Steinway Reports Revenue Up

Steinway Musical Instruments, Inc. (NYSE: LVB) recently reported earnings for the quarter ended March 31, 2011.

Q1 2011 Compared to Q1 2010

• Sales of $73 million, up 6%
• Gross margin decreased to 30.7% from 31.1%
• Income from operations of $4 million, consistent with prior year
• Adjusted EBITDA of $6 million, down 26%
• Adjusted earnings per share decreased to $0.06 from $0.17

Adjustments are detailed in the attached financial tables.

Balance Sheet Highlights

• Cash of $107 million
• Inventory reduced 4% from March 2010

“Our piano business had a nice quarter, with sales up 11% and divisional profits up more than 70%,” said CEO Dana Messina. “We are seeing a nice recovery and the steps taken to lean out our cost structure are having a noticeable effect on our results. We delivered solid growth in sales and gross margins, both domestically and overseas.”

Messina continued, “Our band division saw excellent order flow but sales did not meet our expectations for the first quarter. Many dealers began scheduling their deliveries for later in the year. Our open order backlog, which was up 14% compared to March 31st of last year, is a good indicator of the sales pickup we will see in the second quarter. We are expecting a strong increase in band revenues for 2011.”

“As expected, our real estate operations continue to be soft and were a drag on our first quarter performance,” said Messina. “We have seen leasing activity pick up, but it remains a difficult market environment. Finally, the improvement in business trends allowed us to reinstate salaries and benefits, which had been cut during the downturn. This resulted in first quarter SG&A expenses that are closer to 2009 levels.”

Piano Operations
First quarter results showed a continued rebound in the Company’s piano business. Over the prior year period, unit shipments of Steinway grand pianos rose 17% in the U.S. and 18% in European and Asian markets. Shipments of mid-priced pianos showed similar results, increasing 11% and 12%, respectively. Piano gross margins improved as a result of a higher mix of retail sales in the United States and the return to a normal production schedule at our Hamburg piano factory.

Band Operations
Overall band segment sales were even with last year, as a revenue increase from professional brass instruments offset decreases in percussion products and accessories. Gross margins, which were exceptionally high in the prior year period, decreased in the first quarter. The Company is experiencing manufacturing inefficiencies at one of its brass instrument plants as union contract negotiations continue. Employee severance costs associated with the closure of one of the band segment’s percussion facilities also negatively impacted gross margins in the quarter.

Outlook
Discussing the remainder of 2011, Messina said, “Our New York real estate operations cost us $0.09 per share this quarter due to low rental demand and we expect similar trends to continue through the remainder of 2011. On a more positive note, last week we redeemed $85 million of our bonds, which will save the Company approximately $6 million in interest expense on an annual basis.”

Messina continued, “We are expecting increased revenue in both segments of our business as positive order trends continue. Margins have already improved in our piano business and we expect them to be up for the full year in our band division as well. Our balance sheet remains very strong and we are in great shape to benefit as the economic recovery continues.”

Segment Information

Piano Segment

Q1 2011 Compared to Q1 2010

• Sales of $44 million, up 11%
• Steinway grand piano unit increase of 18%
• Mid-priced piano unit increase of 12%
• Gross margin increased to 34.9% from 32.8%

Band Segment

Q1 2011 Compared to Q1 2010

• Sales of $29 million, consistent with prior year
• Gross margin decreased to 24.4% from 28.8%