Steinway Reports Q3 2005 Results

Steinway Reports Q3 2005 Results

Basic EPS up 31%

WALTHAM, Mass., Nov. 3 /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 nine months ended September 30, 2005.

Net sales for the third quarter increased 1% over the prior year period and gross margins improved 130 basis points. Operating profits climbed 23%, to $9 million, and EBITDA rose 6%, to $13 million. The Company posted Basic EPS of $0.46, an increase of 31% over the comparable quarter. Adjusted EPS was $0.48 compared to $0.42 in 2004. Adjustments for the third quarter of 2005 are comprised of charges relating to the step-up of acquired inventory and are detailed in the attached financial tables.

For the nine-month period, sales rose 3%, to $277 million, and gross margins improved from 28.3% to 28.6%. Operating profits increased 5%, to $24 million. Basic EPS was $1.09.

Piano Operations

Third quarter piano sales increased 3% as compared to the prior year period. A 25% jump in overseas Steinway grand piano shipments was offset by a 15% decrease in grand shipments in the U.S. As a result, worldwide Steinway grand piano unit shipments declined 6%. Total piano unit shipments, including the Company's mid-priced lines, decreased 8% from the third quarter of 2004. Piano gross margins remained strong at 36.3%.

Year-to-date piano sales increased slightly, to $139 million. Price increases and a favorable sales mix offset a decrease in total piano unit shipments of 5%. Gross margins rose from 35.1% to 36.1%.

Band Operations

Third quarter sales of band & orchestral instruments remained level at $47 million. Unit shipments of woodwind and brass instruments increased 3% over the prior year period. Gross margins increased from 18.3% to 20.7%. Adjusted gross margins improved from 20.2% to 21.3%, as production facilities continue to increase their efficiency.

For the first nine months, sales increased 6%, to $138 million. Year-to- date gross margins were 21.1%.

Comments

CEO Dana Messina commented, "We are very pleased with our third quarter performance. We are seeing overall improvement in our band business. Export sales are still strong and gross margins continue to increase."

Turning to piano operations, Messina added, "Our European piano operation is doing very well, with strong sales into Eastern Europe and a positive product mix. In the U.S., the piano business was soft during the third quarter, particularly in the mid-priced segment of the market."

Looking toward the fourth quarter, Messina said, "While our piano business overseas should stay strong, we expect our U.S. piano business to continue to remain challenging through the end of this year. In the upcoming quarter, we expect to realize lower piano gross margins than in the fourth quarter of 2004. In our band operations, we are experiencing an increase in orders and gaining traction on our turnaround efforts. We expect both sales and margin improvement in our band business for the fourth quarter."

The Company anticipates its full year tax rate to be approximately 40% for 2005. The Company continues to expect 2005 sales and operating profits to show improvement over the prior year.

Conference Call

Management will be discussing the Company's third quarter results and outlook for the remainder of 2005 on a conference call today beginning at 5:30 p.m. ET. 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 make 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.
(In Thousands, Except Per Share Data)
(Unaudited)

Condensed Consolidated Statements of Income

Three Months Ended Nine Months Ended
9/30/2005 9/30/2004 9/30/2005 9/30/2004
Net sales $95,914 $94,653 $277,017 $268,402
Cost of sales 68,418 68,757 197,698 192,378
Gross profit 27,496 25,896 79,319 76,024
28.7% 27.4% 28.6% 28.3%

Operating expenses 18,158 18,299 55,196 53,116
Income from operations 9,338 7,597 24,123 22,908
Interest expense, net 3,562 3,690 10,397 10,254
Other (income) expense, net (467) (806) (873) (2,152)
Income before taxes 6,243 4,713 14,599 14,806
Provision for income taxes 2,500 1,885 5,840 5,920
Net income $3,743 $2,828 $8,759 $8,886

Earnings per share - basic $0.46 $0.35 $1.09 $1.10
Earnings per share - diluted $0.45 $0.34 $1.06 $1.06

Weighted average common shares -
basic 8,088 7,998 8,057 8,055
Weighted average common shares -
diluted 8,284 8,282 8,268 8,386

Condensed Consolidated Balance Sheets

9/30/2005 9/30/2004 12/31/2004
Cash $21,012 $14,118 $27,372
Receivables, net 93,424 107,076 88,059
Inventories 173,981 176,392 172,346
Other current assets 21,357 17,287 20,984
Total current assets 309,774 314,873 308,761

Property, plant and equipment, net 97,502 100,665 102,944
Other assets 61,681 66,023 65,840
Total assets $468,957 $481,561 $477,545

Notes payable and current portion of
long-term debt $13,902 $10,427 $14,212
Other current liabilities 56,342 59,723 58,681
Total current liabilities 70,244 70,150 72,893

Long-term debt 201,816 229,742 208,580
Other liabilities 47,951 46,042 50,519
Stockholders' equity 148,946 135,627 145,553
Total liabilities and stockholders'
equity $468,957 $481,561 $477,545

STEINWAY MUSICAL INSTRUMENTS, INC.
(In Thousands, Except Per Share Data)
(Unaudited)

Reconciliation of GAAP Earnings to Adjusted Earnings

Three Months Ended 9/30/05
GAAP Adjustments Adjusted
Band sales $46,943 $- $46,943
Piano sales 48,971 - 48,971
Total sales 95,914 - 95,914

Band gross profit 9,712 274 (1) 9,986
Piano gross profit 17,784 - 17,784
Total gross profit 27,496 274 27,770

Band GM % 20.7% 21.3%
Piano GM% 36.3% 36.3%
Total GM % 28.7% 29.0%

Operating expenses 18,158 - 18,158

Income from operations 9,338 274 9,612

Interest expense, net 3,562 - 3,562
Other (income) expense, net (467) - (467)

Income before taxes 6,243 274 6,517

Provision for income taxes 2,500 110 (2) 2,610

Net income $3,743 $164 $3,907

Earnings per share - basic $0.46 $0.48
Earnings per share - diluted $0.45 $0.47

Three Months Ended 9/30/04
GAAP Adjustments Adjusted
Band sales $47,052 $- $47,052
Piano sales 47,601 - 47,601
Total sales 94,653 - 94,653

Band gross profit 8,596 932 (1) 9,528
Piano gross profit 17,300 - 17,300
Total gross profit 25,896 932 26,828

Band GM% 18.3% 20.2%
Piano GM% 36.3% 36.3%
Total GM% 27.4% 28.3%

Operating expenses 18,299 - 18,299

Income from operations 7,597 932 8,529

Interest expense, net 3,690 - 3,690
Other (income) expense, net (806) - (806)

Income before taxes 4,713 932 5,645

Provision for income taxes 1,885 373 (2) 2,258

Net income $2,828 $559 $3,387

Earnings per share - basic $0.35 $0.42
Earnings per share - diluted $0.34 $0.41

Notes to Reconciliation of GAAP Earnings to Adjusted Earnings
(1) Reflects charges relating to the step-up of acquired inventory.
(2) Reflects the tax effect of Adjustments at the Company's effective
rate for the period.

STEINWAY MUSICAL INSTRUMENTS, INC.
(In Thousands, Except Per Share Data)
(Unaudited)

Reconciliation of GAAP Earnings to Adjusted Earnings

Nine Months Ended 9/30/05
GAAP Adjustments Adjusted
Band sales $137,878 $- $137,878
Piano sales 139,139 - 139,139
Total sales 277,017 - 277,017

Band gross profit 29,124 1,544 (1) 30,668
Piano gross profit 50,195 - 50,195
Total gross profit 79,319 1,544 80,863

Band GM % 21.1% 22.2%
Piano GM% 36.1% 36.1%
Total GM % 28.6% 29.2%

Operating expenses 55,196 - 55,196

Income from operations 24,123 1,544 25,667

Interest expense, net 10,397 - 10,397
Other (income) expense, net (873) - (873)

Income before taxes 14,599 1,544 16,143

Provision for income taxes 5,840 618 (2) 6,458

Net income $8,759 $926 $9,685

Earnings per share - basic $1.09 $1.20
Earnings per share - diluted $1.06 $1.17

Nine Months Ended 9/30/04
GAAP Adjustments Adjusted
Band sales $130,151 $- $130,151
Piano sales 138,251 - 138,251
Total sales 268,402 - 268,402

Band gross profit 27,535 2,376 (3) 29,911
Piano gross profit 48,489 - 48,489
Total gross profit 76,024 2,376 78,400

Band GM % 21.2% 23.0%
Piano GM% 35.1% 35.1%
Total GM % 28.3% 29.2%

Operating expenses 53,116 76 (4) 53,192

Income from operations 22,908 2,300 25,208

Interest expense, net 10,254 - 10,254
Other (income) expense, net (2,152) - (2,152)

Income before taxes 14,806 2,300 17,106

Provision for income taxes 5,920 920 (2) 6,840

Net income $8,886 $1,380 $10,266

Earnings per share - basic $1.10 $1.27
Earnings per share - diluted $1.06 $1.22

Notes to Reconciliation of GAAP Earnings to Adjusted Earnings
(1) Reflects charges relating to the step-up of acquired inventory.
(2) Reflects the tax effect of Adjustments at the Company's effective
rate for the period.
(3) Reflects $1,444 of employee severance costs associated with plant
closures; and $932 of charges relating to the step up of acquired
inventory.
(4) Reflects gain on sale of equipment associated with plant closures.

STEINWAY MUSICAL INSTRUMENTS, INC.
(In Thousands)
(Unaudited)

Reconciliation from Cash Flows from Operating Activities to EBITDA

Three Months Ended
9/30/2005 9/30/2004
Cash flows from operating activities $12,575 $2,928
Changes in operating assets and
liabilities (6,230) 2,763
Income taxes, net of deferred tax benefit 2,549 1,990
Net interest expense 3,562 3,690
Other 154 (153)
Non-recurring, infrequent or unusual cash
charges 274 932
EBITDA $12,884 $12,150

Nine Months Ended
9/30/2005 9/30/2004
Cash flows from operating activities $2,478 $(7,684)
Changes in operating assets and
liabilities 14,420 25,152
Income taxes, net of deferred tax benefit 6,168 6,243
Net interest expense 10,397 10,254
Other 77 (752)
Non-recurring, infrequent or unusual cash
charges 1,544 2,300
EBITDA $35,084 $35,513

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Source: Steinway Musical Instruments, Inc.

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

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

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