Segment Information

9 Months Ended

Sep. 30, 2011

Segment Information

Segment Information

6. Segment Information

        We have three reporting segments; Guitar Center, Direct Response and Music & Arts.

        Beginning in the first quarter of 2011, we reorganized our segments to emphasize a brand reporting structure. We had previously defined our segments by sales or fulfillment channel, whether through our retail stores, internet and catalog direct response or the rental-focused Music & Arts segment. Segment results and net assets for 2010 have been adjusted to reflect the realignment of our Guitar Center online operations and Music & Arts online operations.

        The Guitar Center segment sells products and services through Guitar Center retail stores and online. For the Guitar Center segment, operating costs primarily consist of labor, advertising, depreciation and store occupancy costs.

        The Direct Response segment sells products through direct mail catalogs and e-commerce websites. For the Direct Response segment, operating costs primarily consist of catalog costs, e-commerce advertising costs and order processing and fulfillment costs.

        The Music & Arts segment specializes in band instruments for sales and rental, serving teachers, band directors, college professors and students.

        The corporate segment consists of centralized management, general and administrative functions and is not an operating segment. Interest expense, interest income and income tax expense or benefit are evaluated on a consolidated basis and are not considered in evaluating segment results.

        Our chief operating decision makers include our chief executive officer and chief financial officer. Our chief operating decision makers evaluate segment performance based primarily on net sales and Adjusted EBITDA. Adjusted EBITDA is defined as earnings before interest, taxes, depreciation and amortization, with adjustments for certain non-cash and non-recurring expenses and other adjustments permitted under our debt agreements. Management views Adjusted EBITDA as an important measure of segment performance because it is considered an indicator of segment operating cash flows and facilitates comparison of operating performance on a consistent basis. Adjusted EBITDA is a measure which is also used in calculating financial ratios in several material debt covenants in our asset-based credit facility and term loan. The accounting policies of the segments, where applicable, are the same as those described in the summary of significant accounting policies.

        The following tables summarize financial information for our reporting segments (in thousands):

		Three Months Ended September 30, 2011
		Guitar Center		Music & Arts		Direct Response			Corporate			Total
Net sales		$	358,109	$	44,680	$	85,340		$	—		$	488,129
Gross profit			102,560		18,630		23,063			—			144,253
Selling, general and adiministrative expenses			90,465		17,739		27,724			7,755			143,683
Operating income (loss)			12,095		891		(4,661	)		(7,755	)		570
Depreciation and amortization			19,298		1,008		5,663			532			26,501
Adjusted EBITDA			34,036		2,181		4,065			(3,164	)		37,118
Capital expenditures			9,287		982		1,835			1,337			13,441
Total assets
	Holdings		1,561,717		114,152		336,048			56,879			2,068,796
	Guitar Center		1,561,717		114,152		336,048			53,657			2,065,574

		Three Months Ended September 30, 2010
		Guitar Center		Music & Arts		Direct Response			Corporate			Total
Net sales		$	329,232	$	44,336	$	91,439		$	—			465,007
Gross profit			91,196		18,198		25,115			—			134,509
Selling, general and adiministrative expenses			83,294		18,045		25,351			5,421			132,111
Operating income (loss)			7,902		153		(236	)		(5,421	)		2,398
Depreciation and amortization			20,048		1,070		4,628			482			26,228
Adjusted EBITDA			29,089		1,323		4,567			(3,542	)		31,437
Capital expenditures			9,136		789		4,035			579			14,539
Total assets
	Holdings		1,524,514		112,085		415,276			72,592			2,124,467
	Guitar Center		1,524,514		112,085		415,276			39,272			2,091,147

		Nine Months Ended September 30, 2011
		Guitar Center		Music & Arts		Direct Response			Corporate			Total
Net sales		$	1,074,389	$	126,965	$	268,628		$	—		$	1,469,982
Gross profit			310,216		60,285		75,417			—			445,918
Selling, general and adiministrative expenses			262,080		50,693		82,972			27,177			422,922
Operating income (loss)			48,136		9,592		(7,555	)		(27,177	)		22,996
Depreciation and amortization			57,183		3,149		15,557			1,598			77,487
Adjusted EBITDA			110,158		13,282		12,764			(10,576	)		125,628
Capital expenditures			22,869		2,998		6,254			2,965			35,086
Total assets
	Holdings		1,561,717		114,152		336,048			56,879			2,068,796
	Guitar Center		1,561,717		114,152		336,048			53,657			2,065,574

		Nine Months Ended September 30, 2010
		Guitar Center		Music & Arts		Direct Response		Corporate			Total
Net sales		$	1,016,184	$	125,914	$	271,280	$	—		$	1,413,378
Gross profit			283,734		57,110		76,994		—			417,838
Selling, general and adiministrative expenses			250,115		49,969		74,060		17,505			391,649
Operating income (loss)			33,619		7,141		2,934		(17,505	)		26,189
Depreciation and amortization			60,626		3,204		13,341		1,384			78,555
Adjusted EBITDA			98,976		10,958		16,874		(11,858	)		114,950
Capital expenditures			21,663		1,924		9,942		813			34,342
Total assets
	Holdings		1,524,514		112,085		415,276		72,592			2,124,467
	Guitar Center		1,524,514		112,085		415,276		39,272			2,091,147

        Segment operating results of Holdings and Guitar Center are the same, except that in the first nine months of 2011, selling, general and administrative expenses of $0.3 million related to the amendments and extension of our long-term debt were incurred at the corporate segment at Holdings and were not allocated to Guitar Center.

        We record property and equipment at our segments based on capital expenditures made at each segment. We allocate depreciation and amortization expense to our segments based on actual usage for assets used exclusively at each segment, and based on estimated usage, primarily measured by gross sales, for shared assets. Although depreciation and amortization expense are excluded from Adjusted EBITDA, these measures are regularly provided to our chief operating decision maker as indicators of the capital investment at each segment.

        The following table presents a reconciliation of Adjusted EBITDA to consolidated loss before income taxes (in thousands):

• Holdings

		Three months ended September 30,						Nine months ended September 30,
		2011			2010			2011			2010
Adjusted EBITDA
	Guitar Center	$	34,036		$	29,089		$	110,158		$	98,976
	Music & Arts		2,181			1,323			13,282			10,958
	Direct Response		4,065			4,567			12,764			16,874
	Corporate		(3,164	)		(3,542	)		(10,576	)		(11,858	)
			37,118			31,437			125,628			114,950
Depreciation and amortization expense			26,501			26,228			77,487			78,555
Interest expense, net			40,870			36,325			119,998			107,798
Non-cash charges			820			862			2,485			2,807
Non-recurring charges			635			—			5,252			—
Other adjustments			8,592			1,949			17,408			7,399
Consolidated loss before income taxes		$	(40,300	)	$	(33,927	)	$	(97,002	)	$	(81,609	)

• Guitar Center

		Three months ended September 30,						Nine months ended September 30,
		2011			2010			2011			2010
Adjusted EBITDA
	Guitar Center	$	34,036		$	29,089		$	110,158		$	98,976
	Music & Arts		2,181			1,323			13,282			10,958
	Direct Response		4,065			4,567			12,764			16,874
	Corporate		(3,164	)		(3,542	)		(10,576	)		(11,858	)
			37,118			31,437			125,628			114,950
Depreciation and amortization expense			26,501			26,228			77,487			78,555
Interest expense, net			20,877			17,643			60,020			53,180
Non-cash charges			820			862			2,485			2,807
Non-recurring charges			635			—			5,252			—
Other adjustments			8,592			1,949			17,130			7,399
Consolidated loss before income taxes		$	(20,307	)	$	(15,245	)	$	(36,746	)	$	(26,991	)

        Adjustments in the calculation of Adjusted EBITDA include the following:

• •

  Non-cash charges include stock-based compensation expense and the non-cash portion of rent expense.

  •

  Non-recurring charges include losses realized in 2011 on the sale of our corporate aircraft.

  •

  Other adjustments include restructuring charges, severance payments, bonuses under our long-term management incentive plan, various debt and financing costs, gains and losses on disposal of assets, special charges and management fees paid to the majority stockholder.

• • Restructuring charges included in other adjustments were $5.4 million for the three months ended September 30, 2011 and $8.9 million for the nine months ended September 30, 2011. No restructuring charges were included in other adjustments during the three or nine months ended September 30, 2010.