UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
ý | | QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 FOR THE QUARTERLY PERIOD ENDED MARCH 30, 2002 |
| | | | |
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 ý No o
Number of shares of Common Stock issued and outstanding as of April 30, 2002:
Class A 477,953
Ordinary 8,375,496
Total 8,853,449
1
STEINWAY MUSICAL INSTRUMENTS, INC. AND SUBSIDIARIES
FORM 10Q
INDEX
2
STEINWAY MUSICAL INSTRUMENTS, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF INCOME
(In Thousands Except Share and Per Share Amounts)
(Unaudited)
| | Three Months Ended | |
| | March, 31,
2001 | | March 30,
2002 | |
Net sales | | $ | 101,581 | | $ | 88,059 | |
Cost of sales | | 69,872 | | 62,696 | |
| | | | | |
Gross Profit | | 31,709 | | 25,363 | |
Operating expenses: | | | | | |
Sales and marketing | | 11,769 | | 10,681 | |
General and administrative | | 5,631 | | 5,567 | |
Amortization | | 1,115 | | 289 | |
Other operating expense | | 122 | | 157 | |
Total operating expenses | | 18,637 | | 16,694 | |
| | | | | |
Income from operations | | 13,072 | | 8,669 | |
| | | | | |
Interest expense, net | | 4,537 | | 3,301 | |
Other income, net | | (165 | ) | (305 | ) |
| | | | | |
Income before income taxes | | 8,700 | | 5,673 | |
| | | | | |
Provision for income taxes | | 3,500 | | 1,990 | |
| | | | | |
Net income | | $ | 5,200 | | $ | 3,683 | |
| | | | | |
Net income per share: | | | | | |
Basic | | $ | 0.58 | | $ | 0.42 | |
Diluted | | $ | 0.58 | | $ | 0.42 | |
| | | | | |
Weighted average shares: | | | | | |
Basic | | 8,931,500 | | 8,847,372 | |
Diluted | | 8,931,500 | | 8,853,917 | |
See notes to condensed consolidated financial statements.
3
STEINWAY MUSICAL INSTRUMENTS, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
(In Thousands)
(Unaudited)
| | December 31,
2001 | | March 30,
2002 | |
ASSETS: | | | | | |
Current assets: | | | | | |
Cash | | $ | 5,545 | | $ | 17,787 | |
Accounts, notes and leases receivable, net of allowance for bad debts of $10,909 and $10,955 in 2001 and 2002, respectively | | 82,188 | | 85,430 | |
Inventories | | 161,124 | | 154,332 | |
Prepaid expenses and other current assets | | 4,484 | | 3,269 | |
Deferred tax assets | | 5,636 | | 5,592 | |
Total current assets | | 258,977 | | 266,410 | |
| | | | | |
Property, plant and equipment, net of accumulated depreciation of
$45,105 and $47,366 in 2001 and 2002, respectively | | 104,011 | | 102,348 | |
Goodwill, net of accumulated amortization of $5,999 and $5,961
in 2001 and 2002, respectively | | 27,917 | | 27,713 | |
Other assets, net | | 13,993 | | 13,449 | |
Trademarks, net of accumulated amortization of $12,599 and $12,483
in 2001 and 2002, respectively | | 9,142 | | 9,078 | |
| | | | | |
TOTAL ASSETS | | $ | 414,040 | | $ | 418,998 | |
| | | | | |
LIABILITIES AND STOCKHOLDERS’ EQUITY | | | | | |
Current liabilities: | | | | | |
Current portion of long-term debt | | $ | 7,446 | | $ | 6,812 | |
Accounts payable | | 7,682 | | 7,069 | |
Other current liabilities | | 34,095 | | 38,636 | |
Total current liabilities | | 49,223 | | 52,517 | |
| | | | | |
Long-term debt | | 203,757 | | 202,440 | |
Deferred tax liabilities | | 27,118 | | 26,884 | |
Other liabilities | | 13,571 | | 13,760 | |
Total liabilities | | 293,669 | | 295,601 | |
| | | | | |
Commitments and contingent liabilities | | | | | |
| | | | | |
Stockholders’ equity: | | | | | |
Common stock | | 9 | | 9 | |
Additional paid-in capital | | 72,178 | | 72,201 | |
Retained earnings | | 76,711 | | 80,394 | |
Accumulated other comprehensive income | | (12,674 | ) | (13,354 | ) |
Treasury stock, at cost | | (15,853 | ) | (15,853 | ) |
Total stockholders’ equity | | 120,371 | | 123,397 | |
| | | | | |
TOTAL LIABILITIES AND STOCKHOLDERS’ EQUITY | | $ | 414,040 | | $ | 418,998 | |
See notes to condensed consolidated financial statements.
4
STEINWAY MUSICAL INSTRUMENTS, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(In Thousands)
(Unaudited)
| | Three Months Ended | |
| | March 31, 2001 | | March 30, 2002 | |
Cash flows from operating activities: | | | | | |
Net income | | $ | 5,200 | | $ | 3,683 | |
Adjustments to reconcile net income to cash
flows from operating activities: | | | | | |
Depreciation and amortization | | 3,523 | | 2,777 | |
Deferred tax benefit | | (348 | ) | (99 | ) |
Other | | 118 | | 124 | |
Changes in operating assets and liabilities: | | | | | |
Accounts, notes and leases receivable | | (8,440 | ) | (3,544 | ) |
Inventories | | (6,821 | ) | 6,152 | |
Prepaid expenses and other current assets | | (169 | ) | 970 | |
Accounts payable | | (1,871 | ) | (578 | ) |
Other current liabilities | | 5,055 | | 5,211 | |
Cash flows from operating activities | | (3,753 | ) | 14,696 | |
| | | | | |
Cash flows from investing activities: | | | | | |
Capital expenditures | | (1,428 | ) | (1,033 | ) |
Proceeds from disposals of fixed assets | | 1 | | — | |
Changes in other assets | | 112 | | 486 | |
Cash flows from investing activities | | (1,315 | ) | (547 | ) |
| | | | | |
Cash flows from financing activities: | | | | | |
Net borrowings (repayments) under lines of credit | | 7,175 | | (359 | ) |
Repayments of long-term debt | | (1,528 | ) | (1,582 | ) |
Proceeds from issuance of stock | | — | | 23 | |
Cash flows from financing activities | | 5,647 | | (1,918 | ) |
| | | | | |
Effect of foreign exchange rate changes on cash | | 15 | | 11 | |
| | | | | |
Increase in cash | | 594 | | 12,242 | |
Cash, beginning of period | | 4,989 | | 5,545 | |
| | | | | |
Cash, end of period | | $ | 5,583 | | $ | 17,787 | |
| | | | | |
Supplemental Cash Flow Information | | | | | |
Interest paid | | $ | 2,097 | | $ | 556 | |
Taxes paid | | $ | 3,155 | | $ | 1,590 | |
See notes to condensed consolidated financial statements.
5
STEINWAY MUSICAL INSTRUMENTS, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
MARCH 30, 2002
(In Thousands Except Share Data)
(Unaudited)
(1) Basis of Presentation
The accompanying condensed consolidated financial statements of Steinway Musical Instruments, Inc. and subsidiaries (the “Company”) for the three months ended March 31, 2001 and March 30, 2002 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, 2001, 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 period. The condensed consolidated financial statements should be read in conjunction with the consolidated financial statements and notes thereto contained in the Company’s Annual Report on Form 10-K for the fiscal year ended December 31, 2001 filed with the Securities and Exchange Commission. The results of operations for the three months ended March 30, 2002 are not necessarily indicative of the results that may be expected for the entire year.
(2) Summary of Significant Accounting Policies
Principles of Consolidation - The consolidated financial statements of the Company include the accounts of all of its direct and indirect wholly owned subsidiaries, including The Steinway Piano Company, Inc. (“Steinway”), The Selmer Company, Inc. (“Selmer”), and United Musical Instruments Holdings, Inc. (“UMI”). Significant intercompany balances have been eliminated in consolidation.
Income per Common Share — Basic income per share is computed using the weighted average number of common shares outstanding during each period. Diluted income per common share reflects the effect of the Company’s outstanding options using the treasury stock method, except when such items would be antidilutive. A reconciliation of the weighted average shares used for the basic and diluted computations for the three month periods ended March 31, 2001 and March 30, 2002 is as follows:
| | Three months ended | |
| | 2001 | | 2002 | |
Weighted average shares: | | | | | |
For basic income per share | | 8,931,500 | | 8,847,372 | |
Dilutive effect of stock options | | — | | 6,545 | |
For diluted income per share | | 8,931,500 | | 8,853,917 | |
6
Comprehensive Income — Other comprehensive loss is comprised of foreign currency translation adjustments, additional minimum pension liabilities, and unrealized gains and losses on certain long-term assets. Total comprehensive income for the three month periods ended March 31, 2001 and March 30, 2002 is as follows:
| | Three months ended | |
| | 2001 | | 2002 | |
Net Income | | $ | 5,200 | | $ | 3,683 | |
Other comprehensive loss | | (2,248 | ) | (680 | ) |
Total comprehensive income | | $ | 2,952 | | $ | 3,003 | |
New Accounting Pronouncements — On January 1, 2002 the Company adopted SFAS No. 142, “Goodwill and Intangible Assets,” which supersedes APB Opinion No. 17, “Intangible Assets.” SFAS No. 142 eliminates the requirement to amortize goodwill and indefinite-lived assets. During the second quarter of fiscal year 2002, the Company will complete the transitional impairment test as required by SFAS No. 142. Based on facts and circumstances in existence at March 30, 2002, the Company does not anticipate that, upon completion of the transitional impairment test, it will need to change the nature or carrying amounts of its goodwill or trademark assets. If these rules had applied to goodwill and trademark assets for the first quarter of 2001, the result would have been to increase related pretax income by approximately $764 and net income by approximately $547, or $.06 per share.
In June 2001, the FASB issued SFAS No. 143, “Accounting for Asset Retirement Obligations.” SFAS No. 143 addresses financial accounting and reporting for obligations associated with the retirement of tangible long-lived assets and the associated asset retirement costs. SFAS No. 143 is effective for fiscal years beginning after June 15, 2002. The Company does not expect the adoption of SFAS No. 143 to have a material impact on its financial position or results of operations.
On January 1, 2002, the Company adopted SFAS No. 144, “Accounting for the Impairment or Disposal of Long-Lived Assets,” which addresses the financial accounting and reporting for the impairment or disposal of long-lived assets. SFAS No. 144 supersedes SFAS No. 121, “Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets to Be Disposed Of,” and also supersedes the accounting and certain reporting provisions of APB Opinion No. 30, “Reporting the Results of Operations-Reporting the Effects of Disposal of a Segment of a Business, and Extraordinary, Unusual and Infrequently Occurring Events and Transactions,” for the disposal of a segment of a business. The adoption of SFAS No. 144 did not have a material impact on the Company’s financial position or results of operations.
Reclassifications — Certain prior year amounts have been reclassified to conform to the current year presentation.
7
(3) Inventories
Inventories consist of the following:
| | December 31,
2001 | | March 30,
2002 | |
Raw materials | | $ | 20,948 | | $ | 19,106 | |
Work in process | | 52,967 | | 55,047 | |
Finished goods | | 87,209 | | 80,179 | |
Total | | $ | 161,124 | | $ | 154,332 | |
(4) Other (Income) Expense, Net
Other (income) expense, net consists of the following:
| | Three months ended | |
| | March 31,
2001 | | March 30,
2002 | |
| | | | | |
West 57th Building income | | $ | (1,163 | ) | $ | (1,163 | ) |
West 57th building expenses | | 814 | | 814 | |
Foreign exchange loss, net | | 334 | | 110 | |
Miscellaneous | | (150 | ) | (66 | ) |
Other (income) expense, net | | $ | (165 | ) | $ | (305 | ) |
(5) Commitments and Contingent Liabilities
Certain environmental matters are pending against a subsidiary of the Company, which might result in monetary damages, the amount of which, if any, cannot be determined at the present time. Philips Electronics, a previous owner of a subsidiary of the Company, has agreed to hold the Company harmless from any financial liability arising from these environmental matters which were pending as of December 29, 1988. Management believes that these matters will not have a material adverse impact on the Company’s results of operations or financial condition.
8
(6) Segment Information
The Company has identified two distinct and reportable segments: the piano segment and the band and orchestral instrument segment. These segments were selected based upon the way in which management oversees and evaluates the results of each operation. The following tables present information about the Company’s operating segments for the three month periods ended March 31, 2001 and March 30, 2002:
Three months ended 2001 | | Piano Segment | | Band and Orchestral Segment | | Other | | Consol |
| | U.S. | | Germany | | Other | | Total | | U.S. | | Other | | Total | | & Elim | | Total |
Revenues from external customers | | $ | 29,327 | | $ | 9,347 | | $ | 6,222 | | $ | 44,896 | | $ | 55,410 | | $ | 1,275 | | $ | 56,685 | | $ | — | | $ | 101,581 |
Net income (loss) | | 574 | | 656 | | 875 | | 2,105 | | 226 | | (14 | ) | 212 | | 2,883 | | 5,200 |
| | | | | | | | | | | | | | | | | | | | | | | | | | | |
Three months ended 2002 | | Piano Segment | | Band and Orchestral Segment | | Other | | Consol |
| | U.S. | | Germany | | Other | | Total | | U.S. | | Other | | Total | | & Elim | | Total |
Revenues from external customers | | $ | 23,498 | | $ | 8,050 | | $ | 4,872 | | $ | 36,420 | | $ | 50,670 | | $ | 969 | | $ | 51,639 | | $ | — | | $ | 88,059 |
Net income (loss) | | 230 | | 677 | | 416 | | 1,323 | | (411 | ) | 16 | | (395 | ) | 2,755 | | 3,683 |
| | | | | | | | | | | | | | | | | | | | | | | | | | | |
(7) Summary of Guarantees
On April 19, 2001, the Company completed a $150.0 million 8.75% Senior Note offering. The proceeds of the offering were used to redeem all of the then outstanding 11% Senior Subordinated Notes, with the balance paying down the domestic revolving credit facility.
The Company’s payment obligations under the 8.75% Senior Notes are fully and unconditionally guaranteed on a joint and several basis by Selmer, Steinway, UMI and certain direct and indirect wholly-owned subsidiaries of the Company, each a Guarantor (the “Guarantor Subsidiaries”). These subsidiaries represent all of the operations of the Company (the “Issuer”) conducted in the United States. The remaining subsidiaries, which do not guarantee the 8.75% Senior Notes, represent non-U.S. operations (the “Non Guarantor Subsidiaries”).
The following condensed consolidating supplementary data illustrates the composition of the combined Guarantors. Separate complete financial statements of the respective Guarantors would not provide additional material information that would be useful in assessing the financial composition of the Guarantors. No single Guarantor has any significant legal restrictions on the ability of investors or creditors to obtain access to its assets in event of default on the Guarantee other than its subordination to senior indebtedness.
Investments in subsidiaries are recorded by the Issuer on the cost method for purposes of the supplemental consolidating presentation. Earnings of subsidiaries are therefore not reflected in the Issuer’s investment accounts and earnings. The principal elimination entries eliminate investments in subsidiaries and intercompany balances and transactions.
9
STEINWAY MUSICAL INSTRUMENTS, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATING STATEMENTS OF INCOME
THREE MONTHS ENDED MARCH 30, 2002
(In Thousands)
(Unaudited)
| | Issuer
of Notes | | Guarantor Subsidiaries | | Non
Guarantor Subsidiaries | | Reclass/ Eliminations | | Consolidated | |
Net sales | | $ | — | | $ | 76,736 | | $ | 14,144 | | $ | (2,821 | ) | $ | 88,059 | |
Cost of sales | | — | | 56,601 | | 8,854 | | (2,759 | ) | 62,696 | |
| | | | | | | | | | | |
Gross profit | | — | | 20,135 | | 5,290 | | (62 | ) | 25,363 | |
| | | | | | | | | | | |
Operating expenses: | | | | | | | | | | | |
Sales and marketing | | — | | 8,499 | | 2,191 | | (9 | ) | 10,681 | |
General and administrative | | 1,123 | | 3,335 | | 1,109 | | — | | 5,567 | |
Amortization | | 113 | | 175 | | 1 | | — | | 289 | |
Other operating (income) expense | | (742 | ) | 675 | | 215 | | 9 | | 157 | |
Total operating expenses | | 494 | | 12,684 | | 3,516 | | — | | 16,694 | |
| | | | | | | | | | | |
Income (loss) from operations | | (494 | ) | 7,451 | | 1,774 | | (62 | ) | 8,669 | |
| | | | | | | | | | | |
Interest (income) expense, net | | (275 | ) | 3,508 | | 68 | | — | | 3,301 | |
Other income, net | | — | | (281 | ) | (24 | ) | — | | (305 | ) |
| | | | | | | | | | | |
Income (loss) before income taxes | | (219 | ) | 4,224 | | 1,730 | | (62 | ) | 5,673 | |
| | | | | | | | | | | |
Provision for (benefit of) income taxes | | (69 | ) | 1,393 | | 688 | | (22 | ) | 1,990 | |
| | | | | | | | | | | |
Net income (loss) | | $ | (150 | ) | $ | 2,831 | | $ | 1,042 | | $ | (40 | ) | $ | 3,683 | |
10
STEINWAY MUSICAL INSTRUMENTS, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATING BALANCE SHEETS
MARCH 30, 2002
(In Thousands)
(Unaudited)
| | Issuer
of Notes | | Guarantor Subsidiaries | | Non Guarantor Subsidiaries | | Reclass/ Eliminations | | Consolidated | |
ASSETS | | | | | | | | | | | |
Current assets: | | | | | | | | | | | |
Cash | | $ | — | | $ | 1,073 | | $ | 2,119 | | $ | 14,595 | | $ | 17,787 | |
Accounts, notes and leases receivable, net | | — | | 76,891 | | 8,773 | | (234 | ) | 85,430 | |
Inventories | | — | | 128,912 | | 26,369 | | (949 | ) | 154,332 | |
Prepaid expenses and other current assets | | 297 | | 2,327 | | 645 | | — | | 3,269 | |
Deferred tax assets | | — | | 5,544 | | 4,590 | | (4,542 | ) | 5,592 | |
Total current assets | | 297 | | 214,747 | | 42,496 | | 8,870 | | 266,410 | |
| | | | | | | | | | | |
Property, plant and equipment, net | | 200 | | 89,828 | | 12,320 | | — | | 102,348 | |
Investment in subsidiaries | | 71,143 | | 254,961 | | — | | (326,104 | ) | — | |
Goodwill, net | | — | | 18,795 | | 8,918 | | — | | 27,713 | |
Other assets, net | | 5,039 | | 8,114 | | 296 | | — | | 13,449 | |
Trademarks, net | | — | | 6,280 | | 2,798 | | — | | 9,078 | |
| | | | | | | | | | | |
TOTAL ASSETS | | $ | 76,679 | | $ | 592,725 | | $ | 66,828 | | $ | (317,234 | ) | $ | 418,998 | |
| | | | | | | | | | | |
| | | | | | | | | | | |
LIABILITIES AND STOCKHOLDERS’ EQUITY | | | | | | | | | | | |
Current liabilities: | | | | | | | | | | | |
Current portion of long-term debt | | $ | — | | $ | 6,020 | | $ | 792 | | $ | — | | $ | 6,812 | |
Accounts payable | | 149 | | 5,408 | | 1,746 | | (234 | ) | 7,069 | |
Other current liabilities | | (10,674 | ) | 42,421 | | 12,312 | | (5,423 | ) | 38,636 | |
Total current liabilities | | (10,525 | ) | 53,849 | | 14,850 | | (5,657 | ) | 52,517 | |
| | | | | | | | | | | |
Long-term debt | | 150,042 | | 37,803 | | — | | 14,595 | | 202,440 | |
Intercompany | | (117,541 | ) | 113,739 | | 3,802 | | — | | — | |
Deferred tax liabilities | | — | | 20,822 | | 6,062 | | — | | 26,884 | |
Other liabilities | | 338 | | 2,049 | | 11,373 | | — | | 13,760 | |
Total liabilities | | 22,314 | | 228,262 | | 36,087 | | 8,938 | | 295,601 | |
| | | | | | | | | | | |
Stockholders’ equity | | 54,365 | | 364,463 | | 30,741 | | (326,172 | ) | 123,397 | |
| | | | | | | | | | | |
TOTAL LIABILITIES AND
STOCKHOLDERS’ EQUITY | | $ | 76,679 | | $ | 592,725 | | $ | 66,828 | | $ | (317,234 | ) | $ | 418,998 | |
11
STEINWAY MUSICAL INSTRUMENTS, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATING STATEMENTS OF CASH FLOWS
THREE MONTHS ENDED MARCH 30, 2002
(In Thousands)
(Unaudited)
| | Issuer
of Notes | | Guarantor Subsidiaries | | Non Guarantor Subsidiaries | | Reclass/ Eliminations | | Consolidated | |
Cash flows from operating activities: | | | | | | | | | | | |
Net income (loss) | | $ | (150 | ) | $ | 2,831 | | $ | 1,042 | | $ | (40 | ) | $ | 3,683 | |
Adjustments to reconcile net income (loss)
to cash flows from operating activities: | | | | | | | | | | | |
Depreciation and amortization | | 129 | | 2,266 | | 382 | | — | | 2,777 | |
Deferred tax benefit | | — | | (65 | ) | (34 | ) | — | | (99 | ) |
Other | | — | | 90 | | 34 | | — | | 124 | |
Changes in operating assets and liabilities: | | | | | | | | | | | |
Accounts, notes and leases receivable | | — | | (4,642 | ) | 986 | | 112 | | (3,544 | ) |
Inventories | | — | | 7,835 | | (1,745 | ) | 62 | | 6,152 | |
Prepaid expenses and other current assets | | (120 | ) | 1,006 | | 84 | | — | | 970 | |
Accounts payable | | 65 | | (672 | ) | 141 | | (112 | ) | (578 | ) |
Other current liabilities | | 5,131 | | 1,111 | | (1,009 | ) | (22 | ) | 5,211 | |
Cash flows from operating activities | | 5,055 | | 9,760 | | (119 | ) | — | | 14,696 | |
| | | | | | | | | | | |
Cash flows from investing activities: | | | | | | | | | | | |
Capital expenditures | | — | | (990 | ) | (43 | ) | — | | (1,033 | ) |
Changes in other assets | | 4 | | 482 | | — | | — | | 486 | |
Cash flows from investing activities | | 4 | | (508 | ) | (43 | ) | — | | (547 | ) |
| | | | | | | | | | | |
Cash flows from financing activities: | | | | | | | | | | | |
Net borrowings (repayments) under
lines of credit | | 22 | | (13,973 | ) | (359 | ) | 13,951 | | (359 | ) |
Repayment of long-term debt | | — | | (1,582 | ) | — | | — | | (1,582 | ) |
Proceeds from issuance of stock | | 23 | | — | | — | | — | | 23 | |
Intercompany transactions | | (5,104 | ) | 5,704 | | (600 | ) | — | | — | |
Cash flows from financing activities | | (5,059 | ) | (9,851 | ) | (959 | ) | 13,951 | | (1,918 | ) |
| | | | | | | | | | | |
Effect of exchange rate changes on cash | | — | | — | | 11 | | — | | 11 | |
| | | | | | | | | | | |
Increase (decrease) in cash | | — | | (599 | ) | (1,110 | ) | 13,951 | | 12,242 | |
Cash, beginning of period | | — | | 1,672 | | 3,229 | | 644 | | 5,545 | |
| | | | | | | | | | | |
Cash, end of period | | $ | — | | $ | 1,073 | | $ | 2,119 | | $ | 14,595 | | $ | 17,787 | |
12
ITEM 2 MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
(Dollars in thousands)
Introduction
The Company, through its operating subsidiaries, is a world leader in the design, manufacture and marketing of high quality musical instruments. The piano division concentrates on the high-end grand piano segment of the industry, hand crafting its Steinway pianos in New York and Germany, but also offers vertical pianos and two mid-priced lines of pianos under the Boston and Essex brand names. Moreover, the Company is the largest domestic producer of band and orchestral instruments and offers a complete line of brasswind, woodwind, percussion and stringed instruments and related accessories with well known brand names such as Bach, C.G. Conn, King, and Ludwig. The Company sells its products through dealers and distributors worldwide. Piano customers consist of professional artists, amateur pianists, and institutions such as concert halls, universities, and music schools. Band and orchestral instrument customers consist primarily of middle school and high school students, but also include adult amateur and professional musicians.
Significant Accounting Policies
The nature of the Company’s business - the production and sale of musical instruments - is such that it rarely involves application of highly complex or subjective accounting principles. The accounting policies that are subject to significant management estimates are those normally found in traditional businesses and include inventory reserves, accounts receivable reserves, recourse reserves on notes receivable, and warranty reserves. The Company has available more than a century of experience and data on which to base these estimates. Historical information is adjusted for specific uncertainties, such as new product introductions, and contemporaneous information, such as price fluctuations. Management regularly performs assessments of the underlying assumptions and believes that they provide a reasonable basis for the estimates contained in the Company’s 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 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 herein. These risk factors include, but are not limited to, changes in general economic conditions, increased competition, exchange rate fluctuations, variations in the mix of product sold, 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 Annual Report on Form 10-K for the year ended December 31, 2001 and its Final Prospectus filed in August 1996.
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Results of Operations
Three Months Ended March 30, 2002 Compared to Three Months Ended March 31, 2001
Net Sales - Net sales decreased $13.5 million (13%) to $88.1 million in the first quarter of 2002. Piano sales decreased $8.5 million (19%) on a 27% decrease in Steinway shipments, which was partially offset by a 4% increase in Boston shipments. The decrease in Steinway shipments, which was more pronounced in the U.S., with units down 34% as compared to an 11% decrease in shipments abroad, was primarily a result of the economic slowdown. Band and orchestral instrument sales decreased $5.0 million (9%) on an overall unit decrease of 14%. This decrease resulted from fewer dealer orders, which were exacerbated by a woodwind instrument promotion held in the fourth quarter of 2001 that shifted a significant number of unit sales, which typically would have occurred in the first quarter, to the prior year.
Gross Profit - Gross profit decreased by $6.3 million (20%) to $25.4 million. Gross margins decreased from 31.2% in 2001 to 28.8% in 2002. Piano margins decreased slightly from 36.3% in 2001 to 35.7% in 2002 as a result of both the lower proportion of concert grands sold abroad and the under absorption of overhead resulting from the periodic shutdowns at the Company’s domestic piano manufacturing facility. Band and orchestral instrument margins decreased from 27.2% in 2001 to 23.9% in 2002. This change was due to under absorption of overhead resulting from reduced production levels in consideration of current demand, as well as temporary inefficiencies caused by the implementation of the manufacturing revitalization project at one of the Company’s brasswind manufacturing plants. The Company expects that the implementation of the manufacturing revitalization project will continue to have an impact on band and orchestral instrument margins through the second quarter as the project draws to completion.
Operating Expenses — Overall operating expenses decreased by $1.9 million (10%) to $16.7 million in the first quarter. $1.1 million of this decrease is attributable to reduced sales and marketing expenses associated with trade shows and advertising. The remaining decrease is due to the Company’s implementation of SFAS No. 142, which resulted in a decrease in amortization expense of approximately $0.8 million.
Other Expense, net - Other expenses, primarily interest expense, decreased by $1.4 million (31%) to $3.0 million. Lower average outstanding debt balances resulting from decreased inventory levels and lower interest rates on the Company’s borrowings contributed significantly to the decrease.
Income Taxes — The Company’s effective tax rate decreased from 40.2% in 2001 to 35.1% in 2002 as a result of a shift towards income generated by the Company’s German divisions and a corresponding increased utilization of foreign tax credits.
Liquidity and Capital Resources
The Company has relied primarily upon cash provided by operations, supplemented as necessary by seasonal borrowings under its working capital line, to finance its operations, repay long-term indebtedness and fund capital expenditures.
Cash used in operations in the first three months of 2001 was $3.8 million, compared to cash provided by operations of $14.7 million in the first three months of 2002. This change is due primarily to
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management’s control of working capital and the significant reduction of inventory balances in the current year period.
Capital expenditures of $1.4 million and $1.0 million in the first three months of 2001 and 2002, respectively, were used primarily for the purchase of new machinery, EPA compliance projects, and production facility improvements. The Company expects to expend approximately $5-6 million in 2002 for capital projects primarily related to equipment modernization and production efficiency.
The Company’s real estate term loan, acquisition term loan and domestic seasonal borrowing requirements are accommodated through a committed credit facility with a syndicate of domestic lenders (the “Credit Facility”). The Credit Facility, which was amended to accommodate the $150.0 million 8.75% Senior Note offering completed on April 19, 2001, provides the Company with a potential borrowing capacity of up to $85.0 million in revolving credit loans, based on eligible accounts receivable and inventory balances. The acquisition term loan and revolving credit loan portions of the Credit Facility bear interest at average 30-day LIBOR plus 1.75%, and the real estate term loan bears interest at average 30-day LIBOR plus 1.5%. The Credit facility expires on September 14, 2008. As of March 30, 2002, there were no revolving credit loans outstanding and availability based on eligible accounts receivable and inventory balances was approximately $85.0 million. Open account loans with foreign banks also provide for borrowings by Steinway’s foreign subsidiaries of up to €19.9 million ($17.3 million at the March 30, 2002 exchange rate).
The Company’s long-term financing consists primarily of $150.0 million of 8.75% Senior Notes, $58.5 million of term loans outstanding under the Credit Facility and $792 of notes payable to foreign banks. On April 19, 2001, the Company completed a $150.0 million senior note offering at 8.75%. The proceeds of the offering were used to redeem $110.0 million of previously outstanding Senior Subordinated Notes, with the balance paying down the Credit Facility. The early retirement of the Senior Subordinated Notes, which were redeemed on June 1, 2001 at 102.75% of the principal amount, generated an extraordinary charge of approximately $4.0 million, net of tax of $2.7 million. The Company’s debt agreements contain restrictive covenants that place certain restrictions on the Company, including restrictions on its ability to incur additional indebtedness, to make investments in other entities and to pay cash dividends.
The Company anticipates that revenues and results from operations for 2002 will be comparable to 2001. Management expects to continue its focus on maintaining sufficient, but not excessive, inventory levels, repaying debt, expanding market share, and improving production efficiency. The Company is not aware of any trends, demands, commitments, or costs of resources that are expected to materially impact liquidity or capital resources. Therefore, management believes that cash on hand, together with cash flows anticipated from operations and available borrowings under the Credit Facility, will be adequate to meet existing debt service requirements, fund continuing capital requirements and satisfy working capital and general corporate needs through 2002.
New Accounting Pronouncements
On January 1, 2002 the Company adopted SFAS No. 142, “Goodwill and Intangible Assets,” which supersedes APB Opinion No. 17, “Intangible Assets.” SFAS No. 142 eliminates the requirement to amortize goodwill and indefinite-lived assets. During the second quarter of fiscal year 2002, the Company will complete the transitional impairment test as required by SFAS No. 142. Based on facts and circumstances in existence at March 30, 2002, the Company does not anticipate that, upon completion of the transitional impairment test, it will need to change the nature or carrying amounts of its
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goodwill or trademark assets. If these rules had applied to goodwill and trademark assets for the first quarter of 2001, the result would have been to increase related pretax income by approximately $764 and net income by approximately $547, or $.06 per share.
In June 2001, the FASB issued SFAS No. 143, “Accounting for Asset Retirement Obligations.” SFAS No. 143 addresses financial accounting and reporting for obligations associated with the retirement of tangible long-lived assets and the associated asset retirement costs. SFAS No. 143 is effective for fiscal years beginning after June 15, 2002. The Company does not expect the adoption of SFAS No. 143 to have a material impact on its financial position or results of operations.
On January 1, 2002, the Company adopted SFAS No. 144, “Accounting for the Impairment or Disposal of Long-Lived Assets,” which addresses the financial accounting and reporting for the impairment or disposal of long-lived assets. SFAS No. 144 supersedes SFAS No. 121, “Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets to Be Disposed Of,” and also supersedes the accounting and certain reporting provisions of APB Opinion No. 30, “Reporting the Results of Operations-Reporting the Effects of Disposal of a Segment of a Business, and Extraordinary, Unusual and Infrequently Occurring Events and Transactions,” for the disposal of a segment of a business. The adoption of SFAS No. 144 did not have a material impact on the Company’s financial position or results of operations.
ITEM 3 QUANTITATIVE AND QUALITATIVE DISCLOSURES
ABOUT MARKET RISK
The Company is exposed to market risk associated with changes in foreign currency exchange rates and interest rates. The Company mitigates its foreign currency exchange rate risk by maintaining foreign currency cash balances and holding forward foreign currency contracts. These contracts are used as a hedge against intercompany transactions and are not used for trading or speculative purposes. The fair value of the forward foreign currency exchange contracts is sensitive to changes in foreign currency exchange rates. The impact of an adverse change in foreign currency exchange rates would not be materially different than that disclosed in the Company’s Annual Report on Form 10-K for the year ended December 31, 2001.
Although the majority of the Company’s long-term debt is at a fixed interest rate, the Company’s revolving loans and term loans bear interest at rates that fluctuate with changes in LIBOR. As such, the Company’s interest expense on its revolving loans and term loans and the fair value of its fixed long-term debt are sensitive to changes in market interest rates. The effect of an adverse change in market interest rates on the Company’s interest expense and the fair value of its long-term debt would not be materially different than that disclosed in the Company’s Annual Report on Form 10-K for the year ended December 31, 2001.
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PART II OTHER INFORMATION
ITEM 6 EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits
None
(b) Reports on Form 8-K
The Company did not file any reports on Form 8-K during the quarter ended March 30, 2002.
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SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the Registrants have duly caused this report to be signed on their behalf by the undersigned, thereunto duly authorized.
STEINWAY MUSICAL INSTRUMENTS, INC.
/s/ Dana D. Messina
Dana D. Messina
Director, President and Chief Executive Officer
/s/ Dennis M. Hanson
Dennis M. Hanson
Senior Executive Vice President and
Chief Financial Officer
Date: May 10, 2002
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