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Convertible Notes | 12 Months Ended
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Dec. 31, 2018
Convertible Notes |
Convertible Notes | Note 11. Convertible Notes The components of the convertible notes were as follows (in thousands):
|  |  |  |  |  | Carrying Amount |
|  | Interest Rates |  |  |  | December 31, |
Debt |  | December 31, 2018 |  | Maturities |  | 2018 |  | 2017 |
0.375% Convertible Senior Notes due 2018 |  | 0.375 | % | 2018 |  | $ | — |  | $ | 7,393 |
1.25% Convertible Senior Notes due 2020 |  | 1.25 | % | 2020 |  |  | 17,434 |  |  | 16,608 |
|  |  |  |  |  |  | 17,434 |  |  | 24,001 |
Less current portion |  |  |  |  |  |  | — |  |  | 7,393 |
|  |  |  |  |  | $ | 17,434 |  | $ | 16,608 |
Annual maturities of all convertible notes are as follows (in thousands):
2019 |  | $ | — |
2020 |  |  | 19,094 |
2021 |  |  | — |
2022 |  |  | — |
Thereafter |  |  | — |
|  | $ | 19,094 |
The carrying amount and fair value of our convertible notes as of the dates shown were as follows (in thousands):
|  | December 31, |
|  | 2018 |  | 2017 |
|  | Carrying |  |  |  |  | Carrying |  |  |  |
|  | Amount |  | Fair Value |  | Amount |  | Fair Value |
0.375% Convertible Senior Notes due 2018 |  | $ | — |  | $ | — |  | $ | 7,393 |  | $ | 14,129 |
1.25% Convertible Senior Notes due 2020 |  |  | 17,434 |  |  | 25,073 |  |  | 16,608 |  |  | 35,431 |
|  | $ | 17,434 |  | $ | 25,073 |  | $ | 24,001 |  | $ | 49,560 |
The fair values of our 0.375% Convertible Senior Notes due 2018 (the “2018 Notes”) and 1.25% Convertible Senior Notes due 2020 (the “2020 Notes”) are based on data from readily available pricing sources which utilize market observable inputs and other characteristics for similar types of instruments, and, therefore, are classified within Level 2 in the fair value hierarchy. On November 14, 2013, we issued, in a private placement, $375.0 million aggregate principal amount of the 2018 Notes and $375.0 million aggregate principal amount of the 2020 Notes. Entities affiliated with Julian C. Baker, one of our directors and principal stockholders (the “Baker Entities”), purchased $250.0 million aggregate principal amount of the 2018 Notes and $250.0 million aggregate principal amount of the 2020 Notes in this private placement. As of December 31, 2016, the Baker Entities owned $259.0 million and $274.5 million aggregate principal amounts of the 2018 and 2020 Notes, respectively, which were exchanged in 2017 for shares of common stock as described below. The 2018 Notes bore interest at a rate of 0.375% per annum and the 2020 Notes bear interest at a rate of 1.25% per annum, in each case payable semi‑annually in arrears in cash on May 15 and November 15, beginning on May 15, 2014. The 2018 Notes matured on November 15, 2018 and the 2020 Notes will mature on November 15, 2020, unless earlier purchased or converted. We may not redeem the 2020 Notes prior to their relevant scheduled maturity dates. Prior to May 14, 2014, the 2018 and 2020 Notes were not convertible except in connection with a make-whole fundamental change, as defined in the respective indentures. Beginning on, and including, May 15, 2014, the 2018 Notes were and the 2020 Notes are convertible prior to the close of business on the business day immediately preceding May 15, 2018, in the case of the 2018 Notes, and May 15, 2020, in the case of the 2020 Notes, only under the following circumstances: (1) during any calendar quarter commencing after the calendar quarter ending on March 31, 2014 (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 for the 2018 Notes or 2020 Notes, as applicable, 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 2018 Notes or 2020 Notes, as applicable, for each trading day of the measurement period was less than 98% of the product of the last reported sale price of our common stock and the conversion rate for the 2018 Notes or 2020 Notes, as applicable, on each such trading day; or (3) upon the occurrence of specified corporate events. On or after May 15, 2018, in the case of the 2018 Notes, and May 15, 2020, in the case of the 2020 Notes, until the close of business on the second scheduled trading day immediately preceding the relevant maturity date, the 2018 Notes were and the 2020 Notes are convertible at any time, regardless of the foregoing circumstances. Upon conversion we will pay or deliver, as the case may be, cash, shares of common stock or a combination of cash and shares of common stock, at our election. Management’s intent is to settle any conversions of the 2020 Notes in shares of our common stock. The conversion rate for the 2018 Notes was 19.3207 shares of common stock per $1,000 principal amount, equivalent to an initial conversion price of approximately $51.76 per share. The initial conversion rate for the 2020 Notes is 19.3207 shares of common stock per $1,000 principal amount, equivalent to an initial conversion price of approximately $51.76 per share. The conversion rate for the 2018 Notes was and the conversion rate for the 2020 Notes will be subject to adjustment for certain events but will not be adjusted for any accrued and unpaid interest. Upon the occurrence of certain fundamental changes, the holders of the 2020 Notes may require us to purchase all or a portion of their 2020 Notes for cash at a price equal to 100% of the principal amount of the 2020 Notes, plus accrued and unpaid interest, including additional interest, if any, to, but excluding, the fundamental change purchase date. In addition, if, and to the extent, a holder elects to convert any 2020 Notes in connection with a make‑whole fundamental change transaction, as defined in the indenture, we will, under certain circumstances, increase the applicable conversion rate by a number of additional shares of our common stock. The 2018 Notes had similar provisions relating to fundamental changes and make-whole fundamental changes. Since the 2018 Notes could and the 2020 Notes can be settled in cash or common shares or a combination of cash and common shares at our option, we determined the embedded conversion options in the 2018 and 2020 Notes are not required to be separately accounted for as a derivative. However, since the 2018 and 2020 Notes are within the scope of the accounting guidance for cash convertible instruments, we are required to separate the 2018 and 2020 Notes into a liability and equity component. The carrying amount of the liability component is calculated by measuring the fair value of a similar liability that does not have an associated equity component. The carrying amount of the equity component representing the embedded conversion option is determined by deducting the fair value of the liability component from the initial proceeds. The excess of the principal amount of the liability component over its carrying amount is amortized to interest expense over the expected life of a similar liability that does not have an associated equity component using the effective interest method. The equity component is not re‑measured as long as it continues to meet the conditions for equity classification in the accounting guidance for contracts in an entity’s own equity. The liability component of the 2018 Notes on the date of issuance was estimated at $299.4 million, and accordingly, the equity component on the date of issuance was $75.6 million. The discount on the 2018 Notes was amortized to interest expense over the term of the 2018 Notes, using the effective interest method. The 2018 Notes were due on November 15, 2018 and the remaining de minimis principal balance of 2018 Notes that were not converted into common stock were repaid on that date. The carrying value of the 2018 Notes was $7.4 million (net of $0.3 million of debt discount and issuance costs) at December 31, 2017. The liability component of the 2020 Notes on the date of issuance was estimated at $274.8 million, and accordingly, the equity component on the date of issuance was $100.2 million. The discount on the 2020 Notes is being amortized to interest expense over the term of the 2020 Notes, using the effective interest method. The carrying value of the 2020 Notes was $17.4 million and $16.6 million, respectively, (net of $1.7 million and $2.5 million debt discount and issuance costs, respectively) at December 31, 2018 and 2017. During the year ended December 31, 2017, we entered into separately negotiated agreements with certain holders of the 2018 Notes pursuant to which such holders agreed to exchange a total of $367.2 million in aggregate principal amount of the 2018 Notes for the shares of our common stock into which the 2018 Notes were originally convertible, aggregating 7.1 million shares, an additional 0.1 million of premium shares (equivalent to $12.6 million in value) and $2.0 million in cash. Similarly we entered into separately negotiated agreements with certain holders of the 2020 Notes pursuant to which such holders agreed to exchange a total of $355.6 million in aggregate principal amount of the 2020 Notes for the shares of our common stock into which the 2020 Notes were originally convertible, aggregating 6.9 million shares, an additional 0.2 million of premium shares (equivalent to $26.8 million in value) and $7.0 million in cash. Included in the agreements were those with the Baker Entities, which agreed to exchange $259.0 million in aggregate principal amount of the 2018 Notes and $274.5 million in aggregate principal amount of the 2020 Notes for an aggregate of 10.6 million shares. Pursuant to the guidance within the ASC 470-20-40-20, we measured the difference between the fair value and carrying value of the liability portion of the 2018 and 2020 Notes which resulted in recording expense related to senior note conversions of $1.4 million related to the 2018 Notes and $5.1 million related to the 2020 Notes. The estimated fair value of the debt component was determined using a valuation model which is subject to judgement. Assumptions used within the valuation model include an estimated credit rating and an estimated market-based cost of debt. These assumptions were used to perform a discounted cash flow analysis on the future interest and principal payments to determine the estimated fair value of the debt at inducement. In addition, the fair value of the premium shares issued pursuant to these agreements as well as the cash paid in connection with the agreements totaled $48.4 million and is also included within expense related to senior note conversions on the consolidated statement of operations during the year ended December 31, 2017.

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- Definition The entire disclosure for information about short-term and long-term debt arrangements, which includes amounts of borrowings under each line of credit, note payable, commercial paper issue, bonds indenture, debenture issue, own-share lending arrangements and any other contractual agreement to repay funds, and about the underlying arrangements, rationale for a classification as long-term, including repayment terms, interest rates, collateral provided, restrictions on use of assets and activities, whether or not in compliance with debt covenants, and other matters important to users of the financial statements, such as the effects of refinancing and noncompliance with debt covenants. + References Reference 1: http://www.xbrl.org/2003/role/presentationRef -Publisher FASB -Name Accounting Standards Codification -Topic 470 -URI http://asc.fasb.org/topic&trid=2208564 + Details
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