PECO II Reports Second-Quarter 2009 Results

GALION, Ohio, July 30 /PRNewswire-FirstCall/ -- PECO II, Inc. (Nasdaq: PIII),
a communications industry power systems and services provider, today reported
results for the second quarter ended June 30, 2009.

PECO II reported net sales of $9.9 million in the second quarter of 2009.
This compares with $7.5 million in the first quarter of 2009, a 32.6 percent
quarter-to-quarter increase, and $11.1 million in the second quarter of 2008,
a 10.2 percent year-to-year decrease. The Company reported a net loss of $0.2
million, or $0.08 per diluted share, for the second quarter of 2009, compared
with a net loss of $1.6 million, or $0.57 per diluted share, for the first
quarter of 2009 and a net loss of $1.2 million, or $0.45 per diluted share,
for the second quarter of 2008.

The $1.4 million reduction in net loss compared with the first quarter of 2009
was primarily attributed to improved gross margins being realized in both the
product and services businesses. The $1.0 million reduction in net loss
compared with the second quarter of 2008 was primarily driven by improved
services gross margins of $0.5 million resulting from strong revenue growth,
attributed to a significant service provider contract that was awarded to the
Company in the fourth quarter of 2008, combined with a $0.4 million reduction
in operating expenses.

EBITDA was $206,000 in the second quarter of 2009, compared with an EBITDA
loss of $1.2 million for the first quarter of 2009 and an EBITDA loss of $0.7
million for the second quarter of 2008. An explanation and reconciliation of
GAAP net income to EBITDA is included as Attachment A.

Cash provided by operating activities for the six months ended June 30, 2009,
was $287,000. While this included a net loss, it was offset by non-cash
charges and decreases in accounts receivable and inventory along with
increases in accounts payable.

Bookings increased during the second quarter, resulting in a sales backlog of
$7.2 million as of June 30, 2009. The second-quarter backlog was a 43 percent
increase from the $5.0 million backlog at the end of the first quarter of
2009. The bookings-to-billings ratio reflects customer orders received as
compared with the same period's billings and is an indication of future
periods. For the second quarter of 2009, the ratio was 1.22 to 1.

PECO II CEO John Heindel stated, "The second-quarter financial performance
reflects the significant growth and positive operating performance in the
Company's services business combined with the positive impact of the business
process transformation PECO II has implemented over the past couple of years."

Heindel added, "Achieving EBITDA profitability, especially in these
challenging economic times, is a major milestone for the business. In order
to maintain and improve upon this level of financial performance, the Company
must continue to focus on providing its customers with high-quality product
and service solutions."

Second-quarter revenues of $9.9 million reflected significant services
business growth. Services revenues were up by 69 percent and 37 percent when
compared to the first quarter of 2009, and the second quarter of 2008,
respectively. This growth was primarily attributed to a contract with a major
service provider that was awarded in the fourth quarter of 2008. Product
revenues of $6.4 million in the second quarter of 2009 reflected normal
seasonable growth when compared product revenues of $5.4 million for the first
quarter of 2009. Second quarter 2009 product revenues declined $2.1 million
versus the second quarter of 2008. The Company attributes this reduction in
product revenues to the impact of both the slowing economy and merger and
acquisition activity among its customers, which resulted in a slowdown in
orders during the second quarter.

Second-quarter gross margins of $2.4 million, or 24 percent, were $0.6 million
better than the second-quarter 2008 performance. This improvement was
primarily driven by increased services margins of $0.5 million with growth in
the engineering and installation business volume related to the contract award
noted above. Product gross margins of $1.4 million, or 22 percent, were $0.1
million better than the second quarter 2008, notwithstanding the revenue
decline of $2.1 million. The product margin improvement was primarily
attributable to a number of product enhancements that have been implemented
and which have resulted in a reduction in product support costs combined with
a favorable sales volume mix.

Heindel further noted, "In the second quarter, the Company was awarded a
nationwide maintenance contract for the DC power component of a Tier II
Wireline service provider's network. Additionally, the Company had six new
account wins, most of which are with its new small power platform. Further,
the Company had wins at three existing accounts deploying new cabinet
solutions. Lastly, the Company received USDA (United States Department of
Agriculture) Rural Utilities Services acceptance for certain models of its
power products. The USDA, through the RUS process, provides programs to
finance rural America's telecommunications infrastructure."

Heindel added, "As a result of the business process enhancements implemented
during the past couple of years, the Company has been able to significantly
reduce its break-even point. The reduced break-even point, combined with the
services business growth and the Company's industry-leading responsiveness
capability, provides a sustainable platform for PECO II to have its customers
continue to rely on PECO II for their power requirements."

About PECO II, Inc.

PECO II, headquartered in Galion, Ohio, provides engineering and on-site
installation services and designs, and manufactures and markets communications
power systems and power distribution equipment. As the largest independent
full-service provider of telecommunications power systems, the Company
provides total power quality/reliability solutions and supports the power
infrastructure needs of communications service providers in the local
exchange, long-distance, wireless, broadband and Internet markets. Additional
information about PECO II can be found at www.peco2.com.

Forward-Looking Statements

Statements in this release that are not historical fact are forward-looking
statements, which involve risks and uncertainties that may cause actual
results or events to differ materially from those expressed or implied in such
statements. Factors that may cause actual results to differ materially from
those in the forward-looking statements include, but are not limited to, a
general economic recession; a downturn in our principal customers' businesses;
the growth in the communications industry; the ability to develop and market
new products and product enhancements; the ability to attract and retain
customers; competition and technological change; and successful implementation
of the Company's business strategy. In addition, this release contains
time-sensitive information that reflects management's best analysis only as of
the date of this release. PECO II does not undertake any obligation to
publicly update or revise any forward-looking statements to reflect future
events, information or circumstances that arise after the date of this
release. Further information concerning issues that could materially affect
financial performance related to forward-looking statements can be found in
PECO II's periodic filings with the Securities and Exchange Commission.

PECO II, INC.
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(unaudited)

(In thousands, except for per share data)

For the Three Months For the Six Months
-------------------- ------------------
Ended June 30, Ended June 30,
------------- -------------
2009 2008 2009 2008
---- ---- ---- ----

Net sales:
Product $6,434 $8,505 $11,855 $15,795
Services 3,493 2,552 5,555 4,273
------ ------ ------ ------
9,927 11,057 17,410 20,068
Cost of sales (exclusive
of depreciation and
amortization):
Product 4,973 7,170 9,638 13,290
Services 2,568 2,084 4,343 3,510
------ ------ ------ ------
7,541 9,254 13,981 16,800

Gross margin 2,386 1,803 3,429 3,268

Operating expenses:
Depreciation and
amortization 370 381 741 762
Research, development
and engineering 413 666 934 1,287
Selling, general and
administrative 1,841 2,029 3,610 3,937
------ ------ ------ ------
2,624 3,076 5,285 5,986
------ ------ ------ ------
Loss from operations (238) (1,273) (1,856) (2,718)
Interest income, net 8 41 17 105
------ ------ ------ ------
Loss before income taxes (230) (1,232) (1,839) (2,613)
Income tax expense (10) (1) (18) (9)
------ ------ ------ ------
Net loss $(240) $(1,233) $(1,857) $(2,622)
====== ====== ====== ======
Net loss per common share:
Basic and diluted $(0.08) $(0.45) $(0.65) $(0.95)
====== ====== ====== ======
Weighted average common
shares outstanding:
Basic and diluted 2,841 2,755 2,837 2,751
====== ====== ====== ======

PECO II, INC.
CONSOLIDATED BALANCE SHEETS
(In thousands, except for share data)
June 30, December 31,
------- -----------
2009 2008
---- ----
ASSETS (unaudited)
Current assets:
Cash and cash equivalents $5,010 $5,814
Accounts receivable, net 3,553 4,366
Inventories, net 8,412 8,533
Cost and earnings in excess of
billings on uncompleted contracts 1,722 622
Prepaid expenses and other
current assets 216 267
Assets held for sale 10 28
Restricted cash 923 834
------- ------
Total current assets 19,846 20,464
------- ------
Property and equipment, at cost:
Land and land improvements 195 195
Buildings and building
improvements 4,628 4,628
Machinery and equipment 2,978 2,895
Furniture and fixtures 5,521 5,518
------- -------
13,322 13,236
Less-accumulated depreciation: (10,282) (10,109)
------- -------
Property and equipment, net 3,040 3,127
Other assets:
Idle facility 800 800
Intangibles, net 2,212 2,748
------- -------
Total assets $25,898 $27,139
======= =======
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Borrowings under line of credit $923 $834
Bank overdrafts - 994
Accounts payable 4,399 3,387
Billings in excess of cost and
estimated earnings on
uncompleted contracts 420 235
Accrued compensation expense 1,107 923
Accrued income taxes 43 56
Other accrued expenses 1,674 1,633
------- -------
Total current liabilities 8,566 8,062
------- -------

Shareholders' equity:
Common stock, no par value:
150,000,000 shares
authorized; 2,850,861 and
2,816,527 shares issued at
June 30, 2009 and December
31, 2008, respectively 3,616 3,573
Additional paid-in capital 121,970 121,901
Accumulated deficit (108,254) (106,397)
------- -------
Total shareholders' equity 17,332 19,077
------- ------
Total liabilities and
shareholders' equity $25,898 $27,139
======= =======

Attachment A

EBITDA is not a financial measure calculated in accordance with U.S. generally
accepted accounting principles (GAAP) and should not be considered as an
alternative to net income, operating income or any other financial measure so
calculated and presented. We define EBITDA as net income/(loss) before
interest expense, taxes, depreciation, amortization, and non-cash stock
compensation expense. Other companies may define EBITDA differently. We
present EBITDA because we believe it to be an important supplemental measure
of our performance that is commonly used by securities analysts, investors and
other interested parties in the evaluation of companies in our industry.
Management also uses this information internally for forecasting and
budgeting. You should not consider EBITDA in isolation, or as a substitute
for analysis of our results as reported under GAAP.

Reconciliation of GAAP Net Loss to EBITDA
(unaudited)
For the Three For the Three
Months Ended Months Ended
June 30, March 31,
(In thousands) 2009 2008 2009 2008
2009 and 2008 EBITDA Breakdown
Net Loss per GAAP $(240) $(1,233) $(1,617) $(1,389)
Interest expense $6 $- $5 $6
Taxes $10 $1 $8 $9
Depreciation/ amortization $370 $381 $371 $381
Non-cash stock-based compensation $60 $117 $51 $63
------------------------------------------------------------------------
EBITDA $206 $(734) $(1,182) $(930)

SOURCE PECO II, Inc.

Scott A. Wallace, Corporate Controller and Principal Accounting Officer of
PECO II, Inc., +1-419-468-7600