During the second quarter of 2007, Katy reported restructuring and other non-recurring or unusual items of $2.8 million pre-tax [$0.36 per share], including a gain on the sale and operating activities of the discontinued businesses of $6.9 million offset by severance, restructuring and related costs of ($2.4) million and loss on sale of assets of ($1.7) million.  During the second quarter of 2006, Katy reported no significant restructuring and other non-recurring or unusual items.  Details regarding these items are provided in the “Reconciliations of GAAP Results to Results Excluding Certain Unusual Items” accompanying this press release.

 For the six months ended June 30, 2007, Katy reported restructuring and other non-recurring or unusual items of $4.6 million pre-tax [$0.57 per share], including a gain on the sale and operating activities of discontinued businesses of $8.8 million offset by severance, restructuring and related costs of ($2.6) million and loss on sale of assets of ($1.6) million.  For the six months ended June 30, 2006, Katy reported restructuring and other non-recurring or unusual items of ($1.8) million pre-tax [($0.23) per share], including severance, restructuring and related costs of ($0.9) million, loss from discontinued operations of ($0.7) million and costs of ($0.8) million related to the cumulative effect of a change in accounting principle for the implementation of SFAS No. 123R, Accounting for Stock-Based Compensation offset by gain on SESCO joint venture transaction of $0.6 million.  Details regarding these items are provided in the “Reconciliations of GAAP Results to Results Excluding Certain Unusual Items” accompanying this press release.

Financial highlights for the second quarter of 2007, as compared to the same period in the prior year, included:

·        Net sales in the second quarter of 2007 were $81.5 million, a decrease of $3.1 million compared to the same period in 2006 primarily due to lower volume activity in the Electrical Products Group.  Overall, the decrease in net sales of 4% resulted from lower volumes of 13% offset by higher pricing of 9%.  Lower net sales in the Electrical Products Group resulted from lower demand from its major customers along with its timing as the second quarter volume level slightly offsets the volume improvement reflected in the first quarter of 2007.  In addition, the Electrical Products Group has increased prices driven by the significant change in copper prices over the past year.

·        Gross margins were 12.2% in the second quarter of 2007, versus 13.1% in the second quarter of 2006.  In 2007, our margins were adversely impacted by higher copper costs within our Electrical Products Group, a significant portion of which were not passed through as price increases.

·        Selling, general and administrative expenses were $1.4 million lower than the second quarter of 2006.  These costs represented 11.8% of net sales in the second quarter of 2007, a decrease from 13.0% of net sales for the same period of 2006.  The reduction in percentage reflects favorable trends within our self-insurance programs as well as cost improvements implemented during the past year.

·        On June 6, 2007, Katy sold Contico Manufacturing, Ltd. (“CML”) for approximately $10.4 million which resulted in a $7.2 million gain on sale of discontinued business.  The Company has reflected all activity associated with operations of this division and the sale as a discontinued operation for all periods presented.

·        Debt at  June 30, 2007 was $48.9 million [57% of total capitalization], versus $62.2 million [56% of total capitalization] at June 30, 2006.  The increase in the ratio of debt to total capitalization was principally due to the lower stockholders’ equity which resulted from the net loss reflected over the past twelve months.  In addition, stockholders’ equity has been impacted from the adoption of SFAS No. 158, Employers’ Accounting for Defined Benefit Pension and Other Postretirement Plans and FIN 48, Accounting for Uncertainty in Income Taxes.  Debt has been reduced as a result of proceeds received from the various business units sold in the past twelve months.  Cash on hand at June 30, 2007 was $2.5 million versus $4.6 million at June 30, 2006.

·         Katy used  free cash flow of $11.1 million during the six month period ended June 30, 2007 versus using $5.9 million of free cash flow during the six month period ended June 30, 2006.  The increased use of cash was primarily attributable to the higher operating loss in 2007 as compared to 2006.  Free cash flow, a non-GAAP financial measure, is discussed further below.

“Our overall results continue to be adversely impacted by the Electrical Products Group’s inability to recover from customers all of the copper cost increases that the Group is experiencing,” said Anthony T. Castor III, Katy’s President and Chief Executive Officer.  “While we have implemented more price increases during the second quarter of 2007, they were not enough to recover volatile changes in our material costs,” 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.

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.

2007 Second Quarter Report