Steinway Musical Instruments (LVB) 10-Q 2012 Q1 Quarterly report

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C.  20549

FORM 10-Q

xQUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 FOR THE QUARTERLY PERIOD ENDED MARCH 31, 2012

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

COMMISSION FILE NUMBER 001-11911

STEINWAY MUSICAL INSTRUMENTS, INC.

(Exact name of registrant as specified in its charter)

DELAWARE	35-1910745
(State or Other Jurisdiction of	(I.R.S. Employer
Incorporation or Organization)	Identification No.)
800 South Street, Suite 305
Waltham, Massachusetts	02453
(Address of Principal Executive Offices)	(Zip Code)

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

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

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

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

Large accelerated filer o	Accelerated filer x
Non-accelerated filer o	Smaller reporting company o
(Do not check if a smaller reporting company)

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

Number of shares of Common Stock issued and outstanding as of May 4, 2012: 12,372,599

STEINWAY MUSICAL INSTRUMENTS, INC. AND SUBSIDIARIES

FORM 10-Q

INDEX

PART I	FINANCIAL STATEMENTS
Item 1.	Unaudited Condensed Consolidated Financial Statements:
	Condensed Consolidated Statements of Operations Three months ended March 31, 2012 and 2011	3
	Condensed Consolidated Statements of Comprehensive Income Three months ended March 31, 2012 and 2011	4
	Condensed Consolidated Balance Sheets March 31, 2012 and December 31, 2011	5
	Condensed Consolidated Statements of Cash Flows Three months ended March 31, 2012 and 2011	6
	Condensed Consolidated Statement of Stockholders’ Equity Three months ended March 31, 2012	7
	Notes to Condensed Consolidated Financial Statements	8
Item 2.	Management’s Discussion and Analysis of Financial Condition and Results of Operations	17
Item 3.	Quantitative and Qualitative Disclosures about Market Risk	24
Item 4.	Controls and Procedures	24
PART II.	OTHER INFORMATION
Item 6.	Exhibits	25
	Signatures	26

2

PART IFINANCIAL STATEMENTS

ITEM 1CONDENSED 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 March 31,
	2012			2011
Net sales	$	77,953		$	72,931
Cost of sales	54,806			50,534
Gross profit	23,147			22,397
Operating expenses:
Sales and marketing	11,985			10,181
General and administrative	8,961			8,383
Other operating expenses	38			161
Total operating expenses	20,984			18,725
Income from operations	2,163			3,672
Other expense, net	354			488
Interest income	(358		)	(368		)
Interest expense	1,208			2,724
Total non-operating expenses	1,204			2,844
Income before income taxes	959			828
Income tax provision	369			323
Net income	$	590		$	505
Earnings per share:
Basic	$	0.05		$	0.04
Diluted	$	0.05		$	0.04
Weighted average shares:
Basic	12,367,914			12,087,950
Diluted	12,505,869			12,190,035

See notes to condensed consolidated financial statements.

3

STEINWAY MUSICAL INSTRUMENTS, INC. AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME

Unaudited

(In Thousands)

	Three Months Ended March 31,
	2012		2011
Net income	$	590	$	505
Other comprehensive income, net of tax:
Foreign currency translation adjustments	924		3,316
Total comprehensive income	$	1,514	$	3,821

See notes to condensed consolidated financial statements.

4

STEINWAY MUSICAL INSTRUMENTS, INC. AND SUBSIDIARIES

CONDENSED CONSOLIDATED BALANCE SHEETS

Unaudited

(In Thousands)

	March 31,			December 31,
	2012			2011
Assets
Current assets:
Cash	$	43,668		$	49,888
Accounts, notes, and other receivables, net of allowances of $8,234 and $10,754 in 2012 and 2011, respectively	42,491			42,322
Inventories	138,169			132,401
Prepaid expenses and other current assets	13,938			11,917
Deferred tax assets	12,142			12,093
Total current assets	$	250,408		$	248,621
Property, plant and equipment, net of accumulated depreciation of $115,225 and $115,291 in 2012 and 2011, respectively	88,455			86,997
Trademarks	13,866			13,743
Goodwill	23,067			22,676
Other intangibles, net	2,055			2,293
Other assets	17,479			18,430
Long-term deferred tax assets	16,684			16,614
Total assets	$	412,014		$	409,374
Liabilities and stockholders’ equity
Current liabilities:
Debt	$	604		$	650
Accounts payable	12,213			10,702
Other current liabilities	35,483			38,623
Total current liabilities	48,300			49,975
Long-term debt	70,383			67,367
Deferred tax liabilities	2,623			2,438
Pension and other postretirement benefit liabilities	48,367			48,468
Other non-current liabilities	8,003			8,533
Total liabilities	177,676			176,781
Commitments and contingent liabilities
Stockholders’ equity:
Common stock	14			14
Additional paid-in capital	161,175			160,996
Retained earnings	136,101			135,522
Accumulated other comprehensive loss	(18,352		)	(19,276		)
Treasury stock, at cost	(44,600		)	(44,663		)
Total stockholders’ equity	234,338			232,593
Total liabilities and stockholders’ equity	$	412,014		$	409,374

See notes to condensed consolidated financial statements.

5

STEINWAY MUSICAL INSTRUMENTS, INC. AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

Unaudited

(In Thousands)

	Three Months Ended March 31,
	2012			2011
Cash flows from operating activities:
Net income	$	590		$	505
Adjustments to reconcile net income to cash flows from operating activities:
Depreciation and amortization	2,263			2,198
Stock-based compensation expense	111			406
Excess tax benefit from stock-based awards	(16		)	(7		)
Tax benefit from stock option exercises	18			7
Deferred tax benefit	(76		)	(115		)
Provision for (recovery of) doubtful accounts	688			(257		)
Other	(199		)	182
Changes in operating assets and liabilities:
Accounts, notes and other receivables	(78		)	686
Inventories	(6,204		)	(7,238		)
Prepaid expenses and other assets	(1,292		)	(2,283		)
Accounts payable	1,233			(1,046		)
Other liabilities	(4,758		)	(3,367		)
Cash flows from operating activities	(7,720		)	(10,329		)
Cash flows from investing activities:
Capital expenditures	(1,906		)	(1,170		)
Payment for acquisition and contingent consideration for previous acquisition	—			(2,727		)
Other	46			41
Cash flows from investing activities	(1,860		)	(3,856		)
Cash flows from financing activities:
Borrowings under lines of credit	3,000			669
Repayments under lines of credit	—			(668		)
Proceeds from issuance of common stock	102			40
Excess tax benefit from stock-based awards	16			7
Cash flows from financing activities	3,118			48
Effect of foreign exchange rate changes on cash	242			1,395
Decrease in cash	(6,220		)	(12,742		)
Cash, beginning of period	49,888			119,811
Cash, end of period	$	43,668		$	107,069
Supplemental Cash Flow Information:
Interest paid	$	2,364		$	5,345
Income taxes paid	$	2,988		$	1,598

See notes to condensed consolidated financial statements.

6

STEINWAY MUSICAL INSTRUMENTS, INC. AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENT OF STOCKHOLDERS’ EQUITY

Unaudited

(In Thousands Except Option and Share Data)

	Common Stock		Additional Paid-In Capital		Retained Earnings			Accumulated Other Comprehensive Loss			Treasury Stock			Total Stockholders’ Equity
Balance, January 1, 2012	$	14	$	160,996	$	135,522		$	(19,276	)	$	(44,663	)	$	232,593
Comprehensive income					590			924						1,514
Exercise of 7,200 options for shares of common stock	—		50		(11		)				63			102
Tax benefit of options exercised			18											18
Stock-based compensation			111											111
Balance, March 31, 2012	$	14	$	161,175	$	136,101		$	(18,352	)	$	(44,600	)	$	234,338

See notes to condensed consolidated financial statements.

7

STEINWAY MUSICAL INSTRUMENTS, INC. AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED

FINANCIAL STATEMENTS

MARCH 31, 2012

Unaudited

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

(1)Basis of Presentation

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

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

(2)Summary of Significant Accounting Policies

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

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

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

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

(3)Earnings per Common Share

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

8

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

	Three Months Ended March 31,
	2012		2011
Numerator:
Net income:	$	590	$	505
Denominator:
Weighted-average common shares outstanding - basic	12,367,914		12,087,950
Dilutive effect of stock-based compensation plans	137,955		102,085
Weighted-average common shares outstanding - diluted	12,505,869		12,190,035
Net income per share - basic	$	0.05	$	0.04
Net income per share - diluted	$	0.05	$	0.04

We did not include 372,000 or 534,100 of the outstanding options to purchase shares of common stock in the computation of diluted earnings per share for the three months ended March 31, 2012 and 2011, respectively, because generally their exercise prices were more than the average market price of our common shares, and therefore antidilutive.

(4)Inventories

	March 31,		December 31,
	2012		2011
Raw materials	$	18,234	$	18,242
Work-in-process	33,713		33,377
Finished goods	86,222		80,782
Total inventory	$	138,169	$	132,401

(5)Goodwill, Trademarks, and Other Intangible Assets

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

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

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

	Piano		Band		Total
Goodwill:
Balance, January 1, 2012	$	22,676	$	—	$	22,676
Foreign currency translation impact	391		—		391
Balance, March 31, 2012	$	23,067	$	—	$	23,067
Trademarks:
Balance, January 1, 2012	$	8,769	$	4,974	$	13,743
Foreign currency translation impact	123		—		123
Balance, March 31, 2012	$	8,892	$	4,974	$	13,866

9

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

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

	March 31, 2012			December 31, 2011
Gross deferred financing costs	$	3,932		$	3,932
Accumulated amortization	(2,827		)	(2,726		)
Deferred financing costs, net	$	1,105		$	1,206
Gross non-compete agreements	$	250		$	250
Accumulated amortization	(194		)	(181		)
Non-compete agreements, net	$	56		$	69
Gross customer relationships	$	786		$	762
Accumulated amortization	(388		)	(349		)
Customer relationships, net	$	398		$	413
Gross website and developed technology	$	2,176		$	2,176
Accumulated amortization	(1,680		)	(1,571		)
Website and developed technology, net	$	496		$	605
Total gross other intangibles	$	7,144		$	7,120
Accumulated amortization	(5,089		)	(4,827		)
Total other intangibles, net	$	2,055		$	2,293

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

	Three Months Ended March 31,
	2012		2011
Amortization expense	$	262	$	310

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

Remainder of 2012	$	783
2013	698
2014	310
2015	225
2016	37
Thereafter	2
Total	$	2,055

10

(6)Other Current Liabilities

Our other current liabilities consist of the following:

	March 31, 2012		December 31, 2011
Accrued payroll and related benefits	$	14,085	$	12,965
Current portion of pension and other postretirement benefit liabilities	1,250		1,235
Accrued warranty expense	1,408		1,242
Accrued interest	422		1,608
Deferred income	8,584		8,971
Environmental liabilities	49		61
Income and other taxes payable	420		1,105
Other accrued expenses	9,265		11,436
Total	$	35,483	$	38,623

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

	March 31, 2012			March 31, 2011			December 31, 2011
Beginning balance	$	1,242		$	1,510		$	1,510
Additions	321			332			1,123
Claims and reversals	(177		)	(484		)	(1,381		)
Foreign currency translation impact	22			44			(10		)
Ending balance	$	1,408		$	1,402		$	1,242

(7)Debt

Our outstanding debt consists of the following:

	March 31, 2012			December 31, 2011
7.00% Senior Notes	$	67,506		$	67,506
Unamortized bond discount	(123		)	(139		)
Domestic line of credit	3,000			—
Overseas lines of credit	604			650
Total	70,987			68,017
Less: current portion	604			650
Long-term debt	$	70,383		$	67,367

Scheduled repayments of outstanding debt as of March 31, 2012 are as follows:

Remainder of 2012	$	604
2013	—
2014	67,506
2015	3,000
Total	$	71,110

11

(8)Fair Values of Financial Instruments

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

Level 1Valuation is based upon unadjusted quoted prices for identical instruments traded in active markets.

Level 2Valuation 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 3Valuation is generated from model-based techniques that use at least one significant assumption not observable in the market. These unobservable assumptions include management’s own judgments about the assumptions market participants would use in pricing the asset or liability. Valuation techniques include use of option pricing models, discounted cash flow models and similar techniques.

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

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

	March 31, 2012		December 31, 2011
Financial assets:
Trading securities(1) - Level 1	$	1,904	$	1,682
Foreign currency contracts(2) - Level 2	371		598
	$	2,275	$	2,280
Financial liabilities:
Foreign currency contracts(2) - Level 2	$	147	$	1,114

(1)	Our trading securities pertain to the Supplemental Executive Retirement Plan (“SERP”) and are held in a Rabbi Trust. We record a corresponding liability for the same amount in our financial statements, which represents our obligation to SERP participants.
(2)	Our foreign currency contracts pertain to obligations or potential obligations to purchase or sell euros, pounds, U.S. dollars, and yen under various forward and option contracts.

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

	March 31, 2012				December 31, 2011
	Net Carrying Value		Estimated Fair Value		Net Carrying Value		Estimated Fair Value
Financial liabilities:
Debt	$	70,987	$	71,153	$	68,017	$	67,777

12

The carrying values of accounts, notes and other receivables, and accounts payable approximate fair value. Certain assets, including long-lived assets held and used, trademarks associated with our online music business, and assets held for sale are measured at fair value on a non-recurring basis. There were no fair value measurement losses recognized for such assets in the first quarter of 2012.

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

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

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

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

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

Stock Plans — The 2006 Stock Plan provides for the granting of 1,000,000 stock options (including incentive stock options and non-qualified stock options), stock appreciation rights, restricted shares and other stock awards to certain key employees, consultants and advisors. Our stock options generally have five-year vesting terms and ten-year option terms. Our restricted shares, if any, generally have three-year vesting terms.

Our 1996 Stock Plan has expired but still has vested options outstanding. We reached our registered share limitation in early 2007, and had previously reserved 721,750 treasury stock shares to issue under this plan. We have since issued 228,874 shares of treasury stock to cover options exercised, with 226,276 remaining options outstanding. Since in most instances the average cost of the treasury stock exceeded the price of the options exercised, the difference between the proceeds received and the average cost of the treasury stock issued resulted in a reduction of retained earnings. The reduction to retained earnings associated with options exercised during the three months ended March 31, 2012 was less than $0.1 million. There was no reduction to retained earnings associated with options exercised during the three months ended March 31, 2011.

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

	Three Months Ended March 31,
	2012		2011
Compensation cost included in:
Basic income per share	$	0.01	$	0.03
Diluted income per share	$	0.01	$	0.03
Stock-based compensation expense	111		406
Income tax benefit	26		82

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.

13

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 months ended March 31, 2012 or 2011. The following table sets forth information regarding the Stock Plans:

	Number of Options		Weighted- Average Exercise Price		Weighted- Average Remaining Contract Life (in years)	Aggregate Intrinsic Value
Outstanding, January 1, 2012	826,076		$	21.33
Granted	—		—
Exercised	(7,200	)	14.14
Forfeited	—		—
Outstanding, March 31, 2012	818,876		$	21.40	5.0	$	4,461
Exercisable, March 31, 2012	734,876		$	22.04	4.7	$	3,608

The total intrinsic value of the options exercised during the three month period ended March 31, 2012 was $0.1 million. The total intrinsic value of the options exercised during the three month period ended March 31, 2011 was nominal. As of March 31, 2012, there was $0.4 million of unrecognized compensation cost related to nonvested share-based compensation arrangements. This compensation is expected to be recognized over a weighted-average period of approximately two years. Cash received from option exercises under the Stock Plans for the three month periods ended March 31, 2012 and 2011 was $0.1 million and less than $0.1 million, respectively.

The following tables set forth information regarding the Purchase Plan:

	Three Months Ended March 31,
	2012	2011
Risk-free interest rate	0.2%	0.3%
Weighted-average expected life of option feature (in years)	1.0	1.0
Expected volatility of underlying stock	28.6%	28.3%
Expected dividends	n/a	n/a
Weighted-average fair value of option feature	$7.19	$4.81

	Number of Options		Weighted- Average Exercise Price		Remaining Contract Life (in years)	Aggregate Intrinsic Value
Outstanding, January 1, 2012	10,503		$	24.70
Shares subscribed	6,408		24.70
Exercised	—		—
Forfeited	(936	)	24.70
Outstanding, March 31, 2012	15,975		$	24.70	0.3	$	12

14

(10)Other Expense, Net

	Three Months Ended March 31,
	2012			2011
West 57th Street building income	$	(555	)	$	(665	)
West 57th Street building expense	1,805			1,788
Foreign exchange gain, net	(619		)	(661		)
Miscellaneous, net	(277		)	26
Other expense, net	$	354		$	488

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; 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.

(11)Commitments and Contingent Liabilities

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

Certain environmental laws, such as the Comprehensive Environmental Response, Compensation, and Liability Act, as amended (“CERCLA”), impose strict, retroactive, joint and several liability upon persons responsible for releases of hazardous substances, which liability is broadly construed. Under CERCLA and other laws, we may have liability for investigation and cleanup costs and other damages relating to our current or former properties, or third-party sites to which we sent wastes for disposal. Our potential liability at any of these sites is affected by many factors including, but not limited to, the method of remediation, our portion of the hazardous substances at the site relative to that of other parties, the number of responsible parties, the financial capabilities of other parties, and contractual rights and obligations.

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

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

15

(12)Retirement Plans

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

	Domestic Plan						Foreign Plans
	Three Months Ended March 31,						Three Months Ended March 31,
	2012			2011			2012			2011
Service cost	$	4		$	88		$	113		$	157
Interest cost	850			864			405			434
Expected return on plan assets	(1,046		)	(1,049		)	(118		)	(105		)
Amortization of prior service cost (credit)	—			28			(13		)	(13		)
Amortization of net loss	313			489			12			29
Net periodic pension cost	$	121		$	420		$	399		$	502

Based on our domestic plan’s current funded status, we anticipate making contributions of $4.5 million to our domestic plan in 2012 as required by federal laws and regulations. As of March 31, 2012, we have made contributions of $0.9 million to this plan. Our anticipated contributions to the pension plan of our U.K. subsidiary approximate $0.8 million for the current year. As of March 31, 2012, we have made contributions of $0.2 million to this plan. The pension plans of our German entities do not hold any assets and use operating cash to pay participant benefits as they become due. Expected 2012 benefit payments under these plans are $1.2 million, of which $0.3 million was paid through March 31, 2012.

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

(13)Segment Information

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

The following tables present information about our operating segments for the three months ended March 31, 2012 and 2011:

Three Months Ended 2012	Piano Segment									Band Segment						Other &			Consol
	U.S.			Germany		Other		Total		U.S.		Europe		Total		Elim			Total
Net sales to external customers	$	20,412		$	12,591	$	11,140	$	44,143	$	32,898	$	912	$	33,810	$	—		$	77,953
Income (loss) from operations	(273		)	1,877		1,394		2,998		1,063		70		1,133		(1,968		)	2,163
Three Months Ended 2011	Piano Segment									Band Segment						Other &			Consol
	U.S.			Germany		Other		Total		U.S.		Europe		Total		Elim			Total
Net sales to external customers	$	20,350		$	11,626	$	11,613	$	43,589	$	28,267	$	1,075	$	29,342	$	—		$	72,931
Income (loss) from operations	709			1,395		1,428		3,532		931		94		1,025		(885		)	3,672

16

ITEM 2	MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
	(Tabular Amounts in Thousands Except Percentages, Share and Per Share Data)

Introduction

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

Critical Accounting Policies and Estimates

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

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

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

Accounts Receivable

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

Inventory

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

17

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.

Long-lived Assets

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

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

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

Pensions and Other Postretirement Benefit Costs

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

Income Taxes

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

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

18

Environmental Liabilities

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

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

Forward-Looking Statements

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

19

Results of Operations

Three Months Ended March 31, 2012 Compared to Three Months Ended March 31, 2011

	Three Months Ended March 31,						Change
	2012			2011			$		%
Net sales
Band	$	33,810		$	29,342		4,468		15.2
Piano	44,143			43,589			554		1.3
Total sales	77,953			72,931			5,022		6.9
Cost of sales
Band	25,854			22,174			3,680		16.6
Piano	28,952			28,360			592		2.1
Total cost of sales	54,806			50,534			4,272		8.5
Gross profit
Band	7,956		23.5%	7,168		24.4%	788		11.0
Piano	15,191		34.4%	15,229		34.9%	(38	)	(0.2	)
Total gross profit	23,147			22,397			750		3.3
	29.7%			30.7%
Operating expenses	20,984			18,725			2,259		12.1
Income from operations	2,163			3,672			(1,509	)	(41.1	)
Other expense, net	354			488			(134	)	(27.5	)
Net interest expense	850			2,356			(1,506	)	(63.9	)
Non-operating expenses	1,204			2,844			(1,640	)	(57.7	)
Income before income taxes	959			828			131		15.8
Income tax provision	369		38.5%	323		39.0%	46		14.2
Net income	$	590		$	505		85		16.8

Overview — Piano division revenues improved primarily as a result of increased shipments of Steinway grand units in Europe. Band division revenues increased significantly due to strong demand for certain brass products as well as student clarinets. Band division gross margins deteriorated due to higher material, overhead, and sourced-product costs.

Net Sales — Revenue generated by our Americas region of $20.4 million was consistent with the year-ago period. Retail sales made by our Chicago stores, which were acquired in mid-2011, offset the impact of a 6% decrease in Steinway grand unit shipments and a 12% decrease in Boston and Essex unit shipments. Sales in Europe were $1.3 million greater than the year-ago period due to a 28% increase in Steinway grand unit shipments and a 14% increase in Boston and Essex unit shipments primarily as a result of strong wholesale demand. These improvements more than offset the 15% decrease in Steinway grand unit shipments and the 9% decrease in Boston and Essex unit shipments in the Asia-Pacific region, which caused a $0.8 million decrease in revenue generated in this region.

Band division revenue increased $4.5 million during the period. An overall unit shipment increase of 4%, price increases implemented mid-2011, and a shift in mix to step-up and professional instruments resulted in a significant improvement. This shift was due, in part, to the residual demand for certain brass instrument products which had limited availability when our Eastlake, Ohio brass instrument manufacturing facility was on strike in 2011.

Gross Profit— Gross profit was $0.8 million higher due to better sales at both divisions. Margins generated by the Americas decreased from 33.5% to 31.7%. Although retail sales, which typically generate higher margins, were $0.8 million higher than the year-ago period, the increase was offset by a shift in mix to smaller, lower margin Steinway grand models. Gross margins on sales in the Europe and Asia-Pacific regions were consistent with the year-ago period at 41.8% and 29.6%, respectively.

20

Gross margin generated by the band division dropped from 24.4% to 23.5% in the current period. Although we did not have $0.4 million of severance charges as in the year-ago period, materials, overhead, and sourced-product cost increases more than offset the benefit of price increases implemented mid-2011, resulting in a lower margin.

Operating Expenses — Operating expenses increased $2.3 million during the period. Sales and marketing costs increased $1.8 million due to an increase in bad debt expense of $0.9 million as well as $0.6 million in incremental retail costs associated with our new locations. General and administrative costs increased $0.6 million due to legal and consulting costs related to activities undertaken by our Board of Directors in pursuit of strategic alternatives.

Non-operating Expenses — Non-operating expenses were $1.6 million less, most of which is lower interest expense resulting from the extinguishment of $85.0 million of our 7.00% Senior Notes in May 2011. Net incremental expense associated with our West 57th Street building of $0.1 million was offset by appreciation on our Supplemental Executive Retirement Plan assets. We expect to continue to incur temporary losses on our West 57th Street building in the near term due to low occupancy rates.

Income Taxes — We recorded income tax expense of $0.4 million, reflecting our anticipated annual effective income tax rate of 36.6% associated with current year income, as well as uncertain tax positions and discrete items. The combination of these items resulted in an effective tax rate of 38.5% for the period. The rate of 39.0% in the year-ago period reflected an anticipated annual effective income tax rate of 38.3% as well as 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 three months ended March 31, 2012 and 2011 are summarized as follows:

	2012			2011			Change
Net income:	$	590		$	505		$	85
Changes in operating assets and liabilities	(11,099		)	(13,248		)	2,149
Other adjustments to reconcile net income to cash from operating activities	2,789			2,414			375
Cash flows from operating activities	(7,720		)	(10,329		)	2,609
Cash flows from investing activities	(1,860		)	(3,856		)	1,996
Cash flows from financing activities	3,118			48			3,070

Cash used by operating activities decreased $2.6 million from the year-ago period. Cash used by accounts receivable increased $0.8 million, primarily as a result of increased sales and receivables at our band division. Cash used for inventory was $1.0 million lower since shipments outpaced inventory production at our band division. We used $1.0 million less for prepaids and other assets due to lower prepaid expense activity. Lastly, we used $0.9 million less for accounts payable and accrued liabilities due to the timing of payments.

Cash used for investing activities were $2.0 lower than the year-ago period. Although we used an additional $0.7 million for capital projects, in the year-ago period we paid $2.7 million in contingent consideration for the acquisition of our online music business. In 2012, we expect capital expenditures for the full year to be in the range of $6.0 to $8.0 million.

Cash provided by financing activities increased $3.1 million due to borrowings on our domestic line of credit of $3.0 million. Proceeds from the sale of stock also contributed to financing cash flows.

21

Borrowing Activities and Availability — We have a domestic credit facility with a syndicate of lenders (the “Credit Facility”) with a potential borrowing capacity of $100.0 million in revolving credit loans, which expires on October 5, 2015. It provides for periodic borrowings at either London Interbank Offering Rate (“LIBOR”) plus a range from 1.75% to 2.25%, or as-needed borrowings at an alternate base rate, plus a range from 0.75% to 1.25%; both ranges depend upon borrowing availability at the time of borrowing. The Credit Facility is collateralized by our domestic accounts receivable, inventory, and certain property, plant and equipment. As of March 31, 2012 we had $3.0 million outstanding on this Credit Facility and $81.5 million of availability, net of borrowing restrictions.

Our non-domestic credit facilities originating from two German banks provide for borrowings by foreign subsidiaries of up to €15.3 million ($20.3 million at the March 31, 2012 exchange rate), net of borrowing restrictions of €0.1 million ($0.2 million at the March 31, 2012 exchange rate) and are payable on December 31, 2013 or February 28, 2014. 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 £0.9 million ($1.4 million at the March 31, 2012 exchange rate) for use by our U.K. branch and ¥300 million ($3.6 million at the March 31, 2012 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 ($3.3 million at the March 31, 2012 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 at rates of the Bank of England base rate plus 4.75% for British pound loans, a base rate contingent upon currency borrowed plus 1.0% for loans of our Chinese subsidiary, and Tokyo Interbank Offered Rate (“TIBOR”) plus 1.4% for Japanese yen loans. We had nothing outstanding as of March 31, 2012 on these credit facilities.

Our Japanese subsidiary also maintains a separate revolving loan agreement that provides additional borrowing capacity of up to ¥300 million ($3.6 million at the March 31, 2012 exchange rate) based on eligible inventory balances. The revolving loan agreement bears interest at an average 30-day TIBOR rate plus 0.9% (outstanding borrowings at 1.1% at March 31, 2012) and expires on June 30, 2012. As of March 31, 2012 we had $0.6 million outstanding on this revolving loan agreement.

At March 31, 2012, our total outstanding indebtedness amounted to $71.1 million, consisting of $67.5 million of our 7.00% Senior Notes due March 1, 2014, $3.0 million outstanding on our Credit Facility, and $0.6 million of notes payable to foreign banks.

All of our debt agreements contain covenants that place certain restrictions on us, including our ability to incur additional indebtedness, to repurchase 7.00% Senior Notes, to make investments in other entities, and limitations on cash dividend payments. We were in compliance with all such covenants as of March 31, 2012 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 102,127 shares and approximately $22.5 million remains authorized for repurchases under this program. We did not make any repurchases during the three months ended March 31, 2012.

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 borrowings on our domestic line of credit. We intend to manage accounts receivable and credit risk, and control inventory levels by monitoring purchases and production schedules. Our intention is to manage cash outflow and maintain sufficient operating cash on hand to meet short-term requirements. We indefinitely reinvest earnings of our foreign operations. This indefinite reinvestment does not have a material impact on our liquidity. Should we no longer indefinitely reinvest these earnings, we would be required to accrue and pay U.S. taxes associated with these earnings. However, we do not currently intend or foresee a need to repatriate these earnings. We believe that domestic cash flows from operations coupled with our domestic borrowing availability is sufficient to fund domestic operating activity for the next twelve months. Similarly, cash flows from overseas operations coupled with our overseas borrowing availability is sufficient to fund overseas operating activity for the next twelve months.

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

Other than those described above, we do not have any current plans or intentions that will have a material impact on our liquidity in 2012, 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

22

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 for the next twelve months.

Contractual Obligations - The following table provides a summary of our contractual obligations at March 31, 2012.

	Payments due by period
Contractual Obligations	Total		Less than 1 year		1 - 3 years		3 - 5 years		More than 5 years
Long-term debt(1)	$	80,383	$	5,395	$	71,958	$	3,030	$	—
Capital leases	8		3		5		—		—
Operating leases(2)	253,848		6,173		10,170		8,885		228,620
Purchase obligations(3)	27,390		27,361		29		—		—
Other long-term liabilities(4)	58,801		6,776		3,721		3,717		44,587
Total	$	420,430	$	45,708	$	85,883	$	15,632	$	273,207

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 March 31, 2012 rates. The nature of our long-term debt obligations, including changes to our long-term debt structure, is described more fully in the “Borrowing Activities and Availability” section of “Liquidity and Capital Resources.”
(2)	Approximately $239.9 million of our operating lease obligations are attributable to the land lease associated with the purchase of Steinway Hall, which has eighty-five 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 12 in the Notes to Condensed Consolidated Financial Statements included within this filing and obligations under employee and consultant agreements. We have not included $0.2 million of liabilities relating to uncertain tax positions within this schedule due to the uncertainty of the payment date, if any.

Recent Accounting Pronouncements

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

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

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

23

ITEM 3QUANTITATIVE 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, 2011.

Our revolving loans bear interest at rates that fluctuate with changes in the Prime Rate, Federal Funds Rate, LIBOR, TIBOR, EURIBOR, the Bank of England Rate, and other base rates. 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, 2011.

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 4CONTROLS 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 March 31, 2012, 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.

24

PART II	OTHER INFORMATION
ITEM 6	EXHIBITS
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
101.INS	XBRL Instance Document*
101.SCH	XBRL Taxonomy Extension Schema Document*
101.CAL	XBRL Taxonomy Extension Calculation Linkbase Document*
101.DEF	XBRL Taxonomy Extension Definition Linkbase Document*
101.LAB	XBRL Taxonomy Extension Label Linkbase Document*
101.PRE	XBRL Taxonomy Extension Presentation Linkbase Document*

* Pursuant to Rule 406T of Regulation S-T, the Interactive Data Files on Exhibit 101 hereto are deemed not filed or part of a registration statement or prospectus for purposes of Sections 11 or 12 of the Securities Act of 1933, as amended, are deemed not filed for purposes of Section 18 of the Securities and Exchange Act of 1934, as amended, and otherwise are not subject to liability under those sections.

25

SIGNATURES

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/ Michael T. Sweeney
	Michael T. Sweeney
	President and Chief Executive Officer
	/s/ Dennis M. Hanson
	Dennis M. Hanson
	Senior Executive Vice President and
	Chief Financial Officer
Date: May 8, 2012

26