Segment Information

12 Months Ended

Dec. 31, 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 the fiscal years 2010 and 2009 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 students, teachers, band directors and college professors.

        Corporate consists of centralized management, general and administrative functions. 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 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 Holdings' reporting segments (in thousands):

	Year ended December 31, 2011
	Guitar Center		Music & Arts		Direct Response			Corporate			Total
Net sales	$	1,529,831	$	178,464	$	374,282		$	—		$	2,082,577
Gross profit		448,479		83,315		103,349			—			635,143
Selling, general and adiministrative expenses		361,353		68,373		116,465			33,035			579,226
Impairment of intangible assets		—		—		45,961			—			45,961
Impairment of goodwill		—		—		107,026			—			107,026
Operating income (loss)		87,126		14,942		(166,103	)		(33,035	)		(97,070	)
Depreciation and amortization		76,435		4,380		23,106			2,276			106,197
Adjusted EBITDA		171,002		19,616		18,265			(11,973	)		196,910
Capital expenditures		39,361		3,535		8,881			5,547			57,324
Total assets
Holdings		1,545,040		105,169		172,656			36,201			1,859,066
Guitar Center		1,545,040		105,169		172,656			60,884			1,883,749

	Year ended December 31, 2010
	Guitar Center		Music & Arts		Direct Response		Corporate			Total
Net sales	$	1,444,829	$	175,659	$	390,407	$	—		$	2,010,895
Gross profit		416,212		80,125		109,514		—			605,851
Selling, general and adiministrative expenses		347,448		68,490		105,740		24,457			546,135
Operating income (loss)		68,764		11,635		3,774		(24,457	)		59,716
Depreciation and amortization		81,832		4,317		17,961		736			104,846
Adjusted EBITDA		157,696		16,563		22,450		(12,402	)		184,307
Capital expenditures		30,564		2,685		13,346		1,292			47,887
Total assets
Holdings		1,640,886		101,280		332,847		45,705			2,120,718
Guitar Center		1,640,886		101,280		332,847		40,602			2,115,615

	Year ended December 31, 2009
	Guitar Center			Music & Arts		Direct Response		Corporate			Total
Net sales	$	1,434,533		$	175,903	$	393,743	$	—		$	2,004,179
Gross profit		399,233			78,005		112,190		—			589,428
Selling, general and adiministrative expenses		346,723			66,719		111,250		19,127			543,819
Impairment of intangible assets		9,709			—		—		—			9,709
Impairment of goodwill		123,804			—		—		—			123,804
Operating income (loss)		(81,003	)		11,286		940		(19,127	)		(87,904	)
Depreciation and amortization		88,715			4,026		20,414		648			113,803
Adjusted EBITDA		154,012			15,853		22,180		(12,763	)		179,282
Capital expenditures		27,590			2,703		14,914		10			45,217
Total assets
Holdings		1,619,187			113,742		336,823		70,327			2,140,079
Guitar Center		1,619,187			113,742		336,823		39,928			2,109,680

        Segment operating results of Guitar Center are the same as for Holdings, except that in 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 tables present a reconciliation of Adjusted EBITDA to consolidated loss before income taxes (in thousands):

• Holdings

	Year ended December 31,
	2011			2010			2009
Adjusted EBITDA
Guitar Center	$	171,002		$	157,696		$	154,012
Music & Arts		19,616			16,563			15,853
Direct Response		18,265			22,450			22,180
Corporate		(11,973	)		(12,402	)		(12,763	)
		196,910			184,307			179,282
Depreciation and amortization expense		106,197			104,846			113,803
Interest expense, net		161,036			145,233			137,016
Non-cash charges		3,382			5,157			4,574
Non-recurring charges		5,257			—			—
Impairment charges		154,281			884			135,664
Other adjustments		24,863			13,704			13,145
Consolidated loss before income taxes	$	(258,106	)	$	(85,517	)	$	(224,920	)

• Guitar Center

	Year ended December 31,
	2011			2010			2009
Adjusted EBITDA
Guitar Center	$	171,002		$	157,696		$	154,012
Music & Arts		19,616			16,563			15,853
Direct Response		18,265			22,450			22,180
Corporate		(11,973	)		(12,402	)		(12,763	)
		196,910			184,307			179,282
Depreciation and amortization expense		106,197			104,846			113,803
Interest expense, net		81,063			70,842			72,044
Non-cash charges		3,382			5,157			4,574
Non-recurring charges		5,257			—			—
Impairment charges		154,281			884			135,664
Other adjustments		24,585			13,704			13,145
Consolidated loss before income taxes	$	(177,855	)	$	(11,126	)	$	(159,948	)

        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 consist of the loss recognized on the sale of our corporate aircraft.

  •

  Other adjustments include restructuring charges, severance payments, bonuses under our long-term management incentive plan, gains and losses on disposal of assets and management fees paid to Bain Capital as discussed in Note 13.

   

  • Restructuring charges included in other adjustments were $13.0 million for 2011. No restructuring charges were included in other adjustments for 2010.