Steinway Reports 2004 Results

Steinway Reports 2004 Results

GAAP Basic EPS $1.97 vs. $1.09; Adjusted Basic EPS Up 22% to $2.16

WALTHAM, Mass., March 10 /PRNewswire-FirstCall/ -- Steinway Musical Instruments, Inc. (NYSE:LVB), one of the world's leading manufacturers of musical instruments, today announced results for the quarter and year ended December 31, 2004.

Net sales increased 13% for the fourth quarter, to $107 million. Cash flow from operations was $32 million, up 25%, and EBITDA was $15 million. Basic EPS increased 55%, to $0.87 from $0.56 in the fourth quarter of 2003.

For the full year, sales increased 11% to $375 million. Cash flow from operations was $24 million and EBITDA improved 10%, to $51 million. Despite incurring professional service fees related to regulatory compliance with the Sarbanes-Oxley Act of over $3 million, or $0.27 per share, basic EPS was $1.97 and Adjusted EPS was $2.16. Adjustments are comprised of costs associated with band instrument plant closures and other non-comparable items, which are detailed in the attached financial tables.

Piano Operations

For the fourth quarter, piano sales climbed 9% to $65 million. Unit shipments of both Steinway grand pianos and the Company's Boston and Essex pianos increased 5%. Gross margins increased 400 basis points to 41.4% on a more favorable product mix and improved production efficiencies.

For the year, piano sales increased 13%, to $204 million from $180 million. Strong demand in the US and positive results in Asia led to a 9% increase in unit shipments of Steinway grand pianos worldwide. Unit shipments of Boston and Essex pianos also improved, increasing 10% over the prior year. Manufacturing efficiencies and strong retail sales contributed to improved gross margins, which increased to 37.1% from 34.2% in 2003.

Band Operations

In the fourth quarter, band instrument sales increased 21% overall, to $41 million from $34 million. The Company's base Conn-Selmer business grew 6%, with an acquisition contributing an additional $5 million. The increase was led by strong demand for the Company's new imported student level instruments, both in the US and overseas. Continued strong demand for percussion instruments also contributed to the sales increase. Gross margins improved from 10.6% to 14.6% in the fourth quarter of 2004 primarily as a result of the absence of plant closure costs. Adjusted gross margins decreased to 15.2% from 18.3% in the prior year period. This decline was primarily due to low production levels and resulting unfavorable manufacturing variances.

For the year, sales increased 9% to $171 million. The Company's base Conn-Selmer business grew 3%, with acquisitions contributing an additional $10 million in sales. Severance payments associated with plant closures and charges to cost of sales for the step up of inventory from an acquisition negatively impacted gross margins, which were reported at 19.6%. Adjusted gross margins declined, from 23.6% to 21.1%, as increased margins on sales of imported student products were offset by significant increases in certain raw material costs and inefficiencies resulting from plant consolidations.

Comments

CEO Dana Messina remarked, "I am pleased with our overall results for the fourth quarter. Our piano business posted strong results both in the US and overseas. Over the coming months we will be increasing production levels in New York and Hamburg to meet anticipated higher demand. We expect our piano business to have a good year in 2005."

Turning to band operations, he said, "During 2004 we implemented several new strategies in our band division. Our new imported student level instruments have been well received and our export business is strong. Our channel strategy is also proving to be successful. However, the shift in our sales toward new channels has resulted in a change from our traditional ordering patterns. Compared to prior years, we expect to receive a higher percentage of our 2005 orders in the second and third quarters."

Messina added, "We also moved forward with our rationalization plans and reduced our band instrument manufacturing capacity by over 20%. Plant consolidation necessitated the training of many new production workers during 2004. As a result, production levels are not yet up to desired levels and gross margins did not meet our expectations. We anticipate improvement in 2005 as the manufacturing disruptions are reduced."

"The integration of our Leblanc acquisition has been successful thus far," said Messina. "Sales and order trends are positive and operating expenses are down. Once charges from the step up of inventory have run through, we should see further financial benefit."

The Company expects overall improvement in its business for 2005 but has decided to end its practice of giving earnings guidance.

10-K Filing

Section 404 of the Sarbanes-Oxley Act requires additional procedures be performed by both the Company and its auditors. These procedures necessitate more time to complete the year-end closing and audit than Steinway Musical Instruments, Inc. has historically required. The Company will utilize a 15- day extension to timely file its Form 10-K for the fiscal year ended December 31, 2004.

Conference Call

Management will be discussing the Company's results and outlook for 2005 on a conference call today beginning at 5:30 p.m. EST. A live web cast and an archived version of the call will be available to all interested parties on the Company's web site, http://www.steinwaymusical.com/.

About Steinway Musical Instruments

Steinway Musical Instruments, Inc., through its Steinway and Conn-Selmer divisions, is one of the world's leading manufacturers of musical instruments. Its notable products include Bach Stradivarius trumpets, Selmer Paris saxophones, C.G. Conn French horns, Leblanc clarinets, King trombones, Ludwig snare drums and Steinway & Sons pianos.

Non-GAAP Financial Measures Used by Steinway Musical Instruments

The Company uses the non-GAAP measurement EBITDA, which it defines as earnings before net interest expense, income taxes, depreciation and amortization, adjusted to exclude non-recurring, infrequent or unusual items. The Company uses EBITDA because it is useful to management and investors as a measure of the Company's core operating performance. The Company also believes EBITDA is helpful in determining the Company's ability to meet future debt service, capital expenditures and working capital requirements. In addition, certain of the Company's debt covenants are based upon EBITDA calculations and the Company uses EBITDA as the basis for determining bonuses for its managers. However, EBITDA should not be construed as a substitute for operating income or a better indicator of liquidity than cash flows from operating activities, which are determined in accordance with GAAP.

The Company has provided other non-GAAP measurements which present operating results on a basis excluding certain non-comparable items. The Company has provided Adjusted financial information because management uses it to better understand the Company's core operating performance on a going forward basis. This Adjusted information also provides meaningful comparisons of performance between periods. However, there are limitations in the use of such information because the Company's actual results do include the impact of these Adjustments. The non-GAAP measures are intended only as a supplement to the comparable GAAP measures.

"Safe Harbor" Statement Under the Private Securities Litigation Reform Act of 1995

This release contains "forward-looking statements" which represent the Company's present expectations or beliefs concerning future events. The Company cautions that such statements are necessarily based on certain assumptions which are subject to risks and uncertainties which could cause actual results to differ materially from those indicated in this release. These risk factors include the following: changes in general economic conditions; recent geopolitical events; increased competition; work stoppages and slowdowns; exchange rate fluctuations; variations in the mix of products sold; market acceptance of new band instrument product and distribution strategies; ability of suppliers to meet demand; fluctuations in effective tax rates resulting from shifts in sources of income; and the ability to successfully integrate and operate acquired businesses. Further information on these risk factors is included in the Company's filings with the Securities and Exchange Commission.

Contact:
Julie A. Theriault
Telephone: 781-894-9770
E-mail: ir@steinwaymusical.com

STEINWAY MUSICAL INSTRUMENTS, INC.
Condensed Consolidated Statements of Income
(In Thousands, Except Per Share Data)
(Unaudited)

Fourth Quarter Full Year
2004 2003 2004 2003
Net sales $106,632 $94,130 $375,034 $337,220
Cost of sales 73,523 68,013 265,901 244,667
Gross profit 33,109 26,117 109,133 92,553

Operating expenses 21,776 18,062 74,892 69,729
Income from operations 11,333 8,055 34,241 22,824
Interest expense, net 3,183 2,777 13,437 11,945
Other (income) expense, net (1,011) (1,485) (3,163) (3,517)
Income before taxes 9,161 6,763 23,967 14,396
Provision for income taxes 2,180 1,746 8,100 4,698
Net income $6,981 $5,017 $15,867 $9,698

Earnings per share - basic $0.87 $0.56 $1.97 $1.09
Earnings per share - diluted $0.85 $0.55 $1.91 $1.09

Weighted average common shares -
basic 8,019 8,955 8,046 8,925
Weighted average common shares -
diluted 8,230 9,040 8,304 8,926

Condensed Consolidated Balance Sheets
12/31/2004 12/31/2003
Cash $27,372 $42,283
Receivables, net 88,059 76,403
Inventories 172,346 152,029
Other current assets 20,984 17,555
Total current assets 308,761 288,270

Property, plant and equipment, net 102,944 98,937
Other assets 65,840 58,458
Total assets $477,545 $445,665

Notes payable and current portion of
long-term debt $14,212 $10,638
Other current liabilities 59,546 50,666
Total current liabilities 73,758 61,304

Long-term debt 208,580 185,964
Other liabilities 49,654 45,762
Stockholders' equity 145,553 152,635
Total liabilities and
stockholders' equity $477,545 $445,665

STEINWAY MUSICAL INSTRUMENTS, INC.
Reconciliation of GAAP Earnings to Adjusted Earnings

(In Thousands, Except Per Share Data)
(Unaudited)

Three Months Ended 12/31/04 Three Months Ended 12/31/03
GAAP Adjustments Adjusted GAAP Adjustments Adjusted

Net sales $106,632 $ - $106,632 $94,130 $ - $94,130
Cost of sales 73,523 (242)(1) 73,281 68,013 (2,623)(4) 65,390

Gross profit 33,109 242 33,351 26,117 2,623 28,740
31.0% 31.3% 27.7% 30.5%
Operating
expenses 21,776 287 (2) 22,063 18,062 (883)(5) 17,179

Income from
operations 11,333 (45) 11,288 8,055 3,506 11,561

Interest expense,
net 3,183 - 3,183 2,777 - 2,777
Other income,
net (1,011) - (1,011) (1,485) - (1,485)
Income before
taxes 9,161 (45) 9,116 6,763 3,506 10,269

Provision for
income taxes 2,180 (11)(3) 2,169 1,746 905 (3) 2,651

Net income $6,981 ($34) $6,947 $5,017 $2,601 $7,618

Earnings per
share:
Basic $0.87 $0.87 $0.56 $0.85
Diluted $0.85 $0.84 $0.55 $0.84

Weighted average
common shares:
Basic 8,019 8,019 8,955 8,955
Diluted 8,230 8,230 9,040 9,040

Notes to Reconciliation of GAAP Earnings to Adjusted Earnings

(1) Reflects charges primarily relating to the step up of Leblanc
inventory.
(2) Reflects a gain on the sale of property associated with plant
closures.
(3) Reflects the tax effect of Adjustments at the Company's effective rate
for the quarter.
(4) Reflects $1,200 lower-of-cost-or-market adjustment to inventory and
$1,423 of employee severance costs, both associated with plant
closures.
(5) Reflects asset impairment charges related to plant closures.

STEINWAY MUSICAL INSTRUMENTS, INC.
Reconciliation of GAAP Earnings to Adjusted Earnings

(In Thousands, Except Per Share Data)
(Unaudited)

Twelve Months Ended 12/31/04 Twelve Months Ended 12/31/03
GAAP Adjust- Adjusted GAAP Adjust- Adjusted
ments ments

Netsales $375,034 $- $375,034 $337,220 $- $337,220
Cost of sales 265,901 (2,618)(1) 263,283 244,667 (6,044)(4) 238,623

Gross profit 109,133 2,618 111,751 92,553 6,044 98,597
29.1% 29.8% 27.4% 29.2%

Operating
expenses 74,892 363(2) 75,255 69,729 (2,958)(5) 66,771

Income from
operations 34,241 2,255 36,496 22,824 9,002 31,826

Interest
expense, net 13,437 - 13,437 11,945 - 11,945
Other income,
net (3,163) - (3,163) (3,517) - (3,517)

Income before
taxes 23,967 2,255 26,222 14,396 9,002 23,398

Provision for
income taxes 8,100 762(3) 8,862 4,698 2,935(3) 7,633

Net income $15,867 $1,493 $17,360 $9,698 $6,067 $15,765

Earnings per
share:
Basic $1.97 $2.16 $1.09 $1.77
Diluted $1.91 $2.09 $1.09 $1.77

Weighted average
common shares:
Basic 8,046 8,046 8,925 8,925
Diluted 8,304 8,304 8,926 8,926

Notes to Reconciliation of GAAP Earnings to Adjusted Earnings

(1) Reflects $1,418 of employee severance costs associated with plant
closures and $1,200 of charges relating to the step up of Leblanc
inventory.
(2) Reflects a gain on the sale of property and equipment associated with
plant closures.
(3) Reflects the tax effect of Adjustments at the Company's effective rate
for the period.
(4) Reflects $1,903 paid in accordance with the terms of expired labor
contracts; $1,258 impact of labor strikes; $1,200 from a lower-of-
cost-or-market adjustment to inventory and $1,683 of employee
severance costs, both associated with plant closures.
(5) Reflects asset impairment charges related to plant closures.

STEINWAY MUSICAL INSTRUMENTS, INC.
Reconciliation from Cash Flows from Operating Activities to EBITDA

(In Thousands)
(Unaudited)

Three Months Ended
12/31/2004 12/31/2003
Cash flows from operating activities $31,557 $25,166
Changes in operating assets and
liabilities (22,205) (18,059)
Income taxes, net of deferred tax
benefit 3,589 4,578
Net interest expense 3,183 2,777
Other (750) (94)
Non-recurring, infrequent or unusual
cash charges (45) 1,423
EBITDA $15,329 $15,791

Twelve Months Ended
12/31/2004 12/31/2003
Cash flows from operating activities $23,768 $31,212
Changes in operating assets and
liabilities 2,133 (8,669)
Income taxes, net of deferred tax
benefit 9,832 7,299
Net interest expense 13,437 11,945
Other (583) (329)
Non-recurring, infrequent or unusual
cash charges 2,255 4,844
EBITDA $50,842 $46,302

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Source: Steinway Musical Instruments, Inc.

CONTACT: Julie A. Theriault of Steinway Musical Instruments, +1-781-894-
9770, ir@steinwaymusical.com

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

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