Steinway Reports Q3 2007 Results
Steinway Reports Q3 2007 Results
Band Segment Sales Up 14%
WALTHAM, Mass., Nov. 8 /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, 2007.
Revenues for the third quarter increased 9% over the prior year period, led by a 14% increase in sales in the Company's band business. Gross profit increased $2.0 million, or 8%, as improved piano margins lessened the impact of lower band margins. Operating profit increased 4% over the prior year.
For the quarter, the Company generated EPS of $0.35 compared to $0.12 in the prior year period. The $0.35 EPS compares to Adjusted EPS of $0.14 in the third quarter of 2006. Adjustments for 2006 are detailed in the attached financial tables.
Band Operations
Sales of professional trumpets and trombones continued to improve in the third quarter, leading to a 14% increase in revenues over the prior year period. Production levels at the Company's Elkhart brass plant remain on target, but continued costs resulting from the strike and lower levels of production of woodwind instruments led to a reduction in overall band gross margins to 19.5% from 20.7% in the comparable quarter.
For the nine-month period ended September 30, 2007, sales declined to $125.7 million, or 7%, as a result of dealer consolidation and customer inventory reduction. Gross margins improved to 20.7% from 19.3% on improved sales mix of higher margin professional instruments and lower inventory reserve charges.
Piano Operations
Overall piano revenue increased 5% for the quarter. Robust sales of the Company's mid-priced pianos offset a decrease in sales of Steinway-branded instruments. In addition, currency translation improved revenues by $1.4 million. Led by its Essex line, the Company saw a 38% increase in worldwide shipments of mid-priced pianos for the quarter. This more than offset a 7% decrease in worldwide shipments of Steinway grand pianos as compared to the prior year period.
Overall piano gross margins increased to 36.3% from 35.4% in the year ago period. The margin increase can be traced to strong domestic retail sales, a mix shift toward higher margin limited edition and larger sized pianos, and favorable purchasing of the Company's mid-priced pianos.
Year-to-date, piano revenues were up 11% to $159.3 million. Worldwide shipments of the Company's mid-priced pianos were up 66%, more than offsetting a 7% decrease in unit shipments of Steinway grands. For the nine-month period, gross margins improved to 36.3% from 34.3%.
Comments
"We're pleased with our overall results this quarter," stated CEO Dana Messina. "Sales, gross profit and operating profit all improved versus the prior year. Our piano business showed mixed results this quarter, but we continue to fare better than the industry as a whole. We were disappointed by our wholesale Steinway business in the U.S. and overseas, but our domestic retail sales were up and shipments of mid-priced pianos remained strong."
Turning to band operations, Messina said, "We're happy to report that third quarter revenues in our band segment were back to pre-strike levels. For the first time this year, we shipped more band instruments than in the comparable prior year period. We were pleased that production and sales of professional brass instruments increased, but the dealer consolidation we discussed earlier this year continues to affect woodwind sales. We reduced production at our two woodwind facilities due to weaker than expected orders."
"In the third quarter of 2006, we began hiring replacement workers for our Elkhart brass plant and the size of our production staff has more than doubled over a year ago," noted Messina. "We are making significant progress in product quality as well as unit output. However, this quarter we incurred a similar amount of inefficient production expenses as last year due to the higher number of replacement workers and some additional training as we shifted our production mix from our standard models to more specialized instruments. We need to progress further on production efficiency in our domestic manufacturing facilities to see increased margins."
Looking at the fourth quarter, Messina commented, "The fourth quarter is the beginning of the selling season in our band business. Although it is too early to evaluate our programs and product offerings, we expect band sales in the fourth quarter to improve over the prior year. Looking at our piano business, the U.S. piano market remains challenging. Our domestic inventories remain too high and our domestic production levels will need to be reduced. Overseas, we expect our fourth quarter business to be stable."
On yesterday's decertification vote at the Company's Elkhart brass facility, Messina said, "After continuous appeals and delays by the UAW, our employees have finally had an opportunity to vote. Of the votes counted, 105 were for decertification and 63 were for retention of the union. There are 144 challenged ballots which have not been counted. The outcome of the vote will be determined by these ballots. The disposition of the challenged ballots will be decided in the coming weeks by the National Labor Relations Board. We continue to focus on producing and delivering the finest brass musical instruments in the world. The outcome of this vote is not expected to materially affect our business going forward."
Conference Call
Management will be discussing the Company's third quarter results and outlook for the remainder of 2007 on a conference call today beginning at 5:00 p.m. ET. A live webcast and an archive of the call will be available to all interested parties on the Company's website, 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 income from operations 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; impact of dealer consolidations on orders; ability of new workers to meet desired production levels; exchange rate fluctuations; variations in the mix of products sold; market acceptance of new product and distribution strategies; ability of suppliers to meet demand; concentration of credit risk; 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.
STEINWAY MUSICAL INSTRUMENTS, INC. Condensed Consolidated Statements of Income (In Thousands, Except Per Share Data) (Unaudited) Three Months Ended Nine Months Ended 9/30/2007 9/30/2006 9/30/2007 9/30/2006 Net sales $99,293 $90,876 $284,982 $278,493 Cost of sales 71,202 64,831 201,086 203,307 Gross profit 28,091 26,045 83,896 75,186 28.3% 28.7% 29.4% 27.0% Operating expenses: Sales and marketing 11,243 10,458 35,336 33,191 Provision for doubtful accounts 794 172 1,512 4,734 General and administrative 8,361 8,143 25,512 24,332 Amortization 196 189 588 615 Other operating expenses 262 138 1,297 253 Total operating expenses 20,856 19,100 64,245 63,125 Income from operations 7,235 6,945 19,651 12,061 Interest expense, net 2,905 2,665 7,580 8,565 Other (income) expense, net 37 (395) (154) 7,833 Income (loss) before income taxes 4,293 4,675 12,225 (4,337) Income tax provision (benefit) 1,285 3,707 4,634 (2,602) Net income (loss) $3,008 $968 $7,591 ($1,735) Earnings (loss) per share - basic $0.35 $0.12 $0.89 ($0.21) Earnings (loss) per share - diluted $0.35 $0.11 $0.88 ($0.21) Weighted average common shares - basic 8,569 8,357 8,503 8,280 Weighted average common shares - diluted 8,683 8,430 8,641 8,280 Condensed Consolidated Balance Sheets (In Thousands) (Unaudited) 9/30/2007 9/30/2006 12/31/2006 Cash $14,988 $17,324 $30,409 Receivables, net 86,061 93,779 75,161 Inventories 167,733 151,187 154,623 Other current assets 24,311 27,957 22,485 Total current assets 293,093 290,247 282,678 Property, plant and equipment, net 94,676 95,367 95,598 Other assets 70,935 64,598 68,899 Total assets $458,704 $450,212 $447,175 Debt $3,369 $4,861 $4,595 Other current liabilities 56,170 53,947 61,453 Total current liabilities 59,539 58,808 66,048 Long-term debt 194,672 187,695 173,816 Other liabilities 57,165 46,310 49,310 Stockholders' equity 147,328 157,399 158,001 Total liabilities and stockholders' equity $458,704 $450,212 $447,175 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 Income tax provision 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 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 (3) 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)(4) (1,841) (Loss) income before income taxes (4,337) 11,829 7,492 Income tax (benefit) provision (2,602) 7,097 (2) 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 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 $130 charges relating to the step-up of inventory and $2,025 of unabsorbed overhead associated with a labor strike. (4) Reflects loss on extinguishment of debt. STEINWAY MUSICAL INSTRUMENTS, INC. Reconciliation from Income from Operations to Adjusted EBITDA (In Thousands) (Unaudited) Three Months Ended 9/30/2007 9/30/2006 Income from operations $7,235 $6,945 Other (income) expense, net (37) 395 Depreciation 2,430 2,417 Amortization 196 189 Non-recurring, infrequent or unusual items - 864 Adjusted EBITDA $9,824 $10,810 Nine Months Ended 9/30/2007 9/30/2006 Income from operations $19,651 $12,061 Other (income) expense, net 154 (7,833) Depreciation 7,251 7,430 Amortization 588 615 Non-recurring, infrequent or unusual items - 11,829 Adjusted EBITDA $27,644 $24,102 Contact: Julie A. Theriault Telephone: 781-894-9770 Email: ir@steinwaymusical.com
First Call Analyst:
FCMN Contact:
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/
Profile: International Entertainment
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