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FINANCING ARRANGEMENTS | 3 Months Ended
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Mar. 31, 2021
Debt Disclosure [Abstract] |
FINANCING ARRANGEMENTS | FINANCING ARRANGEMENTS Adoption of ASU 2020-06 On January 1, 2021, we early adopted ASU 2020-06 using the modified retrospective method. The ASU eliminates the requirement to separately recognize an equity component when accounting for convertible debt that may be cash-settled upon conversion or convertible instruments with a beneficial conversion feature. Additionally, the ASU removes certain conditions for equity classification related to contracts in an entity’s own equity (e.g., warrants) and amends certain guidance related to the computation of earnings per share for convertible instruments and contracts in an entity’s own equity. Beginning January 1, 2021, our condensed consolidated financials are presented in accordance with ASU 2020-06, while prior period amounts are not adjusted and continue to be reported in accordance with our historical policies. The new guidance changes the accounting for our 3.25% Convertible Senior Notes, due 2022, as discussed below. 3.25% Convertible Senior Notes due 2022 In April 2016, we issued $250.0 million in aggregate principal amount of convertible senior notes (the "Atairos Notes") in a private placement to A-G Holdings, L.P. ("AGH"). Michael Angelakis, the chairman and chief executive officer of Atairos Group, Inc. ("Atairos"), joined our Board of Directors (the "Board") in connection with the issuance of the Atairos Notes. Atairos controls the voting power of AGH. The net proceeds from this offering were $243.2 million. The Atairos Notes bear interest at a rate of 3.25% per annum, payable annually in arrears on April 1 of each year. Each $1,000 of principal amount of the Atairos Notes initially is convertible into 9.25926 shares of common stock, which is equivalent to an initial conversion price of $108.00 per share, subject to adjustment upon the occurrence of specified events. Upon conversion, we can elect to settle the conversion value in cash, shares of our common stock, or any combination of cash and shares of our common stock. In May 2021, we entered into an agreement with AGH pursuant to which we will repurchase the Atairos Notes on or before May 14, 2021. For additional information, see Part II, Item 5. Other Information. Prior to the adoption of ASU 2020-06, we separated the Atairos Notes into their liability and equity components. The liability was initially calculated by measuring the fair value of a similar liability without an associated conversion feature. The difference between the principal amount of the Atairos Notes and the liability component was recognized in equity, effectively resulting in a debt discount. We incurred transaction costs of $6.8 million related to the issuance of the Atairos Notes. Transaction costs attributable to the liability component of $4.8 million were also recorded as a debt discount in the condensed consolidated balance sheets. The debt discount was amortized to interest expense over the term of the Atairos Notes. Together with the cash interest, this resulted in an effective interest rate of 9.75%. Transaction costs attributable to the equity component of $2.0 million were recorded in stockholders' equity as a reduction of the equity component. Following the adoption of ASU 2020-06, the previously bifurcated equity component of our Atairos Notes was recombined with the liability component, resulting in a single liability-classified instrument. The carrying value of the Atairos Notes at transition was determined by recalculating the basis of the notes as if the conversion option had not been bifurcated at issuance. Transaction costs related to the issuance of the Atairos Notes that were allocated to the equity component were reclassified out of Additional paid-in-capital and the amortization and the related debt discount associated with these costs was recalculated through the transition date. The transaction costs continue to be recorded as a debt discount in the condensed consolidated balance sheets and are amortized to interest expense over the remaining term of the Atairos Notes. Together with the cash interest, this results in an effective interest rate of 3.76%. As a result of adopting ASU 2020-06, we recorded a $67.0 million net reduction to additional paid-in capital, $19.0 million increase to non-current liabilities and a $48.0 million reduction to our opening accumulated deficit as of January 1, 2021 related to the Atairos Notes. See Note 12, Income (Loss) Per Share, for additional information on the effect on diluted per-share amounts. The carrying amount of the Atairos Notes consisted of the following as of March 31, 2021 and December 31, 2020 (in thousands):
| March 31, 2021 |  | December 31, 2020
Liability component: |  |  |
Principal amount | $ | 250,000 |  |  | $ | 250,000 |
Less: debt discount - transaction costs | (1,239) |  |  | (1,459) |
Less: debt discount - equity | — |  |  | (19,051) |
Net carrying amount of liability component | $ | 248,761 |  |  | $ | 229,490 |
Net carrying amount of equity component | $ | — |  |  | $ | 67,014 |
We classified the fair value of the Atairos Notes as a Level 3 measurement due to the lack of observable market data over fair value inputs such as our stock price volatility over the term of the Atairos Notes and our cost of debt. The estimated fair value of the Atairos Notes as of March 31, 2021 and December 31, 2020 was $262.2 million and $263.3 million, and was determined using a lattice model. As of March 31, 2021, the remaining term of the Atairos Notes is approximately 1 year. During the three months ended March 31, 2021 and 2020, we recognized interest costs on the Atairos Notes as follows (in thousands):
| Three Months Ended March 31,
| 2021 |  | 2020
Contractual interest (3.25% of the principal amount per annum) | $ | 2,032 |  |  | $ | 2,032 |
Amortization of debt discount | 303 |  |  | 3,516 |
Total | $ | 2,335 |  |  | $ | 5,548 |
Note Hedges and Warrants In May 2016, we purchased convertible note hedges with respect to our common stock for a cost of $59.1 million from certain bank counterparties. The convertible note hedges provide us with the right to purchase up to 2.3 million shares of our common stock at an initial strike price of $108.00 per share, which corresponds to the initial conversion price of the Atairos Notes, and are exercisable upon conversion of the Atairos Notes. The convertible note hedges are intended to reduce the potential economic dilution upon conversion of the Atairos Notes. The convertible note hedges are separate transactions and are not part of the terms of the Atairos Notes. Holders of the Atairos Notes do not have any rights with respect to the convertible note hedges. In May 2016, we also sold warrants for total cash proceeds of $35.5 million to certain bank counterparties. The warrants provide the counterparties with the right to purchase up to 2.3 million shares of our common stock at a strike price of $170.00 per share. The warrants expire on various dates between July 1, 2022 and August 26, 2022 and are exercisable on their expiration dates. The warrants are separate transactions and are not part of the terms of the Atairos Notes or convertible note hedges. Holders of the Atairos Notes and convertible note hedges do not have any rights with respect to the warrants. The amounts paid and received for the convertible note hedges and warrants were recorded in additional paid-in capital in the condensed consolidated balance sheets as of March 31, 2021 and December 31, 2020. The convertible note hedges and warrants are not remeasured as long as they continue to meet the conditions for equity classification. The amounts paid for the convertible note hedges are tax deductible over the term of the Atairos Notes, while the proceeds received from the warrants are not taxable. In connection with the repurchase of the Atairos Notes, we intend to unwind the related note hedge and warrants. Under the if-converted method, the shares of common stock underlying the conversion option in the Atairos Notes are included in the diluted earnings per share denominator and the interest expense and amortization of the transaction costs on the Atairos Notes, net of tax, is added to the numerator. Taken together, the purchase of the convertible note hedges and sale of warrants are intended to offset any actual dilution from the conversion of the Atairos Notes and to effectively increase the overall conversion price from $108.00 to $170.00 per share. 1.125% Convertible Senior Notes due 2026 In March 2021, we issued $200.0 million aggregate principal amount of convertible senior notes due 2026 (the "2026 Notes") in a private offering to qualified institutional buyers. The net proceeds from this offering were $193.0 million. The 2026 Notes bear interest at a rate of 1.125% per annum, payable semiannually in arrears on March 15 and September 15 of each year, beginning on September 15, 2021. The 2026 Notes will mature on March 15, 2026, subject to earlier repurchase, redemption or conversion. We used $23.8 million of the net proceeds from the offering to pay the cost of certain related capped call transactions, and intend to use the remaining net proceeds, together with cash on hand, to repay or repurchase, the Atairos Notes. As of March 31, 2021, the remaining net proceeds from this offering and related transactions of $169.8 million is presented in Restricted cash in our condensed consolidated balance sheets. The use of the net proceeds from the offering is subject to the terms of our second amendment to the revolving credit agreement, as described in the Revolving Credit Agreement section below. In April 2021, we issued an additional $30.0 million aggregate principal amount of 2026 Notes following the exercise by the initial purchasers of their option to purchase additional 2026 Notes, and we entered into additional capped call transactions in connection therewith. The net proceeds from the sale of the additional 2026 Notes were $29.1 million. We used $3.6 million of the net proceeds to pay the cost of the additional capped call transactions and intend to use the remainder of the net proceeds from the over-allotment option to repay or repurchase the Atairos Notes. Each $1,000 of principal amount of the 2026 Notes initially is convertible into 14.6800 shares of common stock, which is equivalent to an initial conversion price of $68.12 per share, subject to adjustment upon the occurrence of specified events. In addition, upon the occurrence of a make-whole fundamental change (as defined in the Indenture governing the 2026 Notes) or if we issue a notice of redemption, we will, in certain circumstances, increase the conversion rate by a number of additional shares for a holder that elects to convert its 2026 Notes in connection with such make-whole fundamental change or redemption. Upon conversion, we can elect to settle the conversion value in cash, shares of our common stock, or any combination of cash and shares of our common stock. Subject to certain conditions, holders of the 2026 Notes may convert the 2026 Notes at their option at any time until the close of business on the scheduled trading day immediately preceding the maturity date. In addition, if specified corporate events occur prior to the maturity date, we may be required to increase the conversion rate for holders who elect to convert based on the effective date of such event and the applicable stock price attributable to the event. Based on the closing price of the common stock of $50.55 as of March 31, 2021, the if-converted value of the 2026 Notes was less than the principal amount. Certain conditions apply to the conversion by holders and redemption by us of the 2026 Notes, which are set forth in the Indenture governing the 2026 Notes. In addition, upon the occurrence of a fundamental change (as defined in the Indenture) prior to the maturity date, holders may require us to repurchase all or a portion of the 2026 Notes for cash. The 2026 Notes are our senior unsecured obligations and will rank senior in right of payment to any of our indebtedness that is expressly subordinated in right of payment to the 2026 Notes; equal in right of payment to any of our unsecured indebtedness that is not so subordinated; effectively junior in right of payment to any of our secured indebtedness to the extent of the value of the assets securing such indebtedness; and structurally junior to all indebtedness and other liabilities of current or future subsidiaries (including trade payables). The Indenture includes customary events of default. If an event of default, as defined in the Indenture, occurs and is continuing, the principal amount of the 2026 Notes and any accrued and unpaid interest may be declared immediately due and payable. In the case of bankruptcy or insolvency, the principal amount of the 2026 Notes and any accrued and unpaid interest would automatically become immediately due and payable. We account for the 2026 Notes as a single liability-classified instrument measured at amortized cost due to the adoption of ASU 2020-06. The carrying value of the 2026 Notes was determined by deducting transaction costs incurred in connection with the issuance of the 2026 Notes of $6.8 million from the principal amount. Those transaction costs were recorded as a debt discount in the condensed consolidated balance sheets and are amortized to interest expense. Together with the cash interest, this results in an effective interest rate of 1.84% over the term of the 2026 Notes. We have presented the 2026 Notes in non-current liabilities in the accompanying condensed consolidated balance sheets. The carrying amount of the 2026 Notes consisted of the following as of March 31, 2021 (in thousands):
| March 31, 2021
Principal amount | $ | 200,000 |
Less: debt discount | (6,765) |
Net carrying amount of liability | $ | 193,235 |
We classified the fair value of the 2026 Notes as a Level 3 measurement due to the lack of observable market data over fair value inputs such as our stock price volatility over the term of the 2026 Notes and our cost of debt. The estimated fair value of the 2026 Notes as of March 31, 2021 was $205.4 million and was determined using a lattice model. Capped Call Transactions In March and April 2021, in connection with the offering of the 2026 Notes, we entered into privately negotiated capped call transactions with each of Barclays Bank PLC, BNP Paribas and Mizuho Markets Americas LLC. The capped call transactions cover, subject to customary adjustments, the number of shares of common stock initially underlying the 2026 Notes. The capped call transactions are expected generally to reduce potential dilution to our common stock upon any conversion of the 2026 Notes and/or offset any cash payments we are required to make in excess of the principal amount of converted notes, with such reduction and/or offset subject to a cap initially equal to $104.80 (which represents a premium of 100% over the last reported sale price of our common stock on The Nasdaq Global Select Market on March 22, 2021), subject to certain adjustments under the terms of the capped call transactions. The capped call transactions are accounted for as freestanding derivatives and recorded at the initial fair value in additional paid-in-capital in the condensed consolidated balance sheets with no recorded subsequent change to fair value as long as they meet the criteria for equity classification. Under the if-converted method, the shares of common stock underlying the conversion option in the 2026 Notes are included in the diluted earnings per share denominator and the interest expense and amortization of the debt discount on the 2026 Notes, net of tax, is added to the numerator. However, upon conversion, there will be minimized economic dilution from the 2026 Notes, as exercise of the capped call transactions reduces dilution from the 2026 Notes that would have otherwise occurred when the price of our common stock exceeds the conversion price. The capped call transactions are intended to offset actual dilution from the conversion of the 2026 Notes and to effectively increase the overall conversion price from $68.12 to $104.80 per share. Revolving Credit Agreement In May 2019, we entered into a second amended and restated senior secured revolving credit agreement which provided for aggregate principal borrowings of up to $400.0 million (prior to the Amendments described below) and matures in May 2024. In July 2020, we entered into an amendment to the revolving credit agreement (the "First Amendment") in order to provide us with, among other things, operational flexibility and covenant relief through the end of the first quarter of 2021 in light of the ongoing impacts of COVID-19 on our business. In addition to the covenant relief described below, the First Amendment permanently reduces borrowing capacity under our senior secured revolving credit facility from $400.0 million to $225.0 million. In March 2021, we entered into a second amendment to the revolving credit agreement (the "Second Amendment" and the revolving credit agreement as amended, the "Amended Credit Agreement") to extend the suspension period provided by the First Amendment through the fourth quarter 2021 (the "Suspension Period"), amend and remove certain financial covenants applicable after the amended Suspension Period ends and permit the issuance of the 2026 Notes and related capped call transactions. The Second Amendment requires that the net proceeds from the 2026 Notes be used to repay or repurchase the Atairos Notes. We deferred debt issuance costs of $3.5 million as a result of entering into the Amended Credit Agreement. Deferred debt issuance costs are included within Other non-current assets on the condensed consolidated balance sheets as of March 31, 2021 and are amortized to interest expense over the term of the respective agreement. Pursuant to the Amendments, during the Suspension Period, we will be exempt from certain covenant restrictions, namely the requirements to maintain a maximum funded indebtedness to EBITDA ratio, and a minimum liquidity balance (including any undrawn amounts under the credit facility) of at least 70% of our accrued merchant and supplier payables balance (which covenant will apply again upon termination of the Suspension Period). Additionally, the Amendments provide that, during the Suspension Period, we will be required to maintain specified minimum quarterly EBITDA levels and to maintain a monthly minimum liquidity balance (including any undrawn amounts under the credit facility) of at least 100% of our accrued merchant and supplier payables balance for such month plus $50.0 million. The Second Amendment also permanently removes requirements (which previously only applied after the Suspension Period) that we maintain (i) a maximum senior secured indebtedness to EBITDA ratio and (ii) unrestricted cash of not less than $250 million. Finally, the Second Amendment changes the requirement to maintain a minimum fixed charge coverage ratio (which requirement applies only after the Suspension Period ends) to a requirement to maintain a minimum interest coverage ratio. In addition, under the Amended Credit Agreement, we are subject to various covenants, including customary restrictive covenants that limit our ability to, among other things: incur additional indebtedness; make dividend and other restricted payments, including limiting the amount of our share repurchases; enter into sale and leaseback transactions; make investments, loans or advances; grant or incur liens on assets; sell assets; engage in mergers, consolidations, liquidations or dissolutions; and engage in transactions with related parties and other affiliates. The Amendments further restrict certain of these negative covenants during the Suspension Period, including our ability to make share repurchases, acquisitions, investments and to incur additional indebtedness and liens. Non-compliance with the covenants under the Amended Credit Agreement may result in termination of the commitments thereunder and any then outstanding borrowings may be declared due and payable immediately. We have the right to terminate the Amended Credit Agreement or reduce the available commitments at any time. The Amendments also increased interest rates through the end of the Suspension Period, raising the alternative base rate and Canadian prime spreads to 1.50%, the fixed rate spreads to 2.50% and the commitment fee to 0.4% on the daily amount of the unused commitments under the Amended Credit Agreement. Following the Suspension Period, the applicable spread and commitment fee will revert to pre-Amendment levels, which provides for (a) interest at a rate per annum equal to (i) an adjusted LIBO rate or (ii) a customary base rate (with loans denominated in certain currencies bearing interest at rates specific to such currencies) plus an additional margin ranging between 0.50% and 2.00% and (b) commitment fees ranging from 0.25% to 0.35% on the daily amount of unused commitments. The Amended Credit Agreement also provides for the issuance of up to $75.0 million in letters of credit, provided that the sum of outstanding borrowings and letters of credit do not exceed the maximum funding commitment of $225.0 million. The Amended Credit Agreement is secured by substantially all of our tangible and intangible assets, including a pledge of 100% of the outstanding capital stock of substantially all of our direct and indirect domestic subsidiaries and 65% of the shares or equity interests of first-tier foreign subsidiaries and each U.S. entity whose assets substantially consist of capital stock and/or intercompany debt of one or more foreign subsidiaries, subject to certain exceptions. Certain of our domestic and foreign subsidiaries are guarantors under the Amended Credit Agreement. We had $100.0 million of outstanding borrowings and $23.1 million of outstanding letters of credit as of March 31, 2021, and $200.0 million of outstanding borrowings and $20.6 million of outstanding letters of credit as of December 31, 2020 under the Amended Credit Agreement.

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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://fasb.org/us-gaap/role/ref/legacyRef -Publisher FASB -Name Accounting Standards Codification -Topic 470 -URI http://asc.fasb.org/topic&trid=2208564 + Details
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