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Goodwill and Intangible Assets

9 Months Ended

Sep. 30, 2011

2. Goodwill and Intangible Assets

Goodwill allocation

In the first quarter of 2011, we reorganized our operating segments to emphasize a brand reporting structure. As a result of this change, the Guitar Center segment includes the sales and operating expenses of our Guitar Center online operations together with the sales and operating expenses of Guitar Center stores. Similarly, the Music & Arts segment includes the sales and operating expenses of our Music & Arts online operations with those of Music & Arts stores. We had previously reported the results of our Guitar Center and Music & Arts online operations with the Direct Response segment.

We reallocated goodwill at the Direct Response segment based on the relative fair values of the www.guitarcenter.com and Direct Response components. We did not allocate any goodwill to the www.musicarts.com component, as its net sales and operating income were not material in relation to the Direct Response segment as a whole.

In determining the estimated fair values of the Direct Response and www.guitarcenter.com components, we used a market multiple and a discounted cash flow analysis, as used for the annual goodwill impairment test. We used discount rates of 12.5% to 14.0% for the discounted cash flow analysis as of January 1, 2011. In addition, we used the Gordon Growth Method, for which the terminal capitalization rates used were 4.8% to 5.0%.

Based on the results of this analysis, we reallocated $61.8 million of goodwill from the Direct Response segment to the Guitar Center segment.

The following table presents an analysis of the changes in goodwill by reporting segment (in thousands):

		Guitar Center			Direct Response			Total

Balance at December 31, 2010
	Goodwill		644,393			170,718			815,111
	Accumulated impairment losses		(123,804	)		(1,903	)		(125,707	)

			520,589			168,815			689,404

Reassignment of goodwill upon change in operating segments			61,789			(61,789	)		—

Balance at September 30, 2011
	Goodwill		706,182			108,929			815,111
	Accumulated impairment losses		(123,804	)		(1,903	)		(125,707	)

		$	582,378		$	107,026		$	689,404

Other intangible assets

We amortize intangible assets with finite useful lives over their respective estimated useful lives. We amortize customer relationship intangible assets using an accelerated method based on expected customer attrition rates. Other intangible assets with finite useful lives are generally amortized using the straight-line method.

The following is a summary of our intangible assets as of September 30, 2011 and December 31, 2010 (dollars in thousands, life in years):

				September 30, 2011

		Weighted- Average Useful Life		September 30, 2011
		Weighted- Average Useful Life		Gross Carrying Amount		Accumulated Amortization			Total
Unamortized trademark			—	$	240,804	$	—		$	240,804
Amortized
	Customer relationships		12.3		303,400		(181,874	)		121,526
	Favorable lease terms		7.5		57,721		(43,731	)		13,990
	Covenants not to compete		4.2		210		(208	)		2
	Other		4.5		665		(535	)		130

Intangible assets, net				$	602,800	$	(226,348	)	$	376,452

				December 31, 2010

		Weighted- Average Useful Life		December 31, 2010
		Weighted- Average Useful Life		Gross Carrying Amount		Accumulated Amortization			Total
Unamortized trademark			—	$	240,804	$	—		$	240,804
Amortized
	Customer relationships		12.3		303,400		(155,436	)		147,964
	Favorable lease terms		7.5		57,721		(37,950	)		19,771
	Covenants not to compete		4.2		210		(182	)		28
	Other		4.5		665		(447	)		218

Intangible assets, net				$	602,800	$	(194,015	)	$	408,785

We include amortization of favorable leases in cost of goods sold, buying and occupancy. We include amortization of other intangible assets such as customer relationships and non-compete agreements in selling, general and administrative expenses.

Amortization expense included in cost of goods sold, buying and occupancy was $1.8 million for the three months ended September 30, 2011 and $2.2 million for the same period in 2010. Amortization expense included in cost of goods sold, buying and occupancy was $5.8 million for the nine months ended September 30, 2011 and $7.1 million for the same period in 2010.

Amortization expense included in selling, general and administrative expense was $8.8 million for the three months ended September 30, 2011 and $10.3 million for the same period in 2010. Amortization expense included in selling, general and administrative expense was $26.6 million for the nine months ended September 30, 2011 and $30.7 million for the same period in 2010.

The future estimated amortization expense related to intangible assets as of September 30, 2011 is as follows (in thousands):

Year

Remainder of fiscal 2011		10,548
2012		33,589
2013		25,507
2014		18,763
2015		14,166
Thereafter		33,075

Total	$	135,648

- Definition

The entire disclosure for the aggregate amount of goodwill and a description of intangible assets, which may include (a) for amortizable intangible assets (also referred to as finite-lived intangible assets), the carrying amount, the amount of any significant residual value, and the weighted-average amortization period, (b) for intangible assets not subject to amortization (also referred to as indefinite-lived intangible assets), the carrying amount, and (c) the amount of research and development assets acquired and written off in the period, including the line item in the income statement in which the amounts written off are aggregated, if not readily apparent from the income statement. Also discloses (a) for amortizable intangibles assets in total and by major class, the gross carrying amount and accumulated amortization, the total amortization expense for the period, and the estimated aggregate amortization expense for each of the five succeeding fiscal years, (b) for intangible assets not subject to amortization the carrying amount in total and by major class, and (c) for goodwill, in total and for each reportable segment, the changes in the carrying amount of goodwill during the period (including the aggregate amount of goodwill acquired, the aggregate amount of impairment losses recognized, and the amount of goodwill included in the gain (loss) on disposal of a reporting unit). If any part of goodwill has not been allocated to a reportable segment, discloses the unallocated amount and the reasons for not allocating. For each impairment loss recognized related to an intangible asset (excluding goodwill), discloses: (a) a description of the impaired intangible asset and the facts and circumstances leading to the impairment, (b) the amount of the impairment loss and the method for determining fair value, (c) the caption in the income statement or the statement of activities in which the impairment loss is aggregated, and (d) the segment in which the impaired intangible asset is reported. For each goodwill impairment loss recognized, discloses: (a) a description of the facts and circumstances leading to the impairment, (b) the amount of the impairment loss and the method of determining the fair value of the associated reporting unit, and (c) if a recognized impairment loss is an estimate not finalized and the reasons why the estimate is not final. May also disclose the nature and amount of any significant adjustments made to a previous estimate of an impairment loss.

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