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0.25% Convertible Senior Notes, Convertible Note Hedge and Warrant | 9 Months Ended
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Sep. 30, 2017
Debt Disclosure [Abstract] |
0.25% Convertible Senior Notes, Convertible Note Hedge and Warrant | 7. 0.25% Convertible Senior Notes, Convertible Note Hedge and Warrant In May 2017, the Company issued $350 million aggregate principal amount of 0.25% convertible senior notes due June 1, 2022 (the “Maturity Date”) in a private offering and an additional $50 million aggregate principal amount of such notes pursuant to the exercise in full of the over-allotment options of the initial purchasers (the “2022 Notes”). The interest rates are fixed at 0.25% per annum and are payable semi-annually in arrears on June 1 and December 1 of each year, commencing on December 1, 2017. The total net proceeds from the debt offering, after deducting initial purchase discounts and debt issuance costs, were approximately $389.2 million. Each $1,000 principal amount of the 2022 Notes will initially be convertible into 10.5519 shares of the Company’s common stock (the “Conversion Option”), which is equivalent to an initial conversion price of approximately $94.77 per share, subject to adjustment upon the occurrence of specified events. The 2022 Notes will be convertible at the option of the holders at any time prior to the close of business on the business day immediately preceding February 1, 2022, only under the following circumstances: (1) during any calendar quarter commencing after the calendar quarter ending on June 30, 2017, if the last reported sale price of the Company’s 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; (2) 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 the Measurement Period was less than 98% of the product of the last reported sale price of the Company’s common stock and the conversion rate on each such trading day; or (3) upon the occurrence of specified corporate events. On or after February 1, 2022 until the close of business on the second scheduled trading day immediately preceding the Maturity Date, holders may convert their 2022 Notes at any time, regardless of the foregoing circumstances. Upon conversion, the Company will pay or deliver, as the case may be, cash, shares of the Company’s common stock or a combination of cash and shares of the Company’s common stock, at the Company’s election. If the Company undergoes a fundamental change prior to the maturity date, holders of the notes may require the Company to repurchase for cash all or any portion of their notes at a repurchase price equal to 100% of the principal amount of the notes to be repurchased, plus accrued and unpaid interest to, but excluding, the fundamental change repurchase date. In addition, if specific corporate events occur prior to the applicable maturity date, the Company will increase the conversion rate for a holder who elects to convert their notes in connection with such a corporate event in certain circumstances. During the three months ended September 30, 2017, the conditions allowing holders of the 2022 Notes to convert have not been met. The 2022 Notes are therefore not convertible during the three or nine months ended September 30, 2017 and are classified as long-term debt. In accounting for the issuance of the convertible senior notes, the Company separated the 2022 Notes into liability and equity components. The carrying amount of the liability component was calculated by measuring the fair value of a similar debt instrument that does not have an associated convertible feature. The carrying amount of the equity component representing the Conversion Option was $106 million and was determined by deducting the fair value of the liability component from the par value of the 2022 Notes. The equity component is not remeasured as long as it continues to meet the conditions for equity classification. The excess of the principal amount of the liability component over its carrying amount (the "Debt Discount") is amortized to interest expense over the term of the 2022 Notes expense at an effective interest rate of 6.95% over the contractual term of the 2022 Notes. In accounting for the debt issuance costs of $10.8 million related to the 2022 Notes, the Company allocated the total amount incurred to the liability and equity components of the 2022 Notes based on their relative values. Issuance costs attributable to the liability component were $7.9 million and will be amortized to interest expense using the effective interest method over the contractual terms of the 2022 Notes. Issuance costs attributable to the equity component were $2.9 million and are netted with the equity component in stockholders’ equity. The net carrying amount of the liability component of the 2022 Notes is as follows:
| As of September 30, 2017 |  |  | As of December 31, 2016 |
| (in thousands) |
Principal | $ | 400,000 |  |  | $ | — |
Unamortized debt discount |  | (99,042 | ) |  |  | — |
Unamortized issuance costs |  | (7,395 | ) |  |  | — |
Net carrying amount | $ | 293,563 |  |  | $ | — |
The net carrying amount of the equity component of the 2022 Notes is as follows:
| As of September 30, 2017 |  |  | As of December 31, 2016 |
| (in thousands) |
Debt discount for conversion option | $ | 106,006 |  |  |  | — |
Issuance costs |  | (2,854 | ) |  |  | — |
Net carrying amount | $ | 103,152 |  |  | $ | — |
Interest expense related to the 2022 Notes is as follows:
| Three Months Ended September 30, |  |  | Nine Months Ended September 30, |
| 2017 |  |  | 2016 |  |  | 2017 |  |  | 2016 |
| (in thousands) |  |  | (in thousands) |
Contractual interest expense | $ | 250 |  |  | $ | — |  |  | $ | 390 |  |  | $ | — |
Amortization of debt discount |  | 4,465 |  |  |  | — |  |  |  | 6,963 |  |  |  | — |
Amortization of issuance costs |  | 334 |  |  |  | — |  |  |  | 519 |  |  |  | — |
Total interest expense | $ | 5,049 |  |  | $ | — |  |  | $ | 7,872 |  |  | $ | — |
In connection with the offering of the 2022 Notes, the Company entered into convertible note hedge transactions (the “Convertible Note Hedges”) with certain counterparties in which the Company has the option to purchase (subject to adjustment for certain specified events) a total of approximately 4.2 million shares of the Company’s common stock at a price of approximately $94.77 per share. The Convertible Note Hedges will be settled in cash or shares, or any combination thereof, in accordance with the settlement method of the 2022 Notes in excess of the par amount, and are expected to settle upon conversion of the 2022 Notes. The total cost of the Convertible Note Hedges was $78.9 million. In addition, the Company sold warrants to certain bank counterparties whereby the holders of the warrants have the option to purchase initially (subject to adjustment for certain specified events) a total of approximately 4.2 million shares of the Company’s common stock at a price of $115.8 per share. The amount by which the settlement price exceeds the strike price may be settled in shares or cash at the Company’s election. The warrants are expected to settle three business days from each trading day commencing on September 1, 2022 and ending on the 79th trading day thereafter. The Company received $58.9 million in cash proceeds, net of issuance costs of $200 thousand, from the sale of these warrants. Taken together, the purchase of the Convertible Note Hedges and the sale of warrants are intended to offset any actual dilution from the conversion of these notes and to effectively increase the overall conversion price from $94.77 to $115.83 per share. As these transactions meet certain accounting criteria, the Convertible Note Hedges and warrants are recorded in stockholders’ equity and are not accounted for as derivatives. The net cost of $20 million incurred in connection with the Convertible Note Hedges and warrant transactions was recorded as a reduction to additional paid-in capital on the consolidated balance sheet. The difference between the Debt Discount and the total cost of the Convertible Note Hedges, and the difference between the calculation of the book and tax allocation of debt issuance costs between the liability and equity components of the 2022 Notes, resulted in a difference between the carrying amount and tax basis of the 2022 Notes. This taxable temporary difference resulted in the Company recognizing a $9.4 million deferred tax liability which was recorded as an adjustment to additional paid-in capital on the consolidated balance sheet. The creation of the deferred tax liability is recognized as a component of equity and represents a source of future taxable income which supports realization of a portion of the income tax benefit associated with the 2017 loss from operations. Therefore, the Company will record a corresponding income tax benefit in its consolidated statement of operations in 2017. In accordance with the guidance for calculating the interim income tax (benefit) provision, $6.9 million of this benefit was recorded as a deferred income tax benefit on the consolidated statement of operations during the nine months ended September 30, 2017. The difference of $2.5 million between the interim benefit from income taxes and the deferred tax liability of $9.4 million was recorded as a liability for accrued income taxes on the consolidated balance sheet. This liability will be reversed and the remaining $2.5 million deferred income tax benefit will be recorded during the remainder of 2017 as additional losses from operations are generated. The net equity impact, included in additional paid-in capital, of the above components of the 2022 Notes is as follows:
| (in thousands) |
Conversion Option | $ | 106,006 |
Purchase of Convertible Note Hedges |  | (78,920 | )
Sales of warrants |  | 59,080 |
Issuance costs |  | (3,054 | )
Deferred tax liability |  | (9,399 | )
Total | $ | 73,713 |

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