Goodwill and Intangible Assets

6 Months Ended

Jun. 30, 2013

2. Goodwill and Intangible Assets

Goodwill

Goodwill at our Guitar Center segment as of June 30, 2013 and December 31, 2012 consisted of a gross amount of $706.2 million, less accumulated impairment losses of $123.8 million. Goodwill at our Music & Arts segment as of June 30, 2013 totaled $0.2 million.

We perform a qualitative assessment annually at the beginning of the fourth quarter to determine if facts and circumstances indicate that goodwill is more likely than not impaired. We also test goodwill for impairment upon the occurrence of events or substantive changes in circumstances that indicate that goodwill is more likely than not impaired.

We determined at the end of the first half of 2013 that there were sufficient indicators that it was more likely than not that goodwill at our Guitar Center reporting unit, which is also an operating segment, may be impaired. These indicators included a decline in operating income and cash flows compared to the prior year period, and a downward adjustment to our projections of future operating income and cash flows from the reporting unit. We therefore performed step 1 of the goodwill impairment test for our Guitar Center reporting unit as of June 30, 2013. We used a discounted cash flow analysis and a market multiple analysis, equally weighted, to estimate the fair value of our Guitar Center reporting unit. Based on the step 1 analysis, no goodwill impairment was indicated.

Because we performed the step 1 goodwill impairment test for our Guitar Center reporting unit, we also evaluated the indefinite-lived intangible assets and amortizable intangible asset group of our Guitar Center segment for impairment. The analysis did not result in an impairment of the Guitar Center segment’s indefinite-lived intangible assets, as their estimated fair values exceeded their carrying amounts. Similarly, there was no impairment of the Guitar Center segment’s amortizable intangible assets, as the projected future undiscounted cash flows from the asset group significantly exceeded its carrying amount.

Other intangible assets

We perform a qualitative assessment annually at the beginning of the fourth quarter to determine if facts and circumstances indicate that our indefinite-lived intangible assets are more likely than not impaired. We also test indefinite-lived intangible assets for impairment whenever events and circumstances indicate that the fair value of the asset is more likely than not less than its carrying amount. We evaluated our direct response indefinite-lived trademarks and trade names for impairment after continued decreases in net sales at our direct response segment. Because net sales is the primary driver of fair value for our indefinite-lived trademark and trade names, we determined that the decrease in net sales indicated possible impairment of these assets. We revised our revenue projections for the direct response brands based on net sales achieved through the first half of 2013 and expectations about our initiatives to improve the brands’ performance. As a result of the impairment analysis, we recognized an impairment charge of $2.3 million in the second quarter of 2013 related to certain of our direct response indefinite-lived trademarks and trade names.

The impairment analysis did not result in an impairment of the direct response segment’s amortizing customer relationship intangible asset, as the projected future undiscounted cash flows from the asset group significantly exceeded its carrying amount.

See Note 5 for more information about fair value measurements for our intangible assets.

The following tables present a summary of our intangible assets other than goodwill (dollars in thousands, life in years):

		June 30, 2013
	Weighted-	Gross
	Average Useful	Carrying		Accumulated			Intangible
	Life	Amount		Amortization			Assets, Net
Unamortized trademarks	—	$	206,201	$	—		$	206,201
Amortized
Customer relationships	13.0	224,497		(157,182		)	67,315
Favorable lease terms	7.5	57,721		(53,505		)	4,216
Covenants not to compete and other	4.2	881		(697		)	184
		$	489,300	$	(211,384	)	$	277,916

		December 31, 2012
	Weighted-	Gross
	Average Useful	Carrying		Accumulated			Intangible
	Life	Amount		Amortization			Assets, Net
Unamortized trademarks	—	$	208,501	$	—		$	208,501
Amortized
Customer relationships	13.0	224,302		(148,042		)	76,260
Favorable lease terms	7.5	57,721		(51,323		)	6,398
Covenants not to compete and other	4.3	785		(675		)	110
		$	491,309	$	(200,040	)	$	291,269

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 is classified in our condensed consolidated statements of comprehensive loss as follows (in thousands):

	Three months ended June 30,				Six months ended June 30,
	2013		2012		2013		2012
Cost of goods sold, buying and occupancy	$	999	$	1,514	$	2,182	$	3,141
Selling, general and administrative expenses	4,597		5,777		9,179		11,555

The future estimated amortization expense related to intangible assets as of June 30, 2013 was as follows (in thousands):

Year
Remainder of 2013	$	10,994
2014	16,458
2015	12,499
2016	9,670
2017	7,638
Thereafter	14,456
Total	$	71,715

- 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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