GALION, Ohio, Nov. 8 /PRNewswire-FirstCall/ -- PECO II, Inc. , a full-service provider of engineering and on-site installation services and manufacturer of communications power systems and equipment to the communications industry, today reported results for the third quarter ended September 30, 2006.

Third-quarter 2006 Review

PECO II reported net sales of $12.4 million in the third quarter of 2006, an 8 percent increase over the $11.5 million reported in the third quarter of 2005. Excluding $2.5 million of revenues attributable to the Delta acquisition, third-quarter 2006 net sales decreased 14 percent from the third quarter of 2005. PECO II reported a net loss of $1.8 million, or $0.06 per basic and diluted share, for the third quarter of 2006, compared with a net loss of $0.2 million, or $0.01 per basic and diluted share, for the third quarter of 2005.

EBITDA was a loss of $1.0 million in the third quarter of 2006, compared with income of $0.1 million for the third quarter of 2005. An explanation and reconciliation of GAAP net income to EBITDA is included as Attachment A.

The net loss of $1.8 million for the third quarter of 2006 included $0.4 million of unabsorbed factory/production costs, $0.4 million in cost overruns on Service projects, $0.3 million related to non-cash amortization costs of Delta intangible assets, $0.2 million in Delta transition costs, $0.1 million in non-cash stock-based compensation costs, and $0.1 million in component cost increases.

John G. Heindel, president and chief executive officer, said, "The third- quarter performance reflects the impact of a downturn in customer orders combined with delays in forecasted orders from certain customers. Revenues declined sequentially, and the Company was unable to adjust its cost structure to account for this reduction in revenues. We believe that our previously announced plans to implement a strategic outsourcing program will provide the framework to transition fixed production costs to variable costs. We expect to be better equipped to react to shifts in our customers' ordering patterns once we have implemented the outsourcing of our non-strategic manufacturing functions."

Cash used for operating activities was $4.0 million for the nine months ended September 30, 2006. This was primarily due to operating losses and increases in inventories and costs and earnings in excess of billings, but was partially offset by increases in accounts payable and accruals. There was $1.3 million of cash provided by investing activities, which was primarily from the sale of the excess manufacturing facility less cash paid for the Delta acquisition. Cash provided by financing activities was $0.5 million, which included use of PECO II's credit line and the issuance of common stock for options exercised.

Inventory increased by $5.7 million for the first nine months of 2006. This was primarily due to increased raw materials to support the business growth the Company has experienced in 2006, combined with inventory staged for orders that were anticipated in the quarter that have been delayed.

The book-to-bill ratio for the third quarter of 2006 was 0.9, compared with 1.1 in the third quarter of 2005. Customer order backlog of $6.1 million as of September 30, 2006, was an 18 percent decrease from the second quarter and a 30 percent decrease from the third quarter of 2005.

Gross margin decreased to $1.4 million for the third quarter of 2006, compared with $2.8 million during the corresponding period in 2005. The gross margin percentage of 11 percent was 13 percent less than the 24 percent in the corresponding period in 2005. This percentage reduction was driven primarily by: 1) unabsorbed factory/production costs resulting in lowering gross margin by $0.4 million; 2) Service projects overrun of $0.4 million; 3) Delta transition costs of $0.2 million; 4) raw material cost increases that could not be passed on to customers of $0.1 million; and 5) amortization of $0.2 million relating to the supply agreement obtained as part of the Delta acquisition. Delta transition costs are expected to end in November 2006.

SG&A expenses of $2.4 million for the third quarter of 2006 were $0.4 million greater than the corresponding period in 2005. This increase was primarily attributable to: 1) increased investment in sales resources of $0.2 million; 2) non-cash stock-based compensation of $0.1 million; and, 3) amortization cost of $0.1 million relating to the Delta acquisition.

R&D expenses for the third quarter of 2006 were $0.9 million, a 17 percent increase from $0.7 million in the comparable quarter in 2005. This increase was primarily attributed to the cost of external certification tests for new products being introduced to the market. The Company continues its efforts to bring new products to the telecom market that add value to or reduce the cost of customers' offerings.

Conference Call on the Web

PECO II will hold a conference call with investors and analysts on Wednesday, November 8, 2006, at 10 a.m. Eastern time. The call will be available over the Internet at http://www.peco2.com/. To listen to the call, go to the Web site to register, download and install any necessary audio software. For those unable to listen to the live broadcast, a replay of the webcast will be archived and available shortly after the call.

About PECO II, Inc.

PECO II, headquartered in Galion, Ohio, provides engineering and on-site installation services and designs, 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 http://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. CONSOLIDATED STATEMENTS OF OPERATIONS (unaudited) (In thousands, except for per share data) For the Three Months For the Nine Months Ended September 30, Ended September 30, 2006 2005 2006 2005 Net sales: Product $8,965 $8,349 $26,646 $21,523 Services 3,457 3,133 9,825 8,602 12,422 11,482 36,471 30,125 Cost of goods sold: Product 7,679 6,030 21,824 15,817 Services 3,358 2,665 9,177 7,735 11,037 8,695 31,001 23,552 Gross margin: Product 1,286 2,319 4,822 5,706 Services 99 468 648 867 1,385 2,787 5,470 6,573 Operating expenses: Research, development and engineering 871 745 2,558 2,189 Selling, general and administrative 2,368 1,942 7,395 5,884 Real estate impairment - 430 - 430 3,239 3,117 9,953 8,503 Loss from operations (1,854) (330) (4,483) (1,930) Loss from joint venture - - - (8) Loss from operations after joint venture (1,854) (330) (4,483) (1,938) Interest income, net 121 43 359 143 Loss before income taxes (1,733) (287) (4,124) (1,795) Benefit (provision) for income taxes (17) 74 47 54 Net loss $(1,750) $(213) $(4,077) $(1,741) Net loss per common share: Basic and diluted $(0.06) $(0.01) $(0.16) $(0.08) Weighted average common shares outstanding: Basic and diluted 27,147 21,595 25,484 21,579 PECO II, INC. CONSOLIDATED BALANCE SHEETS (in thousands, except for per share data) ASSETS September 30, December 31, 2006 2005 Current Assets: (Unaudited) Cash and cash equivalents $ 6,635 $ 8,778 Accounts receivable, net of allowance of $80 in September 30, 2006 and $119 in December 31, 2005 6,816 7,046 Inventories, net of allowance of $2,080 in September 30, 2006 and $2,110 in December 31, 2005 13,808 8,124 Prepaid expenses and other current assets 328 732 Assets held for sale 1,300 3,518 Cost and earnings in excess of billings on uncompleted contracts 1,538 898 Restricted cash 3,500 3,683 Total current assets 33,925 32,779 Property and equipment, at cost: Land and land improvements 195 195 Buildings and building improvements 4,638 4,608 Machinery and equipment 9,034 9,072 Furniture and fixtures 5,862 5,853 19,729 19,728 Less-accumulated depreciation (14,588) (13,904) Property and equipment, net 5,141 5,824 Other Assets: Goodwill, net 6,126 1,774 Intangibles, net 5,163 - Investment in joint venture 6 6 Total Assets $50,361 $40,383 LIABILITIES AND SHAREHOLDERS' EQUITY Current Liabilities: Borrowings under line of credit $1,645 $ 1,419 Capital leases payable 97 92 Accounts payable 3,756 1,880 Accrued compensation expense 1,737 1,106 Billings in excess of cost and earnings on uncompleted contracts 306 79 Accrued income taxes 77 144 Other accrued expenses 3,682 4,455 Total current liabilities 11,300 9,175 Long-term Liabilities: Capital leases payable, net of current portion 279 354 Shareholders' Equity: Common shares, no par value: authorized 150,000,000 shares; 27,149,201 and 22,201,666 shares issued at September 30, 2006 and December 31, 2005 3,444 2,816 Warrants 5,005 - Additional paid-in capital 115,830 109,978 Retained deficit (85,497) (81,420) Treasury shares, at cost, 0 and 346,925 shares at September 30, 2006 and December 31, 2005, respectively - (520) Total shareholders' equity 38,782 30,854 Total Liabilities and Shareholders' Equity $50,361 $40,383 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 September 30, September 30, (In thousands) 2006 2005 3rd Quarter EBITDA Breakdown Net Loss per GAAP $(1,750) $(213) Interest expense $39 $71 Taxes $17 $(74) Depreciation/ amortization $ 524 $ 332 Non-cash stock-based compensation $ 137 $- EBITDA $(1,033) $ 116

CONTACT: Sandra A. Frankhouse, Chief Financial Officer and Treasurer of
PECO II, Inc., +1-419-468-7600

Web site: http://www.peco2.com/