Measurement Specialties, Inc F3Q09 Earnings Call Transcript

Measurement Specialties, Inc (MEAS)

F3Q09 Earnings Call

February 5, 2009 11:00 am ET

Executives

Frank D. Guidone - President, Chief Executive Officer, Director

Mark Thomson - Chief Financial Officer, Secretary

Analysts

Lawrence Solo - CJS Securities

John Franzreb - Sidoti & Co.

Theodor Kundtz - Needham & Company

Tom [Claugus] - Graham Partners

Larry Solo - TJF Securities

Stan Trilling - CSFB

Frank Guidone

Presentation

Operator

Greetings and welcome to the Measurement Specialties Third Quarter Fiscal Year 2009 Earnings Call. (Operator Instructions) It is now my pleasure to introduce your host Mr. Frank Guidone, CEO for Measurement Specialties. Thank you, Mr. Guidone you may now begin.

Frank Guidone

Thank you, Chris. Now let me start this morning’s call by reminding everyone that the comments made today fall under the Safe Harbor provision. Management wishes to caution investors that certain statements made on today’s call are considered forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995 Section 27A of the Securities Act of 1933 as amended and Section 21E of the Securities and Exchange Act of 1934 as amended.

Forward-looking statements may be identified by such words or phrases as believe, expect, intend, estimate, anticipate, project, will, may and similar expressions. All statements that address operating performance, events, or developments that we expect or anticipate will occur in the future are forward-looking statements. These forward-looking statements are not guarantees of future performance and involve a number of risks and uncertainties. Please refer to risk factors outlined in the company’s SEC reports for more detail.

The company from time to time considers acquiring or disposing businesses or product lines forward-looking statements do not include the impact of acquisitions or dispositions of assets which could affect results in the near term. Actual results may differ materially. The company assumes no obligation to update the information provided in today’s call.

Well good morning everyone. I will begin this morning with some high-level comments and observations and then hand the call over to Mark Thompson.

As projected in our last call and as presented by Mark during the January investor conferences, we experienced significant decline in our third quarter sales led by large decreases in sales to customers supporting passenger and non-passenger markets. Our Q3 sales were 23% lower than the corresponding period last year and 26 below the prior quarter.

Truck and auto was down almost twice that in Q3 versus Q2. The fallout in the care and light truck market is affecting not only end products but also sensors sold to things like auto safety testing facilities, customers tied to consumer products; semiconductor, building, and commercial markets have also lowered demand and forecasts.

We are in one of the worst recessions in decades and the decrease in our sales reflects the current downward economic pressure in most areas of the economy. However, in spite of the decline in sales, we remain profitable and continue to generate solid EBITDA. Adjusted EBITDA for the quarter was $5.5 million or 12.8% of sales. This was clearly down from our past performance, but solidly profitable, particularly given the sharp sales decline.

I can assure you we’re managing the situation closely, particularly with respect to expenses and our balance sheet, all translating into a focus on free cash flow. We’ve taken decisive action to align our labor workforce with the latest sales projections and we’ve lowered costs through reductions in headcount, management salaries, and elimination of the company’s management bonus program and 401K match, as well as curtailment of other expenses and capital expenditures.

Backlog continued to decline in the third quarter, dropping to $54.4 million at the end of December from $66 million in September. Monthly bookings need to meet and then exceed monthly billings before we can comfortably assume we’re in a recovery mode. The bottom line is that we’ve got very limited visibility at this time and are not comfortable providing any sort of sales guidance until we see some stability in the bookings and backlog.

Engineering activity around new programs remains high and we are trying to be extremely selective to ensure we’re allocating engineering capacity to those programs that have the highest probability of success both in terms of timing and annual sales potential.

After much anticipation, we held the grand opening of our new Asia Manufacturing and R&D headquarters in Shenzhen, China on January 15th. The facility is largely operational and we should have 100% of the manufacturing moved to the new facility and running by this spring.

On January 30th, we consummated two small acquisitions. The first, Atexis, is a boutique temperature sensor company focusing on custom probes with operating ranges from -200° Celsius to 2000° Celsius. Based in France, they established a low cost operation in Chengdu, China several years ago. This is in the Shenzhen province. The facility will allow us to more aggressively attack the white goods markets among others. Their expertise in a broad range of temperature sensing technologies, including platinum sensors, will allow us to strategically expand our temperature sensing line and drive sales synergies. To that end, we’ve already identified a significant cross-selling opportunity with a large HVAC customer. For 2008 Atexis had sales of approximately 8 million euro.

The second FGP is a long-standing player in the European test and measurement market. The founder, a former Entran employee, who you will recall we acquired Entran back in 2004, started FGP in 1975 and over that period has developed a reputation for providing high quality, low volume pressure acceleration and force solutions for demanding applications, particularly in the aerospace and automotive test and measurement markets.

Aside from the obvious synergies, being in particular that the FGP’s main facility is located a stones throw from our current facility in Les Clayes-sous-Bois, France, FGP has a more extensive sales and engineering group in France that will serve as our main team for the European test and measurement market in the future.

I know many people are concerned about doing acquisitions in this environment. We believe this is the right move for us, because number one we remain conservatively leveraged. While we increased our borrowing approximately $9 million to support the acquisitions our leverage and fixed charge ratios are still relatively conservative. Two, we have better leverage in bear than bull markets in terms of negotiating. Multiples have clearly come down as result of the global recession and we think this represents an opportunity for those companies capable of doing deals. Three, these deals represent further sales in operational synergies. These acquisitions provide us a host of additional operation and sales synergies for us to mine at this time.

With those comments, I will turn the call over to Mark.

Mark Thomson

Thank you, Frank. I will now cover the financial results for the third quarter fiscal 2009 in more detail starting off with a short discussion on cash flow and liquidity.

Cash at the end of December was $23.2 million. As of December 31 our outstanding borrowings under our credit facility totaled $56.8 million and the company had an additional $64.2 million of availability.

Our weighted average interest rate applicable to borrowing spend of the revolving credit facility as approximately 3.5% at December 31, however our incremental borrowing rate has since declined to 3.1% at the end of January.

During the first nine months of fiscal 2009 we generated $17.6 million in cash from operations; invested nearly $11.3 million in capital expenditures; and used $4.2 million from financing activities. From a free cash flow perspective, defined as cash flow from operations less capital expenditures we generated $6.3 million year-to-date.

Our capital expenditures during the first nine months of fiscal 2009 are heavily influenced by our continued investment in the new China facility, which completed in Q3. Of our $11.3 million of capital expenditures through the first nine months of fiscal 2009 about 44% or $5 million is tied to the China facility and related equipment. We continue to manage capital investments and working capital closely.

As planned, inventory turns did increase during the quarter mainly driven by the customer build plans and advance for our transition to the new China building. We anticipate that this inventory will be worked down during the next two quarters which will have a favorable impact to inventory turns and cash generation.

Given the economic environment, we continue to critically evaluate our credit exposures and continue to evaluate credit risk of customers who may be experiencing cash flow issues.

Net sales for the third quarter decreased $12.7 million to $3.3 million, a 22.7% decrease over the same period last year. Excluding sales from Intersema, which we completed in fiscal 2008, approximately $2.4 million, organic sales decreased $15 million or 27%. Net sales for the first nine months decreased $4.4 million to $161 million a 2.7% decrease over the same period last year.

Excluding sales from the Intersema acquisition of roughly $10.8 million, organic sales decreased $15.2 million or 9.2%. As Frank mentioned, the decrease in sales largely reflects decreases in sales to customers supporting passenger and non-passenger vehicle markets, another market adversely impacted by the current economic downturn.

In spite of decreased sales, gross margin for the quarter improved by 180 basis points to 43.7% as compared with the corresponding period last year. Relative to the prior quarter our gross margin improved 120 basis points.

Gross margin for the nine months ended December 31 increased to 42.9% from 42.1% in the same period last year.

During the quarter we integrated our Intersema organization onto our ERP system. In doing so we conformed Intersema onto our standard costing system and made certain adjustments to inventory. These adjustments favorably impacted gross margin by approximately $500,000.

Generally, the major drivers of gross margin continue to be product mix, foreign exchange rates, and the impact of commodity prices offset by various cost reduction initiatives. From a foreign exchange perspective the rate of appreciation of the RMB relative to the US dollar had stabilized during the past two quarters, however relative to the three and nine months last year the RMB appreciated approximately 7.4% and 8.8% respectively. This translates to approximately $1.6 million in annualized margin erosion.

Overall total operating expenses for Q3 increased $0.9 million or 5.7% to $18.9 million and for the nine months ended December 31, total operating expenses increased $6.3 million or 13% as compared to the same period last year.

SG&A for Q3 increased $0.5 million or 3.7% to $14.9 million as compared to the same period last year; of which, $0.9 million was associated with SG&A as a result of the Intersema and Visyx acquisitions.

As Frank noted, we made a decision to eliminate our fiscal 2009 management bonus plan and 401K match. The reversal of the bonus and 401K accruals totaled just under $700,000.

For the nine-month period SG&A increased $4.9 million or 11% to $48.7 million of which $3.1 million was associated with SG&A specific to these acquisitions. The majority of the remaining increase for the three and nine-month period is associated with the higher translation of the euro denominated cost as a result of the stronger euro for the first three quarters of fiscal 2009 versus the same period last year.

Management is dedicated to managing our operating expenses and we continue to implement various cost control measures given the current economic environment.

The company’s overall annual effective tax rate in fiscal 2009 was reduced from 28% to 26.5% as a result of a shift in income generated to lower tax regions and changes in estimates of permanent tax items.

As mentioned in earlier calls and during the investor conferences, an important tax initiative for the company was to obtain high tech status for a company in China. The company recently received formal notification that we did not obtain the qualification as a high new tech enterprise due to a lack of IP in the form of registered patents in China. Given that this criterion may evolve and we have the ability of registering IP in China, we will continue to pursue high tech status.

The company still maintains large net operating loss carry forwards in both Germany and in the US and at the end of fiscal 2008 Germany and the US NOLs approximated $13 million and $16 million respectively. It is important to note these, as the NOLs have a favorable impact on our actual taxes paid and remain a large benefit to the business.

Lastly, based on a combination of factors including the economic environment, our operating results and a decline in our market capitalization during the quarter, we concluded that there were sufficient indicators that required the company to perform an interim goodwill and term analysis. Using both the income approach and market approach to determine the fair value of the reporting units, it was determined that no impairment of goodwill existed and all of our acquisition related intangible assets were considered recoverable.

With that I will turn it back over to Frank.

Frank Guidone

Thank you, Mark. Chris we will now open it up for some questions.

Question and Answer Session

Operator

Your first question comes from the line of Larry Solo with CJS Securities.

Lawrence Solo - CJS Securities

Frank, I understand that your visibility is very limited, but can you maybe just give us a little more color on your wide range, your $45 to $65 million for the coming quarter and do you see this number, from where you stand today, potentially going lower as you look out in the 12 months of fiscal 2010 or any ideas on that?

Frank Guidone

I would just say based on January billings and the current bookings and backlog that right now we would say the fourth quarter is going to be at the low end of that range. You know, as I have mentioned many times before, the numbers that we’re seeing, particularly in the auto and truck; I think that’s the only market that we can really calibrate well to because there is good numbers in terms of what the overall OEMs are doing and what they’re anticipating in terms of build schedules as compared to what we see. We’re seeing a much more significant impact to our business than kind of what they’re planning on.

Generally if you look at Globally OEMs and varies a little bit in the US versus Europe and Asia, but in general it’s kind of a 25% to 30% reset is what the OEMs are planning on in terms of their build rates versus what we were a couple of quarters ago. Right now we’re seeing more dramatic declines than that and so we have to conclude that that’s a result of managing the inventory and the supply chain. But at some point we’ve got to kind of reset back to be comparable to those numbers. So, since we don’t have visibility to what that supply chain inventory looks like, it ‘s kind of a guessing game as to how much we will lag as to that.

We know that OEMs are generally back working. There were between two and four weeks most of the OEMs took off over the Christmas break timeframe and so now it’s a function really to see over the next few weeks and the next couple of months, really, how the bookings start to flow in before we can have a better picture. That’s the biggest issue.

The rest of the markets, I mean, everything is weak for sure, but nothing is being hit as dramatically as this area.

Lawrence Solo - CJS Securities

Okay and then last quarter you kind of discussed a bunch of new opportunities and when they may hit. How kind of new prospectively, is it still remaining pretty strong?

Frank Guidone

It is and this is the real difficulty we’re having. We’ve tried to adjust from a headcount and cost perspective as much of the areas as we can to try to match the decline in sales without overly jeopardizing our ability to react to new programs since that’s what’s going to drive new sales to help back fill for existing customer business that’s falling below prior periods. That remains very active.

As I said in my comments I think the key right now is to drive a greater degree of focus so that we are honing in on a fewer number of programs that we think have the greatest probability of success. But there are a lot of things in the funnel. There are a lot of things to work on. There still remains a lot of opportunity. As you know our development cycle is relatively long, so things don’t turn into sales very quickly.

We have our management team here in Dallas this week where we’re going through and trying to do our annual planning session. New business is helping to offset some of the declines in our outlook.

Lawrence Solo - CJS Securities

On a couple of the acquisitions you announced, I know it’s difficult to say exactly, but would it be a fair statement to assume they’ll be, at least on a cash basis, accretive?

Frank Guidone

Yes. I mean they’re EBITDA positive and they’ll be accretive on a cash basis. As always with our acquisitions they are not going to be EPS accretive for at least a year until we work through some of the amortization expense.

Lawrence Solo - CJS Securities

Okay, great, I got it. Thank you.

Operator

Your next question comes from the line of John Franzreb - Sidoti & Co.

John Franzreb - Sidoti & Co.

I just wanted to clarify, Frank, if I heard you correctly you said that 3x the January order book that sits at that low end of that revenue guidance. Is that what I heard?

Frank Guidone

Not relative to January. I would say that, based on where January came in, based on where we’re seeing the January bookings and kind of projecting out the rest of the quarter, we’re going to be at the low end of the range is our best guess.

John Franzreb - Sidoti & Co.

Right so based on January you don’t need to step up to hit the bottom end of that guidance then?

Frank Guidone

Keep in mind that most of the auto OEMs still were not back to work in January. So, January is a low month, but the part we know that was going to be lower.

John Franzreb - Sidoti & Co.

Okay and on that point can you give us a sense x auto with the balance of the business was doing?

Frank Guidone

I don’t have the markets cut out. We’ve done this analysis a few times. In general, I would say that the rest of the business, let’s say excluding medical for a moment, is in the 10% to 15% down range, most of the markets, most of our customers. Some being on the higher end, things like the businesses that are tied more directly to home building or construction are down a little more than that. Consumer businesses tied to the consumer are probably closer to the 20% or 30% range.

John Franzreb - Sidoti & Co.

Okay that makes sense. Now, regarding some of the cost cuts that you put out there. Clearly, A) can you quantify how much you expect in savings over the next fiscal year from those moves and B) how much of those are actually sustainable savings, because I imagine the bonus program, for instance, will come back at some point. Could you discuss those two points?

Frank Guidone

I’d rather not put out numbers yet because in terms of quantifying savings because we keep layering on as we get more information and visibility. We’ve made a number of changes and so I don’t yet have enough solid run rate months to give you a good answer on exactly where that’s all shaking out because there’s some puts and takes as you can imagine.

As far as sustainability, the reduction in management wages, we made that a six-month program. That’s the only one that has kind of defined term on it. I would say the other items are open ended. Right now we’ve basically suspended the 401k match and the management bonus program until we’re in a position where we feel like we can comfortably bring those back and right now we’re not comfortable. I mean I wouldn’t say that that has a fixed window on it.

John Franzreb - Sidoti & Co.

Okay. I have one last question. Could you talk a little bit about your decision to eliminate the group reporting process?

Frank Guidone

Yes. We’ve really been managing, I mean the business is becoming more and more matrix as we integrate more and we really manage sales and contribution margin by product line It ‘s much more effective to manage the fixed bucket of expenses by site. People are generally associated with a site and we can control the expenses better by site. It’s a more logical means of how we manage the business and it aligns control better with how the costs logically align as well.

From a sales perspective there’s kind of two cuts that the world, there’s the product line cut which we look at globally by the type of technology and then there is market cuts. We’re starting to establish a sales alignment, at least with a couple of markets, like say auto and truck, that give us a market cut for sales and sales responsibility, that is a little different, that we think will drive better market concentration and market focus.

Operator

Your next question comes from the line of Theodor Kundtz with Needham & Company.

Theodor Kundtz - Needham & Company

Could you talk a little bit about the revenue? Going back to the revenue estimates again, Frank, you are including the acquisitions in those estimates right?

Frank Guidone

No.

Theodor Kundtz - Needham & Company

Oh you’re not. Oh, okay so when you talk about the low end of that range that excludes the benefit of the two acquisitions you just made?

Frank Guidone

Yes.

Theodor Kundtz - Needham & Company

Okay which could probably add, I’m guessing, what $3 to $4 million for the quarter? I figure they both were doing about $20 million in total, $19, $20 million in revenues run rate. That’s what I was using.

Frank Guidone

Yes, you’re in the ballpark.

Theodor Kundtz - Needham & Company

So we could add that on to it and now those margins…

Frank Guidone

Now keep in mind we’ll have it for2/3 of the quarter.

Frank Guidone

Right, I know that, right, right.

Theodor Kundtz - Needham & Company

Then the margins on that business are roughly comparable to your current gross margins?

Frank Guidone

Let me not comment on gross margins since we have not yet had a good chance to try to align all of their cost buckets with the way we do our standard costing, which could create some shifts. From an EBITDA perspective they’re running around 10%.

Theodor Kundtz - Needham & Company

Okay. Okay so would you assume that the current outlook for gross margins is comparable to this quarter, which has, I guess, benefited you mentioned from both the lower mix of Sensata and the cost cutting efforts? Do you think that could be a comparable number in this current quarter?

Frank Guidone

My only caution is on absorption.

Theodor Kundtz - Needham & Company

Right, that’s why I was surprised. I really thought they would be lower because of that. I am surprised because I assume the third quarter wasn’t great either.

Frank Guidone

No, but we were building inventory, because we really didn’t start moving the China facility until around mid December.

Theodor Kundtz - Needham & Company

Got it, that makes sense. You’re going to cut back on the inventory build?

Frank Guidone

Exactly. It’s a tough number to try to nail down, because there is a lot of moving parts to so many different facilities. I ‘m not trying to side step it, but it would be difficult for me to give you a tight range on that one.

Theodor Kundtz - Needham & Company

No, I understand that, because I was surprised by how well the gross margins came in, in the quarter and you just explained it.

Also, could you talk about the CapEx requirements going forward. Now that the China facility is completed, what do you expect those to be?

Frank Guidone

Well, I’ve got my management team in the room and I think if I go ask them what they’d like versus what we’ll allow them to spend it’s going to be different. Clearly, right now, I would say that we’re on a maintenance CapEx level, plus specific investment in equipment that’s required to support new programs. But, there isn’t a lot of growth investment required for capacity increase; so I think we generally have sufficient capacity, able to move up and down. Clearly we’re operating well below where we were a few quarters ago, so we have plenty of capacity. But, there are some new programs that require a particular piece of equipment that might be different than what we have and so there’s some unique investment there.

In general, I think the 3% to 4% range should hold, even on lower sales, reflecting kind of a maintenance plus exception spend situation.

Theodor Kundtz - Needham & Company

Okay so should we think of it as like the $11.3 million minus the $5 million for the third three quarters at that kind of run rate? Just take out what you spent on China and use that as the run rate?

Mark Thomson

Ted, this is Mark. I think the best way of doing that would be take 3% to 4% of sales, which will get you on or about the same number. That is a better way of actually estimating.

Theodor Kundtz - Needham & Company

Okay. Mark while I’ve got you, maybe you could just comment on the tax rate. The number you gave us is what you expect it to be going forward?

Mark Thomson

The $26.5 is for this fiscal year as we do a pretty elaborate estimation by region and entity each respective year. Of course that gives you a good indication of profit before tax and then therefore we can do some pretty good scrubs. Unfortunately there is a little volatility year-over-year based on some of the permanent tax items. In particular sub part F what we call deemed dividends and in part that actually shifted in our favor this year along with some of the shift of profits to lower tax regions. So that was the main driver between the $28 and the $26.5. I am going forward by virtue of just what we’ve learned with respect to the China facility and we still continue to grow in areas where it’s generally outside of some of the lower tax regions. We do expect our tax rate to increase probably a couple of points year-over-year.

Theodor Kundtz - Needham & Company

Okay. Frank, looking at the business x the automotive side, which you indicated was down 10% to 15%. You kind of excluded medical so I’m not sure what your total would be, but let’s call it 10%, 12% kind of down.

Frank Guidone

That is with consumer being twice that.

Theodor Kundtz - Needham & Company

Right, right, yes the auto being well above that as well.

Frank Guidone

That is right.

Theodor Kundtz - Needham & Company

What would you say you’re seeing now. Are things getting worse or have things sort of stabilized in your mind or can’t you tell yet in terms of the x the automotive side of the business?

Frank Guidone

I think, as you’re asking the question, I’m thinking about how I would answer it in terms of backing it up with some analysis. I think what might be helpful and I haven’t done this yet, would be to break our bookings and billings by market to see if at least in the non-auto, non-consumer are we booking at the same rate we’re billing, which would tell me we’ve kind of stabilized. In total we’re still consuming backlog and so although it’s slowing, we are still not yet consistently booking at the same rate that we’re billing consolidated. I would bet that that’s being driven more by the auto and truck and consumer markets, which would suggest that it’s probably more stable in those non-markets, but I haven’t actually done that analysis. It’s an interesting suggestion.

Theodor Kundtz - Needham & Company

Okay. I’m just trying to get a sense of your read on that. And, no real sense of when the automotive could bottom here? I mean because it is an inventory issue, probably, for you guys as well.

Frank Guidone

Yes, I mean you know that market. What may be different from past recessions is it’s a pretty sophisticated supply chain that runs fairly lean, but we are back, in most cases, two, three, four tiers in the supply chain. Every time you move back a tier you add another layer that gets whip sod, right.

It’s tough to tell, but certainly with GM and Ford posting numbers of down 40% and 49%, they have to get on a stable level first before we see that. They’re numbers compared to a year ago look horrible, but their numbers compared to last month and the month prior are certainly starting to slow and stabilize. Once we see that in the end markets then I think we can get a better sense of what we can expect moving forward in that space.

At the end of the day, I think that you can only put off, you’re only going to be able to stretch vehicles - particularly people in business who are buying light trucks and things that are used for business purposes, you can only stretch it so far. This has got to get to a stabilization point at some point.

Theodor Kundtz - Needham & Company

Are you going to have any continued employee layoffs in your business?

Frank Guidone

I’ll tell you the same thing that we’ve told our employees. We’re responsibly managing the business and trying to be responsible to both our employees and to our shareholders, which means we’re trying to be proactive. But, to make statements like we’re done and layoffs are non existent anymore I think is unreasonable given the uncertainty in the top line. So it really depends on what happens in the top line, because that’s the key driver here for us.

Theodor Kundtz - Needham & Company

How about the pricing issue situation, are you seeing any competitive pricing? You generally don’t because of the nature of your business, but has that condition changed at all?

Frank Guidone

I can think of a couple of examples where we’ve seen people being more aggressive. I can certainly think of a few areas where we are planning to be more aggressive to try to drive just volume for absorption. That’s a dangerous game, because you can screw up pricing in a market for a long time, but anything over variable cost is adding absorption, so that’s helpful in this environment. I think it’s got to be a factor. It’ll be a heck of a lot less of a factor in our business than in others because of the custom design aspect of our products.

Theodor Kundtz - Needham & Company

Remind us again, what the auto and consumer portion of your business is, as a percent of business? [Interposing] 20% 25% for auto is that still the number?

Frank Guidone

Yes as part of a loan, trucks and other 8 to 10 so combined auto and heavy truck, which includes off road and over road, represents around 30%, 32% and consumer, well no it’s bigger because of Intersema, that’s probably another roughly 10%.

Theodor Kundtz - Needham & Company

Okay, terrific. Thank you both.

Operator

Your next question comes from the line of Tom [Claugus] - Graham Partners.

Tom [Claugus] - Graham Partners

Just on the acquisitions, did you guys take into consideration the stability of the two businesses purchased in this environment and can you kind of speak to that point, or whether they have growth prospects in the current year?

Frank Guidone

Clearly this is a big concern when you’re buying a business in the face of a recession, so we spend a lot of time trying to address this point. Atexis grew nicely this year and has a strong backlog for growth next year, so I would say the strategy of the businesses are similar, but the strengths are in different areas. With Atexis the real synergy is on their growth and access to their customers for cross selling opportunities and their backlog and their history has been very stable. The areas they sell into have been less affected and they’re a relatively small player in big markets and have been able to win business, so their growing in spite of a recession.

FUP represents some significant synergies from an operational perspective given that it gives us the opportunity to consolidate the two facilities that we have in Les Clayes-sous-Bois now. So there is a big cost synergy aspect to that deal. Their growth prospects are stable. The test and measurement market, I would say, is more stable than many of the others that we serve, but we’re not planning on the same kind of growth as we’re planning on from Atexis. Nevertheless, we think the deal is very attractive because of the operational synergies and because of the engineering and sales force that we get for the European test and measurement market. That’s an area that we’ve been weak. We know we’ve kind of been stuck between a rock and a hard place where we haven’t been growing. Our test and measurement sales in Europe, but to get there would have required us investing in a larger engineering and sales force in Europe and through this acquisition we’re able to gain that and I think leverage the business up.

Tom [Claugus] - Graham Partners

Okay and then on the guidance of $45 to $55, based on your comments it sounds like January wasn’t stellar on bookings. What I’m trying to understand is what are you guys thinking for an up tick in revenues sequentially, which is sort of what you’re guiding to.

Frank Guidone

For the low end of the range at $45 would be a…

Tom [Claugus] - Graham Partners

Be an up tick and so is there anything that you see that you can specifically point to or is your thought that that is what’s going to happen?

Frank Guidone

It’s nothing other than as we’ve said, we believe that the third quarter and at least certainly January, but the third quarter is being impacted by companies adjusting inventories. We know that has to end at some point and when it does we expect to see an up tick. Whether that happens in February or March will make a difference as to where our fourth quarter ends up. You know, we ended the third at 43 change, so we’re not, at this point, given where January came in, expecting to be materially different. That is why I said we will be at the low end of our range.

Operator

Your next question comes from the line of Larry Solo with TJF Securities.

Larry Solo - TJF Securities

Could you just give a little more color on kind of the timing of the headcount reductions? Were they mostly after the quarter? Obviously, I know some of the SG&A reduction was due to the roll back of the quarter so that was like $700,000. My question is, going forward can the implementation for a full quarters worth of headcount reductions offset the accrual and could this kind of be a run rate SG&A number?

Frank Guidone

Most of our headcount reductions happened at the end of November, so we saw the benefit in December, with the exception of the salary reductions which took place in January.

Larry Solo - TJF Securities

Got it and then I have a question maybe for Mark. There was sort of a pretty big swing in accounts receivable and an almost equal swing in accounts payable. What is the reason for that?

Mark Thomson

Well we’re obviously doing our best to manage both days sales and days payable outstanding. To some degree we’ve slowed down our payables, kind of, a little bit in line with industry. To the extent we could we tried to manage our receivables as well. Most of it is just a small timing event.

Larry Solo - TJF Securities

Okay, because it was like a $10 million drop in receivables, which is actually good, and then the payables went up 7 right?

Mark Thomson

Yes. We have really done, I want to say, a very focused effort on managing some of the key large outstanding accounts and I haven’t made a concerted effort, not just in the finance and accounting organization, but included key sales folks to cap and reducing that.

Frank Guidone

Larry, I would say more of the payable is probably associated with the fact that we were building inventory in support of the move to the China facility, which increased vendor GPL.

Larry Solo - TJF Securities

I got it. Okay great, thanks.

Operator

Your next question comes from the line of Stan Trilling with CSFB.

Stan Trilling - CSFB

When do you think you’ll be back to normalized inventory levels?

Frank Guidone

I think if we exclude Sensata for a moment, we’re expecting to be back within normal levels within the next three to four, maybe five months. We were originally projecting by the end of the fourth quarter, given that the volume is slower than what we had expected when we were building the original inventory. It may be a little bit longer.

Sensata will be a longer tail, because their slow down has been much more dramatic than what we had planned when we were building inventory for them.

Stan Trilling - CSFB

Is there anything new in the medical area that looks interesting?

Frank Guidone

There is a lot of activity there. We’ve got a number of things active both in the pressure business. We’re working on, and have been for a couple of years, a couple of major programs with both existing and new customers that we expect to see some traction on this year. We’ve got a position and coder program that we expect to hit this year; a load cell program that we expect to get traction on this year and some temperature programs.

It’s very active. I mean everyone has the message that we’re trying to drive higher concentration in medical. But, the end of the day is an industrial customer walks in with a great opportunity, that’s the higher probability case that we have to go mine. We’re trying to balance the opportunistic applications that are kind of in bound versus our more kind of directed sales activities where we’re trying to drive more medical.

Stan Trilling - CSFB

Okay, thank you.

Operator

Mr. Guidone, there are no further questions at this time. I’d like to turn the call back over to you for any closing comments you may have.

Frank Guidone

Great, thank you. Well these are clearly difficult times, unprecedented; however given our market diversity, the strength of our cash flow and proactive cost management activities, we believe we’ll fare better than most. We believe our new programs will help cushion the impact of a recession as well as help to accelerate our growth once our markets recover.

I would like to thank everyone for their participation on today’s call.

Chris, that will conclude today’s call.

Operator

This concludes today’s teleconference. Thank you for your participation. May you all have a wonderful day.

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