MTS Systems Corporation (MTSC) Q3 2019 Earnings Call Transcript

MTS Systems Corporation (MTSC)
Q3 2019 Earnings Call
August 6, 2019, 10:00 a.m. ET

Contents:

• Prepared Remarks
• Questions and Answers
• Call Participants

Prepared Remarks:

Operator

Welcome to MTS Third Quarter 2019 Earnings Conference Call. Today's conference is being recorded. At this time, I'd like to turn the conference over to Mr. Brian Ross, MTS Executive Vice President and Chief Financial Officer, please go ahead.

Brian T. Ross -- Senior Vice President and Chief Financial Officer

Thank you, Stephanie. Good morning and welcome to MTS Systems Fiscal 2019 Third Quarter Investor Teleconference. Joining me on the call today is Jeff Graves, our President, and Chief Executive Officer. I want to remind you that we will make forward-looking statements today as defined by the Private Securities Litigation Reform Act of 1995. Future results may differ materially from these statements, depending upon risks, some of which are beyond management's control. A list of such risks can be found in our latest SEC Forms 10-Q and 10-K. We disclaim any obligation to revise the forward-looking statements made today based on future events.

This presentation will also include reference to non-GAAP financial measures. These measures are used by management to evaluate the operating performance of the Company over time. They should not be considered in isolation or as a substitute for GAAP measures. A reconciliation of our non-GAAP measures to the nearest GAAP measure can be found in our earnings release. I will now turn the call over to Jeff.

Jeffrey A. Graves -- President and Chief Executive Officer

Thank you, Brian, and good morning, everyone. We appreciate you joining us on our call this morning. Having executed well for the first nine months of our fiscal year performances headlined by another strong quarter of top-line growth. Revenue was up almost 20% from the prior-year quarter, virtually equaling our record performance in our fiscal second quarter of this year. This brings our year-to-date top-line growth rate to 15% reflecting broad secular strength in global research and new product development investments by our university and OEM customers around the world as well as continued investment in industrial automation for enhanced productivity and reliability of manufacturing systems. By all measures, we consider this to be a great achievement in today's marketplace, and we look forward to finishing the year in a solid fashion.

While our Test and Simulation business continued an exciting year of growth, in the third quarter, our Sensors business also accelerated delivering nearly 7% revenue growth in the quarter compared to the prior year. This brought our year-to-date growth rate for sensors to 3.4%, and we expect to see further acceleration in top-line performance in our fourth-quarter. Our sales performance reflects the strength of our technology offerings, our broad geographic presence, and expansion of our market verticals in both our Sensors and Test and Simulation businesses. This top-line performance reflects the increasing success of our growth and diversification strategy, capitalizing on our market-leading Sensors and Test and Simulation product technologies combined with delivering premium service to our customers across the globe.

Consistent with the message that I've been delivering all year long, we continued to leverage the strong core technologies in both of our businesses and prioritize the introduction of new products and services in adjacent markets to accelerate our growth and further diversify our market exposure. While being very pleased with our top-line performance and continuing trends, we also continue to focus intensely on our profitability and are once again very pleased with our progress in this area as reflected in both our adjusted EBITDA and earnings performance. In short, we're continuing to execute on our strategy of making prudent investments in the business to support sustained long-term growth along with efficiency and productivity improvements.

We believe that over time this consistent focus will prove successful in creating a test and measurement company that is more resilient to changes in the external environment and is better able to sustain a high level of financial performance. Looking back on the acquisition we completed in our first quarter of this year, E2M Technologies had another strong quarter and continues to perform to our expectations as we initially described at the beginning of the year. In addition to opening new exciting markets for flight simulation and entertainment, we continue to integrate the technology capabilities of E2M into other areas of MTS that we believe will build an even stronger elective brand in the marketplace.

While our third quarter performance was exciting in and of itself, our accomplishments continued in the following weeks. In early July, we took advantage of an attractive interest rate environment to complete a $350 million bond offering. Our ability to effectively communicate our business strategy and execution plans to a large new audience of fixed income bond investors was well received. I was pleased with the strength of demand and the final outcome. Our new debt structure will allow to further execute on our growth and diversification strategy in the years ahead.

Finally, just last evening, we were pleased and honored to announce the acquisition of the Endevco product lines from Meggitt, LLC. Founded in 1947, for over 70 years, Endevco has been a market leader in high-performance sensors for testing applications. They're a well known and highly respected name in laboratories and research environments around the world. We're extremely pleased to add this suite of sensor products to our existing market-leading portfolio of sensors. The combination of the PCB and Endevco brand names is a natural fit and will continue to strengthen our market-leading technology offerings to customers around the world. As stated in our earnings release, the purchase consideration for the Endevco assets was a proximally $70 million, and we expect these products to contribute approximately $30 million in revenue annually moving forward.

Given the timing of the close this week, we do not expect this transaction to have a material effect on our Q4 or fiscal 2019 performance, but it will certainly provide for a very exciting growth prospect in the years ahead. We'll be providing more detail on the exciting outlook for our Sensor business as well as for our Test and Simulation business at our upcoming Analyst Day to be held here in Minneapolis on September 4. Let me now share a few more details on our financial performance through the third quarter before handing the call over to Brian for further discussion.

Looking first at orders, in the third quarter, we saw a decline from the prior year largely attributable to the timing on order placement. In our Test and Simulation business, we generated orders of $104 million, a 26% decrease over the prior year. However, this order volume largely excludes an exciting order that we received from the US Army valued at over $30 million, inclusive of all options. Similar to the large Sensor Contract that we announced last year, this product contains options which are funded incrementally and as such will not be reflected in orders or backlog until each increment is approved by the Department of Defense. Under this new contract, we will design and build the world's largest road simulator for the U.S. Army, capable of testing multi-actual vehicles weighing up to 100,000 pounds under a wide range of simulated road conditions.

Once complete, the system will reduce the cycle time for new vehicle testing by up to 80%, allowing the Army to field new technologies more quickly and reliably than ever before. This is a great example of how we leverage our existing expertise and intellectual property honed over five decades into expanded applications to provide amazing solutions for our customers. The sheer scale and engineering content of the simulator is a testament to the confidence customers have in MTS to build world-class test and simulation equipment for their specific and often extremely demanding applications. Service orders for the Test and Simulation business were a highlight in the quarter increasing 10% from the prior year while most of the equipment sectors experienced a slight decline.

Our Sensors business saw continuing demand for new products and added $77 million in orders during the third quarter, down only slightly from the prior year. We continue to see broad strength across most of our sensor end markets, particularly in the Americas region, including both are industrial and test sectors. However, a relative basis we've seen higher volatility and periodic weakness in the European and Asian markets compared to the Americas as we continue to navigate global uncertainty around China and general weakness in the European economies. For the first nine months of the year, we generated orders of $361 million in our Test and Simulation business, a 2% increase over the prior year. This, in addition to $254 million in sensor orders, a 6% increase over prior year, provided a combined company orders growth of three and half a percent for the first nine months of our fiscal 2019.

Having summarized our sales drivers, let me next give you some color on our backlog position. From a consolidated perspective, we entered the quarter with a total company backlog of $443 million which remain significantly higher than historical levels and is 17% higher than where we were at this same time a year ago. The reduction backlog from Q2 was driven by the acceleration of our revenue conversion rates from strong production execution in our Test and Simulation business coupled with a slight reduction in order volume. Our operations team in the Test and Simulation business continued to deliver on improving production efficiencies and an excellent management of our supply chain. With the investments we continue to make in our operations, we expect these trends to gain further momentum as we complete the year and move into fiscal 2020.

As a general comment, we believe our backlog is a significant leading indicator of our future performance, our ability to deliver on our growth expectations, and expansion of profitability in fiscal 2019 and beyond. We believe that the fundamental markets we serve which are supported by secular strength and new products investment and industrial automation around the world continue to be positive and that the shorter-term macroeconomic volatility experienced in our third quarter will correct itself over the long-term. This bodes well for both of our businesses.

Moving next to our top-line performance, revenue from our Testing Simulation business was up 28% in the third quarter, compared to the same prior-year period. This performance reflects outstanding follow-through from our strong backlog position at the end of the second quarter. Our production execution in the first nine months of fiscal 2019 generated a 23% increase in revenues for our Test and Simulation business. We continue to take it vantage of opportunities outside of ground vehicles for our Test and Simulation business and particularly in our materials test and our test services area. In addition, E2M has expended the revenue base in our test and simulation business and is performing well in both the flight simulation and entertainment markets as we expected since we acquired the business late in our first quarter.

We remain very optimistic regarding the continued upside potential associated with the continued integration of our businesses in the months ahead. We continue to diversify our Test and Simulation business and reduce our overall exposure to ground vehicle development markets through expansion and through adjacent market verticals. The award from the US Army after the quarter ended is a prime example of core technology that we intend to leverage and deliver to our key customers with our market-leading ground vehicles test and simulation solutions. While we continue to view the testing of new ground vehicles as attractive, we recognize that it brings somewhat higher volatility, which can be disruptive to our workforce planning and her overall financial performance.

Therefore, our objective is to broaden our market participation, gaining more consistency in our growth and greater efficiency in our engineering operations. With the continued strong focus on adjacent markets where we see favorable demand trends and where we can leverage our world-leading technology expertise in force and motion control, we're beginning to see of this effort. While overall sales have increased year to date, revenue from our ground vehicles markets have reduced from a historical form of roughly 45% to 40% today.

Looking forward, we expect continued to clients in this revenue percentage as indicated by the orders profile in our third quarter, which showed ground vehicle orders at 35% of the total. This trend gives us confidence that we will attain our target of 15% in the future while continuing to grow the overall Test and Simulation business. Through this shift in business mix, we expect to experience more consistent growth, decrease volatility, and improved profit margins in the Test and Simulation business.

Looking next at our Sensor business, we continue to expect to grow since revenues on average the double-digit range annually with some years being above and some below this mark. At the halfway mark of fiscal 2019, sensors had delivered revenue growth of 2% for the first six months, paced largely by the need to ramp up production for a record number of new product offerings as well as for our Department of Defense contract. As we exited the second quarter, we expected growth rates to accelerate, and indeed we delivered 7% growth in Q3 setting a new record for sensor revenues. Given the general market outlook and are a strong backlog of sensors for the US military, we would expect this acceleration to continue in our fourth-quarter and through fiscal 2020.

With this expected strong finish to the year, our full-year fiscal 2019 revenue growth for sensors is expected to be in the 6% to 8% range. This top-line performance should allow us our targeted sensors gross margin and adjusted EBITDA margin performance of roughly 50% and 20% respectively. With a strong outlook for sensors demand in the industrial and test markets and the continuing opportunity represented by our Department of Defense sales, we remain extremely bullish about our Sensor business in the coming years. With its strong organic growth potential, margin, and free cash performance, we expect our sensors to be an increasingly important contributor to our overall company performance in the future. Our addition of the Endevco business just this week will further accelerate these positive trends making for an even more exciting future ahead.

So, in summary, we are pleased with our market position and performance trends to the first nine months of fiscal 2019. In looking ahead, it's informative to describe the expectation for each of our business units. For Test and Simulation, while we expect no significant change in our ground vehicle sector, we anticipate growth in our materials and structures equipment sectors and our expanded markets for simulation. In addition, test services will continue to grow as we complete the fiscal year and beyond. Given the strong revenue performance to the first nine months of the year, we expect slight moderation of ingrowth in the fourth quarter for Test and Simulation business which will still provide strong year-over-year performance for this business unit.

From a Sensors perspective, after a lot of heavy lifting in the first half of the year and into the third quarter related to several key new product introductions, we anticipate a strong finish for the fiscal year with double-digit revenue growth in the fourth quarter from a year ago level perspective. With this acceleration in our top line, we expect improved margin performance above the gross and adjusted EBITDA margin level. To deliver this performance, we simply need to keep doing what we have been doing. That is focusing on execution and providing unparalleled total customer satisfaction.

And finally, before handing off to Brian, let me comment on the situation in China and the impact of trade tariffs on our company. As been if you know, we've had success in our China markets for many years, and they continue to represent an area of significant growth potential for us. To date, we've experienced minimal macroeconomic impacts the tariff enactments and believe we are well-positioned to navigate not only the import/export challenges but also to minimize any long-term effects of raw materials inflation. However, as with most companies, the longer that the tariffs remain a headline in the news, the more we could potentially see a degradation in the market simply because the effect the situation is having on the global macroeconomy.

Indeed, for the first time in recent history, we experience a degree of softness in orders from China in our third quarter. However, given the robust investments that the Chinese continue to make in new product development and in their domestic university basic research infrastructure, we remain very bullish about our long-term future there. Now, I'd like to turn the call over to Brian to further discuss our financial results and our outlook. Brian?

Brian T. Ross -- Senior Vice President and Chief Financial Officer

Thank you, Jeff. I'll start today with some exciting events that occurred following the close of our third quarter. I'd like to start by providing a little more background on recent changes in our capital structure. The first is the successful senior unsecured bond offering completed on July 16, 2019, and second, the expiration of term of our tangible equity unit offering completed in July 2016, both items occurring subsequent to our quarter and. We have continuously monitored the debt and equity markets to determine what type of security offering would provide the optimal structure and liquidity that we believe support our business strategy and keep the cost of capital for MTS in an optimum range.

With these considerations in mind and with the rate cuts just snacked by the federal government already being priced into the markets, we believe that our timing was excellent. After meeting with a large number of fixed income investors, we were very pleased with the overwhelming interest in our company and our bond offering. This enabled us to conclude with an interest rate of 5.75% and with the initial offering being upside from the initial $300 million offering to $350 million. With the success of this offering, we are able to completely pay off our existing revolving line of credit balance which was used to acquire E2M Technologies in November 2018 as well as pay down over $200 million of our term loan B debt while retaining approximately 50 men dollars in cash on our balance sheet.

This recapitalization and the resulting liquidity position put us in an even stronger position to execute on our strategy of growing the company both top and bottom line and provide even greater long-term value to MTS and our shareholders. In addition to our bond offering, are tangible equity units offered in July 2016 related to the acquisition of PCB, fully converted subsequent to quarter-end. As you might remember, the TEUs contained both a debt and equity component to them. With the expiration of these units, we paid the final debt installment and settled the remaining equity component on July 1, 2019, further optimizing our capital structure. Of note, this conversion does not impact our EPS calculation as we have reported earnings on a fully converted basis since the offering was completed in 2016.

Our ability to manage our pre-existing debt position through both company performance as well as paydown of principal contribute to our success in the senior bond offering as we continue to manage our debt and capital in a very efficient manner. On the heels of the completion of our bond offering, just yesterday, we announced the acquisition of the Endevco sensor assets from Meggitt Corporation. As Jeff mentioned in his remarks, this is another great milestone in our Sensors business which builds further on the legacy of our MTS and PCB brands adding another highly respected brand with a distinguished 70-year history of providing technology-leading sensor products into the test markets worldwide.

From a financial standpoint, as Jeff mentioned, we paid approximately $70 million for these assets and expect approximately $30 million in revenue on an annualized basis. More context, as well as an exciting vision for our Sensor business, will be provided at our upcoming Analyst The event. From a financing standpoint, the acquisition of Endevco was supported through cash and borrowings from our existing balance sheet with only a slight increase in our leverage. Due to the timing of the transaction near the midpoint of our fourth quarter, we would expect no measurable impact on our forecast for the fiscal year. Guidance for fiscal year 2020 will be included as usual we announce our year-end results in November.

Now will move on to the third quarter fiscal 2019 results with a focus primarily on year-over-year quarterly comparisons. Jeff party touched upon orders, backlog, and revenue performance; so, I will start with gross margin. While there was again another significant increase in our consolidated gross margin dollars in the quarter, our gross margin rate for the quarter declined by 260 basis points versus the prior-year quarter, and two other basis points your date. This decrease is primarily attributable to the change in revenue mix between our two businesses as growth in our Test and Simulation business was more significant in our Sensors business. With its lower gross margins, this makeshift torts Test and Simulation tempered the consolidated gross margin percentage.

Looking at the individual businesses, Test and Simulation gross margin rate decreased by 170 basis points in the quarter versus the prior-year quarter as we work through certain large custom projects that generally carry a lower gross margin than the overall business. Although decrease in gross margin rate, income from operations for Test and Simulation increased from 3.7% to 7.4% for the first nine months comparison to last year which showed a concerted effort by our team to improve overall bottom-line performance. The gross margin rate for our Sensors business to claim 190 basis points versus the same prior-year quarter, primarily due to the production inefficiencies related to the introduction of an abnormally large number of new products. For the first nine months of this fiscal year, we have seen the margin rate decline to 48.9%, however, we expect to see the margin rate for the Sensors business returned approximately 50% for the fourth quarter which is our ongoing target for this business as a result of the focus on resolving previously mentioned manufacturing inefficiencies.

In addition to these impacts caused by the change in our product mix, both businesses continue with their ongoing programs which have begun to lower their cost structures and drive productivity improvements. We continue to manage costs closely to ensure expense leverage aligns with the needs of our business and to be prudent investments; we undertake to drive profitability. These efforts have resulted in an improvement of 3.2 percentage points in operating expenses as a percent of revenue for the first nine months of this fiscal year. Operating expenses for the quarter of $62.1 million and $185.6 million for the nine-month period, have increased by $2.1 million and $16 million respectively when compared to the prior year same periods mainly due to the additional cost for the acquisition of E2M as well as additional variable compensation expense from the strong performance of the businesses.

We also incurred acquisition-related expenses of $1.1 million in additional intangible amortization of $1.1 million in the first nine months of fiscal 2019 as the result of the acquisition of E2M. Total acquisition costs for E2M are expected to be no more than $1.5 million for the year. Net interest expense of $6.7 million increased slightly in the quarter due to the additional drawdown of the revolving line of credit for the acquisition of E2M. Our expectation for interest expense for the year has change solely due to our bond offering. We expect interest expense to be $32 million-$33 million in fiscal 2019 with an additional $50 million of debt equating to approximately $700,000 of additional interest in the fourth quarter of fiscal 2019 and non-cash interest charges a $5.4 million for the right off of capitalized debt issuance fees related to our term loan B which was significantly reduced as part of the bond issuance.

The effective tax rate of 16.1% for the third quarter is indicative of our overall annual expected effective tax rate range for the year, excluding any discrete items for which we recorded a minimal amount in the third quarter. The effective tax rate for the nine-month period was 14%. Our guidance for the full fiscal year effective tax rate is 15% to 18%; however, we do expect certain discrete tax items to occur in the fourth quarter. For the third quarter adjusted EBITDA of $35.4 million increased when he 7% versus the prior-year quarter, primarily driven by improved top and bottom-line performance from our Test and Simulation business. On a year-to-date performance basis, the adjusted EBITDA for Test and Simulation business has increased by 380 basis points in fiscal 2019 to nearly 13% of revenue and are Sensors business is hovering near 20%.

Our performance in Q3 yielded GAAP diluted earnings-per-share of $0.70 per share, a 49% improvement over the prior year with a nine-month GAAP diluted earnings-per-share of $1.97. To remind everyone, our fiscal year 2019 nine-month diluted earnings-per-share of $2.62 includes an additional $1.32 recorded in our Q2 2018 results in relation to the discrete benefit for the tax act. Our adjusted diluted EPS was $0.71 per share for the third quarter and $2.07 for the nine-month period in fiscal 2019. Our EPS performance for the first nine months of the year has is positioned well to achieve our full-year diluted EPS guidance which is only been updated to the additional interest expense anticipated in Q4 2019 as a result of the factors mentioned earlier.

We ended the quarter with $76 million in cash which is in line with where we ended fiscal 2018; we generated $19.3 million of operating cash for the quarter and $59 year-to-date with 32.6 main dollars of free cash flow year-to-date of approximately 5% of consolidated revenue. We did the quarter with total debt of $472 million, a slight decrease from the end of the second quarter 2019. The debt portion of our tangible equity unit issuance from July 2016 was fully extinguished on July 1, 2019. Going forward, we expect strong free cash flow and available cash balances to help us pay our debt down. Our gross debt leverage ratio at the end of Q3 was 3.53 times with our net debt leverage ratio at 2.97 times. We expect that our leverage will increase by the end of the fiscal year to be at or below 3.75 times gross leverage due to the Endevco asset purchase, inclusive of the additional $50 million of debt from the upsizing of our senior unsecured bond offering.

E2M continues to hit all the barks we set for the acquisition driving optimism for long-term potential of this business. For the first nine months of the year, we have recorded pulmonary purchase accounting amounts in our consolidated financial statements and amortization expense of $2.1 million within G&A for intangible assets acquired as part of the acquisition. We expect to record a total of $3 million in amortization for fiscal 2019 or approximately $900,000 in the fourth quarter of 2019. In addition, we recorded a preliminary $1.1 million inventory fair value adjustment, which increased the inventory balance upon acquisition. The total amount was recognized through cost of sales during the first nine months of 2019 with no more expense to be recognized going forward.

Living tar guidance, due to the strong revenue performance in the first nine months of the year, we are increasing our fiscal 2019 full-year revenue guidance range to $875 million-$895 million and are adjusted EBITDA range to 128 million $138 million. The decrease in our GAAP diluted earnings-per-share expectations of now $2.15-$2.35 and adjusted EPS of $2.30-$2.50 is almost totally attributable to the non-cash right of debt issuance cost for the term loan B paydown which is expected to be an expensive approximately $0.22 to earnings-per-share. The reconciliation to adjusted EBITDA and GAAP earnings-per-share can be found in our exhibit F and G in our press release.

The continuation of our strong backlog position, growth in our Test and Simulation business throughout the first nine months of the fiscal year, coupled with significant increases in top-line growth rate in the second half the year in our Sensors business, have been strong contributors to our solid performance expected for this fiscal year. For many of you, that of long followed MTS; you will remember that Test and Simulation business often experiences quarterly fluctuations throughout the year. Given the timing of our backlog turns and strong performance year-to-date, we expect revenue in the fourth quarter of the year to be slightly down for the first three quarters of the year for Test and Simulation. However, it will still be notably a step up from our prior year comparisons.

In summary, we are very pleased with our performance trends throughout the first nine months of fiscal 2019 especially with strong top-line and bottom-line performance of our Test and Simulation business, and as I just mentioned, we expect our full-year performance to include strong fourth-quarter revenue growth from our Sensors business. We continue to be well served by a strategy that includes expanding our portfolio of products in the rapidly growing sensors markets, staying focused on meeting the demands for new test and simulation solutions due to evolving technologies and favorable demographics, and continued diversification into adjacent high-growth markets.

As a final note, I hope to see you at our Analyst Day on September 4 as invitations are being sent out this week. Our entire team is engaged and excited to share with you how we will capitalize on the opportunities in front of us. For those institutional investors that do not receive an invitation, I encourage you to reach out to us for further information on how you can participate. I will now turn the call back to Jeff.

Jeffrey A. Graves -- President and Chief Executive Officer

Thanks, Brian. So, to reiterate, we are pleased with our performance trends to the first nine months of the year, executed nicely in our backlog flow through to revenue and our orders momentum. The clear highlight for the third quarter was the eighth consecutive quarter of record revenues in our Sensor business along with continued revenue growth in our Test and Simulation business, all while maintaining a robust backlog and the support it provides to our outlook for growth and profitability for the rest of the year. As we've mentioned over the last year, with continue to invest in our Test and Simulation business and are starting to see the return on those investments both on the top and bottom line. These investments have proven to be very beneficial in not only the organic growth of the core business but in our ability to integrate E2M and maximize its positive contribution to MTS to date.

For our Sensor business, we look forward to an exciting fourth-quarter with strong organic growth expectations and margin performance and to an exciting year ahead in our fiscal 2020. We continue to focus intently on four key tenets for the remainder of the year. First, we need to keep executing on sensors, leveraging the hard work in new product introduction from the first nine months to delivers accelerated growth and margin expansion. Second, we need to successfully integrate the Endevco product lines, realizing the benefits from this iconic brand and further acceleration of our Sensor business. Third, we need to continue taking advantage of the strength in our non-vehicle related test and simulation opportunities; and fourth, we need to continue to successfully integrate E2M Technologies into our Test and Simulation business without any loss of momentum in their current business which is on an excellent trajectory.

To date, we're executing well on each of these tenets and anticipate continued success moving forward. We look forward to describing in more detail our company's long-term performance outlook and on the vision for each of our business units at our upcoming Investor Day on September 4, here in Minneapolis. With that, Brian and I are happy to take questions.

Questions and Answers:

Operator

Thank you. If you'd like to ask a question, please signal by pressing *1 on your telephone keypad. If you're using a speakerphone, please make sure your mute function is turned off to allow your signal to reach our equipment. Please limit yourself to one question and one follow-up question. Again, you may press 1 now to ask a question. Our first question comes from Deepa Raghava with Wells Fargo Securities.

Deepa Raghava -- Wells Fargo Securities, LLC -- Analyst

Hey, good morning all, few questions from me. Jeff, can you discuss test outlooks just given the order decline It looks like if I were to add back the $13 million defense order, you talked about the order decline should've been like mid-single digits. As we think about momentum exiting fiscal Q3 into Q4 and so far in July, you only have two more months, right? So, if you can discuss just the momentum going in and also if you can discuss some of the steps that you're taking to protect margins there.

Jeffrey A. Graves -- President and Chief Executive Officer

Yeah, great questions Deepa. So, let me start with commentary on the results of our backlog. Backlogs to date is up 17% for the first nine months. So, given that backlog, and are expected turns into revenue and margin performance, that means we're well set for Q4. Obviously, what we said was we expected kind of a deceleration there, but still, some nice growth and that really brings us to the end of the fiscal year. So, we feel good about that. Your first question around orders outlook, it's always a difficult one. I would tell you our -- because they, in Test and Simulation, they tend to be larger orders, and that makes for a lumpier. On the bright side, our opportunity pipeline is extremely robust. We have a very good visibility into our 12-month pipeline; it again sits it over $1 billion as it has for the last couple of years. So, that's comforting that there is good secular demand in the business, there's good demand. And I would say that that broadly geographically.

On a short-term basis, there's always worries and the worry of the day, obviously, are the events in China and the general slowdown in Europe both of which we've seen an order intake rates in the third quarter here. Europe is more of a general kind of malaise there, but with the liquidity position their bankers have taken and all of that, it looks still like a very good market and were bullish on that as we always are. China is obviously much more volatile, and predicting directionally, which way that goes is always hard to short-term. I would tell you I love China in terms of our long-term outlook; they tend to -- they are trending on large investments in their commercial laboratories for development of automobiles and airplanes and all of the cascade down to their basic industries. So, they continue to invest large amounts of money in those areas for long-term infrastructure builds.

They continue to invest a lot in building a bridge design and earthquake simulations, a lot of the good basic research that goes on with building cities and bridges and infrastructure. So, all of that looks very good for the long-term. The question is always around short-term performance, and I don't have any great wisdom on that. Clearly, Q3 was not tremendous in terms of order rates in China, but at the same time, it's good and solid. So, I love the long-term outlook. The short-term outlook is iffier; I will remain optimistic that they get the trade issue settled relatively soon and with that, I think there's a lot of good pent-up demand for our products from a secular standpoint.

So, all of that's to say I can't shed an enormous amount of light on the short-term. Again, Q3 was a tougher quarter in terms of order intake rates, and we wait to see. But given our long-term pipeline in our outlook, I remain very bullish on China in general, and we're a very well-diversified company. So, sorry I can't be a little bit more quantitative than that but again, our backlog being up for the first nine months substantially, gives us a nice buffer and my hope is they get these disputes settled fairly quickly, and we get back to some nice growth there.

Deepa Raghava -- Wells Fargo Securities, LLC -- Analyst

Got it. So, second question on defense spending, that's been edible to your high just at least from a US perspective, and it seems like that will stay that way for some time. Should we continue to think about continued opportunity stream for you guys looking ahead? What your view on momentum there since your initial win and how much has been added since then? How do you -- that seems to be one end market we could have a non-consensus, nontypical view on. So, I'm just curious how do you see momentum there just given that the government is situated to spend there?

Jeffrey A. Graves -- President and Chief Executive Officer

Yeah, great question Deepa. So, clearly, we've benefited from military spending. We've historically never been a large supplier to the military, and even on a total basis now, we're still not large supplier, but it has been a really nice uplift for business. We've got some compelling sensor technology for basic military platforms which is, I think, highly sustainable as they continue the buildout of the military. So, not only have we talked about the contract that we landed, but we see more opportunities on the horizon there, and that's really encouraging to us. The proof will be in the future but there's some good buildout of basic platforms in the military that are being refreshed which I think can bring us some benefit and now what you see in the Test and Simulation side of the business is the funding is getting down now into the basic infrastructure for the military which really had not been invested in for years.

This new road simulator that we're doing for the US Army, fabulous project. It's been talked about for several years, and now they actually have placed the contract with us that will bring them good basic simulation capability for decades to come. So, I think you're still seeing the flesh out, if you will, of the military spending in the economy. I don't think we're unique in that way, but we are very well positioned both on the Sensors and the Test and Simulation side of the business. So, I'm very bullish on it; I think it will continue to provide a lift for several years to our company.

Deepa Raghava -- Wells Fargo Securities, LLC -- Analyst

Got it. Brian, a question for you. Can you talk about the guide here? Revenue outlooks are better, leverage not that strong in the EPS range is still pretty wide. How should we think about the high-end versus low-end given that you have only two more months to go? What are the risks there? What's the upside and back to one of my earlier questions, how are you planning for margin protection in this environment? Thank you.

Brian T. Ross -- Senior Vice President and Chief Financial Officer

Yeah, so, as far as our range being pretty -- I would state that overall as we look at the business we've talked about a good growth trajectory for our Sensors business when you think about it overall. So, that could certainly help with some upside and is we've gotten to the end to some of our operational inefficiencies with new product introductions that we've had, we can certainly see a lift for our margins there in addition to the test side of the world, we do have a pretty large backlog that feeds the fourth-quarter revenue for us.

In addition, we take orders that will ship within this quarter is just a mix of what we see in there. So, we certainly are focused on margin production efficiencies within our Test and Simulation business. So, there's just a range in there that we see that. I do want to make sure, and I think that we pointed out specifically, that really the only decrease in our guidance range was just because of a pretty large amount of write-off of non-cash expenses for EPS change. Otherwise, you would see in their just a general increase in the overall EPS.

Deepa Raghava -- Wells Fargo Securities, LLC -- Analyst

Yeah, got it. But can you talk about margin protection measures you may be taking at your end? Just given the macro backdrop?

Brian T. Ross -- Senior Vice President and Chief Financial Officer

Yeah, so overall, over the last couple years we've been very diligent on the orders that we've taken, and we took a lot of first kind orders preceding up to the first couple of years where we did have some margin degradation. So, we've already kind of implemented the process of making sure we get the right economics on deals and ensuring that that we can fulfill those in the timeframe that we need to and the cost that we need to and then as we look at the orders profile the future, we continue to be very diligent about the as well.

Jeffrey A. Graves -- President and Chief Executive Officer

So, Deepa, if you look at our backlog in Test and Simulation, which it is a backlog of in business, as Brian said, we're pleased with the margin profile and backlog being a strengthening profile, so that's good. The risk is very manageable in backlog. We've implemented a number of changes there to better balance the risk profile of execution with the total volume. And then as we said, we should see an acceleration in our Sensor business, while Tests may be coming off the highest growth rates that they've experienced this year, it's still growing. But overall, the highest growth rate we should see an overall lift in margin from just the overall business mix toward sensors with their higher-margin performance.

Deepa Raghava -- Wells Fargo Securities, LLC -- Analyst

That's very helpful; I'll pass it on. Thank you.

Jeffrey A. Graves -- President and Chief Executive Officer

Thanks, Deepa.

Operator

Thank you. Again, as a quick reminder, if you'd like to ask a question, you may press *1 now. Our next question comes from John Franzreb with Sidoti and Company.

Jeffrey A. Graves -- President and Chief Executive Officer

Good morning John. John, we're not getting anything on this end.

Operator

John, if you muted your phone, please unmute.

Jeffrey A. Graves -- President and Chief Executive Officer

We've left you speechless, John.

Brian T. Ross -- Senior Vice President and Chief Financial Officer

Stephanie, why don't we ask for more questions and give John some time if he needs to hop back on.

Operator

There are no additional questioners at this time.

Jeffrey A. Graves -- President and Chief Executive Officer

Okay. Okay, so, just to wrap up, thank you all for participating in our call today and for your interest in the company. We look forward to updating you on our progress again next quarter and hope to see you at our Analyst Day in September. Thanks, and have a great day.

...

Operator

Thank you, ladies and gentlemen. This concludes today's presentation; you may now disconnect.

Duration: 46 minutes

Call participants:

Brian T. Ross -- Senior Vice President and Chief Financial Officer

Jeffrey A. Graves -- President and Chief Executive Officer

Deepa Raghava -- Wells Fargo Securities, LLC -- Analyst

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