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Steinway Ends Tough Year

Industry bankruptcies and a labor strike at the company’s Elkhart, Ind.-based brass factory hurt Steinway Musical Instruments in 2006.

Revenues decreased 4 percent in the fourth quarter to $106.1 million due to the loss of an estimated $7.6 million in band instrument sales as a result of the strike. Still, Steinway was able to increase gross margins over last year’s quarter from 29.3 percent to 30.4 percent. For the year, revenues decreased only 0.7 percent to $384.6 million, but margin dropped from 28.8 percent to 27.9 percent.

Steinway’s operating expenses increased 21 percent in 2006 as a result of a $4.1 million increase in bad debt expense, the majority of which was related to the bankruptcy of a large band instrument customer. As a result, operating income dropped from $10.7 million to $6.3 million for the fourth quarter, and from $34.8 million to $18.3 million for the year.

Altogether, the company’s income in the quarter dropped 79 percent to $1.06 million. That’s a basic earnings per share of 13 cents (compared to 62 cents in the fourth quarter of 2005). For the year, the company ended up with a loss of $668,000, a loss per share of 8 cents.

As to be expected, while band sales decreased $10.7 million in the quarter (23 percent) and $13.2 million for the year (7 percent), piano sales increased. The fourth quarter saw 10-percent more piano sales, bringing in $6.7 million. Year-to-date sales were up 5 percent.

“We are extremely pleased with the overall results of our piano business this quarter,” said Dana Messina, CEO of Steinway. “For the fourth quarter, an increase in domestic sales of mid-priced pianos offset lower sales of Steinway grands. For the year, worldwide unit shipments in the mid-priced segment increased 30 percent while unit shipments of Steinway grands were virtually level with 2005.”

On the band side, Messina could only offer a bright outlook. “Our band business continues to improve,” he said. “If you factor out the impact of the strike, sales and gross margins would have increased in 2006.”

Messina said that Steinway is negotiating with the union, but that the two parties still disagree on some important terms. That said, he spoke highly of replacement workers’ progress — daily production on March 1 was double what it was in the fourth quarter of 2006.

“Overall, we should see improved band sales and margins in 2007,” Messina said. “Order rates for band instruments are up, and our production rates are improving. While we will continue to deal with the impact of the strike for several more months, we expect production levels of professional instruments at our Elkhart brass plant to improve throughout the year. Looking at our piano business, the U.S. market is difficult to predict, but we expect Europe and Asia to continue to perform well in 2007.”