Steinway Reports Solid Q3 Results Despite Continuing Labor Strike

Steinway Reports Solid Q3 Results Despite Continuing Labor Strike

WALTHAM, Mass., Nov. 2 /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, 2006.

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Revenues decreased 5% for the quarter, to $91 million, due to the loss of an estimated $6.8 million in band instrument sales caused by a labor strike. The strike also negatively impacted gross profit for the quarter by approximately $3 million. Despite these factors, overall gross margins held steady at 28.7%.

Operating expenses increased 5% as compared to the prior year period primarily as a result of an increase in bad debt expense, recruiting costs and stock-based compensation. Net interest expense decreased 25% as compared to the third quarter of 2005, as a result of continued debt reduction and the Company's successful debt refinancing earlier in the year.

For the quarter, the Company posted Basic EPS of $0.12 compared to Basic EPS of $0.46 in the prior year period. Adjusted Basic EPS was $0.14 compared to Adjusted Basic EPS of $0.48 in the third quarter of 2005. Adjustments, which are comprised primarily of costs associated with a labor strike, are detailed in the attached financial tables.

Band Operations

Band sales for the quarter decreased $5 million, or 11%, due to the lost sales caused by a labor strike at one of the Company's manufacturing facilities. Gross margins for the quarter remained stable at 20.7% despite the negative impact of the strike.

Sales for the nine-month period ended September 30, 2006 declined only $2 million, or 2%, as strong sales of other instruments nearly offset the $12 million in lost sales from the strike. Gross margins declined from 21.1% to 19.3% as a result of strike-related unabsorbed overhead.

Piano Operations

Worldwide piano sales for the quarter increased slightly, to $49 million, as strong demand overseas offset a decrease in sales in the United States. Third quarter unit shipments of Steinway grand pianos overseas rose 8%. Domestically, Steinway grand unit shipments pulled back from the 21% increase experienced in the second quarter, declining 10% in the third quarter, but ending the nine-month period slightly ahead of the prior year. Third quarter shipments of the Company's mid-priced pianos climbed 26% worldwide after the June re-launch of the Essex brand. Gross margins decreased to 35.4% primarily as a result of the shift in mix toward lower margin mid-priced pianos and a lower proportion of retail sales in the quarter.

Year-to-date piano sales were up 3% despite the negative impact of approximately $1 million of foreign currency translation. Gross margins declined from 36.1% to 34.3% as a result of additional plant shutdowns and a shift in product mix.

Comments

Discussing third quarter results of the piano segment, CEO Dana Messina stated, "Overall, our piano business posted very solid results. Overseas, we had a fantastic quarter. We saw solid increases in virtually all product categories, with Steinway grand unit shipments up 8%. In the U.S., while business remains a bit choppy from one quarter to the next, we are tracking ahead of last year. On a year-to-date basis, with our strong overseas performance, unit shipments of Steinway grands are up 3% worldwide."

Turning to the mid-priced segment, Messina noted, "We couldn't be more pleased with the results of the re-launch of our Essex piano line. Order flow continued to be strong through the third quarter and the feedback on the pianos from our dealers has been very positive."

Regarding band operations, Messina said, "Our Elkhart brass workers remain out on strike. In the meantime, we began hiring replacement workers in July and now have more than 130 individuals producing instruments. At this point, we are spending a great deal of time on training but we expect output from this facility to at least double in the fourth quarter as our new workers reach more productive levels. Bach trumpets and trombones are the number one selling professional instruments in their categories and we expect to begin 2007 with a very large backlog of orders. We feel that, once we have ramped up production, we will be able to improve the quality of these instruments from historic levels. Also, greater flexibility from cross-training the workforce and better product flow will help us reduce our costs. Our goal remains to satisfy our customers in a profitable manner and we are very excited about the potential of our new workforce."

Conference Call

Management will be discussing the Company's third quarter results and outlook for the remainder of 2006 on a conference call today beginning at 5:00 p.m. ET. A live web cast and an archive 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 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
Email: ir@steinwaymusical.com

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

Three Months Ended Nine Months Ended
9/30/2006 9/30/2005 9/30/2006 9/30/2005
Net sales $90,876 $95,914 $278,493 $277,017
Cost of sales 64,831 68,418 203,307 197,698
Gross profit 26,045 27,496 75,186 79,319
28.7% 28.7% 27.0% 28.6%

Operating expenses 19,100 18,158 63,125 55,196
Income from
operations 6,945 9,338 12,061 24,123
Interest expense, net 2,665 3,562 8,565 10,397
Other (income)
expense, net (395) (467) 7,833 (873)
(Loss) income before
income taxes 4,675 6,243 (4,337) 14,599
Income tax (benefit)
provision 3,707 2,500 (2,602) 5,840
Net (loss) income $968 $3,743 ($1,735) $8,759

(Loss) earnings
per share - basic $0.12 $0.46 ($0.21) $1.09
(Loss) earnings
per share - diluted $0.11 $0.45 ($0.21) $1.06
Weighted average
common shares -
basic 8,357 8,088 8,280 8,057
Weighted average
common shares -
diluted 8,430 8,284 8,280 8,268

Condensed Consolidated Balance Sheets
(In Thousands)
(Unaudited)

9/30/2006 9/30/2005 12/31/2005
Cash $17,324 $21,012 $34,952
Receivables, net 93,779 93,424 81,880
Inventories 151,187 173,981 159,310
Other current assets 27,957 21,357 19,589
Total current assets 290,247 309,774 295,731

Property, plant and
equipment, net 95,367 97,502 96,664
Other assets 64,598 61,681 63,260
Total assets $450,212 $468,957 $455,655

Notes payable and
current portion of
long-term debt $4,861 $13,902 $12,977
Other current
liabilities 53,947 56,342 58,904
Total current
liabilities 58,808 70,244 71,881

Long-term debt 187,695 201,816 191,715
Other liabilities 46,310 47,951 43,229
Stockholders' equity 157,399 148,946 148,830
Total liabilities
and stockholders'
equity $450,212 $468,957 $455,655

STEINWAY MUSICAL INSTRUMENTS, INC.
Reconciliation of GAAP Earnings to Adjusted Earnings
(In Thousands, Except Per Share Data)
(Unaudited)

Three Months Ended 9/30/06
GAAP Adjustments Adjusted
Band sales $41,573 $- $41,573
Piano sales 49,303 - 49,303
Total sales 90,876 - 90,876

Band gross profit 8,611 864 (1) 9,475
Piano gross profit 17,434 - 17,434
Total gross profit 26,045 864 26,909

Band GM % 20.7% 22.8%
Piano GM% 35.4% 35.4%
Total GM % 28.7% 29.6%

Operating expenses 19,100 - 19,100

Income from operations 6,945 864 7,809

Interest expense, net 2,665 - 2,665
Other (income) expense,
net (395) - (395)

Income before income
taxes 4,675 864 5,539

Provision for income
taxes 3,707 685 (2) 4,392

Net income $968 $179 $1,147

Earnings per share -
basic $0.12 $0.14
Earnings per share -
diluted $0.11 $0.14
Weighted average
common shares - basic 8,357 8,357
Weighted average
common shares - diluted 8,430 8,430

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 (3) 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 income
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
Weighted average
common shares - basic 8,088 8,088
Weighted average
common shares - diluted 8,284 8,284

Notes to Reconciliation of GAAP Earnings to Adjusted Earnings
(1) Reflects $864 of unabsorbed overhead associated with a labor strike.
(2) Reflects the tax effect of Adjustments at the Company's effective
rate for the period.
(3) Reflects charges relating to the step-up of inventory.

STEINWAY MUSICAL INSTRUMENTS, INC.
Reconciliation of GAAP Earnings to Adjusted Earnings
(In Thousands, Except Per Share Data)
(Unaudited)

Nine Months Ended 9/30/06
GAAP Adjustments Adjusted
Band sales $135,398 $- $135,398
Piano sales 143,095 - 143,095
Total sales 278,493 - 278,493

Band gross profit 26,107 2,155 (1) 28,262
Piano gross profit 49,079 - 49,079
Total gross profit 75,186 2,155 77,341

Band GM % 19.3% 20.9%
Piano GM% 34.3% 34.3%
Total GM % 27.0% 27.8%

Operating expenses 63,125 - 63,125

Income from operations 12,061 2,155 14,216

Interest expense, net 8,565 - 8,565
Other (income) expense,
net 7,833 (9,674)(2) (1,841)

(Loss) income before
income taxes (4,337) 11,829 7,492

Income tax (benefit)
provision (2,602) 7,097 (3) 4,495

Net (loss) income ($1,735) $4,732 $2,997

(Loss) earnings per
share - basic ($0.21) $0.36
(Loss) earnings per
share - diluted ($0.21) $0.36
Weighted average
common shares - basic 8,280 8,280
Weighted average
common shares - diluted 8,280 8,407

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 (4) 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 income
taxes 14,599 1,544 16,143

Provision for income
taxes 5,840 618 (3) 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
Weighted average
common shares - basic 8,057 8,057
Weighted average
common shares - diluted 8,268 8,268

Notes to Reconciliation of GAAP Earnings to Adjusted Earnings
(1) Reflects $130 charges relating to the step-up of inventory and
$2,025 of unabsorbed overhead associated with a labor strike.
(2) Reflects loss on extinguishment of debt.
(3) Reflects the tax effect of Adjustments at the Company's effective
rate for the period.
(4) Reflects charges relating to the step-up of inventory.

STEINWAY MUSICAL INSTRUMENTS, INC.
Reconciliation from Cash Flows from Operating Activities to Adjusted
EBITDA
(In Thousands)
(Unaudited)

Three Months Ended
9/30/2006 9/30/2005
Cash flows from operating
activities $(3,014) $12,575
Changes in operating assets
and liabilities 7,407 (6,230)
Stock based compensation expense (325) -

Income taxes, net of deferred
tax benefit 1,755 2,549
Net interest expense 2,665 3,562
Provision for doubtful accounts (172) 143
Other
1,630 11
Non-recurring, infrequent or
unusual cash charges 864 274
Adjusted EBITDA $10,810 $12,884

Nine Months Ended
9/30/2006 9/30/2005

Cash flows from operating
activities
$ 1,375 $ 2,478
Changes in operating assets
and liabilities 10,759 14,420
Stock based compensation expense (891) -

Income taxes, net of deferred
tax benefit 5,673 6,168
Net interest expense 8,565 10,397
Provision for doubtful accounts (4,734) (79)
Other 1,200 156
Non-recurring, infrequent or
unusual cash charges 2,155 1,544
Adjusted EBITDA $24,102 $35,084

First Call Analyst:
FCMN Contact:

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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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