Convertible Senior Notes

6 Months Ended

Jun. 30, 2019

9. Convertible Senior Notes

2.00% Convertible Senior Notes Due 2028

On August 24, 2018, the Company issued $800,000 thousands of 2.00% Convertible Senior Notes due 2028 and issued an additional $80,000 thousand of notes on August 31, 2018 pursuant to the partial exercise of the initial purchasers’ option to purchase such additional notes, for an aggregate principal amount of $880,000 thousands of 2.00% Convertible Senior Notes due 2028 (collectively, the “2028 Notes”). The 2028 Notes are unsecured, unsubordinated obligations of the Company, which pay interest in cash semi-annually, on February 15 and August 15 of each year, at a rate of 2.00% per annum. The 2028 Notes will mature on August 15, 2028 unless earlier redeemed, repurchased or converted in accordance with their terms prior to such date. The 2028 Notes may be converted, under specific conditions, based on an initial conversion rate of 2.2553 shares of common stock per $1,000 principal amount of the 2028 Notes (equivalent to an initial conversion price of $443.40 per share of common stock), subject to adjustment as described in the indenture governing the 2028 Notes. For additional information regarding the 2028 Notes please refer to Note 2 and Note 17 to the audited consolidated financial statements for the year ended December 31, 2018, contained in the Company’s Annual Report on Form 10-K filed with the SEC.

In connection with the issuance of the 2028 Notes, the Company paid $91,784 thousands, $11,472 thousands and $88,362 thousands (including transaction expenses) in August 2018, November 2018 and June 2019, respectively, to enter capped call transactions with respect to shares of the common stock with certain financial institutions (the “2028 Notes Capped Call Transactions”). The 2028 Notes Capped Call Transactions are expected generally to reduce the potential dilution upon conversion of the 2028 Notes in the event that the market price of the Company’s common stock is greater than the strike price of the 2028 Notes Capped Call Transactions. Therefore, as a result of executing the 2028 Notes Capped Call Transactions, the Company will reduce its exposure to potential dilution once the market price of its common shares exceeds the strike price of $443.41, $633.87 and $703.64 with a cap price of approximately $656.90, $666.72, $846.86 per common share for the capped calls entered into in August 2018, November 2018 and June 2019, respectively. The cost of the 2028 Notes Capped Call Transactions is included as a net reduction to additional paid-in capital in the stockholders’ equity section of the consolidated balance sheets.

The total estimated fair value of the 2028 Notes was $1,387,267 thousands and $787,266 thousands as of June 30, 2019 and December 31, 2018, respectively. The fair value was determined based on the closing trading price per $100 principal amount of the 2028 Notes as of the last day of trading for the period. The Company considered the fair value of the 2028 Notes as of June 30, 2019 and December 31, 2018 to be a Level 2 measurement. The fair value of the 2028 Notes is primarily affected by the trading price of our common stock and market interest rates. Based on the $611.77 closing price of the Company’s common stock on June 30, 2019, the if-converted value of the 2028 Notes exceeded their principal amount by $334,158 thousands.

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The following table presents the carrying amounts of the liability and equity components related to the 2028 Notes as of June 30, 2019 and December 31, 2018:


	June 30, 2019		December 31, 2018
	(In thousands)
Amount of the equity component (1)	$	327,305	$	327,305

2.00% Convertible Senior Notes due 2028	$	880,000	$	880,000
Unamortized debt discount (2)		(313,498)		(325,783)
Unamortized transaction costs related to the debt component		(9,719)		(9,958)
Contractual coupon interest accrual		15,009		5,867
Contractual coupon interest payment		(8,360)		—
Net carrying amount	$	563,432	$	550,126

(1)Net of $6,163 thousands of transaction costs related to the equity component of the 2028 Notes.

(2)As of June 30, 2019, the remaining period over which the unamortized debt discount will be amortized is 9.2 years.

The following table presents the interest expense for the contractual interest, the accretion of debt discount and the amortization of debt issuance costs:


	Six month periods ended June 30,		Three month periods ended June 30,
	2019		2019
	(In thousands)
Contractual coupon interest expense	$	9,142	$	4,400
Amortization of debt discount		12,285		5,968
Amortization of debt issuance costs		239		117
Total interest expense related to the 2028 Notes	$	21,666	$	10,485

2.25% Convertible Senior Notes Due 2019

On June 30, 2014, the Company issued $330,000 thousands of 2.25% Convertible Senior Notes due 2019 (the “2019 Notes”). The 2019 Notes were unsecured, unsubordinated obligations of the Company, which paid interest in cash semi-annually, on January 1 and July 1, at a rate of 2.25% per annum.

The 2019 Notes were convertible, under specific conditions, based on an initial conversion rate of 7.9353 shares of common stock per $1,000 principal amount of the 2019 Notes (equivalent to an initial conversion price of $126.02 per share of common stock), subject to adjustment as described in the indenture governing the 2019 Notes. For additional information regarding the 2019 Notes please refer to Note 2 and Note 17 to the audited consolidated financial statements for the year ended December 31, 2018, contained in the Company’s Annual Report on Form 10-K filed with the SEC.

In connection with the issuance of the 2019 Notes, the Company paid $19,668 thousands, $67,308 thousands and $45,692 thousands (including transaction expenses) in June 2014, September 2017 and March 2018, respectively, to enter into capped call transactions with respect to shares of the common stock (the “2019 Notes Capped Call Transactions” and together with the 2028 Notes Capped Call Transactions, the “Capped Call Transactions”), with certain financial institutions. The 2019 Notes Capped Call Transactions were expected generally to reduce the potential dilution upon conversion of the 2019 Notes in the event that the market price of the common stock is greater than the strike price of the 2019 Notes Capped Call Transactions. The cost of the 2019 Notes Capped Call Transactions is included as a net reduction to additional paid-in capital in the stockholders’ equity section of the consolidated balance sheets.

On August 24, 2018, the Company used a portion of the net proceeds from the 2028 Notes to repurchase or exchange and retire $263,724 thousands principal amount of its outstanding 2019 Notes. The consideration paid included $348,123 thousands in cash and 1,044,298 shares of the Company’s common stock. Additionally, the Company entered into agreements with certain financial institutions who were counterparties to the existing 2019 Notes Capped Call Transactions entered into in June 2014 and September 2017 to terminate a portion of those transactions, in each case, in a notional amount corresponding to the amount of 2019 Notes repurchased or exchanged and retired. In connection with the termination of existing 2019 Capped Call Transactions and the related unwinding of the existing hedge position, the Company received from certain financial institutions the amount of $121,703 thousands and $14,405 thousands in August 2018 and November 2018, respectively.

The total estimated fair value of the 2019 Notes was $324,905 thousands and $150,572 thousands as of June 30, 2019 and December 31, 2018, respectively. The fair value was determined based on the closing trading price per $100 principal amount of the 2019 Notes as of the last day of trading for the period. The Company considered the fair value of the 2019 Notes as of June 30, 2019 and December 31, 2018 to be a Level 2 measurement. The fair value of the 2019 Notes is primarily affected by the trading price of our common stock and market interest rates. Based on the $611.77 closing price of the Company’s common stock on June 30, 2019, the if-converted value of the 2019 Notes exceeded their principal amount by $254,317 thousands.

The 2019 Notes matured on July 1, 2019. Holders of $65,961 thousands principal amount of the 2019 Notes elected to convert their 2019 Notes at maturity, and the Company issued 523,407 shares of common stock in settlement of such conversions. $17 thousands of the principal amount of the 2019 Notes was not converted, and was repaid by the Company in cash at maturity. Also on July 1, 2019, the Company received and retired 131,994 shares of common stock in settlement of capped call agreements that the Company had previously entered into in relation to the 2019 Notes.

The following table presents the carrying amounts of the liability and equity components related to the 2019 Notes as of June 30, 2019 and December 31, 2018:


	June 30, 2019		December 31, 2018
	(In thousands)
Amount of the equity component (1)	$	9,196	$	9,196

2.25% Convertible Senior Notes due 2019	$	65,978	$	65,987
Unamortized debt discount		—		(1,063)
Unamortized transaction costs related to the debt component		—		(176)
Contractual coupon interest accrual		745		5,447
Contractual coupon interest payment		(745)		(5,447)
Net carrying amount	$	65,978	$	64,748

(1)Net of $236 thousands of transaction costs related to the equity component of the 2019 Notes.

The following table presents the interest expense for the contractual interest, the accretion of debt discount and the amortization of debt issuance costs:


	Six month periods ended June 30,				Three month periods ended June 30,
	2019		2018		2019		2018

	(In thousands)				(In thousands)
Contractual coupon interest expense	$	745	$	3,713	$	372	$	1,857
Amortization of debt discount		1,063		5,016		532		2,508
Amortization of debt issuance costs		176		798		88		399
Total interest expense related to the 2019 Notes	$	1,984	$	9,527	$	992	$	4,764