DEBT

3 Months Ended

Mar. 31, 2020

Convertible senior notes and capped calls

Convertible senior notes

In February 2020, the Company issued Convertible Senior Notes (the "Notes") with an aggregate principal amount of $600 million, due March 1, 2025, in a private placement to certain initial purchasers in reliance upon the exemption from registration provided by Section 4(a)(2) of the Securities Act in transactions not involving any public offering, for resale by the initial purchasers to persons whom the initial purchasers believe are qualified institutional buyers pursuant to Rule144A under the Securities Act. This included $75 million in aggregate principal amount of the Notes that the Company issued resulting from initial purchasers fully exercising their option to purchase additional Notes. There are no required principal payments prior to the maturity of the Notes. The Notes will accrue interest at an annual rate of 0.75%, payable semi-annually in arrears on March 1 and September 1 of each year, beginning on September 1, 2020. The proceeds of the issuance were used for the Capped Call Transactions (described below), working capital, and other general corporate purposes.

Total net proceeds from the Notes and Capped Call Transactions:


(in thousands)	Amount
Principal			$	600,000
Less: issuance costs			(14,527)
Less: Capped Call Transactions			(51,900)
	$	533,573

Beginning on September 1, 2024, noteholders may convert their Notes at any time at their election. Before September 1, 2024, noteholders may convert their Notes in the following circumstances:

•During any calendar quarter commencing after the calendar quarter ending on June 30, 2020 (and only during such calendar quarter), if the last reported sale price per share of common stock exceeds one hundred and thirty percent (130%) of the conversion price for each of at least twenty (20) trading days (whether or not consecutive) during the thirty (30) consecutive trading days ending on, and including, the last trading day of the immediately preceding calendar quarter.

•During the five (5) consecutive business days immediately after any five (5) consecutive trading day period, (the “Measurement Period”) if the trading price per $1,000 principal amount of Notes for each trading day of the Measurement Period was less than ninety eight percent (98%) of the product of the last reported sale price per share of common stock on such trading day and the conversion rate on such trading day.

•Upon the occurrence of certain corporate events or distributions, or if the Company calls all or any Notes for redemption, then the noteholder of any Note may convert such Note at any time before the close of business on the business day immediately before the related redemption date (or, if the Company fails to pay the redemption price due on such redemption date in full, at any time until the Company pays such redemption price in full).

As of March 31, 2020, no Notes were eligible for conversion at the election of the noteholder.

The initial conversion rate is 7.4045 shares of common stock per $1,000 principal amount of the Notes, which represents an initial conversion price of approximately $135.05 per share of common stock. The Company will settle conversions by paying or delivering, as applicable, cash, shares of its common stock, or a combination of cash and shares of its common stock, at the Company’s election, based on the applicable conversion rate. The conversion rate will be adjusted upon the occurrence of certain events including spin offs, tender offers, exchange offers and certain stockholder distributions.

On or after March 1, 2023 and on or before the 40th scheduled trading day immediately before the maturity date, the Company may redeem for cash all or part of the Notes, at a repurchase price equal to 100% of the principal amount, plus accrued and unpaid interest, if the last reported sale price of the Company’s common stock exceeded 130% of the conversion price then in effect for at least 20 trading days (whether or not consecutive) during any 30 consecutive trading day period ending on, and including, the trading day immediately preceding the date on which the Company provides a redemption notice.

If certain corporate events that constitute a “Fundamental Change” (as described below) occur at any time, each noteholder will have the right, at such noteholder’s option, to require the Company to repurchase for cash all of such noteholder’s Notes, or any portion of the principal thereof that is equal to $1,000 or an integral multiple of $1,000, at a repurchase price equal to 100% of the principal amount thereof, plus accrued and unpaid interest. A fundamental change relates to events such as mergers, changes in control of the Company, liquidation/dissolution of the Company, or the delisting of the Company’s common stock.

In accounting for the transaction, the Notes have been separated into liability and equity components.

•The initial carrying amount of the liability component was calculated by measuring the fair value of a similar debt instrument that does not have an associated conversion feature.

•The equity component was recorded as an increase to additional paid-in capital and is not remeasured as long as it continues to meet the conditions for equity classification.

The excess of the principal amount of the Notes over the initial carrying amount of the liability component, the debt discount, is amortized as interest expense over the contractual term of the Notes.

The Company incurred issuance costs of $14.5 million related to the Notes, which were allocated between liability and equity components of the Notes proportionate to the initial carry amount of the liability and equity components.

•Issuance costs attributable to the liability component are netted against the principal balance of the Notes and are amortized as interest expense using the effective interest method over the contractual term of the Notes.

•Issuance costs attributable to the equity component are netted with the equity component in additional paid-in capital and are not amortized.

Net carrying amount of the liability component:


(in thousands)	March 31, 2020
Principal	$	600,000
Unamortized debt discount	(82,624)
Unamortized issuance costs	(12,268)
	$	505,108

Net carrying amount of the equity component, included in additional paid in capital:


(in thousands)	March 31, 2020
Conversion options ⁽¹⁾	$	61,604

(1) Net of issuance costs and taxes.

Interest expense related to the Notes:


	Three Months Ended March 31,
(in thousands)	2020
Contractual interest expense (0.75% coupon)	$	450
Amortization of debt discount ⁽¹⁾	1,497
Amortization of issuance cost ⁽¹⁾	222
	$	2,169

(1) Amortized based upon an effective interest rate of 4.31%.

Future payments of principal and contractual interest:


	March 31, 2020
(in thousands)	Principal		Interest		Total
2020	$	—	$	2,338	$	2,338
2021	—		4,500		4,500
2022	—		4,500		4,500
2023	—		4,500		4,500
2024	—		4,500		4,500
2025	600,000		1,488		601,488
	$	600,000	$	21,826	$	621,826

Capped call transactions

In February 2020, the Company entered into privately negotiated capped call transactions (“Capped Call Transactions”) with certain financial institutions. The Capped Call Transactions cover approximately 4.4 million shares (representing the number of shares for which the Notes are initially convertible) of the Company’s common stock and are generally expected to reduce potential dilution to the common stock upon any conversion of Notes and/or offset any potential cash payments the Company is required to make in excess of the principal amount of converted Notes, as the case may be, with such reduction and/or offset subject to a cap. The cap price of the Capped Call Transactions is initially $196.44. The Capped Call Transactions are classified as “other long-term assets” and re-measured to fair value at the end of each reporting period, resulting in a non-operating gain or loss.

Change in value of Capped Call Transactions:


(in thousands)	Three Months Ended March 31, 2020
Value at issuance	$	51,900
Fair value adjustment	(18,592)
Balance as of March 31,	$	33,308

Credit Facility

In November 2019, and as amended in February 2020, the Company entered into a five-year $100 million senior secured revolving credit agreement (the “Credit Facility”) with PNC Bank, National Association (“PNC”). The Company may use borrowings to finance working capital needs and for general corporate purposes. Subject to specific circumstances, the Credit Facility allows the Company to increase the aggregate commitment up to $200 million.

The Credit Facility contains customary covenants, including, but not limited to, those relating to additional indebtedness, liens, asset divestitures, and affiliate transactions. The Company is also required to comply with financial covenants that consist of a maximum net consolidated leverage ratio of 3.5 (with a step-up in the event of certain acquisitions) and a minimum consolidated interest coverage ratio of 3.5. The commitments expire on November 4, 2024, and any outstanding loans will be payable on such date.

As of March 31, 2020 and December 31, 2019, the Company had no outstanding borrowings under the Credit Facility.