Fair Value Measurements

9 Months Ended

Sep. 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 market data, while unobservable inputs reflect assumptions for which market data are not available.

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 during the nine months ended September 30, 2013 (in thousands):

	Fair Value Measurements
	Using Inputs Considered as								Total
	Level 1		Level 2		Level 3		Total		Losses
Goodwill at the Guitar Center segment	$	—	$	—	$	222,278	$	222,278	$	360,100
Trademarks and trade names at the direct response segment	—		—		7,400		7,400		2,300

We use a combination of income-based and market-based approaches to estimate the fair value of goodwill. These approaches use significant unobservable inputs, including forecasted revenues, gross profit margins, operating profit margins, working capital requirements, perpetual growth rates and long term discount rates.

We use an income-based approach to estimate the fair values of our indefinite-lived trademarks and trade names, 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.

Total losses represent impairment charges recognized to reduce the assets’ carrying values to their estimated fair values.

The following table presents quantitative information about level 3 inputs used in our fair value measurements during the nine months ended September 30, 2013:

Fair Value Measurement	Fair Value at measurement date(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	16.6%
				Long-term revenue growth rate	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):

	September 30, 2013				December 31, 2012
	Carrying Amount		EstimatedFair Value		Carrying Amount		EstimatedFair Value
Guitar Center
Asset-based revolving credit facility	$	165,000	$	165,000	$	—	$	—
Senior secured term loan	617,500		604,378		621,762		600,000
Senior unsecured notes	394,890		423,590		394,890		418,579
Capital lease obligations	333		333		54		54
Total Guitar Center	1,177,723		1,193,301		1,016,706		1,018,633
Holdings
Senior unsecured PIK notes	434,889		475,823		564,673		596,965
Holdings consolidated	$	1,612,612	$	1,669,124	$	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.