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

·        On November 1, 2007, the Company entered into a definitive agreement to sell the Woods U.S. and Woods Canada businesses which comprises our Electrical Products Group.  The sale is expected to close by November 30, 2007.  As of September 30, 2007, the Company determined these businesses met the criteria as an Asset Held for Sale which results in all operating activities being classified as discontinued operations for all periods presented.  Besides the Woods U.S. and Woods Canada businesses, the discontinued operations also includes the Metal Truck Box business, Consumer United Kingdom business and Contico Manufacturing, Ltd. business, all of which were sold in either 2006 or 2007.   .

·        Net sales in the third quarter of 2007 were $49.2 million, a decrease of $2.7 million compared to the same period in 2006 primarily due to lower volume activity within our Glit business unit.  Overall, the decrease in net sales of 5% resulted from lower volumes of 11% offset by higher pricing of 6%.

·        Gross margins were 11.3% in the third quarter of 2007, versus 14.6% in the third quarter of 2006.  In 2007, our margins were adversely impacted by the above lower volume as well as production inefficiencies at our Glit business unit.  In addition, the Company had an unfavorable variance of approximately $0.7 million to its quarterly LIFO adjustment.

·        Selling, general and administrative expenses were $1.2 million lower than the third quarter of 2006.  These costs represented 13.4% of net sales in the third quarter of 2007, a decrease from 15.0% of net sales for the same period of 2006.  The reduction in percentage reflects the lower requirements under the Company’s incentive compensation plan and self insurance programs as well as various cost improvements implemented during the past year.

·        Debt at September 30, 2007 was $52.4 million [61% of total capitalization], versus $62.1 million [58% of total capitalization] at September 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 September 30, 2007 was $2.2 million versus $4.2 million at September 30, 2006.

·         Katy Katy used free cash flow of $15.7 million during the nine month period ended September 30, 2007 versus using $5.9 million of free cash flow during the nine month period ended September 30, 2006.  The increased use of cash was primarily attributable to the higher working capital requirements in 2007 as compared to 2006.  Free cash flow, a non-GAAP financial measure, is discussed further below.

“The Electrical Products Group transaction will move Katy to a single-business model which will allow the organization to further focus its resources on our core business, Continental Commercial Products, which services the janitorial/sanitary and food service markets,” said Anthony T. Castor III, Katy’s President and Chief Executive Officer.  “While our quarterly performance was impacted by lower volume, we believe that our cost position will improve as we continue to focus on our core business,” 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 current interests primarily in Maintenance Products and Electrical Products.  After the sale of the Electrical Products Group, Katy will be focused on the manufacturing and distribution of commercial cleaning products and consumer home products.    

2007 Third Quarter Report