Debt

12 Months Ended

Jan. 02, 2021

Debt

Debt

10. Debt

0.625% Convertible Senior Notes

On June 1, 2020, the Company completed a private offering of $535 million principal amount convertible senior notes (the “2025 Notes”). The 2025 Notes bear interest semi-annually at a rate of 0.625% per year and mature on June 15, 2025. The Company used $310.0 million of the proceeds to repay in full the outstanding balance under its credit facility and the remainder of the proceeds, along with cash on hand, to repurchase approximately $236.8 million aggregate principal amount of its outstanding 1.375% convertible senior notes.

The 2025 Notes are convertible at an initial conversion rate of 8.1498 shares of common stock per $1,000 principal amount of the 2025 Notes, or approximately 4.4 million shares of common stock, which is equivalent to a conversion price of approximately $122.70 per share. The conversion rate is subject to adjustment under certain circumstances. Holders may convert the 2025 Notes under the following circumstances: during any calendar quarter after the calendar quarter ended on September 30, 2020 if the closing price of the Company’s common stock for at least 20 trading days in the 30 consecutive trading days ending on the last trading day of the preceding calendar quarter is greater than or equal to $159.51 per share, representing 130% of the conversion price of the 2025 Notes; during the five business day period after any ten consecutive trading day period (the “measurement period”) in which the trading price per $1,000 principal amount of notes for each trading day of the measurement period was less than 98% of the product of the closing sale price of our common stock and the conversion rate on each such trading day; if specified distributions or corporate events occur; if the Notes are called for redemption; or at any time after March 15, 2025. The Company may redeem all or any portion of the 2025 Notes, at its option, on or after June 20, 2023, if the last reported sale price of the Company’s common stock has been at least 130% of the conversion price then in effect for at least 20 trading days during any 30 consecutive trading day period. Upon conversion, the 2025 Notes may be settled in cash, shares of the Company’s common stock or a combination of cash and shares, at the Company’s election.

The Company incurred debt issuance costs of approximately $10.4 million, which was allocated to the liability and equity components in proportion to the allocation of the proceeds. The costs allocated to the liability component are being amortized as interest expense over the term of the 2025 Notes using the effective interest method.

1.375% Convertible Senior Notes

On March 6, 2017, the Company completed a private offering of $400 million principal amount convertible senior notes (the “2022 Notes”). The Notes bear interest semi-annually at a rate of 1.375% per year and mature on March 1, 2022.

The 2022 Notes are convertible at an initial conversion rate of 10.7744 shares of common stock per $1,000 principal amount of the 2022 Notes, or approximately 4.3 million shares of common stock, which is equivalent to a conversion price of approximately $92.81 per share. The conversion rate is subject to adjustment under certain circumstances. Holders may convert the 2022 Notes under the following circumstances: during any calendar quarter after the calendar quarter ended on June 30, 2017 if the closing price of the Company’s common stock for at least 20 trading days in the 30 consecutive trading days ending on the last trading day of the preceding calendar quarter is greater than or equal to $120.66 per share, representing 130% of the conversion price of the 2022 Notes; during the five business day period after any ten consecutive trading day period (the “measurement period”) in which the trading price per $1,000 principal amount of notes for each trading day of the measurement period was less than 98% of the product of the closing sale price of our common stock and the conversion rate on each such trading day; if specified distributions or corporate events occur; if the 2022 Notes are called for redemption; or at any time after December 1, 2021. The Company may redeem all or any portion of the 2022 Notes, at its option, on or after March 6, 2020, if the last reported sale price of the Company’s common stock has been at least 130% of the conversion price then in effect for at least 20 trading days during any 30 consecutive trading day period. Upon conversion, the 2022 Notes may be settled in cash, shares of the Company’s common stock or a combination of cash and shares, at the Company’s election.

10. Debt (continued)

The Company incurred debt issuance costs of approximately $10.6 million, which was allocated to the liability and equity components in proportion to the allocation of the proceeds. The costs allocated to the liability component are being amortized as interest expense over the term of the 2022 Notes using the effective interest method.

During fiscal 2020, the Company paid $305.1 million in cash to repurchase $259.4 million aggregate principal amount of the 2022 Notes. The Company recognized a loss on debt extinguishment of $4.1. million during fiscal 2020, which was recorded in interest expense in the Consolidated Statements of Income. On January 6, 2021, the Company issued a notice of redemption for the remaining $140.6 million principal amount of the 2022 Notes. The redemption will occur on March 22, 2021, unless earlier converted.

The principal balances of the notes were separated into liability and equity components, and recorded initially at fair value. The excess of the principal amounts of the liability components over their carrying amounts represent the debt discount, which are amortized to interest expense over the term of the notes using the effective interest method. The carrying amounts of the liability components was estimated by discounting the contractual cash flows of similar non-convertible debt at an appropriate market rate at the date of issuance.

The carrying amount of the notes consisted of the following (in thousands):

	January 2,		December 28,
	2021		2019
Liability component
Principal	$	675,567	$	400,000
Unamortized debt discount		(103,953)		(27,580)
Unamortized debt issuance costs		(8,189)		(4,163)
Net carrying amount	$	563,425	$	368,257
Equity component
Net carrying amount	$	108,438	$	57,735

The liability components of the notes are recorded in convertible debt on the Consolidated Balance Sheet. The equity components of the notes are recorded in additional paid-in capital. The effective interest rate for the liability component was 5.336% for the 2025 Notes and 4.75% for the 2022 Notes. As of January 2, 2021, the remaining period over which the debt discount and debt issuance costs will be amortized was 4.5 years for the 2025 Notes and 0.2 years for the 2022 Notes.

Interest expense related to the notes was comprised of the following (in thousands):

	Year Ended
	January 2,		December 28,		December 29,
	2021		2019		2018
Contractual interest expense	$	5,530	$	5,485	$	5,500
Amortization of debt discount		19,375		11,717		11,202
Amortization of debt issuance costs		2,058		1,768		1,690
	$	26,963	$	18,970	$	18,392

Credit Facility

The Company and certain of its domestic subsidiaries (the “Guarantors”) have a $400 million revolving credit facility with a maturity date of August 7, 2024. The credit facility includes a $25 million letter of credit sublimit and a $10 million swingline loan sublimit. The Company also has an option to increase the size of the borrowing capacity by up to the greater of an aggregate of $250 million and 100% of EBITDA, plus an amount that would not cause a secured leverage ratio (funded debt secured by assets/EBITDA) to exceed 3.25 to 1.00, subject to certain conditions. On March 27, 2020, the Company borrowed $310 million under the credit facility. On June 1, 2020, the Company repaid in full the outstanding balance of the credit facility.

10. Debt (continued)

The credit facility, other than swingline loans, will bear interest at the Eurodollar rate plus an applicable margin or, at the option of the Company, a base rate (defined as the highest of the Wells Fargo prime rate, the Federal Funds rate plus 0.50% and the Eurodollar Base Rate plus 1.00%) plus an applicable margin. Swingline loans accrue interest at the base rate plus the applicable margin for base rate loans. The applicable margins for the Eurodollar rate loans range from 1.00% to 1.75% and for base rate loans range from 0.00% to 0.75%, depending in each case, on the leverage ratio as defined in the credit facility.

The credit facility contains various conditions, covenants and representations with which the Company must be in compliance in order to borrow funds and to avoid an event of default, including financial covenants that the Company must maintain a net leverage ratio (funded indebtedness/EBITDA) of no more than 4.25 to 1, a secured leverage ratio of no more than 3.50 to 1, and a minimum interest coverage ratio (EBITDA/interest payments) of no less than 2.50 to 1. As of January 2, 2021, the Company was in compliance with all covenants of the credit facility. The Company’s obligations under the credit facility are guaranteed by the Guarantors and are secured by a security interest in substantially all assets of the Company and the Guarantors.