Segment Information

12 Months Ended

Dec. 31, 2012

Segment Information

Segment Information

6. Segment Information

We have three reporting segments; Guitar Center, direct response and Music & Arts.

Beginning in 2012, our corporate segment includes the activities of our shared services subsidiary, GTRC Services, Inc. This shared service organization operates support services for all our brands, including distribution and fulfillment centers, contact centers and technology services that were previously managed separately by our Guitar Center and direct response segments. We believe that centralizing the management of these shared operations will improve our flexibility to efficiently manage these resources. Substantially all of the costs of these shared service operations are allocated among our segments based on estimated usage, as determined primarily based on sales, cost of goods sold or call volume at each business.

Certain costs related to corporate office facilities were previously incurred directly by our Guitar Center and direct response segments. Upon implementing GTRC Services, Inc., our corporate office facility is shared and the related costs are not allocated to our business segments. Segment results for 2011 and 2010 have been adjusted to reflect this change.

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 and unallocated costs of our shared service operations. Interest expense, interest income and income tax expense or benefit are evaluated on a consolidated basis and are not considered in the evaluation of 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 following tables summarize financial information for Holdings’ reporting segments (in thousands):

	Year ended December 31, 2012
	GuitarCenter		Music & Arts		Direct  Response		Corporate			Total
Net sales	$	1,596,094	$	189,766	$	353,331	$	—		$	2,139,191
Gross profit	459,680		86,043		97,668		—			643,391
Selling, general and administrative expenses	356,832		69,791		95,196		25,905			547,724
Operating income (loss)	102,848		16,252		2,472		(25,905		)	95,667
Depreciation and amortization	66,457		4,414		15,801		4,233			90,905
Adjusted EBITDA	173,153		21,041		19,159		(13,349		)	200,004
Capital expenditures	39,041		7,051		7,858		13,518			67,468
Total assets
Holdings	1,410,303		113,119		166,496		126,640			1,816,558
Guitar Center	1,410,303		113,119		166,496		155,891			1,845,809

	Year ended December 31, 2011
	GuitarCenter		Music & Arts		Direct Response			Corporate			Total
Net sales	$	1,530,133	$	178,443	$	374,001		$	—		$	2,082,577
Gross profit	448,543		83,307		103,293			—			635,143
Selling, general and administrative expenses	355,879		68,373		116,798			38,176			579,226
Impairment of intangible assets	—		—		45,961			—			45,961
Impairment of goodwill	—		—		107,026			—			107,026
Operating income (loss)	92,664		14,934		(166,492		)	(38,176		)	(97,070		)
Depreciation and amortization	74,719		4,380		24,264			2,834			106,197
Adjusted EBITDA	174,554		19,607		19,034			(16,285		)	196,910
Capital expenditures	29,269		3,535		8,881			15,639			57,324
Total assets
Holdings	1,480,701		105,170		171,639			101,556			1,859,066
Guitar Center	1,480,701		105,170		171,639			126,239			1,883,749

	Year ended December 31, 2010
	GuitarCenter		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 administrative expenses	343,407		68,595		105,974		28,159			546,135
Operating income (loss)	72,805		11,530		3,540		(28,159		)	59,716
Depreciation and amortization	80,574		4,317		17,961		1,994			104,846
Adjusted EBITDA	160,479		16,458		22,216		(14,846		)	184,307
Capital expenditures	19,659		2,685		13,346		12,197			47,887
Total assets
Holdings	1,471,302		101,280		331,737		216,399			2,120,718
Guitar Center	1,471,302		101,280		331,737		211,296			2,115,615

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 direct 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 makers.

Material unallocated assets at our corporate segment primarily consist of cash, property and equipment related to our shared data centers and corporate office facilities, deferred income taxes and capitalized financing fees.

We reassigned the assets of our shared data centers and our corporate office facilities and certain cash accounts to the corporate segment upon implementing our shared services organization. Total assets for each segment in 2011 and 2010 have been adjusted to reflect this change.

The following tables present a reconciliation of Adjusted EBITDA to consolidated income or loss before income taxes (in thousands):

Holdings

	Year ended December 31,
	2012			2011			2010
Adjusted EBITDA
Guitar Center	$	173,153		$	174,554		$	160,479
Music & Arts	21,041			19,607			16,458
Direct Response	19,159			19,034			22,216
Corporate	(13,349		)	(16,285		)	(14,846		)
	200,004			196,910			184,307
Depreciation and amortization expense	90,905			106,197			104,846
Interest expense, net	165,344			161,036			145,233
Non-cash charges	2,265			3,382			5,157
Non-recurring charges	—			5,257			—
Impairment charges	559			154,281			884
Other adjustments	10,608			24,863			13,704
Consolidated loss before income taxes	$	(69,677	)	$	(258,106	)	$	(85,517	)

Guitar Center

	Year ended December 31,
	2012			2011			2010
Adjusted EBITDA
Guitar Center	$	173,153		$	174,554		$	160,479
Music & Arts	21,041			19,607			16,458
Direct Response	19,159			19,034			22,216
Corporate	(13,349		)	(16,285		)	(14,846		)
	200,004			196,910			184,307
Depreciation and amortization expense	90,905			106,197			104,846
Interest expense, net	85,369			81,063			70,842
Non-cash charges	2,265			3,382			5,157
Non-recurring charges	—			5,257			—
Impairment charges	559			154,281			884
Other adjustments	10,608			24,585			13,704
Consolidated income (loss) before income taxes	$	10,298		$	(177,855	)	$	(11,126	)

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 in 2011consist 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, various debt and financing costs, gains and losses on disposal of assets, special charges and management fees paid to Bain Capital as discussed in Note 13.

Restructuring charges included in other adjustments were $2.1 million for 2012 and $13.0 million for 2011.