Fair Value Measurements

6 Months Ended

Jun. 30, 2013

Fair Value Measurements

Fair Value Measurements

5. Fair Value Measurements

The accounting standards related to fair value measurements define fair value and provide a consistent framework for measuring fair value under GAAP. Valuation techniques are based on observable and unobservable inputs. Observable inputs reflect readily obtainable data from independent sources, while unobservable inputs reflect market assumptions.

Valuation inputs are classified into the following hierarchy:

· Level 1 Inputs— Quoted prices for identical instruments in active markets.

· Level 2 Inputs— Quoted prices for similar instruments in active markets; quoted prices for identical or similar instruments in markets that are not active; and model-derived valuations whose inputs are observable or whose significant value drivers are observable.

· Level 3 Inputs— Instruments with significant unobservable value drivers.

Valuation policies and procedures for fair value measurements using level 3 inputs are established by finance management reporting to our chief financial officer. We corroborate level 3 inputs with historical and market information where possible and appropriate and we may engage third-party valuation firms to assist us in determining certain fair value measurements.

We do not have any material assets or liabilities measured at fair value on a recurring basis.

The fair values of cash, receivables, accounts payable, accrued expenses and other current liabilities approximate their carrying values because of their short-term nature.

Some assets are not measured at fair value on an ongoing basis but are subject to fair value adjustments only in certain circumstances. These assets can include long-lived and intangible assets that have been reduced to fair value when they are impaired and long-lived assets that are held for sale. Assets that are written down to fair value when impaired are not subsequently adjusted to fair value unless further impairment occurs.

The following table presents the fair value hierarchy for assets measured at fair value on a non-recurring basis (in thousands):

	Three and six months ended June 30, 2013
	Level 1		Level 2		Level 3		Total		Total Losses
Trademarks and trade names at the direct response segment	$	—	$	—	$	7,400	$	7,400	$	2,300

We estimate the fair values of our indefinite-lived trademarks and trade names using a discounted cash flow analysis, specifically the relief-from-royalty method. This approach uses unobservable inputs, including projected revenue and our internal cost of capital. This approach also uses market observations about royalty rates.

The following table presents quantitative information about level 3 inputs used in our fair value measurements:

Fair Value Measurement	Fair Value at June 30, 2013 (in thousands)		Valuation technique	Unobservable input	Range
Trademarks and trade names at the direct response segment	$	7,400	Discounted cash flow	Weighted-average cost of capital Long-term revenue growth rate	16.6% 1.0%
				Royalty rates	0.5% - 1.5%

The following table presents the difference between the carrying amount and estimated fair value of our long-term debt (in thousands):

	June 30, 2013				December 31, 2012
	Carrying Amount		Estimated Fair Value		Carrying Amount		Estimated Fair Value
Guitar Center
Asset-based revolving credit facility	$	138,000	$	138,000	$	—	$	—
Senior secured term loan	619,125		612,160		621,762		600,000
Senior unsecured notes	394,890		408,288		394,890		418,579
Capital lease obligations	397		397		54		54
Total Guitar Center	1,152,412		1,158,845		1,016,706		1,018,633
Holdings
Senior unsecured PIK notes	434,889		462,636		564,673		596,965
Holdings consolidated	$	1,587,301	$	1,621,481	$	1,581,379	$	1,615,598

We estimate the fair value of our long-term debt using observable inputs classified as level 2 in the fair value hierarchy. We use present value and market techniques that consider rates of return on similar credit facilities recently initiated by companies with like credit quality in similar industries, quoted prices for similar instruments and inquiries with certain investment communities.

The carrying amount of our asset-based facility approximates its estimated fair value due to its short-term nature (borrowings are typically done in increments of 90 days or less), variable interest rate and similar rates offered for debt of similar maturities and credit risk.