MasterCraft Boat Holdings, Inc. Fair Value Disclosure

10. FAIR VALUE MEASUREMENTS

Fair value is the exchange price that would be received for an asset or paid to transfer a liability (exit price) in the principal or most advantageous market for the asset or liability in an orderly transaction between market participants on the measurement date. There are three levels of inputs that may be used to measure fair values:

Level 1 — Quoted prices (unadjusted) for identical assets or liabilities in active markets that the entity has the ability to access as of the measurement date.

Level 2 — Significant other observable inputs other than Level 1 prices such as quoted prices for similar assets or liabilities; quoted prices in markets that are not active; or other inputs that are observable or can be corroborated by observable market data.

Level 3 — Significant unobservable inputs that reflect a company’s own assumptions about the inputs that market participants would use in pricing an asset or liability.

When determining the fair value measurements for assets or liabilities required or permitted to be recorded at and/or marked to fair value, the Company considers the principal or most advantageous market in which it would transact and considers assumptions that market participants would use when pricing the asset or liability. When possible, the Company looks to active and observable markets to price identical assets. When identical assets are not traded in active markets, the Company looks to market observable data for similar assets.

Fair Value Measurements on a Recurring Basis

The following tables summarize the Company’s financial assets and liabilities measured at fair value on a recurring basis as of June 30, 2019 and 2018:

Interest Rate Cap

In November 2017, the Company entered into an interest rate cap agreement (“Interest Rate Cap”) with a certain financial institution.  The Interest Rate Cap provides for the Company to receive monthly payments based on (i) an amortizing notional amount and (ii) the amount by which the one-month London Inter-Bank Offered Rate exceeds 2.00%. The notional amount as of June 30, 2019 was $32,813. The Interest Rate Cap will terminate on December 31, 2020.  

The Interest Rate Cap is valued utilizing pricing models which use inputs such as interest rate forecasts and notional amounts. Fair value measurements for the Company’s Interest Rate Cap are classified under Level 2 because such measurements are based on significant other observable inputs. There were no transfers of assets or liabilities between Level 1 and Level 2 during the fiscal year ended June 30, 2019.

Fair Value Measurements on a Nonrecurring Basis

NauticStar Goodwill — The Company performed its annual goodwill analysis as of June 30, 2019.  As a result, the fair value of goodwill attributable to the NauticStar reporting unit was estimated to be $8,199 as of June 30, 2019.  Inputs used to estimate this fair value include significant unobservable inputs that reflect the Company’s own assumptions about the inputs that market participants would use and, therefore, goodwill attributable to the NauticStar reporting unit is classified within Level 3 of the fair value hierarchy.  

NauticStar Trade Name — During the goodwill assessment noted above, the Company also analyzed indefinite-lived assets, or trade names. As a result, the fair value of the NauticStar trade name was estimated to be $13,000 as of June 30, 2019.  Inputs used to estimate this fair value include significant unobservable inputs that reflect the Company’s own assumptions about the inputs that market participants would use and, therefore, the NauticStar trade name is classified within Level 3 of the fair value hierarchy.  

See Note 8 for a description of the valuation techniques and inputs used in the fair value measurement of goodwill attributable to the NauticStar reporting unit and the NauticStar trade name.