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, 2010 |
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| 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.) |
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800 South Street, Suite 305 |
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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 o 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 |
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Non-accelerated filer o |
| Smaller reporting company o |
(Do not check if a smaller reporting company) |
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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 4, 2010:
| Class A |
| 477,952 |
| Ordinary |
| 11,598,337 |
| Total |
| 12,076,289 |
STEINWAY MUSICAL INSTRUMENTS, INC. AND SUBSIDIARIES
FORM 10-Q
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, |
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| 2010 |
| 2009 |
| 2010 |
| 2009 |
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Net sales |
| $ | 78,248 |
| $ | 72,113 |
| $ | 146,791 |
| $ | 142,104 |
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Cost of sales |
| 56,085 |
| 53,215 |
| 103,304 |
| 104,597 |
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Gross profit |
| 22,163 |
| 18,898 |
| 43,487 |
| 37,507 |
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Operating expenses: |
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Sales and marketing |
| 10,032 |
| 9,860 |
| 20,169 |
| 20,480 |
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General and administrative |
| 6,598 |
| 7,248 |
| 13,717 |
| 14,702 |
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Other operating expenses |
| 392 |
| 283 |
| 737 |
| 869 |
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Total operating expenses |
| 17,022 |
| 17,391 |
| 34,623 |
| 36,051 |
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Income from operations |
| 5,141 |
| 1,507 |
| 8,864 |
| 1,456 |
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Other expense (income), net |
| 658 |
| (253 | ) | (809 | ) | (811 | ) | ||||
Net gain on extinguishment of debt |
| (104 | ) | — |
| (104 | ) | (3,434 | ) | ||||
Interest income |
| (287 | ) | (420 | ) | (744 | ) | (982 | ) | ||||
Interest expense |
| 2,782 |
| 2,936 |
| 5,598 |
| 6,020 |
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Total non-operating expenses |
| 3,049 |
| 2,263 |
| 3,941 |
| 793 |
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Income (loss) before income taxes |
| 2,092 |
| (756 | ) | 4,923 |
| 663 |
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Income tax provision (benefit) |
| 912 |
| (136 | ) | 1,943 |
| 278 |
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Net income (loss) |
| $ | 1,180 |
| $ | (620 | ) | $ | 2,980 |
| $ | 385 |
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Earnings per share: |
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Basic |
| $ | 0.10 |
| $ | (0.07 | ) | $ | 0.27 |
| $ | 0.05 |
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Diluted |
| $ | 0.10 |
| $ | (0.07 | ) | $ | 0.26 |
| $ | 0.05 |
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Weighted average shares: |
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Basic |
| 12,019,468 |
| 8,533,259 |
| 11,226,649 |
| 8,533,259 |
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Diluted |
| 12,098,725 |
| 8,533,259 |
| 11,291,021 |
| 8,537,619 |
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See notes to condensed consolidated financial statements.
STEINWAY MUSICAL INSTRUMENTS, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
Unaudited
(In Thousands)
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| June 30, |
| December 31, |
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| 2010 |
| 2009 |
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Assets |
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Current assets |
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Cash |
| $ | 92,063 |
| $ | 65,873 |
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Accounts, notes, and other receivables, net of allowances of |
| 46,852 |
| 45,073 |
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Inventories |
| 151,868 |
| 158,030 |
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Prepaid expenses and other current assets |
| 13,698 |
| 13,499 |
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Deferred tax assets |
| 12,272 |
| 11,431 |
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Total current assets |
| $ | 316,753 |
| $ | 293,906 |
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Property, plant and equipment, net of accumulated depreciation of |
| 84,933 |
| 89,538 |
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Trademarks |
| 14,614 |
| 15,284 |
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Goodwill |
| 21,929 |
| 24,063 |
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Other intangibles, net |
| 3,520 |
| 4,183 |
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Other assets |
| 12,343 |
| 12,663 |
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Long-term deferred tax assets |
| 11,135 |
| 10,153 |
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Total assets |
| $ | 465,227 |
| $ | 449,790 |
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Liabilities and stockholders’ equity |
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Current liabilities: |
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Debt |
| $ | 1,131 |
| $ | 537 |
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Accounts payable |
| 9,961 |
| 9,764 |
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Other current liabilities |
| 37,616 |
| 36,395 |
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Total current liabilities |
| 48,708 |
| 46,696 |
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Long-term debt |
| 151,976 |
| 157,703 |
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Deferred tax liabilities |
| 7,087 |
| 7,124 |
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Pension and other postretirement benefit liabilities |
| 33,236 |
| 35,766 |
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Other non-current liabilities |
| 5,505 |
| 6,005 |
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Total liabilities |
| 246,512 |
| 253,294 |
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Commitments and contingent liabilities |
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Stockholders’ equity: |
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Common stock |
| 14 |
| 12 |
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Additional paid-in capital |
| 153,135 |
| 125,192 |
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Retained earnings |
| 129,289 |
| 126,415 |
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Accumulated other comprehensive loss |
| (17,004 | ) | (7,851 | ) | ||
Treasury stock, at cost |
| (46,719 | ) | (47,272 | ) | ||
Total stockholders’ equity |
| 218,715 |
| 196,496 |
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Total liabilities and stockholders’ equity |
| $ | 465,227 |
| $ | 449,790 |
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See notes to condensed consolidated financial statements.
STEINWAY MUSICAL INSTRUMENTS, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
Unaudited
(In Thousands)
|
| Six Months Ended June 30, |
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| 2010 |
| 2009 |
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Cash flows from operating activities: |
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Net income |
| $ | 2,980 |
| $ | 385 |
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Adjustments to reconcile net income to cash flows from operating activities: |
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Depreciation and amortization |
| 5,050 |
| 5,362 |
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Amortization of bond discount |
| 74 |
| 77 |
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Net gain on extinguishment of debt |
| (104 | ) | (3,434 | ) | ||
Stock based compensation expense |
| 741 |
| 562 |
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Excess tax benefits from stock-based awards |
| 64 |
| — |
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Tax benefit from stock option exercises |
| 4 |
| — |
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Deferred tax benefit |
| (1,207 | ) | (679 | ) | ||
Other |
| 335 |
| 703 |
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Changes in operating assets and liabilities: |
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Accounts, notes and other receivables |
| (2,655 | ) | 3,744 |
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Inventories |
| 306 |
| (7,357 | ) | ||
Prepaid expenses and other assets |
| (552 | ) | 1,997 |
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Accounts payable |
| 472 |
| (3,395 | ) | ||
Other liabilities |
| 2,603 |
| (3,946 | ) | ||
Cash flows from operating activities: |
| 8,111 |
| (5,981 | ) | ||
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Cash flows from investing activities: |
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Capital expenditures |
| (1,150 | ) | (2,212 | ) | ||
Proceeds from disposals of property, plant and equipment |
| 7 |
| 24 |
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Other |
| 78 |
| — |
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Acquisition of businesses, net of cash acquired |
| — |
| (820 | ) | ||
Cash flows from investing activities |
| (1,065 | ) | (3,008 | ) | ||
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Cash flows from financing activities: |
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Borrowings under lines of credit |
| 799 |
| 126,693 |
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Repayments under lines of credit |
| (264 | ) | (109,006 | ) | ||
Repayments of long-term debt, net of discount |
| (5,633 | ) | (7,280 | ) | ||
Proceeds from issuance of common stock |
| 27,647 |
| — |
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Excess tax benefits from stock-based awards |
| (64 | ) | — |
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Cash flows from financing activities |
| 22,485 |
| 10,407 |
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Effect of foreign exchange rate changes on cash |
| (3,341 | ) | (98 | ) | ||
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Change in cash |
| 26,190 |
| 1,320 |
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Cash, beginning of period |
| 65,873 |
| 44,380 |
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Cash, end of period |
| $ | 92,063 |
| $ | 45,700 |
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Supplemental Cash Flow Information: |
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Interest paid |
| $ | 6,144 |
| $ | 7,208 |
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Income taxes paid |
| $ | 5,080 |
| $ | 2,882 |
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See notes to condensed consolidated financial statements.
STEINWAY MUSICAL INSTRUMENTS, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENT OF STOCKHOLDERS’ EQUITY
Unaudited
(In Thousands Except Share Data)
|
| Common |
| Additional |
| Retained |
| Accumulated |
| Treasury |
| Total |
| ||||||
Balance, January 1, 2010 |
| $ | 12 |
| $ | 125,192 |
| $ | 126,415 |
| $ | (7,851 | ) | $ | (47,272 | ) | $ | 196,496 |
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Comprehensive loss: |
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Net income |
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| 2,980 |
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| 2,980 |
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Foreign currency translation adjustments |
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| (9,213 | ) |
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| (9,213 | ) | ||||||
Changes in pension and other postretirement benefits, net |
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| 60 |
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| 60 |
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Total comprehensive loss |
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| (6,173 | ) | ||||||
Exercise of 23,700 options for shares of common stock |
| — |
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| (106 | ) |
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| 553 |
| 447 |
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Tax benefit of options exercised |
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| 4 |
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| 4 |
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Stock-based compensation |
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| 741 |
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| 741 |
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Issuance of 1,700,000 shares of common stock |
| 2 |
| 27,198 |
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| 27,200 |
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Balance, June 30, 2010 |
| $ | 14 |
| $ | 153,135 |
| $ | 129,289 |
| $ | (17,004 | ) | $ | (46,719 | ) | $ | 218,715 |
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See notes to condensed consolidated financial statements.
STEINWAY MUSICAL INSTRUMENTS, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED
FINANCIAL STATEMENTS
JUNE 30, 2010
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, 2010 and 2009 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, 2009, 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, 2009 filed with the Securities and Exchange Commission (“SEC”). The results of operations for the three and six months ended June 30, 2010 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
Principles of Consolidation - Our condensed consolidated financial statements include the accounts of all direct and indirect subsidiaries, all of which are wholly owned, including the piano (“Steinway”), band (“Conn-Selmer”), and online music (“Arkiv”) divisions. Intercompany balances have been eliminated in consolidation.
Use of Estimates - The preparation of financial statements in conformity with accounting principles generally accepted in the United States of America necessarily requires us to make estimates and assumptions that affect the reported amounts of assets and liabilities, the disclosure of contingent assets and liabilities at the date of the financial statements, and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates.
Income Taxes - We provide for income taxes using an asset and liability approach. We compute deferred income tax assets and liabilities for differences between the financial statement and tax bases of assets and liabilities that will result in taxable or deductible amounts in the future based on enacted tax laws and rates applicable to the periods in which the differences are expected to affect taxable income. We establish valuation allowances when necessary to reduce deferred tax assets to the amount that more likely than not will be realized.
We provide reserves for potential payments of tax to various tax authorities related to uncertain tax positions and other issues. Reserves related to uncertain tax positions are based on a determination of whether and how much of a tax benefit taken in our tax filings or positions is more likely than not to be realized, assuming that the matter in question will be raised by the tax authorities. Potential interest and penalties associated with such uncertain tax positions are recorded as a component of income tax expense. We believe appropriate provisions for outstanding issues have been made.
Income tax-related interest and penalties is reported as a component of income tax expense. We file income tax returns at the U.S. federal, state, and local levels, as well as in several foreign jurisdictions. With few exceptions, our returns are no longer subject to examinations for years before 2006.
There were no material changes to the liability for uncertain tax positions in the first six months of 2010. Although we believe our tax estimates are appropriate, the final determination of tax audits and any related litigation could result in changes in our estimates.
Stock-based Compensation - We record compensation cost on a straight-line basis over the award’s requisite service period for all share-based awards granted. We estimate the fair value of our stock option awards (less estimated forfeitures) and employee stock purchase plan rights on the date of grant using the Black-Scholes option valuation model.
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 using the treasury stock method, except when such options would be antidilutive.
A reconciliation of the weighted-average shares used for the basic and diluted computations is as follows:
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| Three Months Ended June 30, |
| Six Months Ended June 30, |
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| 2010 |
| 2009 |
| 2010 |
| 2009 |
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Weighted-average shares: |
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For basic earnings (loss) per share |
| 12,019,468 |
| 8,533,259 |
| 11,226,649 |
| 8,533,259 |
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Dilutive effect of stock-based compensation plans |
| 79,257 |
| — |
| 64,372 |
| 4,360 |
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For diluted earnings (loss) per share |
| 12,098,725 |
| 8,533,259 |
| 11,291,021 |
| 8,537,619 |
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We did not include any of the 797,716 outstanding options to purchase shares of common stock in the computation of diluted (loss) earnings per share for the three and six months ended June 30, 2009 because generally their exercise prices were more than the average market price of our common shares, and therefore antidilutive. We did not include 711,580 or 735,756 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, 2010, respectively, because they were antidilutive.
Accumulated Other Comprehensive Loss - Accumulated other comprehensive loss is comprised of foreign currency translation adjustments and pension and other postretirement benefits. The components of accumulated other comprehensive loss are as follows:
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| June 30, |
| December 31, |
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| 2010 |
| 2009 |
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Accumulated other comprehensive loss: |
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Foreign currency translation adjustment |
| $ | (1,933 | ) | $ | 7,280 |
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Pension and other postretirement benefits |
| (15,071 | ) | (15,131 | ) | ||
Total accumulated other comprehensive loss |
| $ | (17,004 | ) | $ | (7,851 | ) |
The components of comprehensive loss are as follows:
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| Three Months Ended June 30, |
| Six Months Ended June 30, |
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| 2010 |
| 2009 |
| 2010 |
| 2009 |
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Comprehensive loss: |
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Net income (loss) |
| $ | 1,180 |
| $ | (620 | ) | $ | 2,980 |
| $ | 385 |
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Foreign currency translation adjustment |
| (5,223 | ) | 4,402 |
| (9,213 | ) | 1,114 |
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Pension and other postretirement benefits, net |
| 60 | (1) | — |
| 60 | (1) | — |
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Total comprehensive loss |
| $ | (3,983 | ) | $ | 3,782 |
| $ | (6,173 | ) | $ | 1,499 |
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(1) Represents a gross change of $83, net of $23 in related tax impact.
Recent Accounting Pronouncements - In January 2010, the Financial Accounting Standards Board (“FASB”) issued guidance which amends the existing fair value measurements and disclosures guidance. These amendments require a greater level of disaggregated information as well as more disclosure around valuation techniques and inputs to fair value measurements. The amendments also provide guidance on employers’ disclosures about postretirement benefit plan assets to require that disclosures be provided by classes of assets instead of by major categories of assets. We were required to comply with this new standard as of January 1, 2010. Its adoption did not have a material impact on our consolidated financial statements.
In March 2010, the FASB issued new guidance which clarifies the scope exception for embedded credit related derivatives. We will be required to comply with this new standard on July 1, 2010. We do not expect a material impact on our financial statements from the adoption of this guidance.
(3) Inventories
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| June 30, |
| December 31, |
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| 2010 |
| 2009 |
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Raw materials |
| $ | 16,170 |
| $ | 18,413 |
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Work-in-process |
| 35,354 |
| 42,121 |
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Finished goods |
| 100,344 |
| 97,496 |
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Total inventory |
| $ | 151,868 |
| $ | 158,030 |
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(4) 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. We performed our annual goodwill and intangible asset impairment test as of July 31, 2009. Based on our analysis, it was determined that a portion of the trademarks associated with the online music business of the piano division was impaired. Accordingly, we wrote down the trademarks by $1.0 million in 2009. Our analysis of the other piano and band division trademarks did not indicate an impairment; therefore, no charge was taken against those assets or any other intangible assets attributable to those divisions. No other events or circumstances occurred subsequent to our annual impairment test which would have indicated that these assets may be impaired.
The changes in carrying amounts of goodwill and trademarks are as follows:
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| Piano |
| Band |
| Total |
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Goodwill: |
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Balance, January 1, 2010 |
| $ | 24,063 |
| $ | — |
| $ | 24,063 |
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Foreign currency translation impact |
| (2,134 | ) | — |
| (2,134 | ) | |||
Balance, June 30, 2010 |
| $ | 21,929 |
| $ | — |
| $ | 21,929 |
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Trademarks: |
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Balance, January 1, 2010 |
| $ | 9,460 |
| $ | 5,824 |
| $ | 15,284 |
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Foreign currency translation impact |
| (670 | ) | — |
| (670 | ) | |||
Balance, June 30, 2010 |
| $ | 8,790 |
| $ | 5,824 |
| $ | 14,614 |
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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:
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| June 30, |
| December 31, |
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Gross deferred financing costs |
| $ | 5,088 |
| $ | 5,333 |
|
Accumulated amortization |
| (3,262 | ) | (3,135 | ) | ||
Deferred financing costs, net |
| $ | 1,826 |
| $ | 2,198 |
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Gross non-compete agreements |
| $ | 250 |
| $ | 250 |
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Accumulated amortization |
| (106 | ) | (81 | ) | ||
Non-compete agreements, net |
| $ | 144 |
| $ | 169 |
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Gross customer relationships |
| $ | 512 |
| $ | 506 |
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Accumulated amortization |
| (221 | ) | (166 | ) | ||
Customer relationships, net |
| $ | 291 |
| $ | 340 |
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Gross website and developed technology |
| $ | 2,176 |
| $ | 2,176 |
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Accumulated amortization |
| (917 | ) | (700 | ) | ||
Website and developed technology, net |
| $ | 1,259 |
| $ | 1,476 |
|
|
|
|
|
|
| ||
Total gross other intangibles |
| $ | 8,026 |
| $ | 8,265 |
|
Accumulated amortization |
| (4,506 | ) | (4,082 | ) | ||
Other intangibles, net |
| $ | 3,520 |
| $ | 4,183 |
|
Deferred financing costs were impacted by our purchase of $5.8 million of our Senior Notes in May and June, 2010. These repurchases are described more fully in Note 6. The weighted-average amortization period for deferred financing costs is seven years, and the weighted-average amortization period for all other amortizable intangibles is approximately five years. Total amortization expense, which includes amortization of deferred financing costs, is as follows:
|
| Three Months Ended June 30, |
| Six Months Ended June 30, |
| ||||||||
|
| 2010 |
| 2009 |
| 2010 |
| 2009 |
| ||||
Amortization expense |
| $ | 305 |
| $ | 332 |
| $ | 611 |
| $ | 667 |
|
The following table shows the total estimated amortization expense for the remainder of 2010 and beyond:
Remainder of 2010 |
| $ | 599 |
|
2011 |
| 1,138 |
| |
2012 |
| 1,026 |
| |
2013 |
| 674 |
| |
2014 |
| 80 |
| |
Thereafter |
| 3 |
| |
Total |
| $ | 3,520 |
|
(5) Other Current Liabilities
|
| June 30, |
| December 31, |
| ||
Accrued payroll and related benefits |
| $ | 12,443 |
| $ | 9,326 |
|
Current portion of pension and other postretirement benefit liabilities |
| 1,129 |
| 1,456 |
| ||
Accrued warranty expense |
| 1,432 |
| 1,553 |
| ||
Accrued interest |
| 3,545 |
| 3,675 |
| ||
Deferred income |
| 7,124 |
| 7,210 |
| ||
Environmental liabilities |
| 2,290 |
| 2,377 |
| ||
Income and other taxes payable |
| 1,992 |
| 3,383 |
| ||
Other accrued expenses |
| 7,661 |
| 7,415 |
| ||
Total |
| $ | 37,616 |
| $ | 36,395 |
|
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, 2010 and 2009, and the year ended December 31, 2009 is as follows:
|
| June 30, |
| June 30, |
| December 31, |
| |||
Beginning balance |
| $ | 1,553 |
| $ | 1,451 |
| $ | 1,451 |
|
Additions |
| 433 |
| 432 |
| 945 |
| |||
Claims and reversals |
| (460 | ) | (494 | ) | (865 | ) | |||
Foreign currency translation impact |
| (94 | ) | 21 |
| 22 |
| |||
Ending balance |
| $ | 1,432 |
| $ | 1,410 |
| $ | 1,553 |
|
(6) Long-Term Debt
Our long-term debt consists of the following:
|
| June 30, |
| December 31, |
| ||
Senior Notes |
| $ | 152,506 |
| $ | 158,326 |
|
Unamortized bond discount |
| (530 | ) | (623 | ) | ||
Overseas lines of credit |
| 1,131 |
| 537 |
| ||
Total |
| 153,107 |
| 158,240 |
| ||
Less: current portion |
| 1,131 |
| 537 |
| ||
Long-term debt |
| $ | 151,976 |
| $ | 157,703 |
|
Scheduled repayments of long-term debt as of June 30, 2010 are as follows:
Remainder of 2010 |
| $ | 1,131 |
|
2011 |
| — |
| |
2012 |
| — |
| |
2013 |
| — |
| |
2014 |
| 152,506 |
| |
Total |
| $ | 153,637 |
|
During the second quarter of 2010, we repurchased $5.8 million of our Senior Notes at prices ranging from 95.0% to 98.0% plus interest. As a result, we recorded a net gain on extinguishment of debt of $0.1 million. A summary of the transactions is as follows:
Principal repurchased |
| $ | 5,820 |
|
Less: |
|
|
| |
Cash paid |
| (5,633 | ) | |
Write-off of deferred financing costs |
| (64 | ) | |
Write-off of bond discount |
| (19 | ) | |
Net gain on extinguishment of debt |
| $ | 104 |
|
(7) 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 do not have any assets or liabilities carried at Level 3 fair value.)
We value our foreign currency contracts using internal models with observable inputs, including currency forward and spot prices. Estimated fair value has been determined as the difference between the current forward rate and the contract rate, multiplied by the notional amount of the contract, or upon the estimated fair value of purchased option contracts.
The following table presents information about our assets and liabilities measured at fair value on a recurring basis as of June 30, 2010 and December 31, 2009 and the fair value hierarchy of the valuation techniques we utilized.
|
| June 30, |
| December 31, |
| ||
Financial assets: |
|
|
|
|
| ||
Trading securities(1) - Level 1 |
| $ | 1,584 |
| $ | 1,623 |
|
Foreign currency contracts(2) - Level 2 |
| 867 |
| 82 |
| ||
|
| $ | 2,451 |
| $ | 1,705 |
|
|
|
|
|
|
| ||
Financial liabilities: |
|
|
|
|
| ||
Foreign currency contracts(2) - Level 2 |
| $ | 704 |
| $ | 3 |
|
(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 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, 2010 |
| December 31, 2009 |
| ||||||||
|
| Net Carrying |
| Estimated |
| Net Carrying |
| Estimated |
| ||||
Financial liabilities: |
|
|
|
|
|
|
|
|
| ||||
Debt |
| $ | 153,637 |
| $ | 146,774 |
| $ | 158,863 |
| $ | 144,218 |
|
The carrying values of accounts, notes and other receivables, and accounts payable approximate fair value.
(8) Stockholders’ Equity and Stock-based Compensation Arrangements
Our common stock is comprised of two classes: Class A and Ordinary. With the exception of disparate voting power, both classes are substantially identical. Each share of Class A common stock entitles the holder to 98 votes. Holders of Ordinary common stock are entitled to one vote per share. Each share of Class A common stock shall automatically convert to Ordinary common stock if, at any time, that share of Class A common stock is not owned by an original Class A holder. In March 2010 Samick Musical Instruments Co., Ltd. (“Samick”) exercised its right to purchase 1,700,000 shares of our ordinary common stock at a price of $16.00 per share, which resulted in a cash payment to us of $27.2 million. As of June 30, 2010 our Chairman and our Chief Executive Officer collectively owned 100% of the Class A common shares, representing approximately 80% of the combined voting power of the Class A common stock and Ordinary common stock.
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 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 1996 Stock Plan has expired but still has vested and unvested 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 122,674 shares of treasury stock to cover options exercised, with 338,276 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. This reduction was $0.1 million for the three and six months ended June 30, 2010. There were no stock option exercises during the three and six months ended June 30, 2009.
The compensation cost and the income tax benefit recognized for these plans is as follows:
|
| Three Months Ended June 30, |
| Six Months Ended June 30, |
| ||||||||
|
| 2010 |
| 2009 |
| 2010 |
| 2009 |
| ||||
Compensation cost included in basic and diluted income per share |
| $ | 0.03 |
| $ | 0.03 |
| $ | 0.05 |
| $ | 0.06 |
|
Stock-based compensation expense |
| 375 |
| 293 |
| 741 |
| 562 |
| ||||
Income tax benefit |
| 68 |
| 43 |
| 135 |
| 85 |
| ||||
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, 2010 or 2009. The following table sets forth information regarding the Stock Plans:
|
| Number of |
| Weighted- |
| Weighted- |
| Aggregate |
| ||
Outstanding, January 1, 2010 |
| 1,129,176 |
| $ | 20.61 |
|
|
|
|
| |
Granted |
| — |
| — |
|
|
|
|
| ||
Exercised |
| (23,700 | ) | 18.84 |
|
|
|
|
| ||
Forfeited |
| (15,320 | ) | 24.58 |
|
|
|
|
| ||
Outstanding, June 30, 2010 |
| 1,090,156 |
| $ | 20.59 |
| 6.7 |
| $ | 2,371,645 |
|
|
|
|
|
|
|
|
|
|
| ||
Exercisable, June 30, 2010 |
| 508,576 |
| $ | 23.67 |
| 4.5 |
| $ | 6,370 |
|
There were no options exercised during the three months ended June 30, 2010. The total intrinsic value of the options exercised during the six months ended June 30, 2010 was nominal. There were no options exercised during the three and six months ended June 30, 2009. As of June 30, 2010, there was $3.4 million of unrecognized compensation cost related to nonvested share-based compensation arrangements granted under the Stock Plan. This compensation cost is expected to be recognized over a period of 3.4 years. Cash received from option exercises under the Stock Plans for the period ended June 30, 2010 was $0.4 million.
The following tables set forth information regarding the Purchase Plan:
|
| Three Months Ended June 30, |
| Six Months Ended June 30, |
| ||||
|
| 2010 |
| 2009 |
| 2010 |
| 2009 |
|
Risk-free interest rate |
| 0.5% |
| 2.2% |
| 0.5% |
| 2.2% |
|
Weighted-average expected life of option feature (in years) |
| 1.0 |
| 1.0 |
| 1.0 |
| 1.0 |
|
Expected volatility of underlying stock |
| 27.9% |
| 25.3% |
| 27.9% |
| 25.3% |
|
Expected dividends |
| n/a |
| n/a |
| n/a |
| n/a |
|
Weighted-average fair value of option feature |
| $2.79 |
| $6.71 |
| $2.79 |
| $6.71 |
|
|
| Number of |
| Weighted- |
| Remaining |
| Aggregate |
| ||
Outstanding, January 1, 2010 |
| 24,382 |
| $ | 9.65 |
|
|
|
|
| |
Granted |
| 27,307 |
| 9.65 |
|
|
|
|
| ||
Exercised |
| — |
| — |
|
|
|
|
| ||
Forfeited |
| (957 | ) | 9.65 |
|
|
|
|
| ||
Outstanding, June 30, 2010 |
| 50,732 |
| $ | 9.65 |
| 0.1 |
| $ | 419,046 |
|
(9) Other Expense (Income), Net
|
| Three Months Ended June 30, |
| Six Months Ended June 30, |
| ||||||||
|
| 2010 |
| 2009 |
| 2010 |
| 2009 |
| ||||
West 57th Street building income |
| $ | (961 | ) | $ | (1,553 | ) | $ | (3,393 | ) | $ | (3,058 | ) |
West 57th Street building expense |
| 1,689 |
| 971 |
| 3,461 |
| 2,186 |
| ||||
Foreign exchange (gain) loss, net |
| (217 | ) | 635 |
| (713 | ) | 349 |
| ||||
Miscellaneous, net |
| 147 |
| (306 | ) | (164 | ) | (288 | ) | ||||
Other expense (income), net |
| $ | 658 |
| $ | (253 | ) | $ | (809 | ) | $ | (811 | ) |
Our building on West 57th Street in New York City is managed by an outside company. West 57th Street building income includes all rent and other income attributable to the property; and West 57th 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.
(10) Commitments and Contingent Liabilities
We are involved in certain legal proceedings regarding environmental matters, which are described below. 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 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.
We are continuing an existing environmental remediation plan at a facility we acquired in 2000 and subsequently sold. We estimate our costs, which approximate $0.7 million, over an 11-year period. We have accrued approximately $0.5 million for the estimated remaining cost of this remediation program, which represents the present value total cost using a discount rate of 4.54%. A summary of expected payments associated with this project is as follows:
|
| Environmental |
| |
Remainder of 2010 |
| $ | 44 |
|
2011 |
| 61 |
| |
2012 |
| 61 |
| |
2013 |
| 61 |
| |
2014 |
| 61 |
| |
Thereafter |
| 362 |
| |
Total |
| $ | 650 |
|
In 2004, we acquired two manufacturing facilities from G. Leblanc Corporation, now Grenadilla, Inc. (“Grenadilla”), for which environmental remediation plans had already been established. In connection with the acquisition, we assumed the existing accrued liability of approximately $0.8 million for the cost of these remediation activities. Based on a review of past and ongoing investigatory and remedial work by our environmental consultants, and discussions with state regulatory officials, as well as periodic sampling, we estimate the remaining costs of such remedial plans to be $1.8 million. Pursuant to the purchase and sale agreement, we sought indemnification from Grenadilla for anticipated costs above the original estimate.We filed a claim against the escrow and recorded a corresponding receivable for this amount in prepaid expenses and other current assets in our consolidated balance sheet. Based on the current estimated costs of remediation, this receivable totaled $2.1 million as of June 30, 2010. We have reached an agreement with Grenadilla whereby related environmental costs are paid directly out of the escrow. Currently, the escrow balance exceeds our receivable balance. Should the escrow be reduced to zero, we would seek further indemnification from Grenadilla for these additional costs. However, we cannot be assured that we will be able to recover such costs.
Based on our past experience and currently available information, the matters described above 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 competitive 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.
In May 2008 we acquired 100% of the membership interest in ArkivMusic, LLC, an online retailer of classical music. Under the purchase agreement, we are obligated to pay an amount equal to 5% of the net operating profits of Arkiv, if any, in 2010, the sum of which is not to exceed $2.5 million. The final purchase price is dependent upon a calculation derived from the 2010 net operating profits which, when finalized, is expected to result in an additional payment between $0.0 million and $2.0 million. To date we have not recorded any liability or additional purchase price associated with this acquisition. However, we may have to do so in the latter part of 2010.
(11) Retirement Plans
We have defined benefit pension plans covering the majority 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, |
| ||||||||
|
| 2010 |
| 2009 |
| 2010 |
| 2009 |
| ||||
Service cost |
| $ | 82 |
| $ | 89 |
| $ | 148 |
| $ | 141 |
|
Interest cost |
| 884 |
| 858 |
| 408 |
| 432 |
| ||||
Expected return on plan assets |
| (1,047 | ) | (871 | ) | (72 | ) | (73 | ) | ||||
Amortization of prior service cost (credit) |
| 28 |
| 52 |
| (13 | ) | — |
| ||||
Amortization of net loss |
| 486 |
| 647 |
| 46 |
| 2 |
| ||||
Net periodic pension cost |
| $ | 433 |
| $ | 775 |
| $ | 517 |
| $ | 502 |
|
|
| Domestic Plan |
| Foreign Plans |
| ||||||||
|
| Six Months Ended June 30, |
| Six Months Ended June 30, |
| ||||||||
|
| 2010 |
| 2009 |
| 2010 |
| 2009 |
| ||||
Service cost |
| $ | 175 |
| $ | 193 |
| $ | 319 |
| $ | 274 |
|
Interest cost |
| 1,728 |
| 1,722 |
| 861 |
| 838 |
| ||||
Expected return on plan assets |
| (2,097 | ) | (1,746 | ) | (167 | ) | (140 | ) | ||||
Amortization of prior service cost (credit) |
| 56 |
| 103 |
| (13 | ) | — |
| ||||
Amortization of net loss |
| 978 |
| 1,255 |
| 80 |
| 4 |
| ||||
Net periodic pension cost |
| $ | 840 |
| $ | 1,527 |
| $ | 1,080 |
| $ | 976 |
|
On April 1, 2010, we amended our U.K. pension plan prospectively to both limit active participants’ annual increases in pensionable salary and reduce the rate at which participants accrue final benefits. We remeasured the plan’s benefit obligation, plan assets and net periodic pension cost as a result of the plan amendment. Assumptions utilized are as follows:
|
| Benefit Obligation |
| Net Periodic Pension Cost |
| ||||||
|
| April 1, |
| January 1, |
| April 1, |
| January 1, |
| Weighted- |
|
|
| 2010 |
| 2010 |
| 2010 |
| 2010 |
| Average |
|
Discount rate |
| 5.50% |
| 5.80% |
| 5.50% |
| 5.80% |
| 5.67% |
|
Expected return on assets |
| n/a |
| n/a |
| 5.30% |
| 5.30% |
| 5.30% |
|
Rate of compensation increase |
| 3.80% |
| 4.80% |
| 3.80% |
| 4.80% |
| 4.37% |
|
The decrease in our long-term pension benefit obligation was more than offset by an increase in our actuarial loss due to the change in valuation assumptions when the plan was remeasured. The plan amendment resulted in a gross decrease in our pension benefit obligation of $0.6 million through recognition of a prior service credit, which will be amortized over a period of 12 years. On a net basis, our long term pension benefit obligation increased by less than $0.1 million and our accumulated other comprehensive loss decreased by $0.1 million, net of tax.
We provide postretirement health care and life insurance benefits to a limited number of certain eligible hourly retirees and their dependents. As a result of terminating one of our collective bargaining agreements in 2009, we have a limited number of participants receiving health care benefits under this plan. Once these participants reach age sixty-five and are eligible for Medicare, no postretirement health care benefits will be provided under this plan. We will continue to provide life insurance benefits for eligible retirees. During the quarter ended June 30, 2010, we made a settlement payment of $0.1 million associated with this plan. This payment had no material impact on the plan. The components of net periodic postretirement benefit cost for these benefits are as follows:
|
| Three Months Ended |
| Six Months Ended |
| ||||||||
|
| 2010 |
| 2009 |
| 2010 |
| 2009 |
| ||||
Service cost |
| $ | 4 |
| $ | 2 |
| $ | 5 |
| $ | 3 |
|
Interest cost |
| 8 |
| 19 |
| 21 |
| 36 |
| ||||
Amortization of prior service credit |
| (28 | ) | (13 | ) | (57 | ) | (26 | ) | ||||
Settlement |
| 6 |
| — |
| 6 |
| — |
| ||||
Net periodic postretirement benefit cost (benefit) |
| $ | (10 | ) | $ | 8 |
| $ | (25 | ) | $ | 13 |
|
Based on federal laws and regulations, we are not required to make a contribution to our domestic pension plan in 2010. We made a payment of less than $0.1 million to this plan during the period and are currently evaluating what additional amount, if any, we will contribute to this plan in 2010. Our anticipated contributions to the pension plan of our U.K. subsidiary approximate $0.8 million for the current year. As of June 30, 2010, 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 2010 benefit payments under these plans are $1.1 million, of which $0.6 million was paid through June 2010.
(12) 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 months ended June 30, 2010 and 2009:
Three Months Ended 2010 |
| Piano Segment |
| Band Segment |
| Other & |
| Consol |
| |||||||||||||||||||
|
| U.S. |
| Germany |
| Other |
| Total |
| U.S. |
| Europe |
| Total |
| Elim |
| Total |
| |||||||||
Net sales to external customers |
| $ | 21,366 |
| $ | 12,943 |
| $ | 10,813 |
| $ | 45,122 |
| $ | 32,144 |
| $ | 982 |
| $ | 33,126 |
| $ | — |
| $ | 78,248 |
|
Income (loss) from operations |
| 223 |
| 2,365 |
| 999 |
| 3,587 |
| 2,031 |
| 67 |
| 2,098 |
| (544 | ) | 5,141 |
| |||||||||
Three Months Ended 2009 |
| Piano Segment |
| Band Segment |
| Other & |
| Consol |
| |||||||||||||||||||
|
| U.S. |
| Germany |
| Other |
| Total |
| U.S. |
| Europe |
| Total |
| Elim |
| Total |
| |||||||||
Net sales to external customers |
| $ | 17,779 |
| $ | 13,076 |
| $ | 11,545 |
| $ | 42,400 |
| $ | 28,755 |
| $ | 958 |
| $ | 29,713 |
| $ | — |
| $ | 72,113 |
|
Income (loss) from operations |
| (1,005 | ) | 1,791 |
| 1,085 |
| 1,871 |
| 556 |
| 85 |
| 641 |
| (1,005 | ) | 1,507 |
| |||||||||
Six Months Ended 2010 |
| Piano Segment |
| Band Segment |
| Other & |
| Consol |
| |||||||||||||||||||
|
| U.S. |
| Germany |
| Other |
| Total |
| U.S. |
| Europe |
| Total |
| Elim |
| Total |
| |||||||||
Net sales to external customers |
| $ | 40,206 |
| $ | 22,665 |
| $ | 21,427 |
| $ | 84,298 |
| $ | 60,424 |
| $ | 2,069 |
| $ | 62,493 |
| $ | — |
| $ | 146,791 |
|
Income (loss) from operations |
| 579 |
| 3,085 |
| 1,973 |
| 5,637 |
| 4,542 |
| 157 |
| 4,699 |
| (1,472 | ) | 8,864 |
| |||||||||
Six Months Ended 2009 |
| Piano Segment |
| Band Segment |
| Other & |
| Consol |
| |||||||||||||||||||
|
| U.S. |
| Germany |
| Other |
| Total |
| U.S. |
| Europe |
| Total |
| Elim |
| Total |
| |||||||||
Net sales to external customers |
| $ | 36,616 |
| $ | 23,828 |
| $ | 19,235 |
| $ | 79,679 |
| $ | 60,310 |
| $ | 2,115 |
| $ | 62,425 |
| $ | — |
| $ | 142,104 |
|
Income (loss) from operations |
| (2,642 | ) | 3,704 |
| 1,258 |
| 2,320 |
| 939 |
| 196 |
| 1,135 |
| (1,999 | ) | 1,456 |
| |||||||||
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 Germany. We also offer 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. 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 2009 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, including a shift from batch processing to single piece production flow, 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.
Workers’ Compensation and Self-Insured Health Claims
We establish self-insured workers’ compensation and health claims reserves based on our trend analysis of data provided by third-party administrators regarding historical claims and anticipated future claims.
Warranty
We establish reserves for warranty claims based on our analysis of historical claims data, recent claims trends, and the various lengths of time for which we warranty our products.
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 may not be recoverable. We measure recoverability by comparing the carrying amount of the asset to the estimated future cash flows the asset 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. Our assessment is based on several analyses, including a comparison of net book value to estimated fair values, market capitalization, and multi-year cash flows.
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 state 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.
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; or the rendering of court decisions affecting our estimates of tax liabilities; as well as other factors.
Stock-Based Compensation
We grant stock-based compensation awards which generally vest over a specified period. When determining the fair value of stock options and subscriptions to purchase shares under the employee stock purchase plan (“Purchase Plan”), we use the Black-Scholes option valuation model, which requires input of certain management assumptions, including dividend yield, expected volatility, risk-free interest rate, expected life of stock options granted during the period, and the life applicable to the Purchase Plan subscriptions. The estimated fair value of the options and subscriptions to purchase shares, and the resultant stock-based compensation expense, can fluctuate based on the assumptions used by management.
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 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; work stoppages and slowdowns; ability to successfully consolidate band manufacturing; impact of dealer consolidations on orders; 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 lease office space; 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, 2009. 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.
Results of Operations
Three Months Ended June 30, 2010 Compared to Three Months Ended June 30, 2009
|
| Three Months Ended June 30, |
|
|
| Change |
| ||||||||
|
| 2010 |
|
|
| 2009 |
|
|
| $ |
| % |
| ||
Net sales |
|
|
|
|
|
|
|
|
|
|
|
|
| ||
Band |
| $ | 33,126 |
|
|
| $ | 29,713 |
|
|
| 3,413 |
| 11.5 |
|
Piano |
| 45,122 |
|
|
| 42,400 |
|
|
| 2,722 |
| 6.4 |
| ||
Total sales |
| 78,248 |
|
|
| 72,113 |
|
|
| 6,135 |
| 8.5 |
| ||
|
|
|
|
|
|
|
|
|
|
|
|
|
| ||
Cost of sales |
|
|
|
|
|
|
|
|
|
|
|
|
| ||
Band |
| 25,822 |
|
|
| 23,484 |
|
|
| 2,338 |
| 10.0 |
| ||
Piano |
| 30,263 |
|
|
| 29,731 |
|
|
| 532 |
| 1.8 |
| ||
Total cost of sales |
| 56,085 |
|
|
| 53,215 |
|
|
| 2,870 |
| 5.4 |
| ||
|
|
|
|
|
|
|
|
|
|
|
|
|
| ||
Gross profit |
|
|
|
|
|
|
|
|
|
|
|
|
| ||
Band |
| 7,304 |
| 22.0% |
| 6,229 |
| 21.0% |
| 1,075 |
| 17.3 |
| ||
Piano |
| 14,859 |
| 32.9% |
| 12,669 |
| 29.9% |
| 2,190 |
| 17.3 |
| ||
Total gross profit |
| 22,163 |
|
|
| 18,898 |
|
|
| 3,265 |
| 17.3 |
| ||
|
| 28.3% |
|
|
| 26.2% |
|
|
|
|
|
|
| ||
|
|
|
|
|
|
|
|
|
|
|
|
|
| ||
Operating expenses |
| 17,022 |
|
|
| 17,391 |
|
|
| (369 | ) | (2.1 | ) | ||
|
|
|
|
|
|
|
|
|
|
|
|
|
| ||
Income from operations |
| 5,141 |
|
|
| 1,507 |
|
|
| 3,634 |
| 241.1 |
| ||
|
|
|
|
|
|
|
|
|
|
|
|
|
| ||
Other expense (income), net |
| 658 |
|
|
| (253 | ) |
|
| 911 |
| (360.1 | ) | ||
Net gain on extinguishment of debt |
| (104 | ) |
|
| — |
|
|
| (104 | ) | 100.0 |
| ||
Net interest expense |
| 2,495 |
|
|
| 2,516 |
|
|
| (21 | ) | (0.8 | ) | ||
Non-operating expenses |
| 3,049 |
|
|
| 2,263 |
|
|
| 786 |
| 34.7 |
| ||
|
|
|
|
|
|
|
|
|
|
|
|
|
| ||
Income (loss) before income taxes |
| 2,092 |
|
|
| (756 | ) |
|
| 2,848 |
| (376.7 | ) | ||
|
|
|
|
|
|
|
|
|
|
|
|
|
| ||
Income tax provision (benefit) |
| 912 |
| 43.6% |
| (136 | ) | 18.0% |
| 1,048 |
| (770.6 | ) | ||
|
|
|
|
|
|
|
|
|
|
|
|
|
| ||
Net income (loss) |
| $ | 1,180 |
|
|
| $ | (620 | ) |
|
| 1,800 |
| (290.3 | ) |
Overview — Piano division revenue improved due to a 20% increase in domestic piano division sales. Piano profits benefited from higher sales as well as more efficient production at both factories. Band division sales increased due to improved orders and pent up demand for many instruments. Band margins increased as a result of better production efficiencies and a shift in mix to higher margin brass instruments.
Net Sales — Due to a 12% increase in domestic Steinway grand unit shipments, domestic piano division revenues improved $3.6 million. Price increases, which were implemented at the beginning of the year, as well as a shift in mix towards retail sales, also enhanced revenues. Overseas Steinway grand unit shipments increased 2% and mid-priced piano lines shipments were 30% higher. However, overseas revenues deteriorated $0.9 million due to foreign currency translation and the shift in mix towards mid-priced upright pianos.
Band division revenues were $3.4 million higher as a result of a 13% increase in unit shipments. As expected, both orders and shipments were higher since the back-to-school selling season is approaching and dealers had immediate needs for inventory. Promotional incentives on select inventory models also contributed to the revenue improvement.
Gross Profit - Gross profit improved $3.3 million as a result of higher sales and improved margins at both the piano and band divisions. Domestically, piano margins increased from 25.0% to 28.7% and overseas margins rose from 33.4% to 36.7%. Changes in production schedules and fewer unplanned shutdown days at both factories bolstered factory efficiency. A domestic shift in mix towards retail units also helped improve the margins.
The band division’s gross margin improved from 21.0% to 22.0% during the period despite a $0.7 million increase in inventory reserve charges. These charges were more than offset by a shift towards higher margin brass instruments as well as improved factory efficiency.
Operating Expenses - Operating expenses decreased $0.4 million. Although bad debt expense decreased $0.3 million, sales and marketing expenses increased $0.2 million due to increased domestic retail sales staff and the addition of a new store. General and administrative costs were $0.7 million lower primarily as a result of lower compensation related costs and professional service fees.
Non-operating Expenses — Non-operating expenses increased $0.8 million despite a $0.9 million shift from foreign exchange losses to foreign exchange gains during the period. This deterioration is primarily attributable to the lower rental income ($1.2 million) at our West 57th Street building. We expect to incur a temporary loss on this facility until we have leased the remaining available space to new tenants. We repurchased $5.8 million of our Senior Notes during the period, which resulted in a gain of $0.1 million. Net interest expense was virtually unchanged as the decrease in interest income associated with financed receivables at the band division was offset by lower interest expense due to lower outstanding borrowings.
Income Taxes - We recorded an income tax expense of $0.9 million, reflecting our anticipated annual effective income tax rate of 39.8% associated with current year income, offset by a nominal benefit associated with uncertain tax positions. The combination of these items resulted in an effective tax rate of 43.6% for the period. The rate of 18.0% in the year-ago period was abnormally low primarily due to no anticipated U.S. federal tax liability. The rate reflected an anticipated annual effective income tax rate of 22.0% related to income for that period, as well as discrete items.
Six Months Ended June 30, 2010 Compared to Six Months Ended June 30, 2009
|
| Six Months Ended June 30, |
|
|
| Change |
| ||||||||
|
| 2010 |
|
|
| 2009 |
|
|
| $ |
| % |
| ||
Net sales |
|
|
|
|
|
|
|
|
|
|
|
|
| ||
Band |
| $ | 62,493 |
|
|
| $ | 62,425 |
|
|
| 68 |
| 0.1 |
|
Piano |
| 84,298 |
|
|
| 79,679 |
|
|
| 4,619 |
| 5.8 |
| ||
Total sales |
| 146,791 |
|
|
| 142,104 |
|
|
| 4,687 |
| 3.3 |
| ||
|
|
|
|
|
|
|
|
|
|
|
|
|
| ||
Cost of sales |
|
|
|
|
|
|
|
|
|
|
|
|
| ||
Band |
| 46,734 |
|
|
| 49,351 |
|
|
| (2,617 | ) | (5.3 | ) | ||
Piano |
| 56,570 |
|
|
| 55,246 |
|
|
| 1,324 |
| 2.4 |
| ||
Total cost of sales |
| 103,304 |
|
|
| 104,597 |
|
|
| (1,293 | ) | (1.2 | ) | ||
|
|
|
|
|
|
|
|
|
|
|
|
|
| ||
Gross profit |
|
|
|
|
|
|
|
|
|
|
|
|
| ||
Band |
| 15,759 |
| 25.2% |
| 13,074 |
| 20.9% |
| 2,685 |
| 20.5 |
| ||
Piano |
| 27,728 |
| 32.9% |
| 24,433 |
| 30.7% |
| 3,295 |
| 13.5 |
| ||
Total gross profit |
| 43,487 |
|
|
| 37,507 |
|
|
| 5,980 |
| 15.9 |
| ||
|
| 29.6% |
|
|
| 26.4% |
|
|
|
|
|
|
| ||
|
|
|
|
|
|
|
|
|
|
|
|
|
| ||
Operating expenses |
| 34,623 |
|
|
| 36,051 |
|
|
| (1,428 | ) | (4.0 | ) | ||
|
|
|
|
|
|
|
|
|
|
|
|
|
| ||
Income from operations |
| 8,864 |
|
|
| 1,456 |
|
|
| 7,408 |
| 508.8 |
| ||
|
|
|
|
|
|
|
|
|
|
|
|
|
| ||
Other income, net |
| (809 | ) |
|
| (811 | ) |
|
| 2 |
| (0.2 | ) | ||
Net gain on extinguishment of debt |
| (104 | ) |
|
| (3,434 | ) |
|
| 3,330 |
| (97.0 | ) | ||
Net interest expense |
| 4,854 |
|
|
| 5,038 |
|
|
| (184 | ) | (3.7 | ) | ||
Non-operating expenses |
| 3,941 |
|
|
| 793 |
|
|
| 3,148 |
| 397.0 |
| ||
|
|
|
|
|
|
|
|
|
|
|
|
|
| ||
Income before income taxes |
| 4,923 |
|
|
| 663 |
|
|
| 4,260 |
| 642.5 |
| ||
|
|
|
|
|
|
|
|
|
|
|
|
|
| ||
Income tax provision |
| 1,943 |
| 39.5% |
| 278 |
| 41.9% |
| 1,665 |
| 598.9 |
| ||
|
|
|
|
|
|
|
|
|
|
|
|
|
| ||
Net income |
| $ | 2,980 |
|
|
| $ | 385 |
|
|
| 2,595 |
| 674.0 |
|
Overview - Piano division revenue improved primarily due to increased domestic demand for our products. Piano margins were better due to more efficient production at both manufacturing facilities. Band division sales were stable, as the reluctance of dealers to place orders in the first quarter was offset by improved orders and shipments in the second quarter. Band margins improved due to more normal production schedules and improved production efficiencies than in the year-ago period.
Net Sales — Domestic piano division revenues were $3.6 million (10%) higher due to a combination of a 3% increase in Steinway grand units, stronger retail sales, and a shift in mix from lower priced upright pianos to higher priced grand pianos. Price increases, which were implemented at the beginning of the year, were also a factor. Overseas revenues increased $1.0 million supported by an improvement in sales by our divisions in Asia, which mitigated the impact of a 2% decrease in Steinway grand unit shipments. Overseas mid-priced piano line shipments rose 36% due in part to improved availability of certain models, although a shift in mix from grands to uprights precluded any revenue increase.
Band division revenues were flat. Improved sales of percussion instruments helped offset the 5% decrease in woodwind and brass instruments. While we had sufficient inventory to supply our dealers, we did not offer pricing incentives or rebates to entice dealers to order early. Accordingly, orders and shipments have shifted to later in the year, picking up in the latter part of the second quarter, when dealers needed inventory.
Gross Profit — Gross profit improved even more significantly than sales primarily as result of higher margins at both the piano and band divisions. Domestically, piano margins increased from 25.3% to 29.8% due to changes in production schedules, which bolstered factory efficiency, as well as better retail sales, which generate higher margins. Overseas margins went from 35.2% to 35.8%, as a shift in shipments to lower margin territories in the first quarter was more than offset by improvements in factory efficiency in the second quarter.
The band division’s gross margin improved from 20.9% to 25.2% during the period. Production schedules have stabilized, resulting in improved overhead absorption and lower factory variances for the first half of 2010.
Operating Expenses - Operating expenses decreased $1.4 million. Sales and marketing expenses decreased $0.3 million primarily due to lower bad debt expense of $0.6 million, which was partially offset by costs associated with incremental retail sales personnel. General and administrative costs were $1.0 million lower as a result of cost saving measures implemented during 2009 and lower compensation related costs.
Non-operating Expenses — Non-operating expenses increased $3.1 million due to the reduction in net gains on extinguishment of debt of $3.3 million. The benefit of a shift from foreign exchange losses to foreign exchange gains of $1.1 million was offset by lower rental income of the same amount at our West 57th Street building.
Income Taxes - We recorded an income tax expense of $1.9 million, reflecting our anticipated annual effective income tax rate of 39.8% associated with current year income, offset by a nominal benefit associated with uncertain tax positions. The combination of these items resulted in an effective tax rate of 39.5% for the period. The rate of 41.9% in the year-ago period reflected an anticipated effective income tax rate of 22.0% related to income for that period, largely due to no anticipated U.S. federal tax liability, and 19.9% relating to uncertain tax positions and discrete items.
Liquidity and Capital Resources
We have relied primarily upon cash provided by operations, supplemented as necessary by seasonal borrowings under our working capital line, to finance our operations, repay long-term indebtedness and fund capital expenditures.
Our statements of cash flows for the six months ended June 30, 2010 and 2009 are summarized as follows:
|
| 2010 |
| 2009 |
| Change |
| |||
Net income: |
| $ | 2,980 |
| $ | 385 |
| $ | 2,595 |
|
Changes in operating assets and liabilities |
| 174 |
| (8,957 | ) | 9,131 |
| |||
Other adjustments to reconcile net income to |
| 4,957 |
| 2,591 |
| 2,366 |
| |||
Cash flows from operating activities |
| 8,111 |
| (5,981 | ) | 14,092 |
| |||
|
|
|
|
|
|
|
| |||
Cash flows from investing activities |
| (1,065 | ) | (3,008 | ) | 1,943 |
| |||
|
|
|
|
|
|
|
| |||
Cash flows from financing activities |
| 22,485 |
| 10,407 |
| 12,078 |
| |||
Cash flows from operating activities improved $14.1 million over the year-ago period. Although the sales increase caused a shift from source to use of cash for accounts receivable of $6.4 million, we also used $7.7 million less for inventory since the sales improvement helped reduce our inventory. We generated $10.4 million more from accounts payable and accrued expenses in the current period. In 2009, we had implemented cost cutting measures to conserve cash and reduce expenditures. In 2010, spending patterns have normalized. The timing of payroll and vacation payments also contributed to the improved cash flow.
Cash flows used for investing activities decreased $1.9 million. In the prior period we used $0.8 million to acquire a subsidiary. In the current period, our capital expenditures were $1.1 million lower. We expect capital expenditures for the full year to be in the range of $3.0 to $4.0 million for normal capital projects, and an additional $1.0 million for improvements and renovations at our building in New York City.
Cash flows provided by financing activities increased $12.1 million as we generated $27.6 million through stock sales in 2010. Also, we did not use our domestic line of credit in 2010, so cash provided by borrowings was $17.2 million lower than the year-ago period.
Borrowing Activities and Availability - We have a domestic credit facility with a syndicate of domestic lenders (the “Credit Facility”) with a potential borrowing capacity of $110.0 million in revolving credit loans, which expires on September 29, 2011. It provides for periodic borrowings at either London Interbank Offering Rate (“LIBOR”) plus a range from 1.25% to 1.75%, or as-needed borrowings at an alternate base rate, plus a range from 0.00% to 0.25%; both ranges depend upon borrowing availability at the time of borrowing. The Credit Facility is collateralized by our domestic accounts receivable, inventory, and property, plant and equipment. As of June 30, 2010, there was nothing outstanding on our Credit Facility, and borrowing availability was approximately $104.6 million.
We also have certain non-domestic credit facilities originating from two German banks that provide for borrowings by foreign subsidiaries of up to €16.5 million ($20.2 million at the June 30, 2010 exchange rate), net of borrowing restrictions of €2.0 million ($2.4 million at the June 30, 2010 exchange rate) which are payable in April 2012. These borrowings are collateralized by most of the assets of the borrowing subsidiaries. A portion of the loans can be converted into a maximum of £0.7 million ($1.1 million at the June 30, 2010 exchange rate) for use by our U.K. branch and ¥300 million ($3.4 million at the June 30, 2010 exchange rate) for use by our Japanese subsidiary. Our Chinese subsidiary also has the ability to convert the equivalent of up to €2.5 million into U.S. dollars or Chinese yuan ($3.1 million at the June 30, 2010 exchange rate). Euro loans bear interest at rates of Euro Interbank Offered Rate (“EURIBOR”) plus a margin determined at the time of borrowing. Margins fluctuate based on the loan amount and the borrower’s bank rating. The remaining demand borrowings bear interest rates of LIBOR plus 0.8% for British pound loans, LIBOR plus 1.0% for U.S. dollar loans of our Chinese subsidiary, and Tokyo Interbank Offered Rate (“TIBOR”) plus 1.3% for Japanese yen loans. We had nothing outstanding as of June 30, 2010 on these credit facilities.
Our Japanese subsidiary also maintains a separate revolving loan agreement that provides additional borrowing capacity of up to ¥500 million ($5.7 million at the June 30, 2010 exchange rate). The revolving loan agreement bears interest at an average 30-day TIBOR rate plus 0.9% (outstanding borrowings at 1.1% at June 30, 2010) and expires on January 31, 2011. As of June 30, 2010, we had $1.1 million outstanding on this revolving loan agreement.
At June 30, 2010, our total outstanding indebtedness amounted to $153.6 million, consisting of $152.5 million of our 7.00% Senior Notes due March 1, 2014 and $1.1 million of notes payable to foreign banks. We repurchased $5.8 million of our Senior Notes during the quarter ended June 30, 2010. We may consider additional repurchases in the future, contingent upon our cash availability and the trading price of our Notes.
All of our debt agreements contain covenants that place certain restrictions on us, including our ability to incur additional indebtedness, to repurchase Senior Notes, to make investments in other entities, and limitations on cash dividend payments. We were in compliance with all such covenants as of June 30, 2010 and do not anticipate any compliance issues in the future. Our bond indenture contains limitations, based on net income (among other things), on the amount of discretionary repurchases we may make of our Ordinary common stock. Our intent and ability to repurchase additional Ordinary common stock either directly from shareholders or on the open market is directly affected by this limitation. In May 2008 we announced a share repurchase program, which permits us to make discretionary purchases of up to $25.0 million of our Ordinary common stock. To date, we have repurchased 80,300 shares and approximately $22.9 million remains authorized for repurchases under this program. We did not make any repurchases in 2009 and have not made any repurchases in 2010.
We experience long production and inventory turnover cycles, which we constantly monitor since fluctuations in demand can have a significant impact on these cycles. In normal economic conditions, we are able to effectively utilize cash flow from operations to fund our debt and capital requirements and pay off seasonal borrowings on our domestic line of credit. While we anticipate the remainder of 2010 to be challenging, we do not expect any adverse impact in our liquidity as we had over $90.0 million in cash as of June 30, 2010. We intend to manage accounts receivable and credit risk, and control inventory levels by monitoring purchases and production schedules. We have also reduced headcount, minimized non-critical expenditures, and forgone wage increases and discretionary benefit program contributions. Our intention is to manage cash outflow and maintain sufficient operating cash on hand to meet short-term requirements.
We do not have any current plans or intentions that will have a material adverse impact on our liquidity in 2010, although we may consider acquisitions that may require funding from operations or from our credit facilities. Other than
those described, we are not aware of any trends, demands, commitments, or costs of resources that are expected to materially impact our liquidity or capital resources. Accordingly, we believe that cash on hand, together with cash flows anticipated from operations and available borrowings under the Credit Facility, will be adequate to meet our debt service requirements, fund regular capital requirements and satisfy our working capital and general corporate needs through the remainder of 2010.
Contractual Obligations - The following table provides a summary of our contractual obligations at June 30, 2010.
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| Payments due by period |
| |||||||||||||
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| Total |
| Less than |
| 1 - 3 years |
| 3 - 5 years |
| More than |
| |||||
Contractual Obligations |
|
|
|
|
|
|
|
|
|
|
| |||||
Long-term debt(1) |
| $ | 192,793 |
| $ | 11,819 |
| $ | 21,351 |
| $ | 159,623 |
| $ | — |
|
Capital leases |
| 14 |
| 10 |
| 4 |
| — |
| — |
| |||||
Operating leases(2) |
| 258,340 |
| 5,811 |
| 9,771 |
| 8,244 |
| 234,514 |
| |||||
Purchase obligations(3) |
| 26,374 |
| 25,421 |
| 953 |
| — |
| — |
| |||||
Other long-term liabilities(4) |
| 37,868 |
| 4,747 |
| 4,785 |
| 4,668 |
| 23,668 |
| |||||
Total |
| $ | 515,389 |
| $ | 47,808 |
| $ | 36,864 |
| $ | 172,535 |
| $ | 258,182 |
|
Notes to Contractual Obligations:
(1) Long-term debt represents long-term debt obligations, the fixed interest on our Notes, and the variable interest on our other loans. We estimated the future variable interest obligation using the applicable June 30, 2010 rates. The nature of our long-term debt obligations, including changes to our long-term debt structure, is described more fully in the “Borrowing Availability and Activities” section of “Liquidity and Capital Resources.”
(2) Approximately $244.8 million of our operating lease obligations are attributable to the land lease associated with the purchase of Steinway Hall, which has eighty seven years remaining. The rest is attributable to the leasing of other facilities and equipment.
(3) Purchase obligations consist of firm purchase commitments for raw materials, finished goods, and service agreements.
(4) Our other long-term liabilities consist primarily of the long-term portion of our pension obligations, which are described in Note 11 in the Notes to Condensed Consolidated Financial Statements included within this filing, liabilities relating to uncertain tax positions which are expected to be settled within one year, and obligations under employee and consultant agreements. We have not included $0.3 million of liabilities relating to uncertain tax positions within this schedule due to the uncertainty of the payment date, if any.
Recent Accounting Pronouncements
In January 2010, the Financial Accounting Standards Board (“FASB”) issued guidance which amends the existing fair value measurements and disclosures guidance. These amendments require a greater level of disaggregated information as well as more disclosure around valuation techniques and inputs to fair value measurements. The amendments also provide guidance on employers’ disclosures about postretirement benefit plan assets to require that disclosures be provided by classes of assets instead of by major categories of assets. We were required to comply with this new standard as of January 1, 2010. Its adoption did not have a material impact on our consolidated financial statements.
In March 2010, the FASB issued new guidance which clarifies the scope exception for embedded credit related derivatives. We will be required to comply with this new standard on July 1, 2010. We do not expect a material impact on our financial statements from the adoption of this guidance.
ITEM 3 QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
We are exposed to market risk associated with changes in foreign currency exchange rates and interest rates. We mitigate a portion of our foreign currency exchange rate risk by maintaining foreign currency cash balances and holding option and forward foreign currency contracts. They are not designated as hedges for accounting purposes. These contracts relate primarily to intercompany transactions and are not used for trading or speculative purposes. The fair value of the option and 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 our Annual Report on Form 10-K for the year ended December 31, 2009.
Our revolving loans bear interest at rates that fluctuate with changes in Prime, LIBOR, TIBOR, and EURIBOR. As such, our interest expense on our revolving loans and the fair value of our fixed long-term debt are sensitive to changes in market interest rates. The effect of an adverse change in market interest rates on our interest expense would not be materially different than that disclosed in our Annual Report on Form 10-K for the year ended December 31, 2009.
The majority of our long-term debt is at a fixed interest rate. Therefore, the associated interest expense is not sensitive to fluctuations in market interest rates. However, the fair value of our fixed interest debt would be sensitive to market rate changes. Such fair value changes may affect our decision whether to retain, replace, or retire this debt.
ITEM 4 CONTROLS AND PROCEDURES
Our principal executive officer and our principal financial officer, after evaluating together with management the design and operation of our disclosure controls and procedures, have concluded that our disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) were effective as of June 30, 2010, the end of the period covered by this report. In designing disclosure controls and procedures, management recognizes that any controls, no matter how well designed and operated, can only provide reasonable, not absolute, assurance of achieving the desired control objectives.
During the quarter covered by this report, there were no significant changes in our internal controls that materially affected, or are reasonably likely to materially affect, internal control over financial reporting.
31.1 Certification of the Principal Executive Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002
31.2 Certification of the Principal Financial Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002
32.1 Certification of the Principal Executive Officer pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002
32.2 Certification of the Principal Financial Officer pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002
Pursuant to the requirements of the Securities Exchange Act of 1934, the Registrant has 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 |
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| /s/ Dennis M. Hanson |
| Dennis M. Hanson |
| Senior Executive Vice President and |
| Chief Financial Officer |
Date: August 9, 2010