LONG-TERM DEBT, LETTERS OF CREDIT AND DERIVATIVES

As of September 30, 2019 and December 31, 2018, our long-term debt is summarized as follows (in thousands):



	September 30, 2019		December 31, 2018
	(unaudited)
Credit Facility revolver	$	90,674	$	156,843
Credit Facility term loan¹	49,691		—
Total Credit Facility	140,365		156,843
Convertible debt²	199,963		195,184
Finance lease obligations	5,389		5,356
Total long-term debt and finance lease obligations	345,717		357,383
Less: current portion of long-term debt and finance lease obligations	4,033		569
Total long-term debt and finance lease obligations, less current portion	$	341,684	$	356,814

_________________


1	Comprised of principal amount outstanding, less unamortized discount and issuance costs.


2	Comprised of principal amount outstanding, less unamortized discount and issuance costs. See Convertible Debt section below for additional information.

Credit Facility

On August 30, 2019, we renewed our banking credit facility (the “Credit Facility”) under the eighth amendment (the “Eighth Amendment”) to the Third Amended and Restated Credit Agreement. The Eighth Amendment amends and restates certain portions of the Third Amended and Restated Credit Agreement, dated as of July 7, 2015. In accordance with the Eighth Amendment, the Credit Facility has a borrowing capacity of up to $275.0 million and consists of a $225.0 million revolving loan facility and a $50.0 million term loan facility. The entire $50.0 million term loan amount was used to pay the outstanding principal amount borrowed under the Credit Facility prior to the effectiveness of the Eighth Amendment. The Credit Facility allows for an increase in total commitments of up to an additional $100.0 million if certain conditions are met. The swing line facility is $35.0 million. The Credit Facility matures in July 2021. Both the revolving loan facility and term loan bear interest based on a variable Eurodollar rate option (LIBOR plus 3.50% margin at September 30, 2019) and has commitment fees on unused borrowing capacity (0.55% at September 30, 2019). The Credit Facility limits our ability to pay cash dividends. The Company’s obligations under the Credit Facility are guaranteed by its material direct and indirect domestic subsidiaries and are secured by a lien on substantially all of the Company’s and the guarantors’ tangible and intangible property (subject to certain specified exclusions) and by a pledge of all of the equity interests in the Company’s material direct and indirect domestic subsidiaries and 65% of the equity interests in the Company’s material first-tier foreign subsidiaries.

The Eighth Amendment amended the financial covenants in the Credit Facility by eliminating the ratio of consolidated EBITDA to consolidated interest charges (the “Interest Coverage Ratio,” as defined in the Credit Facility agreement), adding the ratio of consolidated funded indebtedness to consolidated EBITDA (the "Net Leverage Ratio," as defined in the Credit Facility agreement), adding the ratio of the sum of consolidated EBITDA less taxes and capital expenditures paid in cash to consolidated debt service (the "Debt Service Coverage Ratio," as defined in the Credit Facility agreement) and modifying the ratio of senior secured debt to consolidated EBITDA (the “Senior Secured Leverage Ratio,” as defined in the Credit Facility agreement). The financial covenant requirements under the Eighth Amendment are summarized in the table below.



Fiscal Quarter Ending		Maximum Senior Secured Leverage Ratio
September 30, 2019, December 31, 2019, March 31, 2020, June 30, 2020 and September 30, 2020		2.75 to 1.00
December 31, 2020 and each Fiscal Quarter thereafter		2.50 to 1.00

Fiscal Quarter Ending		Maximum Net Leverage Ratio
March 31, 2020		5.50 to 1.00
June 30, 2020		5.25 to 1.00
September 30, 2020		5.00 to 1.00
December 31, 2020 and each Fiscal Quarter thereafter		4.50 to 1.00

Fiscal Quarter Ending		Minimum Debt Service Coverage Ratio
September 30, 2019		1.10 to 1.00
December 31, 2019, March 31, 2020, June 30, 2020 and September 30, 2020		1.25 to 1.00
December 31, 2020 and each Fiscal Quarter thereafter		1.50 to 1.00

As of September 30, 2019, we are in compliance with the covenants in effect as of such date. The Senior Secured Leverage Ratio and Debt Service Coverage Ratio stood at 2.00 to 1.00 and 1.97 to 1.00, respectively, as of September 30, 2019. We are not bound by a covenant with respect to the Net Leverage Ratio until March 31, 2020, however, as of September 30, 2019 this ratio stood at 5.00 to 1.00. At September 30, 2019, we had $10.3 million of cash on hand and had approximately $59 million of available borrowing capacity through our Credit Facility. As of September 30, 2019, we had $2.4 million of unamortized debt issuance costs and debt discount that are being amortized over the life of the Credit Facility.

Our ability to maintain compliance with the financial covenants is dependent upon our future operating performance and future financial condition, both of which are subject to various risks and uncertainties. Accordingly, there can be no assurance that we will be able to maintain compliance with the Credit Facility covenants as of any future date. In the event we are unable to maintain compliance with our financial covenants, we would seek to enter into an amendment to the Credit Facility with our bank group in order to modify and/or to provide relief from the financial covenants for an additional period of time. Although we have entered into amendments in the past, there can be no assurance that any future amendments would be available on terms acceptable to us, if at all.

In order to secure our casualty insurance programs we are required to post letters of credit generally issued by a bank as collateral. A letter of credit commits the issuer to remit specified amounts to the holder, if the holder demonstrates that we failed to meet our obligations under the letter of credit. If this were to occur, we would be obligated to reimburse the issuer for any payments the issuer was required to remit to the holder of the letter of credit. We were contingently liable for outstanding stand-by letters of credit totaling $18.5 million at September 30, 2019 and $22.8 million at December 31, 2018. Outstanding letters of credit reduce amounts available under our Credit Facility and are considered as having been funded for purposes of calculating our financial covenants under the Credit Facility.

Convertible Debt

Description of the Notes

On July 31, 2017, we issued $230.0 million principal amount of 5.00% Convertible Senior Notes due 2023 (the “Notes”). The Notes, which are senior unsecured obligations of the Company, bear interest at a rate of 5.0% per year, payable semiannually in arrears on February 1 and August 1 of each year, beginning on February 1, 2018. The Notes will mature on August 1, 2023 unless repurchased, redeemed or converted in accordance with their terms prior to such date. The Notes will be convertible at an initial conversion rate of 46.0829 shares of our common stock per $1,000 principal amount of the Notes, which is equivalent to an initial conversion price of approximately $21.70 per share. The conversion rate, and thus the conversion price, may be adjusted under certain circumstances as described in the indenture governing the Notes.

Holders may convert their Notes at their option prior to the close of business on the business day immediately preceding May 1, 2023, but only under the following circumstances:

•

during any calendar quarter commencing after the calendar quarter ending on December 31, 2017 (and only during such calendar quarter), if the last reported sale price of our common stock for at least 20 trading days (whether or not consecutive) during a period of 30 consecutive trading days ending on the last trading day of the immediately preceding calendar quarter is greater than or equal to 130% of the conversion price on each applicable trading day;


•	during the five business day period after any five consecutive trading day period (the “measurement period”) in which the trading price per $1,000 principal amount of Notes for each trading day of such measurement period was less than 98% of the product of the last reported sale price of our common stock and the conversion rate on such trading day;


•	if we call any or all of the Notes for redemption, at any time prior to the close of business on the business day immediately preceding the redemption date; or


•	upon the occurrence of specified corporate events described in the indenture governing the Notes.

On or after May 1, 2023 until the close of business on the business day immediately preceding the maturity date, holders may, at their option, convert their Notes at any time, regardless of the foregoing circumstances.

The Notes are initially convertible into 10,599,067 shares of common stock. Because the Notes could be convertible in full into more than 19.99% of our outstanding common stock, we were required by the listing rules of the New York Stock Exchange to obtain the approval of the holders of our outstanding shares of common stock before the Notes could be converted into more than 5,964,858 shares of common stock. The Notes will be convertible into, subject to various conditions, cash or shares of the Company’s common stock or a combination of cash and shares of the Company’s common stock, in each case, at the Company’s election.

If holders elect to convert the Notes in connection with certain fundamental change transactions described in the indenture governing the Notes, we will, under certain circumstances described in the indenture governing the Notes, increase the conversion rate for the Notes so surrendered for conversion.

We may not redeem the Notes prior to August 5, 2021. We will have the option to redeem all or any portion of the Notes on or after August 5, 2021, if certain conditions (including that our common stock is trading at or above 130% of the conversion price then in effect for at least 20 trading days (whether or not consecutive)), including the trading day immediately preceding the date on which the Company provides notice of redemption, during any 30 consecutive trading day period ending on, and including, the trading day immediately preceding the date on which the Company provides notice of redemption at a redemption price equal to 100% of the principal amount of the Notes to be redeemed, plus accrued and unpaid interest to, but excluding, the redemption date.

Accounting Treatment of the Notes

As of September 30, 2019 and December 31, 2018, the Notes were recorded in our condensed consolidated balance sheets as follows (in thousands):



	September 30, 2019			December 31, 2018
	(unaudited)
Liability component:
Principal	$	230,000		$	230,000
Unamortized issuance costs	(5,033		)	(5,834		)
Unamortized discount	(25,004		)	(28,982		)
Net carrying amount of the liability component¹	$	199,963		$	195,184

Equity component:
Carrying amount of the equity component, net of issuance costs²	$	13,912		$	13,912

_________________


1	Included in the “Long-term debt” line of the condensed consolidated balance sheets.


2	Relates to the portion of the Notes accounted for under ASC 470-20 (defined below) and is included in the “Additional paid-in capital” line of the condensed consolidated balance sheets.

Under ASC 470-20, Debt with Conversion and Other Options, (“ASC 470-20”), an entity must separately account for the liability and equity components of convertible debt instruments that may be settled entirely or partially in cash upon conversion (such as the Notes) in a manner that reflects the issuer’s economic interest cost. However, entities must first consider the guidance in ASC 815-15, Embedded Derivatives (“ASC 815-15”), to determine if an instrument contains an embedded feature that should be separately accounted for as a derivative. We applied this guidance as of the issuance date of the Notes and concluded that for the conversion feature for a portion of the Notes, we must recognize an embedded derivative under ASC 815-15, while the remainder of the Notes is subject to ASC 470-20.

The Company determined the portions of the Notes subject to ASC 815-15 and ASC 470-20 as follows. While the Notes are initially convertible into 10,599,067 shares of common stock, the occurrence of certain corporate events could increase the conversion rate, which could result in the Notes becoming convertible into a maximum of 14,838,703 shares. As of the issuance date of the Notes, 5,964,858 shares, or approximately 40% of the maximum number of shares, was authorized for issuance without shareholder approval, while 8,873,845 shares, or approximately 60%, would have been required to be settled in cash. Therefore, the Company concluded that embedded derivative accounting under ASC 815-15 was applicable to approximately 60% of the Notes, while the remaining 40% of the Notes was subject to ASC 470-20. We recorded the change in fair value of the embedded derivative liability in our results of operations through the shareholder approval date of May 17, 2018 and then reclassified the embedded derivative liability to stockholders’ equity at its May 17, 2018 fair value of $45.4 million during the second quarter of 2018. The related income tax effects of the reclassification charged directly to stockholders’ equity were $7.8 million. As a result of the reclassification to stockholders’ equity, the embedded derivative will no longer be marked to fair value each period. Losses on the embedded derivative liability recognized in the condensed consolidated statements of operations were $24.8 million for the nine months ended September 30, 2018.

The following table sets forth interest expense information related to the Notes (dollars in thousands):



	Three Months Ended September 30,						Nine Months Ended September 30,
	(unaudited)			(unaudited)			(unaudited)			(unaudited)
	2019			2018			2019			2018
Coupon interest	$	2,875		$	2,875		$	8,625		$	8,625
Amortization of debt discount and issuance costs	1,633			1,493			4,778			4,371
Total interest expense on convertible senior notes	$	4,508		$	4,368		$	13,403		$	12,996

Effective interest rate	9.12		%	9.12		%	9.12		%	9.12		%

As of September 30, 2019, the remaining amortization period for the debt discount and issuance costs is 46 months.

Derivatives and Hedging

ASC 815, Derivatives and Hedging (“ASC 815”), requires that derivative instruments be recorded at fair value and included in the balance sheet as assets or liabilities. The accounting for changes in the fair value of a derivative instrument depends on the intended use of the derivative and the resulting designation, which is established at the inception date of a derivative. Special accounting for derivatives qualifying as fair value hedges allows derivatives’ gains and losses to offset related results on the hedged item in the statement of operations. For derivative instruments designated as cash flow hedges, changes in fair value, to the extent the hedge is effective, are recognized in other comprehensive income (loss) until the hedged item is recognized in earnings. Hedge effectiveness is measured at least quarterly based on the relative cumulative changes in fair value between the derivative contract and the hedged item over time. Credit risks related to derivatives include the possibility that the counter-party will not fulfill the terms of the contract. We consider counterparty credit risk to our derivative contracts when valuing our derivative instruments.

Our borrowing of €12.3 million under the Credit Facility serves as an economic hedge of our net investment in our European operations as fluctuations in the fair value of the borrowing attributable to the U.S. Dollar/Euro spot rate will offset translation gains or losses attributable to our investment in our European operations. At September 30, 2019, the €12.3 million borrowing had a U.S. Dollar value of $13.4 million.

As discussed above, we previously recorded an embedded derivative liability for a portion of the Notes. In accordance with ASC 815-15, the embedded derivative instrument was recorded at fair value each period with changes in fair value reflected in our results of operations. No hedge accounting was applied. As a result of obtaining shareholder approval for the issuance of shares upon conversion of the Notes, we recorded the change in fair value of the embedded derivative liability in our results of operations through the shareholder approval date of May 17, 2018 and then reclassified the embedded derivative liability to stockholders’ equity at its May 17, 2018 fair value of $45.4 million during the second quarter of 2018. As a result of the reclassification to stockholders’ equity, the embedded derivative is no longer marked to fair value each period.

The amounts recognized in other comprehensive income (loss), reclassified into income (loss) and the amounts recognized in income (loss) for the three and nine months ended September 30, 2019 and 2018, are as follows (in thousands):



	Gain (Loss) Recognized in Other Comprehensive Income (Loss)				Gain (Loss) Reclassified from Other Comprehensive Income (Loss) to Earnings				Gain (Loss) Recognized in Other Comprehensive Income (Loss)				Gain (Loss) Reclassified from Other Comprehensive Income (Loss) to Earnings
	Three Months Ended September 30,				Three Months Ended September 30,				Nine Months Ended September 30,				Nine Months Ended September 30,
	(unaudited)				(unaudited)				(unaudited)				(unaudited)
	2019		2018		2019		2018		2019		2018		2019		2018
Derivatives Classified as Hedging Instruments
Net investment hedge	$	556	$	97	$	—	$	—	$	651	$	464	$	—	$	—

									Gain (Loss) Recognized in Income (Loss)¹
									Three Months Ended September 30,				Nine Months Ended September 30,
									(unaudited)				(unaudited)
									2019		2018		2019		2018
Derivatives Not Classified as Hedging Instruments
Embedded derivative in convertible debt									$	—	$	—	$	—	$	(24,783	)

_________________

1 Reflected as “Loss on convertible debt embedded derivative” in the condensed consolidated statements of operations.

The following table presents the fair value totals and balance sheet classification for derivatives designated as hedges and derivatives not designated as hedges under ASC 815 (in thousands):

September 30, 2019

December 31, 2018

(unaudited)

Classification

Balance Sheet

Location

Fair

Value

Classification

Balance Sheet

Location

Fair
Value

Derivatives Classified as Hedging Instruments

Net investment hedge

Liability

Long-term debt

(4,555

)

Liability

Long-term debt

(3,904

)