Steinway Reports Q4 2005 Results

Steinway Reports Q4 2005 Results

Band Division Sales up 11%

WALTHAM, Mass., March 20 /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 twelve months ended December 31, 2005.

Net sales for the fourth quarter increased 3% over the prior year period and gross margins decreased 170 basis points. Operating profits were $11 million and Adjusted EBITDA was $14 million. The Company's higher tax rate for the quarter negatively impacted EPS by $0.07, contributing to a decline in Basic EPS to $0.62. Adjusted EPS was $0.66 compared to $0.84 in the prior year period. Adjustments for the fourth quarter of 2005 are primarily comprised of a loss on the early extinguishment of debt.

For the twelve month period, sales rose 3%, to $387 million, and gross margins declined slightly, from 29.1% to 28.8%. Operating profits increased 2% to $35 million. Basic EPS was $1.71.

Piano Operations

For the fourth quarter, worldwide Steinway grand unit shipments increased 4%. This increase offset a 6% decrease in unit shipments of the Company's mid-priced lines, resulting in total piano unit shipments level with the prior year quarter. Exchange rates negatively impacted revenue by nearly $2 million, contributing to a 2% decrease in piano revenue. Manufacturing costs associated with the Company's continuous improvement initiative as well as year end inventory adjustments negatively impacted piano gross margins, which decreased from 41.4% to 37.1%.

Wholesale unit shipments of Steinway grand pianos in 2005 were essentially even with the prior year. However, retail shipments declined 7%, resulting in a 2% decrease in total Steinway grand shipments for the twelve month period. Unit shipments of the Company's Boston and Essex brands declined 6% for the year due to soft demand in the United States. Total piano revenue for 2005 was $204 million, consistent with the prior year. Gross margins declined, from 37.1% to 36.4%, primarily as a result of higher utility costs and lower retail sales.

Band Operations

Fourth quarter sales of band & orchestral instruments rose to $46 million, an 11% increase over the prior year quarter. Unit shipments of woodwind and brass instruments increased 13%. Gross margins increased from 14.6% to 18.2%, as production facilities continue to increase their efficiency.

For the twelve month period, sales increased 7%, to $184 million. Unit shipments of woodwind and brass instruments increased 10% over 2004 and gross margins improved from 19.6% to 20.4%.

Refinancing

Steinway recently completed a successful refinancing transaction, replacing its outstanding 8.75% senior notes with 7% notes due 2014. The Company estimates annual interest savings of approximately $2 million as a result of the more favorable interest rate. In the first half of 2006, Steinway expects to recognize approximately $9 million of debt extinguishment costs.

In addition, the Company repaid one of its term loans which had a principal balance of $16.6 million. As a result, the Company will recognize a loss of approximately $1 million for the quarter ending March 31, 2006 due to elimination of the related deferred financing costs.

Comments

CEO Dana Messina commented, "We are very pleased with our performance. Our band business posted a significant revenue increase in the fourth quarter, an indication of a strong start to our sales year. Gross margins continue to improve as our outsourcing efforts gain traction and our domestic plants increase their production rates."

Turning to piano operations, Messina added, "Our piano operations overseas continue to perform well, having shipped more Steinway grand pianos in 2005 than in any year since 2001. In the U.S., our Steinway business improved during the fourth quarter but demand for our Boston pianos continued to be weak."

Messina also said, "We have further opportunities to improve manufacturing efficiencies and levels of working capital in all of our facilities. Our continuous improvement initiative is focused on these objectives and has been successful. This program was a major contributor to the turnaround of our band business."

Messina commented on management's 2006 outlook, "While we expect our piano business overseas to stay strong, our U.S. piano business will remain challenging. We have taken ten production days out of the first quarter of 2006 in order to reduce domestic piano inventories and these temporary plant shutdowns may have a negative impact on our gross margins. Our band business should perform very well in 2006. We expect the strong sales we saw in the fourth quarter to continue and we expect year over year gross margin improvement as well."

The Company expects total sales and operating profits for 2006 to show improvement over the prior year.

Conference Call

Management will be discussing the Company's fourth quarter results and outlook for 2006 on a conference call today beginning at 5:00 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 Adjusted 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 Adjusted EBITDA because it is useful to management and investors as a measure of the Company's core operating performance. The Company also believes Adjusted 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 Adjusted EBITDA calculations and the Company uses Adjusted EBITDA as the basis for determining bonuses for its managers. However, Adjusted 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 Twelve Months Ended
12/31/2005 12/31/2004 12/31/2005 12/31/2004
Net sales $110,126 $106,632 $387,143 $375,034
Cost of sales 77,911 73,523 275,609 265,901
Gross profit 32,215 33,109 111,534 109,133
29.3% 31.0% 28.8% 29.1%

Operating expenses 21,501 21,776 76,697 74,892
Income from operations 10,714 11,333 34,837 34,241
Interest expense, net 3,248 3,183 13,645 13,437
Other (income) expense, net 73 (1,011) (800) (3,163)
Income before taxes 7,393 9,161 21,992 23,967
Provision for income taxes 2,360 2,180 8,200 8,100
Net income $5,033 $6,981 $13,792 $15,867

Earnings per share - basic $0.62 $0.87 $1.71 $1.97
Earnings per share - diluted $0.61 $0.85 $1.67 $1.91

Weighted average common shares
- basic 8,108 8,019 8,070 8,046
Weighted average common shares
- diluted 8,255 8,230 8,265 8,304

Condensed Consolidated Balance Sheets

12/31/2005 12/31/2004
Cash $34,952 $27,372
Receivables, net 81,880 88,059
Inventories 159,310 172,346
Other current assets 19,307 20,984
Total current assets 295,449 308,761

Property, plant and equipment, net 96,664 102,944
Other assets 63,260 65,840
Total assets $455,373 $477,545

Notes payable and current portion of
long-term debt $12,977 $14,212
Other current liabilities 58,214 58,681
Total current liabilities 71,191 72,893

Long-term debt 191,715 208,580
Other liabilities 43,637 50,519
Stockholders' equity 148,830 145,553
Total liabilities and stockholders'
equity $455,373 $477,545

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

Reconciliation of GAAP Earnings to Adjusted Earnings

Three Months Ended 12/31/05
GAAP Adjustments Adjusted
Band sales $45,748 $- $45,748
Piano sales 64,378 - 64,378
Total sales 110,126 - 110,126

Band gross profit 8,334 29 (1) 8,363
Piano gross profit 23,881 - 23,881
Total gross profit 32,215 29 32,244

Band GM % 18.2% 18.3%
Piano GM% 37.1% 37.1%
Total GM % 29.3% 29.3%

Operating expenses 21,501 - 21,501

Income from operations 10,714 29 10,743

Interest expense, net 3,248 - 3,248
Other (income) expense, net 73 (538) (2) (465)

Income before taxes 7,393 567 7,960

Provision for income taxes 2,360 181 (3) 2,541

Net income $5,033 $386 $5,419

Earnings per share - basic $0.62 $0.67
Earnings per share -
diluted $0.61 $0.66

Three Months Ended 12/31/04
GAAP Adjustments Adjusted
Band sales $41,195 $- $41,195
Piano sales 65,437 - 65,437
Total sales 106,632 - 106,632

Band gross profit 6,032 242 (1) 6,274
Piano gross profit 27,077 - 27,077
Total gross profit 33,109 242 33,351

Band GM % 14.6% 15.2%
Piano GM % 41.4% 41.4%
Total GM % 31.0% 31.3%

Operating expenses 21,776 287 (4) 22,063

Income from operations 11,333 (45) 11,288

Interest expense, net 3,183 - 3,183
Other (income) expense,
net (1,011) - (1,011)

Income before taxes 9,161 (45) 9,116

Provision for income taxes 2,180 (11)(3) 2,169

Net income $6,981 ($34) $6,947

Earnings per share - basic $0.87 $0.87
Earnings per share -
diluted $0.85 $0.84

Notes to Reconciliation of GAAP Earnings to Adjusted Earnings

(1) Reflects charges relating to the step-up of acquired inventory.
(2) Reflects a loss on early extinguishment of debt.
(3) Reflects the tax effect of Adjustments at the Company's effective
rate for the period.
(4) Reflects a gain on the sale of property associated with plant
closures.

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

Reconciliation of GAAP Earnings to Adjusted Earnings

Twelve Months Ended 12/31/05
GAAP Adjustments Adjusted
Band sales $183,626 $- $183,626
Piano sales 203,517 - 203,517
Total sales 387,143 - 387,143

Band gross profit 37,458 1,573 (1) 39,031
Piano gross profit 74,076 - 74,076
Total gross profit 111,534 1,573 113,107

Band GM % 20.4% 21.3%
Piano GM% 36.4% 36.4%
Total GM % 28.8% 29.2%

Operating expenses 76,697 - 76,697

Income from operations 34,837 1,573 36,410

Interest expense, net 13,645 - 13,645
Other (income) expense, net (800) (538) (2) (1,338)

Income before taxes 21,992 2,111 24,103

Provision for income taxes 8,200 787 (3) 8,987

Net income $13,792 $1,324 $15,116

Earnings per share - basic $1.71 $1.87
Earnings per share - diluted $1.67 $1.83

Twelve Months Ended 12/31/04
GAAP Adjustments Adjusted
Band sales $171,346 $- $171,346
Piano sales 203,688 - 203,688
Total sales 375,034 - 375,034

Band gross profit 33,567 2,618 (4) 36,185
Piano gross profit 75,566 - 75,566
Total gross profit 109,133 2,618 111,751

Band GM % 19.6% 21.1%
Piano GM% 37.1% 37.1%
Total GM % 29.1% 29.8%

Operating expenses 74,892 363 (5) 75,255

Income from operations 34,241 2,255 36,496

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

Income before taxes 23,967 2,255 26,222

Provision for income taxes 8,100 762 (3) 8,862

Net income $15,867 $1,493 $17,360

Earnings per share - basic $1.97 $2.16
Earnings per share - diluted $1.91 $2.09

Notes to Reconciliation of GAAP Earnings to Adjusted Earnings

(1) Reflects charges relating to the step-up of acquired inventory.
(2) Reflects a loss on early extinguishment of debt.
(3) Reflects the tax effect of Adjustments at the Company's effective
rate for the period.
(4) Reflects $1,418 of employee severance costs associated with plant
closures; and $1,200 of charges relating to the step up of acquired
inventory.
(5) Reflects a gain on sale of property and equipment associated with
plant closures.

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

Reconciliation from Cash Flows from Operating Activities to Adjusted
EBITDA

Three Months Ended
12/31/2005 12/31/2004
Cash flows from operating activities $26,246 $31,557
Changes in operating assets and
liabilities (18,571) (23,847)
Income taxes, net of deferred tax
benefit 2,708 4,354
Net interest expense 3,248 3,183
Other (136) 127
Non-recurring, infrequent or unusual
cash charges 436 (45)
Adjusted EBITDA $13,931 $15,329

Twelve Months Ended
12/31/2005 12/31/2004
Cash flows from operating activities $28,724 $23,873
Changes in operating assets and
liabilities (4,151) 1,305
Income taxes, net of deferred tax
benefit 8,876 10,597
Net interest expense 13,645 13,437
Other (59) (625)
Non-recurring, infrequent or unusual
cash charges 1,980 2,255
Adjusted EBITDA $49,015 $50,842

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PRN Photo Desk, photodesk@prnewswire.com
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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