10-Q

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 JUNE 30, 2011

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 August 2, 2011:   12,350,774

STEINWAY MUSICAL INSTRUMENTS, INC. AND SUBSIDIARIES

FORM 10-Q

INDEX

PART I	FINANCIAL STATEMENTS
Item 1.	Condensed Consolidated Financial Statements:
	Condensed Consolidated Statements of Operations Three and six months ended June 30, 2011 and 2010	3
	Condensed Consolidated Balance Sheets June 30, 2011 and December 31, 2010	4
	Condensed Consolidated Statements of Cash Flows Six months ended June 30, 2011 and 2010	5
	Condensed Consolidated Statement of Stockholders’ Equity Six months ended June 30, 2011	6
	Notes to Condensed Consolidated Financial Statements	7
Item 2.	Management’s Discussion and Analysis of Financial Condition and Results of Operations	18
Item 3.	Quantitative and Qualitative Disclosures about Market Risk	27
Item 4.	Controls and Procedures	27
PART II.	OTHER INFORMATION
Item 6.	Exhibits	27
	Signatures	28

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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 June 30,						Six Months Ended June 30,
	2011			2010			2011			2010
Net sales	$	88,941		$	78,248		$	161,872		$	146,791
Cost of sales	62,466			56,085			113,000			103,304
Gross profit	26,475			22,163			48,872			43,487
Operating expenses:
Sales and marketing	11,600			10,032			21,781			20,169
General and administrative	11,669			6,903			20,052			14,328
Other operating expenses	72			87			233			126
Facility rationalization and impairment charges	219			—			219			—
Total operating expenses	23,560			17,022			42,285			34,623
Income from operations	2,915			5,141			6,587			8,864
Other expense (income), net	758			658			1,246			(809		)
Net loss (gain) on extinguishment of debt	2,422			(104		)	2,422			(104		)
Interest income	(320		)	(287		)	(688		)	(744		)
Interest expense	1,804			2,782			4,528			5,598
Total non-operating expenses	4,664			3,049			7,508			3,941
(Loss) income before income taxes	(1,749		)	2,092			(921		)	4,923
Income tax (benefit) provision	(702		)	912			(379		)	1,943
Net (loss) income	$	(1,047	)	$	1,180		$	(542	)	$	2,980
(Loss) earnings per share:
Basic	$	(0.09	)	$	0.10		$	(0.04	)	$	0.27
Diluted	$	(0.09	)	$	0.10		$	(0.04	)	$	0.26
Weighted average shares:
Basic	12,144,563			12,019,468			12,116,257			11,226,649
Diluted	12,144,563			12,098,725			12,116,257			11,291,021

See notes to condensed consolidated financial statements.

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STEINWAY MUSICAL INSTRUMENTS, INC. AND SUBSIDIARIES

CONDENSED CONSOLIDATED BALANCE SHEETS

Unaudited

(In Thousands)

	June 30,			December 31,
	2011			2010
Assets
Current assets:
Cash	$	34,151		$	119,811
Accounts, notes, and other receivables, net of allowances of $12,229 and $12,265 in 2011 and 2010, respectively	47,451			42,385
Inventories	150,999			144,500
Prepaid expenses and other current assets	14,077			10,513
Deferred tax assets	11,557			11,419
Total current assets	$	258,235		$	328,628
Property, plant and equipment, net of accumulated depreciation of $115,327 and $110,983 in 2011 and 2010, respectively	87,385			86,404
Trademarks	15,343			14,981
Goodwill	27,180			26,023
Other intangibles, net	2,519			4,028
Other assets	17,751			16,144
Long-term deferred tax assets	9,032			8,886
Total assets	$	417,445		$	485,094
Liabilities and stockholders’ equity
Current liabilities:
Debt	$	1,241		$	2,462
Accounts payable	12,488			12,141
Other current liabilities	32,660			39,181
Total current liabilities	46,389			53,784
Long-term debt	79,335			152,048
Deferred tax liabilities	3,761			3,761
Pension and other postretirement benefit liabilities	41,143			38,366
Other non-current liabilities	8,415			8,511
Total liabilities	179,043			256,470
Commitments and contingent liabilities
Stockholders’ equity:
Common stock	14			14
Additional paid-in capital	158,734			154,404
Retained earnings	133,505			134,209
Accumulated other comprehensive loss	(7,912		)	(12,935		)
Treasury stock, at cost	(45,939		)	(47,068		)
Total stockholders’ equity	238,402			228,624
Total liabilities and stockholders’ equity	$	417,445		$	485,094

See notes to condensed consolidated financial statements.

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STEINWAY MUSICAL INSTRUMENTS, INC. AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

Unaudited

(In Thousands)

	Six Months Ended June 30,
	2011			2010
Cash flows from operating activities:
Net (loss) income	$	(542	)	$	2,980
Adjustments to reconcile net income to cash flows from operating activities:
Depreciation and amortization	4,370			5,050
Amortization of bond discount	59			74
Net loss (gain) on extinguishment of debt	2,422			(104		)
Stock-based compensation expense	3,401			741
(Excess benefit) tax deficiency from stock-based awards	(195		)	64
Tax benefit from stock option exercises	254			4
Deferred tax benefit	(587		)	(1,207		)
(Recovery of) provision for doubtful accounts	(80		)	248
Other	778			87
Changes in operating assets and liabilities:
Accounts, notes and other receivables	(5,217		)	(2,655		)
Inventories	(4,088		)	306
Prepaid expenses and other assets	(4,774		)	(552		)
Accounts payable	196			472
Other liabilities	(4,014		)	2,603
Cash flows from operating activities	(8,017		)	8,111
Cash flows from investing activities:
Capital expenditures	(2,668		)	(1,150		)
Payment for acquisition and contingent consideration for previous acquisition	(3,289		)	—
Other	(6		)	85
Cash flows from investing activities	(5,963		)	(1,065		)
Cash flows from financing activities:
Borrowings under lines of credit	12,750			799
Repayments under lines of credit	(1,982		)	(264		)
Repayments of long-term debt, net of premium or discount	(86,488		)	(5,633		)
Proceeds from issuance of common stock	1,642			27,647
Excess benefit (tax deficiency) from stock-based awards	195			(64		)
Cash flows from financing activities	(73,883		)	22,485
Effect of foreign exchange rate changes on cash	2,203			(3,341		)
(Decrease) increase in cash	(85,660		)	26,190
Cash, beginning of period	119,811			65,873
Cash, end of period	$	34,151		$	92,063
Supplemental Cash Flow Information:
Interest paid	$	6,400		$	6,144
Income taxes paid	$	3,275		$	5,080

See notes to condensed consolidated financial statements.

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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, 2011	$	14	$	154,404	$	134,209		$	(12,935	)	$	(47,068	)	$	228,624
Comprehensive income:
Net loss:					(542		)							(542		)
Foreign currency translation adjustment								5,023						5,023
Total comprehensive income														4,481
Exercise of 108,888 options for shares of common stock	—		675		(162		)				1,129			1,642
Tax benefit of options exercised			254											254
Stock-based compensation			3,401											3,401
Balance, June 30, 2011	$	14	$	158,734	$	133,505		$	(7,912	)	$	(45,939	)	$	238,402

See notes to condensed consolidated financial statements.

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STEINWAY MUSICAL INSTRUMENTS, INC. AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED

FINANCIAL STATEMENTS

JUNE 30, 2011

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, 2011 and 2010 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, 2010, 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, 2010 filed with the Securities and Exchange Commission (“SEC”). The results of operations for the three and six months ended June 30, 2011 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 2010 Annual Report on Form 10-K for the fiscal year ended December 31, 2010. There have been no significant changes in our accounting policies for the first half of fiscal year 2011.

Recent Accounting Pronouncements — There have been no recent accounting pronouncements not yet adopted by the Company which would have a material impact on our 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.

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

	Three Months Ended June 30,					Six Months Ended June 30,
	2011			2010		2011			2010
Numerator:
Net (loss) income	$	(1,047	)	$	1,180	$	(542	)	$	2,980
Denominator:
Weighted-average common shares outstanding - basic	12,144,563			12,019,468		12,116,257			11,226,649
Dilutive effect of stock-based compensation plans	—			79,257		—			64,372
Weighted-average common shares outstanding - diluted	12,144,563			12,098,725		12,116,257			11,291,021
Net income per share - basic	$	(0.09	)	$	0.10	$	(0.04	)	$	0.27
Net income per share - diluted	$	(0.09	)	$	0.10	$	(0.04	)	$	0.26

Since we incurred a loss for the three and six month periods ended June 30, 2011, we did not include any of the 964,238 options to purchase shares of common stock or the right to purchase 31,847 shares under our employee stock purchase plan

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in the computation of diluted earnings per share because their impact would have been antidilutive. We did not include 711,580 and 735,756 of the outstanding options to purchase shares of common stock in the computation of diluted earnings per share for the three and six months ended June 30, 2010, respectively, because generally their exercise prices were more than the average market price of our common shares, and therefore antidilutive.

(4)           Accumulated Other Comprehensive Income (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:

	June 30,			December 31,
	2011			2010
Accumulated other comprehensive loss:
Foreign currency translation adjustment	$	8,763		$	3,740
Pension and other postretirement benefits	(16,675		)	(16,675		)
Total accumulated other comprehensive loss	$	(7,912	)	$	(12,935	)

The components of comprehensive income (loss) are as follows:

	Three Months Ended June 30,						Six Months Ended June 30,
	2011			2010			2011			2010
Comprehensive income (loss):
Net (loss) income:	$	(1,047	)	$	1,180		$	(542	)	$	2,980
Foreign currency translation adjustment	1,707			(5,223		)	5,023			(9,213		)
Pension and other postretirement benefits, net	—			60		(1)	—			60		(1)
Total comprehensive income (loss)	$	660		$	(3,983	)	$	4,481		$	(6,173	)

(1) Represents a gross change of $83, net of $23 in related tax impact

(5)           Inventories

	June 30,		December 31,
	2011		2010
Raw materials	$	19,390	$	18,091
Work-in-process	35,807		34,493
Finished goods	95,802		91,916
Total inventory	$	150,999	$	144,500

Finished goods inventory was impacted by the preliminary purchase price allocation of $0.6 million relating to our acquisition of assets associated with a piano retail store in Chicago, Illinois. This aquisition was not material to our financial condition or results of operations.

(6)           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, 2010 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. Our analyses of band division trademarks and piano division goodwill and trademarks did not indicate any impairment; therefore, no charge was taken against those assets. No other events or circumstances occurred subsequent to our annual impairment test which would have indicated that these assets may be impaired.

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

	Piano		Band		Total
Goodwill:
Balance, January 1, 2011	$	25,823	$	200	$	26,023
Foreign currency translation impact	1,157		—		1,157
Balance, June 30, 2011	$	26,980	$	200	$	27,180
Trademarks:
Balance, January 1, 2011	$	9,157	$	5,824	$	14,981
Foreign currency translation impact	362		—		362
Balance, June 30, 2011	$	9,519	$	5,824	$	15,343

We have previously recorded cumulative impairment losses of $8.6 million associated with band division goodwill and $1.0 million associated with online music business trademarks.

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

	June 30, 2011			December 31, 2010
Gross deferred financing costs	$	3,898		$	6,170
Accumulated amortization	(2,518		)	(3,542		)
Deferred financing costs, net	$	1,380		$	2,628
Gross non-compete agreements	$	250		$	250
Accumulated amortization	(156		)	(131		)
Non-compete agreements, net	$	94		$	119
Gross customer relationships	$	498		$	524
Accumulated amortization	(277		)	(283		)
Customer relationships, net	$	221		$	241
Gross website and developed technology	$	2,176		$	2,176
Accumulated amortization	(1,352		)	(1,136		)
Website and developed technology, net	$	824		$	1,040
Total gross other intangibles	$	6,822		$	9,120
Accumulated amortization	(4,303		)	(5,092		)
Total other intangibles, net	$	2,519		$	4,028

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We wrote off $1.0 million of deferred financing costs during the period, primarily due to the redemption of $85.0 million of our 7.00% Senior Notes, which is discussed more fully in Note 8. 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 two years. Total amortization expense, which includes amortization of deferred financing costs, is as follows:

	Three Months Ended June 30,				Six Months Ended June 30,
	2011		2010		2011		2010
Amortization expense	$	267	$	305	$	577	$	611

The following table shows the total estimated amortization expense for the remainder of 2011 and beyond:

Remainder of 2011	$	491
2012	983
2013	632
2014	245
2015	162
Thereafter	6
Total	$	2,519

(7)           Other Current Liabilities

Our other current liabilities consist of the following:

	June 30, 2011		December 31, 2010
Accrued payroll and related benefits	$	12,760	$	11,428
Current portion of pension and other postretirement benefit liabilities	1,374		1,306
Accrued warranty expense	1,443		1,510
Accrued interest	1,606		3,549
Deferred income	8,697		9,652
Income and other taxes payable	341		358
Other accrued expenses	6,439		11,378
Total	$	32,660	$	39,181

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, 2011 and 2010, and the year ended December 31, 2010 is as follows:

	June 30, 2011			June 30, 2010			December 31, 2010
Beginning balance	$	1,510		$	1,553		$	1,553
Additions	790			433			894
Claims and reversals	(913		)	(460		)	(896		)
Foreign currency translation impact	56			(94		)	(41		)
Ending balance	$	1,443		$	1,432		$	1,510

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(8)           Debt

On May 2, 2011 we redeemed $85.0 million of our 7.00% Senior Notes at 101.75% of principal plus accrued interest pursuant to a call we issued on April 1, 2011. We recorded a net loss on extinguishment of debt of $2.4 million during the second quarter of 2011. This net loss consists of the following:

Premiums paid pursuant to the call	$	1,488
Deferred financing costs write-off	706
Bond discount write-off	228
Net loss on extinguishment of debt	$	2,422

Our outstanding debt consists of the following:

	June 30, 2011			December 31, 2010
7.00% Senior Notes	$	67,506		$	152,506
Unamortized bond discount	(171		)	(458		)
Domestic line of credit	12,000			—
Overseas lines of credit	1,241			2,462
Total	80,576			154,510
Less: current portion	1,241			2,462
Long-term debt	$	79,335		$	152,048

Scheduled repayments of outstanding debt as of June 30, 2011 are as follows:

Remainder of 2011	$	1,241
2012	—
2013	—
2014	67,506
2015	12,000
Total	$	80,747

(9)Facility Rationalization Charges — Band Segment

During the second quarter of 2011, we determined that the book value of our former manufacturing facility in Elkhorn, Wisconsin exceeded the fair value. Accordingly, we recorded a facility impairment charge of $0.2 million as a component of operating expenses. This facility, which has a remaining book value of less than $0.1 million, is included in other assets and is being held for sale.

During the fourth quarter of 2011, we intend to close our tuned percussion instrument manufacturing facility located in LaGrange, Illinois and consolidate the production into our other percussion facility in Monroe, North Carolina. As a result of this pending closure, we recorded charges of $0.4 million in severance and related expenses during the first quarter of 2011 as a component of cost of goods sold. We currently do not expect to incur any additional severance expenses during the remainder of 2011.

The severance liability and related activity associated with this plant closure is as follows:

Facility rationalization severance liability:
Balance at January 1, 2011	$	—
Additions charged to cost of sales	417
Payments	—
Balance, June 30, 2011	$	417

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Although we are still in the process of quantifying the impact of this plant closure, we do not expect impairment charges or equipment relocation costs, if any, to be material.

(10)         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, 2011 and December 31, 2010 and the fair value hierarchy of the valuation techniques we utilized. We classify these assets and liabilities as either short term or long term based on maturity or anticipated realization dates.

	June 30, 2011		December 31, 2010
Financial assets:
Trading securities(1) - Level 1	$	1,872	$	1,758
Foreign currency contracts(2) - Level 2	398		216
	$	2,270	$	1,974
Financial liabilities:
Foreign currency contracts(2) - Level 2	$	295	$	447

(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, 2011				December 31, 2010
	Net Carrying Value		Estimated Fair Value		Net Carrying Value		Estimated Fair Value
Financial liabilities:
Debt	$	80,576	$	80,156	$	154,510	$	156,208

The carrying values of accounts, notes and other receivables, and accounts payable approximate fair value.

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

Our common stock was previously comprised of two classes: Class A and Ordinary. With the exception of disparate voting power, both classes were substantially identical. Each share of Class A common stock entitled the holder to 98 votes. Holders of Ordinary common stock are entitled to one vote per share. On June 2, 2011 our Chairman and Chief Executive Officer sold all of their Class A common stock to other shareholders. Once the Class A stock was no longer held by its former shareholders, it was converted into Ordinary common stock. This eliminated the 80% voting power previously held by our Chairman and Chief Executive Officer.

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

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

Our 1996 Stock Plan has expired but still has vested options outstanding. We reached our registered share limitation in early 2007, and had previously reserved 721,750 treasury stock shares to issue under this plan. We have since issued 171,274 shares of treasury stock to cover options exercised, with 282,276 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 June 30, 2011 was $0.2 million. This reduction was $0.1 million for the three and six months ended June 30, 2010.

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,
	2011		2010		2011		2010
Compensation cost included in:
Basic income per share	$	0.18	$	0.03	$	0.21	$	0.05
Diluted income per share	$	0.18	$	0.03	$	0.21	$	0.05
Stock-based compensation expense	2,996		375		3,401		741
Income tax benefit	769		68		851		135

In connection with the sale of Class A common stock mentioned above, vesting of most of the unvested stock options under our Stock Plan was accelerated. As a result, we incurred $2.2 million of stock-based compensation expense during the second quarter of 2011.

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 and six months ended June 30, 2011 or 2010. During the six months ended June 30, 2011, we granted 40,000 restricted shares with a fair value of $19.89 per share. As a result of the sale of Class A common stock, the vesting of these shares was accelerated and we recognized an associated compensation cost of $0.7 million during the second quarter of 2011.

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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, 2011	1,086,886		$	20.60
Granted	—		—
Exercised	(108,888	)	15.09
Forfeited	(13,760	)	26.18
Outstanding, June 30, 2011	964,238		$	21.15	5.3	$	5,538
Exercisable, June 30, 2011	856,498		$	21.86	5.0	$	4,381

The total intrinsic value of the options exercised during the three and six month period ended June 30, 2011 was $1.0 million. The total intrinsic value of the options exercised during the three and six month periods ended June 30, 2010 was nominal. As of June 30, 2011, there was $0.6 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 2.8 years. Cash received from option exercises under the Stock Plans for the three and six month period ended June 30, 2011 was $1.6 million.

The following tables set forth information regarding the Purchase Plan:

	Three Months Ended June 30,		Six Months Ended June 30,
	2011	2010	2011	2010
Risk-free interest rate	0.3%	0.5%	0.3%	0.5%
Weighted-average expected life of option feature (in years)	1.0	1.0	1.0	1.0
Expected volatility of underlying stock	28.3%	27.9%	28.3%	27.9%
Expected dividends	n/a	n/a	n/a	n/a
Weighted-average fair value of option feature	$4.81	$2.79	$4.81	$2.79

	Number of Options		Weighted- Average Exercise Price		Remaining Contract Life (in years)	Aggregate Intrinsic Value
Outstanding, January 1, 2011	15,709		$	16.58
Shares subscribed	17,165		16.58
Exercised	—		—
Forfeited	(1,027	)	16.58
Outstanding, June 30, 2011	31,847		$	16.58	0.1	$	289

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(12)Other Expense (Income), Net

	Three Months Ended June 30,						Six Months Ended June 30,
	2011			2010			2011			2010
West 57th Street building income	$	(590	)	$	(961	)	$	(1,255	)	$	(3,393	)
West 57th Street building expense	1,582			1,689			3,370			3,461
Foreign exchange loss (gain), net	11			(217		)	(650		)	(713		)
Miscellaneous, net	(245		)	147			(219		)	(164		)
Other expense (income), net	$	758		$	658		$	1,246		$	(809	)

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.

(13)         Commitments and Contingent Liabilities

We are involved in certain legal proceedings regarding environmental matters, which were previously disclosed in our 2010 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.

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(14)       Retirement Plans

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

	Domestic Plan						Foreign Plans
	Three Months Ended June 30,						Three Months Ended June 30,
	2011			2010			2011			2010
Service cost	$	93		$	82		$	165		$	148
Interest cost	762			884			455			408
Expected return on plan assets	(1,101		)	(1,047		)	(107		)	(72		)
Amortization of prior service cost (credit)	29			28			(13		)	(13		)
Amortization of net loss	595			486			29			46
Net periodic pension cost	$	378		$	433		$	529		$	517
	Domestic Plan						Foreign Plans
	Six Months Ended June 30,						Six Months Ended June 30,
	2011			2010			2011			2010
Service cost	$	181		$	175		$	322		$	319
Interest cost	1,626			1,728			889			861
Expected return on plan assets	(2,150		)	(2,097		)	(212		)	(167		)
Amortization of prior service cost (credit)	57			56			(26		)	(13		)
Amortization of net loss	1,084			978			58			80
Net periodic pension cost	$	798		$	840		$	1,031		$	1,080

We have not made any payments to our domestic pension plan as of June 30, 2011. However, we expect to contribute $2.6 million to this plan in the second half of 2011. Our anticipated contributions to the pension plan of our U.K. subsidiary approximate $0.9 million for the current year. As of June 30, 2011, 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 2011 benefit payments under these plans are $1.3 million, of which $0.6 million was paid through June 2011.

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

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(15)         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, 2011 and 2010:

Three Months Ended 2011	Piano Segment								Band Segment						Other &			Consol
	U.S.		Germany		Other		Total		U.S.		Europe		Total		Elim			Total
Net sales to external customers	$	24,517	$	18,148	$	11,506	$	54,171	$	33,723	$	1,047	$	34,770	$	—		$	88,941
Income (loss) from operations	1,310		2,595		1,063		4,968		1,017		75		1,092		(3,145		)	2,915

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

Six Months Ended 2011	Piano Segment								Band Segment						Other &			Consol
	U.S.		Germany		Other		Total		U.S.		Europe		Total		Elim			Total
Net sales to external customers	$	44,867	$	29,774	$	23,119	$	97,760	$	61,990	$	2,122	$	64,112	$	—		$	161,872
Income (loss) from operations	2,019		3,990		2,491		8,500		1,948		169		2,117		(4,030		)	6,587

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

(16)         Subsequent Events

On July 26, 2011, approximately 230 employees (approximately 28% of band division’s workforce) at our Eastlake, Ohio brass instrument manufacturing facility went on strike.

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ITEM 2MANAGEMENT’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. 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 2010 Annual Report on Form 10-K. Not all of these significant accounting policies require management to make difficult, subjective or complex judgments or estimates. However, management considers the following to be critical accounting policies and estimates based on the definition above.

Accounts Receivable

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

Inventory

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

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Workers’ Compensation and Self-Insured Health Claims

We establish self-insured workers’ compensation and health claims reserves 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 using an income and market 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.

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.

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

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Environmental Liabilities

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

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

Forward-Looking Statements

Certain statements contained in this document are “forward-looking statements” within the meaning of Section 21E of the Securities and Exchange Act of 1934, as amended. These forward-looking statements represent our present expectations or beliefs concerning future events. We caution that such statements are necessarily based on certain assumptions which are subject to risks and uncertainties which could cause actual results to differ materially from those indicated in this report. These risk factors include, but are not limited to, the following: changes in general economic conditions; reductions in school budgets; increased competition; 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, 2010. We encourage you to read those descriptions carefully. We caution investors not to place undue reliance on the forward-looking statements contained in this report. These statements, like all statements contained in this report, speak only as of the date of this report (unless another date is indicated) and we undertake no obligation to update or revise the statements except as required by law.

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Results of Operations

Three Months Ended June 30, 2011 Compared to Three Months Ended June 30, 2010

	Three Months Ended June 30,								Change
	2011				2010				$		%
Net sales
Band	$	34,770			$	33,126			1,644		5.0
Piano	54,171				45,122				9,049		20.1
Total sales	88,941				78,248				10,693		13.7
Cost of sales
Band	26,840				25,822				1,018		3.9
Piano	35,626				30,263				5,363		17.7
Total cost of sales	62,466				56,085				6,381		11.4
Gross profit
Band	7,930			22.8%	7,304			22.0%	626		8.6
Piano	18,545			34.2%	14,859			32.9%	3,686		24.8
Total gross profit	26,475				22,163				4,312		19.5
	29.8%				28.3%
Operating expenses	23,560				17,022				6,538		38.4
Income from operations	2,915				5,141				(2,226	)	(43.3	)
Other expense (income), net	758				658				100		15.2
Net loss (gain) on extinguishment of debt	2,422				(104		)		2,526		(2,428.8	)
Net interest expense	1,484				2,495				(1,011	)	(40.5	)
Non-operating expenses	4,664				3,049				1,615		53.0
(Loss) income before income taxes	(1,749		)		2,092				(3,841	)	(183.6	)
Income tax (benefit) provision	(702		)	40.1%	912			43.6%	(1,614	)	(177.0	)
Net (loss) income	$	(1,047	)		$	1,180			(2,227	)	(188.7	)

Overview — Piano division revenues and gross profits improved significantly as a result of increased shipments of Steinway grand units. Band division revenues and gross profits also improved due to greater demand for woodwind and student brass instruments, as well as lower variances and inventory reserve charges. In June our Chairman and Chief Executive Officer sold all of their Class A common stock to other shareholders.  Income from operations was adversely impacted by legal, consulting, and stock-based compensation costs associated with this transaction.

Net Sales — Domestic piano division revenues improved $3.2 million as a result of a 25% increase in Steinway grand unit shipments, which more than offset the impact of an 11% decrease in mid-priced piano unit shipments. Overseas piano division revenues were $5.9 million higher due to strong wholesale demand in Europe as well as $3.1 million attributable to foreign currency exchange rates. Overseas Steinway grand unit shipments increased 14% and mid-priced piano line shipments were 11% higher than the year-ago period.

Band division revenues were $1.6 million higher due to an 8% increase in overall unit shipments. This was largely driven by orders placed in the first quarter but shipped in the second quarter.

Gross Profit— Gross profit was $4.3 million higher primarily due to better sales and margins at our piano divisions.  Domestic piano division gross margins increased from 28.7% to 33.1% due largely to improved demand for Steinway grands at both the wholesale and retail levels, as well as the absence of $0.3 million in costs associated with an unplanned factory shutdown in 2010 which did not recur in the current period. Overseas piano division margins went from 36.7% to 35.2% due to a shift in mix from larger, higher margin Steinway grands to smaller, lower margin Steinway grands.

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Despite increased material and overhead costs, gross margins at the band division rose from 22.0% to 22.8%. In the prior period, production variances which negatively impacted the margin were approximately $0.7 million higher than in the current period. Also, inventory reserves were higher in the year-ago period.

Operating Expenses— Operating expenses increased $6.5 million during the period, much of which was attributable to the Class A common stock sale transaction. This resulted in accelerated vesting of most of our stock options and all of our restricted stock, for which we incurred an incremental $2.5 million in stock-based compensation expense. We also incurred $0.6 million in additional legal and consulting costs associated with the transaction. In addition, the band division also took a $0.2 million facilities impairment charge during the period.

Exclusive of the atypical items mentioned above, sales and marketing costs increased $1.4 million primarily due to advertising and promotional expenses, commissions, and bonuses. General and administrative costs increased $1.9 million due to increased wages, benefits, headcount, and consulting costs. However, inherent in the selling, general, and administrative charges is a $0.7 million increase associated with foreign exchange rate changes. Wages and benefits increased in part due to the reinstatement of salaries and the resumption of annual merit increases.

Non-operating Expenses — Non-operating expenses increased $1.6 million in the current period. In May we extinguished $85.0 million of our 7.00% Senior Notes, which resulted in a loss on extinguishment of $2.4 million, as compared to a gain of $0.1 million in the prior period. However, we were able to lower interest expense by $1.0 million during the period. Expenses associated with our West 57th Street building were $0.3 million higher than the year-ago period. We expect to continue to incur temporary losses in the near term on this facility in 2011 until we have leased the remaining available space to new tenants.

Income Taxes — We recorded an income tax benefit of $0.7 million, reflecting our anticipated annual effective income tax rate of 41.8% 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 40.1% for the period. The rate of 43.6% in the year-ago period reflected an anticipated annual effective income tax rate of 39.8% as well as uncertain tax positions and discrete items.

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Six Months Ended June 30, 2011 Compared to Six Months Ended June 30, 2010

	Six Months Ended June 30,								Change
	2011				2010				$		%
Net sales
Band	$	64,112			$	62,493			1,619		2.6
Piano	97,760				84,298				13,462		16.0
Total sales	161,872				146,791				15,081		10.3
Cost of sales
Band	49,014				46,734				2,280		4.9
Piano	63,986				56,570				7,416		13.1
Total cost of sales	113,000				103,304				9,696		9.4
Gross profit
Band	15,098			23.5%	15,759			25.2%	(661	)	(4.2	)
Piano	33,774			34.5%	27,728			32.9%	6,046		21.8
Total gross profit	48,872				43,487				5,385		12.4
	30.2%				29.6%
Operating expenses	42,285				34,623				7,662		22.1
Income from operations	6,587				8,864				(2,277	)	(25.7	)
Other expense (income), net	1,246				(809		)		2,055		(254.0	)
Net loss (gain) on extinguishment of debt	2,422				(104		)		2,526		(2,428.8	)
Net interest expense	3,840				4,854				(1,014	)	(20.9	)
Non-operating expenses	7,508				3,941				3,567		90.5
(Loss) income before income taxes	(921		)		4,923				(5,844	)	(118.7	)
Income tax (benefit) provision	(379		)	41.2%	1,943			39.5%	(2,322	)	(119.5	)
Net (loss) income	$	(542	)		$	2,980			(3,522	)	(118.2	)

Overview — Piano division revenues and gross profits increased primarily as a result of greatly improved demand for Steinway grand units worldwide. Although band division revenues increased, higher material and overhead costs as well as severance associated with a pending plant closure adversely impacted gross profits. Income from operations was negatively impacted by incremental legal, consulting, and stock-based compensation costs associated with the Class A common stock transaction discussed previously.

Net Sales — Domestic piano division revenues increased $4.7 million as a result of a 21% increase in Steinway grand unit shipments. Strong retail sales more than offset the slight (2%) decrease in mid-price piano shipments. Due to better wholesale demand, which drove a 16% increase in Steinway grand unit shipments, and a favorable foreign exchange rate impact of $3.7 million, overseas piano division revenues increased $8.8 million.

Despite flat overall unit shipments, band division revenues increased $1.6 million due to strong demand for certain student and professional brass instruments.

Gross Profit— Gross profit increased $5.4 million due to improved sales and margins from the piano division. Gross margins at the band division dropped from 25.2% to 23.5% in the current period. Higher material and overhead costs, coupled with severance charges of $0.4 million associated with a pending plant closure adversely impacted the margin.

Piano margins improved from 32.9% to 34.5%. Domestic piano margins grew from 29.8% to 33.3% due to increased retail sales, which typically generate higher margins, as well as the absence of $0.3 million of overhead costs associated with an unplanned factory shutdown in the year-ago period. Overseas piano margins dropped only slightly (35.8% to 35.6%) since

23

the adverse shift in mix to smaller, lower margin Steinway grand models was offset by improved factory throughput and lower variances.

Operating Expenses— Operating expenses increased $7.7 million, of which $2.5 million is incremental stock-based compensation and $0.6 million is legal and consulting costs associated with the Class A common stock transaction mentioned above. Facility impairment charges of $0.2 million also adversely impacted operating expenses.

Typical marketing, advertising, commissions, and promotional expenses increased $1.8 million, but this was partially offset by a shift from bad debt expense to bad debt recovery of $0.3 million. General and administrative costs increased $2.8 million due to increased wages, benefits, headcount, legal, and consulting costs. Wages and benefits increased in part due to the reinstatement of salaries and the resumption of annual merit increases. Also, selling, general, and administrative expenses were adversely impacted by $0.7 million due to foreign currency exchange rate changes.

Non-operating Expenses — Non-operating expenses increased $3.6 million primarily due to a shift from gain on extinguishment of debt to loss on extinguishment of debt of $2.6 million. This loss relates to our redemption of $85.0 million of our 7.00% Senior Notes in May, which generated an interest savings of $1.0 million during the period. We incurred incremental expenses of $2.0 million from our West 57th Street building. We expect to continue to incur  temporary losses on this facility in 2011 until we have leased the remaining available space to new tenants.

Income Taxes — We recorded an income tax benefit of $0.4 million, reflecting our anticipated annual effective income tax rate of 41.8% 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 41.2% for the period. The rate of 39.5% in the year-ago period reflected an anticipated annual effective income tax rate of 39.8% 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 six months ended June 30, 2011 and 2010 are summarized as follows:

	2011			2010			Change
Net (loss) income:	$	(542	)	$	2,980		$	(3,522	)
Changes in operating assets and liabilities	(17,897		)	174			(18,071		)
Other adjustments to reconcile net income to cash from operating activities	10,422			4,957			5,465
Cash flows from operating activities	(8,017		)	8,111			(16,128		)
Cash flows from investing activities	(5,963		)	(1,065		)	(4,898		)
Cash flows from financing activities	(73,883		)	22,485			(96,368		)

Cash flows from operating activities decreased $16.1 million from the year-ago period. We used $4.4 million more for inventory in the current period as a result of higher production levels at many plants. We used $4.2 million more for prepaids and other assets due to prepaid inventory, real estate taxes, and expenses associated with our West 57th Street building. We used $6.9 million more for accounts payable and accrued expenses, primarily due to shifts in spending patterns, which have returned to normal levels.

Cash flows from investing activities resulted in the use of an additional $4.9 million primarily due to the payment of $2.7 million in additional consideration associated with the acquisition of our online music business, as well as $0.6 million paid to acquire assets of a piano retail store in Chicago, Illinois. Higher capital expenditures of $1.5 million were also a factor as capital expenditures were abnormally low in 2010. In 2011, we expect capital expenditures for the full year to be in the range of $4.0 to $6.0 million, along with $1.0 million to $2.0 million for improvements and renovations at our building in New York City.

24

Cash flows from financing activities decreased by $96.4 million compared to the year-ago period. We spent an incremental $80.9 million to extinguish a significant portion of our 7.00% Senior Notes. This was partially offset by incremental cash provided by borrowings of $10.2 million. Also, in the prior period, we generated $27.6 million through stock sales, compared to $1.6 million in the current period.

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 June 30, 2011 we had $12.0 million outstanding on this Credit Facility and $81.9 million of availability, net of borrowing restrictions.

We also have certain non-domestic credit facilities originating from two German banks that provide for borrowings by foreign subsidiaries of up to €16.1 million ($23.3 million at the June 30, 2011 exchange rate), net of borrowing restrictions of €1.4 million ($2.0 million at the June 30, 2011 exchange rate) which are payable either December 31, 2011 or 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 £0.9 million ($1.4 million at the June 30, 2011 exchange rate) for use by our U.K. branch and ¥300 million ($3.7 million at the June 30, 2011 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 ($3.6 million at the June 30, 2011 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 1.6% for Japanese yen loans. We had nothing outstanding as of June 30, 2011 on these credit facilities.

Our Japanese subsidiary also maintains a separate revolving loan agreement that provides additional borrowing capacity of up to ¥300 million ($3.7 million at the June 30, 2011 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, 2011) and expires on June 30, 2012. As of June 30, 2011, we had $1.2 million outstanding on this revolving loan agreement.

At June 30, 2011, our total outstanding indebtedness amounted to $80.7 million, consisting of $67.5 million of our 7.00% Senior Notes due March 1, 2014, $12.0 million outstanding on our Credit Facility, and $1.2 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 June 30, 2011 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 and six months ended June 30, 2011 or 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 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.

On July 26, 2011, workers at our Eastlake, Ohio brass instrument manufacturing facility went on strike. What impact, if any, this may have on our future results of operations or cash flows is contingent upon several factors, including inventory on hand as compared to customer demand, our ability to substitute other products, and the length of time workers remain on strike. However, we do not anticipate that the strike will have an adverse effect on our liquidity.

25

Other than those described above, we do not have any current plans or intentions that will have a material impact on our liquidity in 2011, 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 for the next twelve months.

Contractual Obligations - The following table provides a summary of our contractual obligations at June 30, 2011.

	Payments due by period
	Total		Less than 1 year		1 - 3 years		3 - 5 years		More than 5 years
Contractual Obligations
Long-term debt(1)	$	94,381	$	6,219	$	75,862	$	12,300	$	—
Capital leases	12		5		7		—		—
Operating leases(2)	256,188		6,294		10,087		8,549		231,258
Purchase obligations(3)	32,332		32,290		42		—		—
Other long-term liabilities(4)	49,662		5,007		4,009		3,930		36,716
Total	$	432,575	$	49,815	$	90,007	$	24,779	$	267,974

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, 2011 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 $242.0 million of our operating lease obligations are attributable to the land lease associated with the purchase of Steinway Hall, which has eighty-six 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 14 in the Notes to Condensed Consolidated Financial Statements included within this filing 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

There have been no recent accounting pronouncements not yet adopted by the Company which would have a material impact on our financial statements.

26

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, 2010.

Our revolving loans bear interest at rates that fluctuate with changes in the Prime Rate, Federal Funds Rate, 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, 2010.

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, 2011, 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.

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.

27

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/ Dana D. Messina

Dana D. Messina

Director, President and Chief Executive Officer

/s/ Dennis M. Hanson

Dennis M. Hanson

Senior Executive Vice President and

Chief Financial Officer

Date: August 5, 2011

28

EX-31.1

EXHIBIT 31.1

I, Dana D. Messina, certify that:

1. I have reviewed this quarterly report on Form 10-Q of Steinway Musical Instruments, Inc.;

2. Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report;

3. Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report;

4. The registrant’s other certifying officer and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for the registrant and have:

a) designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared;

b) designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles;

c) evaluated the effectiveness of the registrant’s disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report, based on such evaluation; and

d) disclosed in this report any change in the registrant’s internal control over financial reporting that occurred during the registrant’s most recent fiscal quarter (the registrant’s fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the registrant’s internal control over financial reporting; and

5. The registrant’s other certifying officer and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant’s auditors and the audit committee of the registrant’s board of directors (or persons performing the equivalent functions):

a) all significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant’s ability to record, process, summarize and report financial information; and

b) any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant’s internal control over financial reporting.

Date: August 5, 2011
	/s/ Dana D. Messina
	Dana D. Messina
	Director, President and Chief
	Executive Officer

EX-31.2

EXHIBIT 31.2

I, Dennis M. Hanson, certify that:

1. I have reviewed this quarterly report on Form 10-Q of Steinway Musical Instruments, Inc.;

2. Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report;

3. Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report;

4. The registrant’s other certifying officer and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for the registrant and have:

a) designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared;

b) designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles;

c) evaluated the effectiveness of the registrant’s disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report, based on such evaluation; and

d) disclosed in this report any change in the registrant’s internal control over financial reporting that occurred during the registrant’s most recent fiscal quarter (the registrant’s fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the registrant’s internal control over financial reporting; and

5. The registrant’s other certifying officer and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant’s auditors and the audit committee of the registrant’s board of directors (or persons performing the equivalent functions):

a) all significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant’s ability to record, process, summarize and report financial information; and

b) any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant’s internal control over financial reporting.

Date: August 5, 2011	/s/ Dennis M. Hanson
	Dennis M. Hanson
	Senior Executive Vice President and
	Chief Financial Officer

EX-32.1

EXHIBIT 32.1

CERTIFICATION PURSUANT TO

18 U.S.C. SECTION 1350

AS REQUIRED BY

SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002

In connection with the Quarterly Report on Form 10-Q of Steinway Musical Instruments, Inc. (the “Company”) for the fiscal period ended June 30, 2011 as filed with the Securities and Exchange Commission on the date hereof (the “Report”), I, Dana D. Messina, Chief Executive Officer of the Company, certify that to the best of my knowledge:

1. The Report fully complies with the requirements of section 13(a) or 15(d) of the Securities Exchange Act of 1934; and

2. The information contained in the Report fairly presents, in all material respects, the financial condition and results of operations of the Company.

	/s/ Dana D. Messina
	President and Chief Executive Officer
	(Principal Executive Officer)
August 5, 2011

EX-32.2

EXHIBIT 32.2

CERTIFICATION PURSUANT TO

18 U.S.C. SECTION 1350

AS REQUIRED BY

SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002

In connection with the Quarterly Report on Form 10-Q of Steinway Musical Instruments, Inc. (the “Company”) for the fiscal period ended June 30, 2011 as filed with the Securities and Exchange Commission on the date hereof (the “Report”), I, Dennis M. Hanson, Senior Executive Vice President and Chief Financial Officer of the Company, certify that to the best of my knowledge:

1. The Report fully complies with the requirements of section 13(a) or 15(d) of the Securities Exchange Act of 1934; and

2. The information contained in the Report fairly presents, in all material respects, the financial condition and results of operations of the Company.

	/s/ Dennis M. Hanson
	Senior Executive Vice President and
	Chief Financial Officer
	(Principal Financial Officer)
August 5, 2011

XML



CONDENSED CONSOLIDATED BALANCE SHEETS (Parenthetical) (USD $) In Thousands	Jun. 30, 2011	Dec. 31, 2010
CONDENSED CONSOLIDATED BALANCE SHEETS
Accounts, notes, and other receivables, allowances	$ 12,229	$ 12,265
Property, plant and equipment, accumulated depreciation	$ 115,327	$ 110,983

XML



CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (USD $) In Thousands	6 Months Ended
	Jun. 30, 2011	Jun. 30, 2010
Cash flows from operating activities:
Net (loss) income	$ (542)	$ 2,980
Adjustments to reconcile net income to cash flows from operating activities:
Depreciation and amortization	4,370	5,050
Amortization of bond discount	59	74
Net loss (gain) on extinguishment of debt	2,422	(104)
Stock-based compensation expense	3,401	741
(Excess benefit) tax deficiency from stock-based awards	(195)	64
Tax benefit from stock option exercises	254	4
Deferred tax benefit	(587)	(1,207)
(Recovery of) provision for doubtful accounts	(80)	248
Other	778	87
Changes in operating assets and liabilities:
Accounts, notes and other receivables	(5,217)	(2,655)
Inventories	(4,088)	306
Prepaid expenses and other assets	(4,774)	(552)
Accounts payable	196	472
Other liabilities	(4,014)	2,603
Cash flows from operating activities	(8,017)	8,111
Cash flows from investing activities:
Capital expenditures	(2,668)	(1,150)
Payment for acquisition and contingent consideration for previous acquisition	(3,289)
Other	(6)	85
Cash flows from investing activities	(5,963)	(1,065)
Cash flows from financing activities:
Borrowings under lines of credit	12,750	799
Repayments under lines of credit	(1,982)	(264)
Repayments of long-term debt, net of premium or discount	(86,488)	(5,633)
Proceeds from issuance of common stock	1,642	27,647
Excess benefit (tax deficiency) from stock-based awards	195	(64)
Cash flows from financing activities	(73,883)	22,485
Effect of foreign exchange rate changes on cash	2,203	(3,341)
(Decrease) increase in cash	(85,660)	26,190
Cash, beginning of period	119,811	65,873
Cash, end of period	34,151	92,063
Supplemental Cash Flow Information :
Interest paid	6,400	6,144
Income taxes paid	$ 3,275	$ 5,080

XML



Document and Entity Information	6 Months Ended
	Jun. 30, 2011	Aug. 02, 2011
Document Entity Information
Entity Registrant Name	STEINWAY MUSICAL INSTRUMENTS INC
Entity Central Index Key	0000911583
Document Type	10-Q
Document Period End Date	Jun. 30, 2011
Amendment Flag	false
Current Fiscal Year End Date	--12-31
Entity Current Reporting Status	Yes
Entity Filer Category	Accelerated Filer
Entity Common Stock, Shares Outstanding		12,350,774
Document Fiscal Year Focus	2011
Document Fiscal Period Focus	Q2

XML



CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS (USD $) In Thousands, except Share data	3 Months Ended		6 Months Ended
	Jun. 30, 2011	Jun. 30, 2010	Jun. 30, 2011	Jun. 30, 2010
Net sales	$ 88,941	$ 78,248	$ 161,872	$ 146,791
Cost of sales	62,466	56,085	113,000	103,304
Gross profit	26,475	22,163	48,872	43,487
Operating expenses:
Sales and marketing	11,600	10,032	21,781	20,169
General and administrative	11,669	6,903	20,052	14,328
Other operating expenses	72	87	233	126
Facility rationalization and impairment charges	219		219
Total operating expenses	23,560	17,022	42,285	34,623
Income from operations	2,915	5,141	6,587	8,864
Other expense (income), net	758	658	1,246	(809)
Net loss (gain) on extinguishment of debt	2,422	(104)	2,422	(104)
Interest income	(320)	(287)	(688)	(744)
Interest expense	1,804	2,782	4,528	5,598
Total non-operating expenses	4,664	3,049	7,508	3,941
(Loss) income before income taxes	(1,749)	2,092	(921)	4,923
Income tax (benefit) provision	(702)	912	(379)	1,943
Net (loss) income	$ (1,047)	$ 1,180	$ (542)	$ 2,980
(Loss) earnings per share:
Basic (in dollars per share)	$ (0.09)	$ 0.10	$ (0.04)	$ 0.27
Diluted (in dollars per share)	$ (0.09)	$ 0.10	$ (0.04)	$ 0.26
Weighted average shares:
Basic (in shares)	12,144,563	12,019,468	12,116,257	11,226,649
Diluted (in shares)	12,144,563	12,098,725	12,116,257	11,291,021

XML



Goodwill, Trademarks, and Other Intangible Assets

6 Months Ended

Jun. 30, 2011

Goodwill, Trademarks, and Other Intangible Assets

Goodwill, Trademarks, and Other Intangible Assets

(6)           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, 2010 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. Our analyses of band division trademarks and piano division goodwill and trademarks did not indicate any impairment; therefore, no charge was taken against those assets. 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:

	Piano		Band		Total
Goodwill:
Balance, January 1, 2011	$	25,823	$	200	$	26,023
Foreign currency translation impact	1,157		—		1,157
Balance, June 30, 2011	$	26,980	$	200	$	27,180
Trademarks:
Balance, January 1, 2011	$	9,157	$	5,824	$	14,981
Foreign currency translation impact	362		—		362
Balance, June 30, 2011	$	9,519	$	5,824	$	15,343

We have previously recorded cumulative impairment losses of $8.6 million associated with band division goodwill and $1.0 million associated with online music business trademarks.

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

	June 30, 2011			December 31, 2010
Gross deferred financing costs	$	3,898		$	6,170
Accumulated amortization	(2,518		)	(3,542		)
Deferred financing costs, net	$	1,380		$	2,628
Gross non-compete agreements	$	250		$	250
Accumulated amortization	(156		)	(131		)
Non-compete agreements, net	$	94		$	119
Gross customer relationships	$	498		$	524
Accumulated amortization	(277		)	(283		)
Customer relationships, net	$	221		$	241
Gross website and developed technology	$	2,176		$	2,176
Accumulated amortization	(1,352		)	(1,136		)
Website and developed technology, net	$	824		$	1,040
Total gross other intangibles	$	6,822		$	9,120
Accumulated amortization	(4,303		)	(5,092		)
Total other intangibles, net	$	2,519		$	4,028

We wrote off $1.0 million of deferred financing costs during the period, primarily due to the redemption of $85.0 million of our 7.00% Senior Notes, which is discussed more fully in Note 8. 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 two years. Total amortization expense, which includes amortization of deferred financing costs, is as follows:

	Three Months Ended June 30,				Six Months Ended June 30,
	2011		2010		2011		2010
Amortization expense	$	267	$	305	$	577	$	611

The following table shows the total estimated amortization expense for the remainder of 2011 and beyond:

Remainder of 2011	$	491
2012	983
2013	632
2014	245
2015	162
Thereafter	6
Total	$	2,519

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Stockholders' Equity and Stock-based Compensation Arrangements

6 Months Ended

Jun. 30, 2011

Stockholders' Equity and Stock-based Compensation Arrangements

Stockholders' Equity and Stock-based Compensation Arrangements

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

Our common stock was previously comprised of two classes: Class A and Ordinary. With the exception of disparate voting power, both classes were substantially identical. Each share of Class A common stock entitled the holder to 98 votes. Holders of Ordinary common stock are entitled to one vote per share. On June 2, 2011 our Chairman and Chief Executive Officer sold all of their Class A common stock to other shareholders. Once the Class A stock was no longer held by its former shareholders, it was converted into Ordinary common stock. This eliminated the 80% voting power previously held by our Chairman and Chief Executive Officer.

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

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

Our 1996 Stock Plan has expired but still has vested options outstanding. We reached our registered share limitation in early 2007, and had previously reserved 721,750 treasury stock shares to issue under this plan. We have since issued 171,274 shares of treasury stock to cover options exercised, with 282,276 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 June 30, 2011 was $0.2 million. This reduction was $0.1 million for the three and six months ended June 30, 2010.

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,
	2011		2010		2011		2010
Compensation cost included in:
Basic income per share	$	0.18	$	0.03	$	0.21	$	0.05
Diluted income per share	$	0.18	$	0.03	$	0.21	$	0.05
Stock-based compensation expense	2,996		375		3,401		741
Income tax benefit	769		68		851		135

In connection with the sale of Class A common stock mentioned above, vesting of most of the unvested stock options under our Stock Plan was accelerated. As a result, we incurred $2.2 million of stock-based compensation expense during the second quarter of 2011.

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 and six months ended June 30, 2011 or 2010. During the six months ended June 30, 2011, we granted 40,000 restricted shares with a fair value of $19.89 per share. As a result of the sale of Class A common stock, the vesting of these shares was accelerated and we recognized an associated compensation cost of $0.7 million during the second quarter of 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, 2011	1,086,886		$	20.60
Granted	—		—
Exercised	(108,888	)	15.09
Forfeited	(13,760	)	26.18
Outstanding, June 30, 2011	964,238		$	21.15	5.3	$	5,538
Exercisable, June 30, 2011	856,498		$	21.86	5.0	$	4,381

The total intrinsic value of the options exercised during the three and six month period ended June 30, 2011 was $1.0 million. The total intrinsic value of the options exercised during the three and six month periods ended June 30, 2010 was nominal. As of June 30, 2011, there was $0.6 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 2.8 years. Cash received from option exercises under the Stock Plans for the three and six month period ended June 30, 2011 was $1.6 million.

The following tables set forth information regarding the Purchase Plan:

	Three Months Ended June 30,		Six Months Ended June 30,
	2011	2010	2011	2010
Risk-free interest rate	0.3%	0.5%	0.3%	0.5%
Weighted-average expected life of option feature (in years)	1.0	1.0	1.0	1.0
Expected volatility of underlying stock	28.3%	27.9%	28.3%	27.9%
Expected dividends	n/a	n/a	n/a	n/a
Weighted-average fair value of option feature	$4.81	$2.79	$4.81	$2.79

	Number of Options		Weighted- Average Exercise Price		Remaining Contract Life (in years)	Aggregate Intrinsic Value
Outstanding, January 1, 2011	15,709		$	16.58
Shares subscribed	17,165		16.58
Exercised	—		—
Forfeited	(1,027	)	16.58
Outstanding, June 30, 2011	31,847		$	16.58	0.1	$	289

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Summary of Significant Accounting Policies

6 Months Ended

Jun. 30, 2011

Summary of Significant Accounting Policies

Summary of Significant Accounting Policies

(2)           Summary of Significant Accounting Policies

Our significant accounting policies were described in Note 2 to our audited Consolidated Financial Statements included in our 2010 Annual Report on Form 10-K for the fiscal year ended December 31, 2010. There have been no significant changes in our accounting policies for the first half of fiscal year 2011.

Recent Accounting Pronouncements — There have been no recent accounting pronouncements not yet adopted by the Company which would have a material impact on our financial statements.

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Debt

6 Months Ended

Jun. 30, 2011

Debt

Debt

(8)           Debt

On May 2, 2011 we redeemed $85.0 million of our 7.00% Senior Notes at 101.75% of principal plus accrued interest pursuant to a call we issued on April 1, 2011. We recorded a net loss on extinguishment of debt of $2.4 million during the second quarter of 2011. This net loss consists of the following:

Premiums paid pursuant to the call	$	1,488
Deferred financing costs write-off	706
Bond discount write-off	228
Net loss on extinguishment of debt	$	2,422

Our outstanding debt consists of the following:

	June 30, 2011			December 31, 2010
7.00% Senior Notes	$	67,506		$	152,506
Unamortized bond discount	(171		)	(458		)
Domestic line of credit	12,000			—
Overseas lines of credit	1,241			2,462
Total	80,576			154,510
Less: current portion	1,241			2,462
Long-term debt	$	79,335		$	152,048

Scheduled repayments of outstanding debt as of June 30, 2011 are as follows:

Remainder of 2011	$	1,241
2012	—
2013	—
2014	67,506
2015	12,000
Total	$	80,747

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Commitments and Contingent Liabilities

6 Months Ended

Jun. 30, 2011

Commitments and Contingent Liabilities

Commitments and Contingent Liabilities

(13)         Commitments and Contingent Liabilities

We are involved in certain legal proceedings regarding environmental matters, which were previously disclosed in our 2010 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.

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Facility Rationalization Charges - Band Segment

6 Months Ended

Jun. 30, 2011

Facility Rationalization Charges - Band Segment

Facility Rationalization Charges - Band Segment

Although we are still in the process of quantifying the impact of this plant closure, we do not expect impairment charges or equipment relocation costs, if any, to be material.

(9)           Facility Rationalization Charges — Band Segment

During the second quarter of 2011, we determined that the book value of our former manufacturing facility in Elkhorn, Wisconsin exceeded the fair value. Accordingly, we recorded a facility impairment charge of $0.2 million as a component of operating expenses. This facility, which has a remaining book value of less than $0.1 million, is included in other assets and is being held for sale.

During the fourth quarter of 2011, we intend to close our tuned percussion instrument manufacturing facility located in LaGrange, Illinois and consolidate the production into our other percussion facility in Monroe, North Carolina. As a result of this pending closure, we recorded charges of $0.4 million in severance and related expenses during the first quarter of 2011 as a component of cost of goods sold. We currently do not expect to incur any additional severance expenses during the remainder of 2011.

The severance liability and related activity associated with this plant closure is as follows:

Facility rationalization severance liability:
Balance at January 1, 2011	$	—
Additions charged to cost of sales	417
Payments	—
Balance, June 30, 2011	$	417

          Although we are still in the process of quantifying the impact of this plant closure, we do not expect impairment charges or equipment relocation costs, if any, to be material.

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Other Current Liabilities

6 Months Ended

Jun. 30, 2011

Other Current Liabilities

Other Current Liabilities

(7)           Other Current Liabilities

Our other current liabilities consist of the following:

	June 30, 2011		December 31, 2010
Accrued payroll and related benefits	$	12,760	$	11,428
Current portion of pension and other postretirement benefit liabilities	1,374		1,306
Accrued warranty expense	1,443		1,510
Accrued interest	1,606		3,549
Deferred income	8,697		9,652
Income and other taxes payable	341		358
Other accrued expenses	6,439		11,378
Total	$	32,660	$	39,181

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, 2011 and 2010, and the year ended December 31, 2010 is as follows:

	June 30, 2011			June 30, 2010			December 31, 2010
Beginning balance	$	1,510		$	1,553		$	1,553
Additions	790			433			894
Claims and reversals	(913		)	(460		)	(896		)
Foreign currency translation impact	56			(94		)	(41		)
Ending balance	$	1,443		$	1,432		$	1,510

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CONDENSED CONSOLIDATED STATEMENT OF STOCKHOLDERS' EQUITY (Parenthetical)	6 Months Ended
	Jun. 30, 2011
CONDENSED CONSOLIDATED STATEMENT OF STOCKHOLDERS' EQUITY
Exercise of options for shares of common stock (in shares)	108,888

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Earnings per Common Share

6 Months Ended

Jun. 30, 2011

Earnings per Common Share

Earnings per Common Share

(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.

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

	Three Months Ended June 30,					Six Months Ended June 30,
	2011			2010		2011			2010
Numerator:
Net (loss) income	$	(1,047	)	$	1,180	$	(542	)	$	2,980
Denominator:
Weighted-average common shares outstanding - basic	12,144,563			12,019,468		12,116,257			11,226,649
Dilutive effect of stock-based compensation plans	—			79,257		—			64,372
Weighted-average common shares outstanding - diluted	12,144,563			12,098,725		12,116,257			11,291,021
Net income per share - basic	$	(0.09	)	$	0.10	$	(0.04	)	$	0.27
Net income per share - diluted	$	(0.09	)	$	0.10	$	(0.04	)	$	0.26

Since we incurred a loss for the three and six month periods ended June 30, 2011, we did not include any of the 964,238 options to purchase shares of common stock or the right to purchase 31,847 shares under our employee stock purchase plan in the computation of diluted earnings per share because their impact would have been antidilutive. We did not include 711,580 and 735,756 of the outstanding options to purchase shares of common stock in the computation of diluted earnings per share for the three and six months ended June 30, 2010, respectively, because generally their exercise prices were more than the average market price of our common shares, and therefore antidilutive.

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Accumulated Other Comprehensive Income (Loss)

6 Months Ended

Jun. 30, 2011

Accumulated Other Comprehensive Income (Loss)

Accumulated Other Comprehensive Income (Loss)

(4)           Accumulated Other Comprehensive Income (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:

	June 30,			December 31,
	2011			2010
Accumulated other comprehensive loss:
Foreign currency translation adjustment	$	8,763		$	3,740
Pension and other postretirement benefits	(16,675		)	(16,675		)
Total accumulated other comprehensive loss	$	(7,912	)	$	(12,935	)

The components of comprehensive income (loss) are as follows:

	Three Months Ended June 30,						Six Months Ended June 30,
	2011			2010			2011			2010
Comprehensive income (loss):
Net (loss) income:	$	(1,047	)	$	1,180		$	(542	)	$	2,980
Foreign currency translation adjustment	1,707			(5,223		)	5,023			(9,213		)
Pension and other postretirement benefits, net	—			60		(1)	—			60		(1)
Total comprehensive income (loss)	$	660		$	(3,983	)	$	4,481		$	(6,173	)

(1) Represents a gross change of $83, net of $23 in related tax impact

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Other Expense (Income), Net

6 Months Ended

Jun. 30, 2011

Other Expense (Income), Net

Other Expense (Income), Net

(12)         Other Expense (Income), Net

	Three Months Ended June 30,						Six Months Ended June 30,
	2011			2010			2011			2010
West 57th Street building income	$	(590	)	$	(961	)	$	(1,255	)	$	(3,393	)
West 57th Street building expense	1,582			1,689			3,370			3,461
Foreign exchange loss (gain), net	11			(217		)	(650		)	(713		)
Miscellaneous, net	(245		)	147			(219		)	(164		)
Other expense (income), net	$	758		$	658		$	1,246		$	(809	)

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.

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Inventories

6 Months Ended

Jun. 30, 2011

Inventories

Inventories

(5)           Inventories

	June 30,		December 31,
	2011		2010
Raw materials	$	19,390	$	18,091
Work-in-process	35,807		34,493
Finished goods	95,802		91,916
Total inventory	$	150,999	$	144,500

Finished goods inventory was impacted by the preliminary purchase price allocation of $0.6 million relating to our acquisition of assets associated with a piano retail store in Chicago, Illinois. This aquisition was not material to our financial condition or results of operations.

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Segment Information

6 Months Ended

Jun. 30, 2011

Segment Information

Segment Information

(15)         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, 2011 and 2010:

Three Months Ended 2011	Piano Segment								Band Segment						Other &			Consol
	U.S.		Germany		Other		Total		U.S.		Europe		Total		Elim			Total
Net sales to external customers	$	24,517	$	18,148	$	11,506	$	54,171	$	33,723	$	1,047	$	34,770	$	—		$	88,941
Income (loss) from operations	1,310		2,595		1,063		4,968		1,017		75		1,092		(3,145		)	2,915

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

Six Months Ended 2011	Piano Segment								Band Segment						Other &			Consol
	U.S.		Germany		Other		Total		U.S.		Europe		Total		Elim			Total
Net sales to external customers	$	44,867	$	29,774	$	23,119	$	97,760	$	61,990	$	2,122	$	64,112	$	—		$	161,872
Income (loss) from operations	2,019		3,990		2,491		8,500		1,948		169		2,117		(4,030		)	6,587

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

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CONDENSED CONSOLIDATED STATEMENT OF STOCKHOLDERS' EQUITY (USD $) In Thousands	Total	Common Stock	Additional Paid-In Capital	Retained Earnings	Accumulated Other Comprehensive Loss	Treasury Stock	Comprehensive Income
Balance at Dec. 31, 2010	$ 228,624	$ 14	$ 154,404	$ 134,209	$ (12,935)	$ (47,068)
Comprehensive income:
Net loss:	(542)			(542)			(542)
Foreign currency translation adjustment	5,023				5,023		5,023
Total comprehensive income	4,481						4,481
Exercise of 108,888 options for shares of common stock	1,642		675	(162)		1,129
Tax benefit of options exercised	254		254
Stock-based compensation	3,401		3,401
Balance at Jun. 30, 2011	$ 238,402	$ 14	$ 158,734	$ 133,505	$ (7,912)	$ (45,939)

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Subsequent Events

6 Months Ended

Jun. 30, 2011

Subsequent Events

Subsequent Events

(16)         Subsequent Events

On July 26, 2011, approximately 230 employees (approximately 28% of band division’s workforce) at our Eastlake, Ohio brass instrument manufacturing facility went on strike.

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Basis of Presentation

6 Months Ended

Jun. 30, 2011

Basis of Presentation

Basis of Presentation

(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, 2011 and 2010 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, 2010, 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, 2010 filed with the Securities and Exchange Commission (“SEC”). The results of operations for the three and six months ended June 30, 2011 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.

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Fair Values of Financial Instruments

6 Months Ended

Jun. 30, 2011

Fair Values of Financial Instruments

Fair Values of Financial Instruments

(10)         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, 2011 and December 31, 2010 and the fair value hierarchy of the valuation techniques we utilized. We classify these assets and liabilities as either short term or long term based on maturity or anticipated realization dates.

	June 30, 2011		December 31, 2010
Financial assets:
Trading securities(1) - Level 1	$	1,872	$	1,758
Foreign currency contracts(2) - Level 2	398		216
	$	2,270	$	1,974
Financial liabilities:
Foreign currency contracts(2) - Level 2	$	295	$	447

(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, 2011				December 31, 2010
	Net Carrying Value		Estimated Fair Value		Net Carrying Value		Estimated Fair Value
Financial liabilities:
Debt	$	80,576	$	80,156	$	154,510	$	156,208

The carrying values of accounts, notes and other receivables, and accounts payable approximate fair value.

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Retirement Plans

6 Months Ended

Jun. 30, 2011

Retirement Plans

Retirement Plans

(14)       Retirement Plans

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

	Domestic Plan						Foreign Plans
	Three Months Ended June 30,						Three Months Ended June 30,
	2011			2010			2011			2010
Service cost	$	93		$	82		$	165		$	148
Interest cost	762			884			455			408
Expected return on plan assets	(1,101		)	(1,047		)	(107		)	(72		)
Amortization of prior service cost (credit)	29			28			(13		)	(13		)
Amortization of net loss	595			486			29			46
Net periodic pension cost	$	378		$	433		$	529		$	517
	Domestic Plan						Foreign Plans
	Six Months Ended June 30,						Six Months Ended June 30,
	2011			2010			2011			2010
Service cost	$	181		$	175		$	322		$	319
Interest cost	1,626			1,728			889			861
Expected return on plan assets	(2,150		)	(2,097		)	(212		)	(167		)
Amortization of prior service cost (credit)	57			56			(26		)	(13		)
Amortization of net loss	1,084			978			58			80
Net periodic pension cost	$	798		$	840		$	1,031		$	1,080

We have not made any payments to our domestic pension plan as of June 30, 2011. However, we expect to contribute $2.6 million to this plan in the second half of 2011. Our anticipated contributions to the pension plan of our U.K. subsidiary approximate $0.9 million for the current year. As of June 30, 2011, 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 2011 benefit payments under these plans are $1.3 million, of which $0.6 million was paid through June 2011.

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

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CONDENSED CONSOLIDATED BALANCE SHEETS (USD $) In Thousands	Jun. 30, 2011	Dec. 31, 2010
Current assets:
Cash	$ 34,151	$ 119,811
Accounts, notes, and other receivables, net of allowances of $12,229 and $12,265 in 2011 and 2010, respectively	47,451	42,385
Inventories	150,999	144,500
Prepaid expenses and other current assets	14,077	10,513
Deferred tax assets	11,557	11,419
Total current assets	258,235	328,628
Property, plant and equipment, net of accumulated depreciation of $115,327 and $110,983 in 2011 and 2010, respectively	87,385	86,404
Trademarks	15,343	14,981
Goodwill	27,180	26,023
Other intangibles, net	2,519	4,028
Other assets	17,751	16,144
Long-term deferred tax assets	9,032	8,886
Total assets	417,445	485,094
Current liabilities:
Debt	1,241	2,462
Accounts payable	12,488	12,141
Other current liabilities	32,660	39,181
Total current liabilities	46,389	53,784
Long-term debt	79,335	152,048
Deferred tax liabilities	3,761	3,761
Pension and other postretirement benefit liabilities	41,143	38,366
Other non-current liabilities	8,415	8,511
Total liabilities	179,043	256,470
Commitments and contingent liabilities
Stockholders' equity:
Common stock	14	14
Additional paid-in capital	158,734	154,404
Retained earnings	133,505	134,209
Accumulated other comprehensive loss	(7,912)	(12,935)
Treasury stock, at cost	(45,939)	(47,068)
Total stockholders' equity	238,402	228,624
Total liabilities and stockholders' equity	$ 417,445	$ 485,094