third
quarter
of
2006,
Katy
reported
restructuring
and
other
non-recurring
or
unusual
items
of
($4.1)
million
pre-tax
[($0.15)
per
diluted
share],
including
loss
from
discontinued
operations
of
($3.4)
million
and
s
everance,
restructuring
and
related
costs
of
($0.7)
million.
During
the
third
quarter
of
2005,
Katy
reported
restructuring
and
other
non-recurring
or
unusual
items
of
($1.2)
million
pre-tax
[($0.05)
per
diluted
share],
including
loss
from
discontinued
operations
of
($1.0)
million
and
severance,
restructuring
and
related
costs
of
($0.2)
million.
For
the
nine
months
ended
September
30,
2006,
Katy
reported
restructuring
and
other
non-recurring
or
unusual
items
of
($6.3)
million
pre-tax
[($0.79)
per
diluted
share],
including
costs
of
($0.7)
million
related
to
the
cumulative
effect
of
a
change
in
accounting
principle
for
the
implementation
of
SFAS
No.
123R,
Accounting
for
Stock-Based
Compensation,
severance,
restructuring
and
related
costs
of
($1.6)
million
and
loss
from
discontinued
operations
of
($4.0)
million.
For
the
nine
months
ended
September
30,
2005,
Katy
reported
restructuring
and
other
non-recurring
or
unusual
items
of
($4.3)
million
pre-tax
[($0.54)
per
diluted
share],
including
severance,
restructuring
and
related
costs
of
($2.8)
million,
and
loss
from
discontinued
operations
of
($1.5)
million.
Financial
highlights
for
the
third
quarter
of
2006,
as
compared
to
the
same
period
in
the
prior
year,
included:
· Net
sales
in
the
third
quarter
of
2006
were
$121.2
million,
down
$12.0
million
compared
to
the
same
period
in
2005
primarily
due
to
weaker
sales
in
the
Electrical
Products
Group.
Overall,
the
decrease
of
9%
resulted
from
lower
volumes
of
21%
offset
by
higher
pricing
of
11%
and
favorable
currency
translation
of
1%.
Lower
net
sales
in
the
Electrical
Group
resulted
from
the
reduction
of
certain
product
lines
with
certain
of
our
customers,
primarily
due
to
a
much
milder
hurricane
season
in
2006,
as
net
sales
in
our
Maintenance
Products
Group
was
comparable
to
prior
year.
·
Gross
margins
were
13.4%
in
the
third
quarter
of
2006,
versus
12.6%
in
the
third
quarter
of
2005.
Our
margin
improvement
is
primarily
driven
by
production
efficiencies
gained
in
our
Abrasives
unit
over
the
past
nine
months.
However,
this
improvement
was
negatively
impacted
by
higher
product
costs,
primarily
in
the
Electrical
Products
Group,
many
of
which
were
not
passed
on
through
price
increases
until
the
end
of
the
third
quarter.
·
Selling,
general
and
administrative
expenses
were
$1.1
million
lower
in
the
third
quarter
of
2006.
These
costs
represented
9.7%
of
net
sales
in
the
third
quarter
of
2006,
which
is
comparable
for
the
same
period
of
2005.
The
reduction
in
these
expenses
primarily
relates
to
lower
net
sales
levels
and
the
corresponding
reduction
in
selling
expenses.
·
On
September
29,
2006,
Katy
classified
the
net
assets
of
its
United
Kingdom
consumer
plastics
business
as
an
asset
held
for
sale
pending
a
potential
sale
in
the
next
three
months.
As
a
result,
the
Company
incurred
a
$3.2
million
impairment
charge
which
is
reflected
within
loss
on
sale
of
discontinued
businesses
for
the
three
and
nine
months
ended
September
30,
2006.
Loss
from
operations
of
discontinued
businesses
for
the
nine
months
ended
September
30,
2006
includes
not
only
the
United
Kingdom
consumer
plastics
business
but
also
the
Metal
Truck
Box
division
and
the
partnership
interest
related
to
Savannah
Energy
Systems
Company
(“SESCO”).
The
Metal
Truck
Box
division
and
SESCO
were
sold
during
the
second
quarter
of
2006.
· On
January
1,
2006,
Katy
adopted
SFAS
No.
123R,
Accounting
for
Stock-Based
Compensation
(SFAS
No.
123R).
The
first
quarter
of
2006
includes
a
cumulative
effect
of
a
change
in
accounting
principle
of
$0.7
million
for
the
impact
of
recognizing
the
fair
value
of
our
liability
awards
(stock
appreciation
rights).
The
adoption
of
SFAS
No.
123R
did
not
result
in
a
cumulative
adjustment
associated
with
our
equity
awards
(stock
options);
however,
Katy
did
begin
to
recognize
compensation
cost
of
$0.5
million
for
the
nine
months
ended
September
30,
2006
within
selling
and
administrative
expenses
for
the
fair
value
of
stock
options
not
yet
vested.
·
Debt
at
September
30,
2006
was
$62.1
million
[57%
of
total
capitalization],
versus
$58.1
million
[49%
of
total
capitalization]
at
September
30,
2005.
The
increase
in
the
ratio
of
debt
to
total
capitalization
was
principally
due
to
the
increase
in
working
capital
requirements
in
2006
as
compared
to
2005
as
well
as
lower
stockholders’
equity
which
resulted
from
the
net
loss
reflected
in
2005
and
the
nine
months
ended
September
30,
2006.
Cash
on
hand
at
September
30,
2006
was
$4.1
million,
versus
$8.6
million
at
September
30,
2005.
·
Katy
used
free
cash
flow
of
$5.5
million
during
the
nine
month
period
ended
September
30,
2006
versus
providing
$1.4
million
of
free
cash
flow
during
the
nine
month
period
ended
September
30,
2005.
The
decline
in
free
cash
flow
was
primarily
attributable
to
the
pay
down
of
accounts
payable
in
the
first
quarter
of
2006
as
well
as
the
impact
of
our
seasonal
investment
for
inventory
within
our
Electrical
Products
Group.
·
Katy
expects
current
liquidity
trends
to
remain
stable
throughout
2006
as
inventory
and
other
elements
of
working
capital
are
being
closely
managed
and
capital
expenditures
are
expected
to
be
lower
in
2006.
Free
cash
flow,
a
non-GAAP
financial
measure,
is
discussed
further
below.
·
Katy
was
in
compliance
with
the
amended
covenants
in
the
Bank
of
America
Credit
Agreement
at
September
30,
2006
and
expects
to
be
in
compliance
for
the
balance
of
2006.
“Over
the
past
nine
months,
our
Abrasives
business
unit
continues
to
improve
driving
the
overall
improvement
in
our
Maintenance
Products
group,”
said
Anthony
T.
Castor
III,
Katy’s
President
and
Chief
Executive
Officer.
“However,
the
Electrical
Products
group
was
impacted
by
unprecedented
increases
in
the
price
of
copper
that
were
not
able
to
be
passed
effectively
to
its
customer
base,”
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
financial
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.
2006
Third
Quarter Report
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