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- Quarterly Report (10-Q)

Date : 08/07/2012 @ 2:51PM
Source : Edgar (US Regulatory)
Stock : Steinway Musical Instruments, Inc. (LVB)
Quote : 39.95  0.0 (0.00%) @ 2:05AM
Steinway Musical share price Chart

- Quarterly Report (10-Q)

Table of Contents

 

 

 

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C.  20549

 

FORM 10-Q

 

x

QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 FOR THE QUARTERLY PERIOD ENDED JUNE 30, 2012

 

 

o

TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

 

COMMISSION FILE NUMBER 001-11911

 

STEINWAY MUSICAL INSTRUMENTS, INC.

(Exact name of registrant as specified in its charter)

 

DELAWARE

 

35-1910745

(State or Other Jurisdiction of

 

(I.R.S. Employer

Incorporation or Organization)

 

Identification No.)

 

 

 

800 South Street, Suite 305

 

 

Waltham, Massachusetts

 

02453

(Address of Principal Executive Offices)

 

(Zip Code)

 

Registrant’s telephone number including area code: (781) 894-9770

 

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements during the past 90 days.  Yes  x    No  o

 

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files). Yes  x    No  o

 

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See definition of “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act. (Check one):

 

Large accelerated filer o

 

Accelerated filer x

 

 

 

Non-accelerated filer o

 

Smaller reporting company o

(Do not check if a smaller reporting company)

 

 

 

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).  Yes o    No  x

 

Number of shares of Common Stock issued and outstanding as of August 1, 2012 :   12,421,869

 

 

 



Table of Contents

 

STEINWAY MUSICAL INSTRUMENTS, INC. AND SUBSIDIARIES

FORM 10-Q

INDEX

 

PART I

FINANCIAL STATEMENTS

 

 

 

 

Item 1.

Unaudited Condensed Consolidated Financial Statements:

 

 

 

 

 

Condensed Consolidated Statements of Operations Three and six months ended June 30, 2012 and 2011

3

 

 

 

 

Condensed Consolidated Statements of Comprehensive Income Three and six months ended June 30, 2012 and 2011

4

 

 

 

 

Condensed Consolidated Balance Sheets June 30, 2012 and December 31, 2011

5

 

 

 

 

Condensed Consolidated Statements of Cash Flows Six months ended June 30, 2012 and 2011

6

 

 

 

 

Condensed Consolidated Statement of Stockholders’ Equity Six months ended June 30, 2012

7

 

 

 

 

Notes to Condensed Consolidated Financial Statements

8

 

 

 

Item 2.

Management’s Discussion and Analysis of Financial Condition and Results of Operations

18

 

 

 

Item 3.

Quantitative and Qualitative Disclosures about Market Risk

27

 

 

 

Item 4.

Controls and Procedures

27

 

 

 

PART II.

OTHER INFORMATION

 

 

 

 

Item 6.

Exhibits

28

 

 

 

 

Signatures

29

 

2



Table of Contents

 

PART I

FINANCIAL STATEMENTS

 

 

ITEM 1

CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

 

STEINWAY MUSICAL INSTRUMENTS, INC. AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS

Unaudited

(In Thousands Except Share and Per Share Amounts)

 

 

 

Three Months Ended June 30,

 

Six Months Ended June 30,

 

 

 

2012

 

2011

 

2012

 

2011

 

Net sales

 

$

85,704

 

$

88,941

 

$

163,657

 

$

161,872

 

Cost of sales

 

58,339

 

62,466

 

113,145

 

113,000

 

 

 

 

 

 

 

 

 

 

 

Gross profit

 

27,365

 

26,475

 

50,512

 

48,872

 

 

 

 

 

 

 

 

 

 

 

Operating expenses:

 

 

 

 

 

 

 

 

 

Sales and marketing

 

11,072

 

11,600

 

23,057

 

21,781

 

General and administrative

 

10,144

 

11,669

 

19,105

 

20,052

 

Other operating expenses

 

178

 

291

 

216

 

452

 

Total operating expenses

 

21,394

 

23,560

 

42,378

 

42,285

 

 

 

 

 

 

 

 

 

 

 

Income from operations

 

5,971

 

2,915

 

8,134

 

6,587

 

 

 

 

 

 

 

 

 

 

 

Other expense, net

 

1,277

 

758

 

1,631

 

1,246

 

Net loss on extinguishment of debt

 

 

2,422

 

 

2,422

 

Interest income

 

(276

)

(320

)

(634

)

(688

)

Interest expense

 

1,218

 

1,804

 

2,426

 

4,528

 

Total non-operating expenses

 

2,219

 

4,664

 

3,423

 

7,508

 

 

 

 

 

 

 

 

 

 

 

Income (loss) before income taxes

 

3,752

 

(1,749

)

4,711

 

(921

)

 

 

 

 

 

 

 

 

 

 

Income tax provision (benefit)

 

1,355

 

(702

)

1,724

 

(379

)

 

 

 

 

 

 

 

 

 

 

Net income (loss)

 

$

2,397

 

$

(1,047

)

$

2,987

 

$

(542

)

 

 

 

 

 

 

 

 

 

 

Earnings (loss) per share:

 

 

 

 

 

 

 

 

 

Basic

 

$

0.19

 

$

(0.09

)

$

0.24

 

$

(0.04

)

Diluted

 

$

0.19

 

$

(0.09

)

$

0.24

 

$

(0.04

)

 

 

 

 

 

 

 

 

 

 

Weighted average shares:

 

 

 

 

 

 

 

 

 

Basic

 

12,378,371

 

12,144,563

 

12,373,143

 

12,116,257

 

Diluted

 

12,506,701

 

12,144,563

 

12,507,559

 

12,116,257

 

 

See notes to condensed consolidated financial statements.

 

3



Table of Contents

 

STEINWAY MUSICAL INSTRUMENTS, INC. AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME

Unaudited

(In Thousands)

 

 

 

Three Months Ended June 30,

 

Six Months Ended June 30,

 

 

 

2012

 

2011

 

2012

 

2011

 

 

 

 

 

 

 

 

 

 

 

Net income (loss)

 

$

2,397

 

$

(1,047

)

$

2,987

 

$

(542

)

Other comprehensive (loss) income, net of tax

 

 

 

 

 

 

 

 

 

Foreign currency translation adjustments

 

(1,976

)

1,707

 

(1,052

)

5,023

 

Total comprehensive income

 

$

421

 

$

660

 

$

1,935

 

$

4,481

 

 

See notes to condensed consolidated financial statements.

 

4



Table of Contents

 

STEINWAY MUSICAL INSTRUMENTS, INC. AND SUBSIDIARIES

CONDENSED CONSOLIDATED BALANCE SHEETS

Unaudited

(In Thousands)

 

 

 

June 30,

 

December 31,

 

 

 

2012

 

2011

 

Assets

 

 

 

 

 

Current assets:

 

 

 

 

 

Cash

 

$

40,461

 

$

49,888

 

Accounts, notes, and other receivables, net of allowances of $8,834 and $10,754 in 2012 and 2011, respectively

 

47,392

 

42,322

 

Inventories

 

137,210

 

132,401

 

Prepaid expenses and other current assets

 

12,803

 

11,917

 

Deferred tax assets

 

12,097

 

12,093

 

Total current assets

 

$

249,963

 

$

248,621

 

 

 

 

 

 

 

Property, plant and equipment, net of accumulated depreciation of $114,939 and $115,291 in 2012 and 2011, respectively

 

88,743

 

86,997

 

Trademarks

 

13,648

 

13,743

 

Goodwill

 

22,370

 

22,676

 

Other intangibles, net

 

1,803

 

2,293

 

Other assets

 

17,411

 

18,430

 

Long-term deferred tax assets

 

16,622

 

16,614

 

 

 

 

 

 

 

Total assets

 

$

410,560

 

$

409,374

 

 

 

 

 

 

 

Liabilities and stockholders’ equity

 

 

 

 

 

Current liabilities:

 

 

 

 

 

Debt

 

$

626

 

$

650

 

Accounts payable

 

12,775

 

10,702

 

Other current liabilities

 

34,384

 

38,623

 

Total current liabilities

 

47,785

 

49,975

 

 

 

 

 

 

 

Long-term debt

 

70,899

 

67,367

 

Deferred tax liabilities

 

2,293

 

2,438

 

Pension and other postretirement benefit liabilities

 

46,401

 

48,468

 

Other non-current liabilities

 

8,127

 

8,533

 

Total liabilities

 

175,505

 

176,781

 

 

 

 

 

 

 

Commitments and contingent liabilities

 

 

 

 

 

 

 

 

 

 

 

Stockholders’ equity:

 

 

 

 

 

Common stock

 

14

 

14

 

Additional paid-in capital

 

161,471

 

160,996

 

Retained earnings

 

138,498

 

135,522

 

Accumulated other comprehensive loss

 

(20,328

)

(19,276

)

Treasury stock, at cost

 

(44,600

)

(44,663

)

Total stockholders’ equity

 

235,055

 

232,593

 

 

 

 

 

 

 

Total liabilities and stockholders’ equity

 

$

410,560

 

$

409,374

 

 

See notes to condensed consolidated financial statements.

 

5



Table of Contents

 

STEINWAY MUSICAL INSTRUMENTS, INC. AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

Unaudited

(In Thousands)

 

 

 

Six Months Ended June 30,

 

 

 

2012

 

2011

 

Cash flows from operating activities:

 

 

 

 

 

Net income (loss)

 

$

2,987

 

$

(542

)

Adjustments to reconcile net income to cash flows from operating activities:

 

 

 

 

 

Depreciation and amortization

 

4,466

 

4,370

 

Net loss on extinguishment of debt

 

 

2,422

 

Impairment charges

 

166

 

219

 

Stock-based compensation expense

 

211

 

3,401

 

Excess tax benefit from stock-based awards

 

(16

)

(195

)

Tax benefit from stock option exercises

 

18

 

254

 

Deferred tax benefit

 

(111

)

(587

)

Provision for (recovery of) doubtful accounts

 

915

 

(80

)

Other

 

(100

)

618

 

Changes in operating assets and liabilities:

 

 

 

 

 

Accounts, notes and other receivables

 

(5,313

)

(5,217

)

Inventories

 

(8,204

)

(4,088

)

Prepaid expenses and other assets

 

(489

)

(4,774

)

Accounts payable

 

1,723

 

196

 

Other liabilities

 

(5,905

)

(4,014

)

Cash flows from operating activities

 

(9,652

)

(8,017

)

 

 

 

 

 

 

Cash flows from investing activities:

 

 

 

 

 

Capital expenditures

 

(3,431

)

(2,668

)

Payment for acquisition and contingent consideration for previous acquisition

 

 

(3,289

)

Other

 

78

 

(6

)

Cash flows from investing activities

 

(3,353

)

(5,963

)

 

 

 

 

 

 

Cash flows from financing activities:

 

 

 

 

 

Borrowings under lines of credit

 

4,500

 

12,750

 

Repayments under lines of credit

 

(1,000

)

(1,982

)

Repayments of long-term debt, net of premium

 

 

(86,488

)

Proceeds from issuance of common stock

 

298

 

1,642

 

Excess tax benefit from stock-based awards

 

16

 

195

 

Cash flows from financing activities

 

3,814

 

(73,883

)

 

 

 

 

 

 

Effect of foreign exchange rate changes on cash

 

(236

)

2,203

 

Decrease in cash

 

(9,427

)

(85,660

)

Cash, beginning of period

 

49,888

 

119,811

 

Cash, end of period

 

$

40,461

 

$

34,151

 

 

 

 

 

 

 

Supplemental Cash Flow Information:

 

 

 

 

 

Interest paid

 

$

2,427

 

$

6,400

 

Income taxes paid

 

$

4,626

 

$

3,275

 

 

See notes to condensed consolidated financial statements.

 

6



Table of Contents

 

STEINWAY MUSICAL INSTRUMENTS, INC. AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENT OF STOCKHOLDERS’ EQUITY

Unaudited

(In Thousands Except Option Data)

 

 

 

Common
Stock

 

Additional
Paid-In
Capital

 

Retained
Earnings

 

Accumulated
Other
Comprehensive
Loss

 

Treasury
Stock

 

Total
Stockholders’
Equity

 

Balance, January 1, 2012

 

$

14

 

$

160,996

 

$

135,522

 

$

(19,276

)

$

(44,663

)

$

232,593

 

Comprehensive income (loss)

 

 

 

 

 

2,987

 

(1,052

)

 

 

1,935

 

Exercise of 17,205 options for shares of common stock

 

 

246

 

(11

)

 

 

63

 

298

 

Tax benefit of options exercised

 

 

 

18

 

 

 

 

 

 

 

18

 

Stock-based compensation

 

 

 

211

 

 

 

 

 

 

 

211

 

Balance, June 30, 2012

 

$

14

 

$

161,471

 

$

138,498

 

$

(20,328

)

$

(44,600

)

$

235,055

 

 

See notes to condensed consolidated financial statements.

 

7



Table of Contents

 

STEINWAY MUSICAL INSTRUMENTS, INC. AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED

FINANCIAL STATEMENTS

JUNE 30, 2012

Unaudited

(Tabular Amounts In Thousands Except Share, Per Share, Option, and Per Option Data)

 

(1)           Basis of Presentation

 

The accompanying condensed consolidated financial statements of Steinway Musical Instruments, Inc. and subsidiaries (the “Company”) for the three and six months ended June 30, 2012 and 2011 are unaudited. In the opinion of management, these statements have been prepared on the same basis as the audited consolidated financial statements as of and for the year ended December 31, 2011, and include all adjustments which are of a normal and recurring nature, necessary for the fair presentation of financial position, results of operations and cash flows for the interim periods. We encourage you to read the condensed consolidated financial statements in conjunction with the risk factors, consolidated financial statements and notes thereto contained in the Company’s Annual Report on Form 10-K for the year ended December 31, 2011 filed with the Securities and Exchange Commission (“SEC”). The results of operations for the three and six months ended June 30, 2012 are not necessarily indicative of the results that may be expected for the entire year.

 

Throughout this report “we,” “us,” and “our” refer to Steinway Musical Instruments, Inc. and subsidiaries taken as a whole.

 

(2)           Summary of Significant Accounting Policies

 

Our significant accounting policies were described in Note 2 to our audited Consolidated Financial Statements included in our 2011 Annual Report on Form 10-K for the fiscal year ended December 31, 2011. There have been no significant changes in our accounting policies during 2012.

 

Recent Accounting Pronouncements We adopted certain amendments to Accounting Standards Codification (“ASC”) 820, “Fair Value Measurements,” effective January 1, 2012. These amendments include a consistent definition of fair value, enhanced disclosure requirements for “Level 3” fair value adjustments and other changes to required disclosures. Their adoption did not have a material impact on our condensed consolidated financial statements.

 

We adopted the amendments to ASC 220, “Comprehensive Income,” effective January 1, 2012. The amendments pertained to presentation and disclosure only and did not have a material impact on our condensed consolidated financial statements.

 

We adopted the amendments to ASC 350, “Intangibles-Goodwill and Others,” effective January 1, 2012. The amended guidance allows us to do an initial qualitative assessment of relevant events and circumstances to determine if fair value of a reporting unit is more likely than not less than its carrying value, prior to performing the two-step quantitative goodwill impairment test. The adoption of these amendments did not have a material impact on our condensed consolidated financial statements.

 

In July 2012, the Financial Accounting Standards Board amended ASC 350 to provide the option to do an initial qualitative assessment of relevant events and circumstances prior to calculating the fair value of an indefinite-lived intangible asset. This amendment is effective for annual and interim impairment tests performed for fiscal years beginning after September 15, 2012. We will comply with the requirements of this pronouncement when it becomes effective. This pronouncement is not expected to have a material impact on our consolidated financial statements.

 

(3)           Earnings per Common Share

 

We compute earnings per share using the weighted-average number of common shares outstanding during each period. Diluted earnings per common share reflects the dilutive impact of shares subscribed under the Employee Stock Purchase Plan (“Purchase Plan”) and effect of our outstanding options and restricted stock using the treasury stock method, except when such items would be antidilutive.

 

8



Table of Contents

 

The following table presents the calculation of basic and diluted earnings per share:

 

 

 

Three Months Ended June 30,

 

Six Months Ended June 30,

 

 

 

2012

 

2011

 

2012

 

2011

 

Numerator:

 

 

 

 

 

 

 

 

 

Net income (loss):

 

$

2,397

 

$

(1,047

)

$

2,987

 

$

(542

)

 

 

 

 

 

 

 

 

 

 

Denominator:

 

 

 

 

 

 

 

 

 

Weighted-average common shares outstanding - basic

 

12,378,371

 

12,144,563

 

12,373,143

 

12,116,257

 

Dilutive effect of stock-based compensation plans

 

128,330

 

 

134,416

 

 

Weighted-average common shares outstanding - diluted

 

12,506,701

 

12,144,563

 

12,507,559

 

12,116,257

 

 

 

 

 

 

 

 

 

 

 

Net income (loss) per share - basic

 

$

0.19

 

$

(0.09

)

$

0.24

 

$

(0.04

)

Net income (loss) per share - diluted

 

$

0.19

 

$

(0.09

)

$

0.24

 

$

(0.04

)

 

We did not include 372,000 of the outstanding options to purchase shares of common stock in the computation of diluted earnings per share for the three and six months ended June 30, 2012 because generally their exercise prices were more than the average market price of our common shares, and therefore antidilutive. Since we incurred a loss for the three and six month periods ended June 30, 2011, we did not include any of the 964,238 options to purchase shares of common stock or the right to purchase 31,847 shares under our employee stock purchase plan in the computation of earnings per share because their impact would have been antidilutive.

 

(4)           Inventories

 

 

 

June 30,

 

December 31,

 

 

 

2012

 

2011

 

Raw materials

 

$

17,715

 

$

18,242

 

Work-in-process

 

32,867

 

33,377

 

Finished goods

 

86,628

 

80,782

 

Total inventory

 

$

137,210

 

$

132,401

 

 

(5)           Goodwill, Trademarks, and Other Intangible Assets

 

Intangible assets other than goodwill and indefinite-lived trademarks are amortized on a straight-line basis over their estimated useful lives. Deferred financing costs are amortized over the repayment periods of the underlying debt. Goodwill and indefinite-lived trademarks are not amortized but are subject to impairment testing. We conduct our annual impairment test on July 31 st  each year, and also when events and circumstances indicate that the fair value of any of our reporting units may be below the unit’s carrying value. We consider our band division, music education business, piano division, and our online music business to be separate reporting units.

 

Our annual impairment testing date of July 31 st  was selected to coincide with the timing of our fall budgeting and planning process, which provides multi-year cash flows that are used to conduct our annual impairment testing. No other events or circumstances occurred subsequent to our annual impairment test which would have indicated that our assets may be impaired.

 

9



Table of Contents

 

The changes in carrying amounts of goodwill and trademarks are as follows:

 

 

 

Piano

 

Band

 

Total

 

Goodwill:

 

 

 

 

 

 

 

Balance, January 1, 2012

 

$

22,676

 

$

 

$

22,676

 

Foreign currency translation impact

 

(306

)

 

(306

)

Balance, June 30, 2012

 

$

22,370

 

$

 

$

22,370

 

 

 

 

 

 

 

 

 

Trademarks:

 

 

 

 

 

 

 

Balance, January 1, 2012

 

$

8,769

 

$

4,974

 

$

13,743

 

Foreign currency translation impact

 

(95

)

 

(95

)

Balance, June 30, 2012

 

$

8,674

 

$

4,974

 

$

13,648

 

 

Our cumulative impairment losses are $8.8 million associated with band division goodwill, $0.9 million related to band division trademarks, $2.7 million attributable to online music business goodwill, and $1.2 million associated with online music business trademarks.

 

We also carry certain intangible assets that are amortized. Once fully amortized, these assets are removed from both the gross and accumulated amortization balances. These assets consist of the following:

 

 

 

June 30,
2012

 

December 31,
2011

 

Gross deferred financing costs

 

$

3,932

 

$

3,932

 

Accumulated amortization

 

(2,928

)

(2,726

)

Deferred financing costs, net

 

$

1,004

 

$

1,206

 

 

 

 

 

 

 

Gross non-compete agreements

 

$

250

 

$

250

 

Accumulated amortization

 

(206

)

(181

)

Non-compete agreements, net

 

$

44

 

$

69

 

 

 

 

 

 

 

Gross customer relationships

 

$

795

 

$

762

 

Accumulated amortization

 

(427

)

(349

)

Customer relationships, net

 

$

368

 

$

413

 

 

 

 

 

 

 

Gross website and developed technology

 

$

2,176

 

$

2,176

 

Accumulated amortization

 

(1,789

)

(1,571

)

Website and developed technology, net

 

$

387

 

$

605

 

 

 

 

 

 

 

Total gross other intangibles

 

$

7,153

 

$

7,120

 

Accumulated amortization

 

(5,350

)

(4,827

)

Total other intangibles, net

 

$

1,803

 

$

2,293

 

 

The weighted-average amortization period for deferred financing costs is six years, and the weighted-average amortization period for all other amortizable intangibles is approximately five years. The remaining weighted-average amortization period for deferred financing costs is approximately two years and the remaining weighted-average amortization period for all other amortizable intangibles is approximately one year. Total amortization expense, which includes amortization of deferred financing costs, is as follows:

 

 

 

Three Months Ended June 30,

 

Six Months Ended June 30,

 

 

 

2012

 

2011

 

2012

 

2011

 

Amortization expense

 

$

261

 

$

267

 

$

523

 

$

577

 

 

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The following table shows the total estimated amortization expense for the remainder of 2012 and beyond:

 

Remainder of 2012

 

$

523

 

2013

 

699

 

2014

 

312

 

2015

 

227

 

2016

 

39

 

Thereafter

 

3

 

 

 

$

1,803

 

 

(6)           Other Current Liabilities

 

Our other current liabilities consist of the following:

 

 

 

June 30,
2012

 

December 31,
2011

 

Accrued payroll and related benefits

 

$

13,587

 

$

12,965

 

Current portion of pension and other postretirement benefit liabilities

 

1,168

 

1,235

 

Accrued warranty expense

 

1,444

 

1,242

 

Accrued interest

 

1,576

 

1,608

 

Deferred income

 

9,257

 

8,971

 

Environmental liabilities

 

54

 

61

 

Income and other taxes payable

 

566

 

1,105

 

Other accrued expenses

 

6,732

 

11,436

 

Total

 

$

34,384

 

$

38,623

 

 

Accrued warranty expense is recorded at the time of sale for instruments that have a warranty period ranging from one to ten years. The accrued expense recorded is generally calculated on a ratio of warranty costs to sales based on our warranty history and is adjusted periodically following an analysis of actual warranty claims. The accrued warranty expense activity for the six months ended June 30, 2012 and 2011, and the year ended December 31, 2011 is as follows:

 

 

 

June 30,
2012

 

June 30,
2011

 

December 31,
2011

 

Beginning balance

 

$

1,242

 

$

1,510

 

$

1,510

 

Additions

 

698

 

790

 

1,123

 

Claims and reversals

 

(481

)

(913

)

(1,381

)

Foreign currency translation impact

 

(15

)

56

 

(10

)

Ending balance

 

$

1,444

 

$

1,443

 

$

1,242

 

 

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(7)           Debt

 

Our outstanding debt consists of the following:

 

 

 

June 30,
2012

 

December 31,
2011

 

7.00% Senior Notes

 

$

67,506

 

$

67,506

 

Unamortized bond discount

 

(107

)

(139

)

Domestic line of credit

 

3,500

 

 

Overseas lines of credit

 

626

 

650

 

Total

 

71,525

 

68,017

 

Less: current portion

 

626

 

650

 

Long-term debt

 

$

70,899

 

$

67,367

 

 

Scheduled repayments of outstanding debt as of June 30, 2012 are as follows:

 

Remainder of 2012

 

$

626

 

2013

 

 

2014

 

67,506

 

2015

 

3,500

 

Total

 

$

71,632

 

 

(8)                                  Fair Values of Financial Instruments

 

Our financial instruments, which are recorded at fair value, consist primarily of foreign currency contracts and marketable equity securities. We assess the inputs used to measure fair value using the following three-tier hierarchy, which indicates the extent to which inputs used are observable in the market.

 

Level 1

Valuation is based upon unadjusted quoted prices for identical instruments traded in active markets.

 

 

Level 2

Valuation is based upon quoted prices for identical or similar instruments such as interest rates, foreign currency exchange rates, commodity rates and yield curves, and model-based valuation techniques for which all significant assumptions are observable in the market.

 

 

Level 3

Valuation is generated from model-based techniques that use at least one significant assumption not observable in the market. These unobservable assumptions include management’s own judgments about the assumptions market participants would use in pricing the asset or liability. Valuation techniques include use of option pricing models, discounted cash flow models and similar techniques.

 

We value our foreign currency contracts using internal and third-party models with observable inputs, including currency forward and spot prices, volatility factors, and net present value factors. Estimated fair value has been determined as the difference between the current forward or option rate and the contract rate, multiplied by the notional amount of the contract, or upon the estimated fair value of purchased option contracts.

 

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Table of Contents

 

The following table presents information about our assets and liabilities measured at fair value on a recurring basis as of June 30, 2012 and December 31, 2011 and the fair value hierarchy of the valuation techniques we utilized. We classify these assets and liabilities as either short term or long term based on maturity or anticipated realization dates.

 

 

 

June 30,
2012

 

December 31,
2011

 

Financial assets:

 

 

 

 

 

Trading securities(1) - Level 1

 

$

1,831

 

$

1,682

 

Foreign currency contracts(2) - Level 2

 

739

 

598

 

 

 

$

2,570

 

$

2,280

 

 

 

 

 

 

 

Financial liabilities:

 

 

 

 

 

Foreign currency contracts(2) - Level 2

 

$

809

 

$

1,114

 

 


(1)    Our trading securities pertain to the Supplemental Executive Retirement Plan (“SERP”) and are held in a Rabbi Trust. We record a corresponding liability for the same amount in our financial statements, which represents our obligation to SERP participants.

 

(2)    Our foreign currency contracts pertain to obligations or potential obligations to purchase or sell euros, pounds, U.S. dollars, and yen under various forward and option contracts.

 

We base the estimated fair value of our debt on institutional quotes currently available to us. The historical cost, net carrying value, and estimated fair value are as follows:

 

 

 

June 30, 2012

 

December 31, 2011

 

 

 

Net Carrying
Value

 

Estimated
Fair Value

 

Net Carrying
Value

 

Estimated
Fair Value

 

Financial liabilities:

 

 

 

 

 

 

 

 

 

Debt

 

$

71,525

 

$

71,598

 

$

68,017

 

$

67,777

 

 

The carrying values of accounts, notes and other receivables, and accounts payable approximate fair value. Certain assets, including long-lived assets held and used, trademarks associated with our online music business, and assets held for sale are measured at fair value on a non-recurring basis. We recognized a fair value measurement loss of $0.2 million on an asset held for sale. This asset was written down to $0.7 million, which is based on the offer price we received from a potential buyer to purchase this property.

 

(9)                                  Stockholders’ Equity and Stock-based Compensation Arrangements

 

Stockholder Rights Plan — We adopted a Stockholder Rights Plan under which stockholders of record as of October 7, 2011 received rights to purchase shares of a new series of preferred stock. To effect the plan, the Board of Directors declared a dividend of one right on each outstanding share of the Company’s common stock. The rights become exercisable if any person or group acquires 10% or more (or, in one instance, 35% or more) of our common stock.

 

If the rights become exercisable, each right will initially entitle the holder to acquire one one-hundredth (1/100) of a share of a new series of preferred stock at an exercise price of $75 per right. In addition, under certain circumstances, the rights will entitle the holders (other than the person or group triggering the rights) to buy shares of our common stock with a cumulative market value of two times the exercise price at a 50% discount off the then current price. Because the rights of any person or group acquiring the specified ownership percentage become void, that person or group would be subject to significant dilution in their holdings.

 

Until the rights become exercisable, they will not have any impact on our shares outstanding. The rights will expire on September 26, 2021, unless extended or earlier redeemed or exchanged by us pursuant to the terms of the plan.

 

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Table of Contents

 

Employee Stock Purchase Plan — We have an employee stock purchase plan under which substantially all employees may purchase Ordinary common stock through payroll deductions at a purchase price equal to 85% of the lower of the fair market values as of the beginning or end of each twelve-month offering period. Stock purchases under the Purchase Plan are limited to 5% of an employee’s annual base earnings. We have reserved 400,000 shares of common stock for issuance under this plan.

 

Stock Plans — The 2006 Stock Plan provides for the granting of 1,000,000 stock options (including incentive stock options and non-qualified stock options), stock appreciation rights, restricted shares and other stock awards to certain key employees, consultants and advisors. Our stock options generally have five-year vesting terms and ten-year option terms. Our restricted shares have three-year vesting terms, except upon a change in control, when they would vest immediately.

 

Our 1996 Stock Plan has expired but still has vested options outstanding. We reached our registered share limitation in early 2007, and had previously reserved 721,750 treasury stock shares to issue under this plan. We have since issued 228,874 shares of treasury stock to cover options exercised, with 226,276 remaining options outstanding. Since in most instances the average cost of the treasury stock exceeded the price of the options exercised, the difference between the proceeds received and the average cost of the treasury stock issued resulted in a reduction of retained earnings. The reduction to retained earnings associated with options exercised during the three and six months ended June 30, 2012 was nominal. The reduction to retained earnings associated with options exercised during the three and six months ended June 30, 2011 was $0.2 million.

 

The compensation cost and the income tax benefit recognized for these plans are as follows:

 

 

 

Three Months Ended June 30,

 

Six Months Ended June 30,

 

 

 

2012

 

2011

 

2012

 

2011

 

Compensation cost included in:

 

 

 

 

 

 

 

 

 

Basic income per share

 

$

0.01

 

$

0.18

 

$

0.01

 

$

0.21

 

Diluted income per share

 

$

0.01

 

$

0.18

 

$

0.01

 

$

0.21

 

Stock-based compensation expense

 

100

 

2,996

 

211

 

3,401

 

Income tax benefit

 

21

 

769

 

47

 

851

 

 

We measured the fair value of options on their grant date, including the valuation of the option feature implicit in our Purchase Plan, using the Black-Scholes option-pricing model. The risk-free interest rate is based on the weighted-average of U.S. Treasury rates over the expected life of the stock option or the contractual life of the option feature in the Purchase Plan. The expected life of a stock option is based on historical data of similar option holders. We have segregated our employees into two groups based on historical exercise and termination behavior. The expected life of the option feature in the Purchase Plan is the same as its contractual life. Expected volatility is based on historical volatility of our stock over the expected life of the option, as our options are not readily tradable.

 

There were no options granted during the three or six months ended June 30, 2012 or 2011. The following table sets forth information regarding the Stock Plans:

 

 

 

Number of
Options

 

Weighted-
Average
Exercise
Price

 

Weighted-
Average
Remaining
Contract
Life
(in years)

 

Aggregate
Intrinsic
Value

 

Outstanding, January 1, 2012

 

826,076

 

$

21.33

 

 

 

 

 

Granted

 

 

 

 

 

 

 

Exercised

 

(17,205

)

17.32

 

 

 

 

 

Forfeited

 

 

 

 

 

 

 

Outstanding, June 30, 2012

 

808,871

 

$

21.42

 

4.7

 

$

3,833

 

 

 

 

 

 

 

 

 

 

 

Exercisable, June 30, 2012

 

736,871

 

$

22.16

 

4.4

 

$

3,058

 

 

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Table of Contents

 

The total intrinsic value of the options exercised during the three and six month periods ended June 30, 2012 was $0.1 million. The total intrinsic value of the options exercised during the three and six month periods ended June 30, 2011 was $1.0 million. As of June 30, 2012, there was $0.3 million of unrecognized compensation cost related to nonvested share-based compensation arrangements. This compensation is expected to be recognized over a weighted-average period of approximately two years. Cash received from option exercises under the Stock Plans for the six month periods ended June 30, 2012 and 2011 was $0.3 million and $1.6 million, respectively.

 

The following tables set forth information regarding the Purchase Plan:

 

 

 

Three Months Ended June 30,

 

Six Months Ended June 30,

 

 

 

2012

 

2011

 

2012

 

2011

 

Risk-free interest rate

 

0.2%

 

0.3%

 

0.2%

 

0.3%

 

Weighted-average expected life of option feature (in years)

 

1.0

 

1.0

 

1.0

 

1.0

 

Expected volatility of underlying stock

 

28.6%

 

28.3%

 

28.6%

 

28.3%

 

Expected dividends

 

n/a

 

n/a

 

n/a

 

n/a

 

Weighted-average fair value of option feature

 

$7.19

 

$4.81

 

$7.19

 

$4.81

 

 

 

 

Number of
Options

 

Weighted-
Average
Exercise
Price

 

Remaining
Contract
Life
(in years)

 

Aggregate
Intrinsic
Value

 

Outstanding, January 1, 2012

 

10,503

 

$

24.70

 

 

 

 

 

Shares subscribed

 

12,916

 

24.70

 

 

 

 

 

Exercised

 

 

 

 

 

 

 

Forfeited

 

(1,661

)

24.70

 

 

 

 

 

Outstanding, June 30, 2012

 

21,758

 

$

24.70

 

0.1

 

$

78

 

 

(10)                           Other Expense, Net

 

 

 

Three Months Ended June 30,

 

Six Months Ended June 30,

 

 

 

2012

 

2011

 

2012

 

2011

 

West 57 th  Street building income

 

$

(586

)

$

(590

)

$

(1,141

)

$

(1,255

)

West 57 th  Street building expense

 

1,685

 

1,582

 

3,490

 

3,370

 

Foreign exchange loss (gain), net

 

131

 

11

 

(488

)

(650

)

Miscellaneous, net

 

47

 

(245

)

(230

)

(219

)

Other expense, net

 

$

1,277

 

$

758

 

$

1,631

 

$

1,246

 

 

Our building on West 57 th  Street in New York City is managed by an outside company. West 57 th  Street building income includes all rent and other income attributable to the property; West 57 th  Street building expense includes the land lease, real estate taxes, depreciation, and other building costs. Since we utilize a portion of the leasable space for our own retail store, we have allocated a ratable portion of the building expenses to sales and marketing expenses.

 

(11)                           Commitments and Contingent Liabilities

 

We are involved in certain legal proceedings regarding environmental matters, which were previously disclosed in our 2011 Annual Report on Form 10-K. Further, in the ordinary course of business, we are party to various legal actions that we believe are routine in nature and incidental to the operation of our business. While the outcome of such actions cannot be predicted with certainty, we believe that, based on our experience in dealing with these matters, their ultimate resolution will not have a material adverse impact on our business, financial condition, results of operations or prospects.

 

Certain environmental laws, such as the Comprehensive Environmental Response, Compensation, and Liability Act, as amended (“CERCLA”), impose strict, retroactive, joint and several liability upon persons responsible for releases of

 

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Table of Contents

 

hazardous substances, which liability is broadly construed. Under CERCLA and other laws, we may have liability for investigation and cleanup costs and other damages relating to our current or former properties, or third-party sites to which we sent wastes for disposal. Our potential liability at any of these sites is affected by many factors including, but not limited to, the method of remediation, our portion of the hazardous substances at the site relative to that of other parties, the number of responsible parties, the financial capabilities of other parties, and contractual rights and obligations.

 

Based on our past experience and currently available information, these matters and our other liabilities and compliance costs arising under environmental laws are not expected to have a material impact on our capital expenditures, earnings or financial position in an individual year. However, some risk of environmental liability is inherent in the nature of our current and former businesses and we may, in the future, incur material costs to meet current or more stringent compliance, cleanup, or other obligations pursuant to environmental laws.

 

On January 20, 2012, we reached an agreement in principle to sell our band division to an investor group led by two of our current directors. As of the date of this report, the definitive agreement is still in the process of being negotiated. No assurance can be made that a definitive agreement will be reached, or that shareholder approval of the agreement, if sought, would be obtained.  If this sale of the band division were to be completed, it is possible that the disposal of approximately $125.0 million in band assets could result in a pre-tax loss in the range of $48.0-$53.0 million.

 

(12)                           Retirement Plans

 

We have defined benefit pension plans covering many of our employees, including certain employees in Germany and the U.K. The components of net periodic pension cost for these plans are as follows:

 

 

 

Domestic Plan

 

Foreign Plans

 

 

 

Three Months Ended June 30,

 

Three Months Ended June 30,

 

 

 

2012

 

2011

 

2012

 

2011

 

Service cost

 

$

20

 

$

93

 

$

112

 

$

165

 

Interest cost

 

829

 

762

 

400

 

455

 

Expected return on plan assets

 

(1,048

)

(1,101

)

(119

)

(107

)

Amortization of prior service cost (credit)

 

 

29

 

(13

)

(13

)

Amortization of net loss

 

310

 

595

 

12

 

29

 

Net periodic pension cost

 

$

111

 

$

378

 

$

392

 

$

529

 

 

 

 

Domestic Plan

 

Foreign Plans

 

 

 

Six Months Ended June 30,

 

Six Months Ended June 30,

 

 

 

2012

 

2011

 

2012

 

2011

 

Service cost

 

$

24

 

$

181

 

$

225

 

$

322

 

Interest cost

 

1,679

 

1,626

 

805

 

889

 

Expected return on plan assets

 

(2,094

)

(2,150

)

(237

)

(212

)

Amortization of prior service cost (credit)

 

 

57

 

(26

)

(26

)

Amortization of net loss

 

623

 

1,084

 

24

 

58

 

Net periodic pension cost

 

$

232

 

$

798

 

$

791

 

$

1,031

 

 

As of June 30, 2012, we have made contributions of $1.8 million to our domestic plan. Based on this plan’s current funded status, we anticipated making contributions, as required by federal laws and regulations of $4.2 million. However, legislation has recently been passed which may reduce our funding requirements. We are still in the process of evaluating what impact, if any, this legislation will have on our funding of the domestic plan. Our anticipated contributions to the pension plan of our U.K. subsidiary approximate $0.8 million for the current year. As of June 30, 2012, we have made contributions of $0.4 million to this plan. The pension plans of our German entities do not hold any assets and use operating cash to pay participant benefits as they become due. Expected 2012 benefit payments under these plans are $1.2 million, of which $0.6 million was paid through June 30, 2012.

 

We provide postretirement life insurance benefits to a limited number of certain eligible hourly retirees and their dependents. The activity in this plan is not material to the condensed consolidated financial statements.

 

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Table of Contents

 

(13)                           Segment Information

 

We have identified two reportable segments: the piano segment and the band & orchestral instrument segment. We consider these two segments reportable as they are managed separately and the operating results of each segment are separately reviewed and evaluated by our senior management on a regular basis. We have included the results of our online music division within the “U.S. Piano Segment” as we believe its results are not material and its products and customer base are most correlated with piano operations. Management and the chief operating decision maker use income from operations as a meaningful measurement of profit or loss for the segments. Income from operations for the reportable segments includes certain corporate costs allocated to the segments based primarily on revenue, as well as intercompany profit. Amounts reported as “Other & Elim” contain corporate costs that were not allocated to the reportable segments, and the remaining intercompany profit elimination.

 

The following tables present information about our operating segments for the three and six month periods ended June 30, 2012 and 2011:

 

Three Months Ended 2012

 

Piano Segment

 

Band Segment

 

Other &

 

Consol

 

 

 

U.S.

 

Germany

 

Other

 

Total

 

U.S.

 

Europe

 

Total

 

Elim

 

Total

 

Net sales to external customers

 

$

24,049

 

$

14,445

 

$

11,870

 

$

50,364

 

$

34,560

 

$

780

 

$

35,340

 

$

 

$

85,704

 

Income (loss) from operations

 

921

 

3,271

 

1,148

 

5,340

 

3,428

 

10

 

3,438

 

(2,807

)

5,971

 

 

Three Months Ended 2011

 

Piano Segment

 

Band Segment

 

Other &

 

Consol

 

 

 

U.S.

 

Germany

 

Other

 

Total

 

U.S.

 

Europe

 

Total

 

Elim

 

Total

 

Net sales to external customers

 

$

24,517

 

$

18,148

 

$

11,506

 

$

54,171

 

$

33,723

 

$

1,047

 

$

34,770

 

$

 

$

88,941

 

Income (loss) from operations

 

1,310

 

2,595

 

1,063

 

4,968

 

1,017

 

75

 

1,092

 

(3,145

)

2,915

 

 

Six Months Ended 2012

 

Piano Segment

 

Band Segment

 

Other &

 

Consol

 

 

 

U.S.

 

Germany

 

Other

 

Total

 

U.S.

 

Europe

 

Total

 

Elim

 

Total

 

Net sales to external customers

 

$

44,461

 

$

27,036

 

$

23,010

 

$

94,507

 

$

67,458

 

$

1,692

 

$

69,150

 

$

 

$

163,657

 

Income (loss) from operations

 

648

 

5,148

 

2,542

 

8,338

 

4,491

 

80

 

4,571

 

(4,775

)

8,134

 

 

Six Months Ended 2011

 

Piano Segment

 

Band Segment

 

Other &

 

Consol

 

 

 

U.S.

 

Germany

 

Other

 

Total

 

U.S.

 

Europe

 

Total

 

Elim

 

Total

 

Net sales to external customers

 

$

44,867

 

$

29,774

 

$

23,119

 

$

97,760

 

$

61,990

 

$

2,122

 

$

64,112

 

$

 

$

161,872

 

Income (loss) from operations

 

2,019

 

3,990

 

2,491

 

8,500

 

1,948

 

169

 

2,117

 

(4,030

)

6,587

 

 

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Table of Contents

 

ITEM 2

MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

 

(Tabular Amounts in Thousands Except Percentages, Share and Per Share Data)

 

Introduction

 

We are a world leader in the design, manufacture, marketing, and distribution of high quality musical instruments. Our piano division concentrates on the high-end grand piano segment of the industry, handcrafting Steinway pianos in New York and Hamburg. We also offer Steinway upright pianos and two mid-priced lines of pianos under the Boston and Essex brand names. We are also an online retailer of classical music recordings. Through our band division, we are the largest domestic producer of band and orchestral instruments and offer a complete line of brass, woodwind, percussion and string instruments and related accessories with well-known brand names such as Bach, Selmer, C.G. Conn, Leblanc, King, and Ludwig. We sell our products through dealers and distributors worldwide. Our piano customer base consists of professional artists, amateur pianists, and institutions such as concert halls, universities, and music schools. Our band and orchestral instrument customer base consists primarily of middle school and high school students, but also includes adult amateur and professional musicians.

 

Critical Accounting Policies and Estimates

 

The Securities and Exchange Commission (“SEC”) has issued disclosure guidance for “critical accounting policies and estimates.” The SEC defines “critical accounting policies and estimates” as those that require application of management’s most difficult, subjective or complex judgments, often as a result of the need to make estimates about the effect of matters that are inherently uncertain and may change in subsequent periods.

 

Management is required to make certain estimates and assumptions during the preparation of the condensed consolidated financial statements. These estimates and assumptions impact the reported amount of assets and liabilities and disclosures of contingent assets and liabilities as of the date of the consolidated financial statements. Estimates and assumptions are reviewed periodically and the effects of revisions are reflected in the consolidated financial statements in the period they are determined to be necessary. Actual results could differ from those estimates.

 

The significant accounting policies are described in Note 2 of the Notes to Consolidated Financial Statements included in the Company’s 2011 Annual Report on Form 10-K. Not all of these significant accounting policies require management to make difficult, subjective or complex judgments or estimates. However, management considers the following to be critical accounting policies and estimates based on the definition above.

 

Accounts Receivable

 

We establish reserves for accounts receivable and notes receivable. We review overall collectibility trends and customer characteristics such as debt leverage, solvency, and outstanding balances in order to develop our reserve estimates. Historically, a large portion of our sales at both our piano and band divisions has been generated by our top fifteen customers. As a result, we experience some inherent concentration of credit risk in our accounts receivable due to its composition and the relative proportion of large customer receivables to the total. This is especially true at our band division, which characteristically has a majority of our consolidated accounts receivable balance. We consider the credit health and solvency of our customers when developing our receivable reserve estimates.

 

Inventory

 

We establish inventory reserves for items such as lower-of-cost-or-market and obsolescence. We review inventory levels on a detailed basis, concentrating on the age and amounts of raw materials, work-in-process, and finished goods, as well as recent usage and sales dates and quantities to help develop our estimates. Ongoing changes in our business strategy, coupled with increased offshore sourcing, could affect our ability to realize the current cost of our inventory, and are considered by management when developing our estimates. We also establish reserves for anticipated book-to-physical adjustments based upon our historical level of adjustments from our annual physical inventories. We account for our inventory using standard costs. Accordingly, variances between actual and standard costs that are not abnormal in nature are capitalized into inventory and released based on calculated inventory turns. Abnormal costs are expensed in the period in which they occur.

 

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Workers’ Compensation and Self-Insured Health Claims

 

We establish self-insured workers’ compensation and health claims reserves related to employees in the United States based on our trend analysis of data provided by third-party administrators regarding historical claims and anticipated future claims.

 

Long-lived Assets

 

We review long-lived assets, such as property, plant, and equipment, for impairment whenever events or changes in circumstances indicate that the carrying amount of an asset or asset group may not be recoverable. We measure recoverability by comparing the carrying amount of the asset or asset group to the estimated future cash flows the asset or asset group is expected to generate.

 

We establish long-lived intangible assets based on estimated fair values, and amortize finite-lived intangibles over their estimated useful lives. We test our goodwill and indefinite-lived trademark assets for impairment annually or on an interim basis if events or circumstances indicate that the fair value of an asset may have decreased below its carrying value. We determine our reporting units by first identifying our operating segments, and then assess whether any components of these segments constitute a business for which discrete financial information is available and where segment management regularly reviews the operating results of that component. We aggregate components within a reporting unit that have similar economic characteristics.

 

Our assessment is based on a comparison of net book value to estimated fair values primarily using an income approach. For purposes of the income approach, fair value is determined based on the present value of estimated future cash flows, discounted at an appropriate risk-adjusted rate. We make assumptions about the amount and timing of future expected cash flows, terminal value growth rates and appropriate discount rates. The amount and timing of future cash flows within our discounted cash flow analysis is based on our most recent operational budgets, long range strategic plans and other estimates. The terminal value growth rate is used to calculate the value of cash flows beyond the last projected period in our analysis and reflects our best estimates for stable, perpetual growth of our reporting units. We use estimates of market participant weighted-average costs of capital as a basis for determining the discount rates to apply to our reporting units’ future expected cash flows, adjusted for the risks and uncertainty inherent in our industry generally and in our internally developed forecasts. We also use a market approach against which we benchmark the results of our income approach to ensure that the results are appropriate.

 

Pensions and Other Postretirement Benefit Costs

 

We make certain assumptions when calculating our benefit obligations and expenses. We base our selection of assumptions, such as discount rates and long-term rates of return, on information provided by our actuaries, investment advisors, investment committee, current rate trends, and historical trends for our pension asset portfolio. Our benefit obligations and expenses can fluctuate significantly based on the assumptions management selects.

 

Income Taxes

 

We record valuation allowances for certain deferred tax assets related to foreign tax credit carryforwards and net operating loss carryforwards. When assessing the realizability of deferred tax assets, we consider whether it is more likely than not that the deferred tax assets will be fully realized. The ultimate realization of these assets is dependent upon many factors, including the ratio of foreign source income to overall income and generation of sufficient future taxable income in the jurisdictions for which we have loss carryforwards. When establishing or adjusting valuation allowances, we consider these factors, as well as anticipated trends in foreign source income and tax planning strategies which may impact future realizability of these assets.

 

When appropriate, a liability has been recorded for uncertain tax positions. When analyzing these positions, we consider the probability of various outcomes which could result from examination, negotiation, or settlement with various taxing authorities. The final outcome on these positions could differ significantly from our original estimates due to the following: expiring statutes of limitations; availability of detailed historical data; results of audits or examinations conducted by taxing authorities or agents that vary from management’s anticipated results; identification of new tax contingencies; release of applicable administrative tax guidance; management’s decision to settle or appeal assessments; the rendering of court decisions affecting our estimates of tax liabilities; or other factors.

 

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Environmental Liabilities

 

We make certain assumptions when calculating our environmental liabilities. We base our selection of assumptions, such as cost and length of time for remediation, on data provided by our environmental consultants, as well as information provided by regulatory authorities. We also make certain assumptions regarding the indemnifications we have received from others, including whether remediation costs are within the scope of the indemnification, the indemnifier’s ability to perform under the agreement, and whether past claims have been successful. Our environmental obligations and expenses can fluctuate significantly based on management’s assumptions.

 

We believe the assumptions made by management provide a reasonable basis for the estimates reflected in our condensed consolidated financial statements.

 

Forward-Looking Statements

 

Certain statements contained in this document are “forward-looking statements” within the meaning of Section 21E of the Securities and Exchange Act of 1934, as amended. These forward-looking statements represent our present expectations or beliefs concerning future events. We caution 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 report. These risk factors include, but are not limited to, the following: changes in general economic conditions; reductions in school budgets; increased competition; ability of dealers to obtain financing; exchange rate fluctuations; variations in the mix of products sold; market acceptance of new products, ability of suppliers to meet demand; concentration of credit risk; ability to maximize return on NY real estate; and fluctuations in effective tax rates resulting from shifts in sources of income. Further information on these risk factors is included in Item 1A of our Annual Report on Form 10-K for the year ended December 31, 2011. We encourage you to read those descriptions carefully. We caution investors not to place undue reliance on the forward-looking statements contained in this report. These statements, like all statements contained in this report, speak only as of the date of this report (unless another date is indicated) and we undertake no obligation to update or revise the statements except as required by law.

 

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Results of Operations

 

Three Months Ended June 30, 2012 Compared to Three Months Ended June 30, 2011

 

 

 

Three Months Ended June 30,

 

 

 

Change

 

 

 

2012

 

 

 

2011

 

 

 

$

 

%

 

Net sales

 

 

 

 

 

 

 

 

 

 

 

 

 

Band

 

$

35,340

 

 

 

$

34,770

 

 

 

570

 

1.6

 

Piano

 

50,364

 

 

 

54,171

 

 

 

(3,807

)

(7.0

)

Total sales

 

85,704

 

 

 

88,941

 

 

 

(3,237

)

(3.6

)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Cost of sales

 

 

 

 

 

 

 

 

 

 

 

 

 

Band

 

26,210

 

 

 

26,840

 

 

 

(630

)

(2.3

)

Piano

 

32,129

 

 

 

35,626

 

 

 

(3,497

)

(9.8

)

Total cost of sales

 

58,339

 

 

 

62,466

 

 

 

(4,127

)

(6.6

)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Gross profit

 

 

 

 

 

 

 

 

 

 

 

 

 

Band

 

9,130

 

25.8%

 

7,930

 

22.8%

 

1,200

 

15.1

 

Piano

 

18,235

 

36.2%

 

18,545

 

34.2%

 

(310

)

(1.7

)

Total gross profit

 

27,365

 

 

 

26,475

 

 

 

890

 

3.4

 

 

 

31.9%

 

 

 

29.8%

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Operating expenses

 

21,394

 

 

 

23,560

 

 

 

(2,166

)

(9.2

)

Income from operations

 

5,971

 

 

 

2,915

 

 

 

3,056

 

104.8

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Other expense, net

 

1,277

 

 

 

758

 

 

 

519

 

68.5

 

Net loss on extinguishment of debt

 

 

 

 

2,422

 

 

 

(2,422

)

(100.0

)

Net interest expense

 

942

 

 

 

1,484

 

 

 

(542

)

(36.5

)

Non-operating expenses

 

2,219

 

 

 

4,664

 

 

 

(2,445

)

(52.4

)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Income (loss) before income taxes

 

3,752

 

 

 

(1,749

)

 

 

5,501

 

(314.5

)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Income tax provision (benefit)

 

1,355

 

36.1%

 

(702

)

40.1%

 

2,057

 

(293.0

)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Net income (loss)

 

$

2,397

 

 

 

$

(1,047

)

 

 

3,444

 

(328.9

)

 

Overview Piano division revenue decreased primarily as a result of decreased shipments of Steinway grand units in Europe. However, margins improved due to factory efficiencies at our piano manufacturing facility in Germany. Band division revenue increased due to strong demand for certain brass products, and gross margins improved due to factory efficiencies.

 

Net Sales Piano division revenue generated by our Americas region of $24.1 million was $0.5 million less than the year-ago period, primarily due to a 3% decrease in Steinway grand unit shipments. Although sales to dealers were $1.0 million lower, this was partially offset by a $0.5 million increase in retail sales. The retail revenue improvement was due to our Chicago stores, which were acquired in mid-2011. Piano division revenue generated by Europe was $3.6 million less than the year-ago period due largely to an 11% decrease in Steinway grand unit shipments and a 25% decrease in Boston and Essex unit shipments. These decreases are primarily timing related, as a significant number of units were shipped in the first quarter of 2012. An unfavorable exchange rate impact of $1.6 million also adversely impacted revenue in this region. Piano division sales of $12.3 million related to the Asia-Pacific region were slightly better than the year-ago period, since a 3% increase in Steinway grand unit shipments offset the impact of a 14% decrease in Boston and Essex piano shipments.

 

Band division revenue increased $0.6 million during the period. Woodwind and band unit shipments were consistent with the year-ago period, and accessories sales increased $1.2 million, which more than offset the $0.5 million decrease in percussion instrument revenue.

 

Gross Profit Gross profit was $0.9 million higher due to better sales and margins at the band division. Piano division margins generated by the Americas decreased from 33.1% to 32.7% due to higher costs at our online retail music business. Factory variances in certain departments at our New York manufacturing facility were also a factor. Piano division margins attributable to the Europe region increased from 38.2% to

 

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47.4% as a result of factory efficiencies and better absorption of overhead costs, as well as a higher percentage of retail sales. Piano division margins from the Asia-Pacific region dropped slightly from 30.7% to 30.3% primarily as a result of shifts in product mix.

 

Gross margins generated by the band division improved from 22.8% to 25.8% in the current period due to increased production at most manufacturing facilities, which resulted in factory efficiencies and better absorption of overhead costs.

 

Operating Expenses — Operating expenses decreased $2.2 million as compared to the year-ago period. In 2011, the holders of our Class A common stock sold their shares to other shareholders. In conjunction with this transaction, we incurred $2.7 million of incremental costs related to accelerated vesting of most of our stock options and all of our restricted stock as well as $0.6 million in legal costs.

 

Excluding the impact of these transaction-related charges, sales and marketing costs were $0.4 million lower than the year-ago period due to timing of trade shows and lower employee expenses. Our general and administrative costs increased $1.6 million as the current period includes $2.0 million of legal and consulting costs related to activities undertaken by our Board of Directors in pursuit of strategic alternatives. These costs were partially offset by a favorable exchange rate impact of $0.4 million.

 

Non-operating Expenses — Non-operating expenses decreased $2.4 million as we incurred debt extinguishment costs of $2.4 million in the year-ago period. Lower net interest expense of $0.5 million was offset by higher foreign exchange rate losses, incremental costs associated with our West 57 th  Street building, and losses on our Supplemental Executive Retirement Plan assets of a comparable amount.

 

Income Taxes We recorded income tax expense of $1.4 million, reflecting our anticipated annual effective income tax rate of 37.2% associated with current year income, as well as uncertain tax positions and discrete items. The combination of these items resulted in an effective tax rate of 36.1% for the period. The rate of 40.1% in the year-ago period reflected an anticipated annual effective income tax rate of 41.8% as well as uncertain tax positions and discrete items. The effective tax rate in the year-ago period was higher due to the greater amount of stock-based compensation expenses which were not deductible for tax purposes.

 

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Table of Contents

 

Six Months Ended June 30, 2012 Compared to Six Months Ended June 30, 2011

 

 

 

Six Months Ended June 30,

 

 

 

Change

 

 

 

2012

 

 

 

2011

 

 

 

$

 

%

 

Net sales

 

 

 

 

 

 

 

 

 

 

 

 

 

Band

 

$

69,150

 

 

 

$

64,112

 

 

 

5,038

 

7.9

 

Piano

 

94,507

 

 

 

97,760

 

 

 

(3,253

)

(3.3

)

Total sales

 

163,657

 

 

 

161,872

 

 

 

1,785

 

1.1

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Cost of sales

 

 

 

 

 

 

 

 

 

 

 

 

 

Band

 

52,064

 

 

 

49,014

 

 

 

3,050

 

6.2

 

Piano

 

61,081

 

 

 

63,986

 

 

 

(2,905

)

(4.5

)

Total cost of sales

 

113,145

 

 

 

113,000

 

 

 

145

 

0.1

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Gross profit

 

 

 

 

 

 

 

 

 

 

 

 

 

Band

 

17,086

 

24.7%

 

15,098

 

23.5%

 

1,988

 

13.2

 

Piano

 

33,426

 

35.4%

 

33,774

 

34.5%

 

(348

)

(1.0

)

Total gross profit

 

50,512

 

 

 

48,872

 

 

 

1,640

 

3.4

 

 

 

30.9%

 

 

 

30.2%

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Operating expenses

 

42,378

 

 

 

42,285

 

 

 

93

 

0.2

 

Income from operations

 

8,134

 

 

 

6,587

 

 

 

1,547

 

23.5

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Other expense, net

 

1,631