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KATY INDUSTRIES, INC. REPORTS 2002 THIRD QUARTER RESULTS

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MIDDLEBURY, CT – November 8, 2002 – Katy Industries, Inc. (NYSE: KT) today reported net income from continuing operations in the third quarter of 2002 of $2.7 million, or $0.33 per share, versus a net loss from continuing operations of $(0.4) million, or $(0.04) per share, in the third quarter of 2001, excluding restructuring and other non-recurring or unusual items, which are discussed below. Net sales in the third quarter of 2002 were $143.6 million, up 6.6% on a comparable basis from the third quarter of 2001 (excluding SESCO, a business which was exited in April 2002). Sales of consumer products were up 14% and sales of commercial products were flat from the third quarter of 2001.

During the third quarter of 2002, Katy reported restructuring and other non- recurring or unusual charges of $(19.5) million after-tax [$(2.34) per share], results of discontinued operations of $0.2 million [$0.03 per share], a cumulative effect of a change in accounting principle of $(4.2) million [$(0.50) per share], as well as the impact of paid-in-kind dividends earned on convertible preferred stock of $(2.6) million [$(0.31) per share]. Including these items, Katy reported a net loss available to common shareholders of $(23.4) million, or $(2.79) per share, in the third quarter of 2002. During the third quarter of 2001, Katy reported restructuring and other non-recurring or unusual charges of $(5.6) million after-tax [$(.67) per share], as well as the impact of paid-in-kind dividends earned on convertible preferred stock of $(1.8) million [$(0.21) per share]. Including these items, the net loss available to common shareholders was $(7.3) million, or $(0.88) per share, in the third quarter of 2001. Details regarding these items are provided in the accompanying reconciliations between GAAP and pro forma results.

We continue to restructure the Company to provide a platform for future success,” said C. Michael Jacobi, Katy Industries' President and Chief Executive Officer. “Higher year-over-year sales in the third quarter, improved gross margins, and lower SG&A and interest costs are all positive developments that are a direct result of our restructuring efforts.”

Added Mr. Jacobi, “Subsequent to quarter-end, we announced the sale of Hamilton Precision Metals, L.P., a non-core subsidiary, which enabled us to pay off the balance of our term loan well in advance of maturity. We also announced the planned closure of four Woods Industries, Inc. manufacturing facilities located in Indiana, necessitated by our decision to fully outsource the supply of our electrical corded products to lower-cost sources. This step will allow Woods to remain competitive in a very challenging retail environment.” The Company expects to report a restructuring charge during the fourth quarter of 2002 related to the Woods closures.

Earnings for the third quarter of 2002 were unfavorably impacted by charges of $21.0 million, before tax, for restructuring and other non-recurring or unusual items related to severance payments, facility exit costs, impairments of machinery and equipment, consulting fees on a resourcing project and a LIFO inventory adjustment.

As part of its ongoing restructuring efforts, Katy announced that it will consolidate its warehousing and distribution operations for the Contico janitorial/sanitation business from its current Earth City, MO location to its neighboring Bridgeton, MO facility. Contico will abandon the Earth City facility, and accordingly, a charge of $7.1 million for non-cancelable lease payments related to the facility was recorded in the third quarter of 2002. The Contico business unit also recorded an additional $1.4 million non- cancelable lease charge for the Warson Road facility near St. Louis, MO, which was abandoned in July of 2002. A charge for Warson of $1.8 million was recorded in the second quarter, and the additional amount was booked in the third quarter after consideration of sub-leasing alternatives and other costs related to the facility.

The Contico business unit also recorded impairments to certain molds and tooling assets of $6.9 million, after evaluation of projected undiscounted future cash flows expected to be derived from these assets. The Contico business also recorded impairments of $2.6 million related to a trade name intangible asset, and $0.2 million related to assets from the Earth City, MO facility that will be abandoned. Impairments of $1.2 million related to property, plant and equipment at the Wilen Products business unit were recorded in the third quarter of 2002, as a result of the decision to reduce costs by sourcing product from outside vendors. The Company is continuing its evaluation of its various operating units and therefore additional impairments of long-lived assets may be recorded in the fourth quarter.

Gross margins excluding unusual items were 17.3%, up from 14.9% in the third quarter of 2001. Selling, general and administrative expenses, excluding unusual items, were down $0.5 million, and represented 12.5% of sales in the third quarter of 2002, down from 13.6% of sales in the third quarter of 2001. These figures reflect the classification of co-op advertising expenses in net sales (as opposed to their previous classification as selling expenses) for all periods presented, in accordance with the provisions of EITF Issue 01- 09, “Accounting for Consideration Given by a Vendor to a Customer.” For the three-month periods ended September 30, 2002 and 2001, the amounts of cooperative advertising expenses included in net sales were $0.8 million and $1.0 million, respectively.

Interest expense was down $0.6 million as quarter-end debt was reduced by $11.4 million from September 30, 2001. Debt at September 30, 2002 was $76.6 million, which is 35% of total capitalization. Cash on hand at September 30, 2002 was $4.8 million.

Liquidity was relatively stable during the third quarter of 2002, as the company used free cash flow of $1.0 million versus $2.1 million generated in the third quarter of 2001. The Company defines free cash flow as cash generated from operations, net of capital expenditures and cash dividends. Increases in accounts receivable related to strong seasonal business was the primary driver of cash flow in the third quarter of 2002. Earnings before interest, taxes, depreciation and amortization, excluding all unusual and non-recurring items, was $12.1 million for the third quarter of 2002, compared to $7.3 million in the third quarter of 2001. The Company continues to carefully manage its inventory levels. At September 30, 2002, inventory was $71.5 million, down $6.4 million from September 30, 2001.

Katy announced on November 1, 2002, that it had completed the sale of its Hamilton Precision Metals, L.P. business. As a result, the results of Hamilton’s operations have been classified as discontinued operations for all periods presented.

The Company completed its transitional goodwill impairment analysis according to the provisions of SFAS No. 142 “Goodwill and Other Intangible Assets,” in the third quarter of 2002. The final adoption of these provisions resulted in the impairment of goodwill at the Loren Products and GC/Waldom businesses, totaling $4.2 million, pre-tax. This impairment is presented on the statement of operations as a cumulative effect of a change in accounting principle. The 2001 earnings per share are presented to show more meaningful comparisons as a result of the impact of the adoption of the non-amortization provisions of SFAS No. 142. This accounting change resulted in third quarter earnings improvement of $0.3 million, or $0.04 per share. The Company adopted these provisions on January 1, 2002.
Katy also reported a net loss available to common shareholders of $(42.8) million, or $(5.11) per share, for the nine months ended September 30, 2002, versus a net loss available to common shareholders of $(47.3) million, or $(5.67) per share, in the same period of 2001. Excluding restructuring and other non-recurring or unusual items [$(4.08) per share], discontinued operations [$0.18 per share], the cumulative effect of a change in accounting principle [($0.50) per share], as well as the impact of paid-in-kind dividends earned on convertible preferred stock [$(0.94) per share], net income for the nine months ended September 30, 2002 was $1.9 million, or $0.23 per share, versus a net loss of $(7.0) million, or $(0.84) per share, in the same period of 2001. Earnings before interest, taxes, depreciation and amortization, excluding all unusual and non-recurring items, was $25.3 million for the nine months ended September 30, 2002, compared to $16.2 million for the same period in 2001. Results for the nine-month periods reflect the classification of co- op advertising expenses in net sales (as opposed to their previous classification as selling expenses). For the nine-month periods ended September 30, 2002 and 2001, the amounts of the co-operative advertising expenses included in net sales were $2.3 million and $2.7 million, respectively.

This press release may contain various forward-looking statements. The forward- looking statements are based on the beliefs of the company’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 Electrical/Electronics and Maintenance Products.

Click below for PDF financials:
Third Quarter 2002 Financials


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