Debt

Convertible Debt

1.00% Convertible Senior Notes Due 2018

During the second quarter of fiscal year 2018, we paid cash to settle an aggregate of $136 million in principal amount of the Convertible Notes and had $86 million in principal amount outstanding as of July 30, 2017. We also issued 5 million shares of our common stock for the excess conversion value and recognized a loss of $3 million on early conversions of the Convertible Notes. Based on the closing price of our common stock of $164.39 on the last trading day of the second quarter of fiscal year 2018, the if-converted value of the remaining outstanding Convertible Notes as of July 30, 2017 exceeded their principal amount by approximately $619 million. As of July 30, 2017, the conversion rate was 49.8804 shares of common stock per $1,000 principal amount of the Convertible Notes after adjusting for dividend increases (equivalent to an adjusted conversion price of $20.0480 per share of common stock).

Through the second quarter of fiscal year 2018, we settled an aggregate of $1.41 billion in principal amount of the Convertible Notes. Subsequently, we received additional conversion notices for an aggregate of $62 million in principal amount of the Convertible Notes. Settlements of these conversion requests are expected to be completed in the third quarter of fiscal year 2018. The actual number of shares issuable upon conversion will be determined based upon the terms of the Convertible Notes, and we expect to receive an equal number of shares of our common stock under the terms of the Note Hedges.

Holders may convert all or any portion of their Convertible Notes at their option at any time prior to August 1, 2018 under certain circumstances. For example, during any fiscal quarter, if the last reported sale price of the common stock for at least 20 trading days during a period of 30 consecutive trading days ending on the last trading day of the immediately preceding fiscal quarter is greater than or equal to 130% of the conversion price on each applicable trading day, the Convertible Notes become convertible at the holders' option. As this condition was met, the Convertible Notes first became convertible at the holders' option beginning on the first day of fiscal year 2017 and continue to be convertible at the holders’ option through October 29, 2017.

We separately accounted for the liability and equity components of the Convertible Notes at issuance, since our conversion obligation in excess of the aggregate principal could be fully or partially settled in cash. The liability component was assigned by estimating the fair value of a similar debt without the conversion feature. The difference between the net cash proceeds and the liability component was assigned as the equity component. The initial liability component of the Convertible Notes was valued at $1.35 billion and the initial carrying value of the equity component recorded in additional paid-in-capital was valued at $126 million. This equity component, together with the $23 million purchaser's discount to the par value of the Convertible Notes, represented the initial aggregate unamortized debt discount of $148 million. The debt discount is amortized as interest expense over the contractual term of the Convertible Notes using the effective interest method and an interest rate of 3.15%.

As of July 30, 2017, the carrying value of the Convertible Notes was classified as a current liability and the difference between the principal amount and the carrying value of the Convertible Notes was classified as convertible debt conversion obligation in the mezzanine equity section of our Condensed Consolidated Balance Sheet.

The following table presents the carrying value of the Convertible Notes:



	July 30,			January 29,
	2017			2017
	(In millions)
1.00% Convertible Senior Notes	$	86		$	827
Unamortized debt discount (1)	(2		)	(31		)
Net carrying amount	$	84		$	796

(1) As of July 30, 2017, the remaining period over which the unamortized debt discount will be amortized is 1.3 years.

The following table presents interest expense for the contractual interest and the accretion of debt discount and issuance costs related to the Convertible Notes:



	Three Months Ended				Six Months Ended
	July 30,		July 31,		July 30,		July 31,
	2017		2016		2017		2016
	(In millions)
Contractual coupon interest expense	$	—	$	4	$	—	$	8
Amortization of debt discount	1		7		2		14
Total interest expense related to Convertible Notes	$	1	$	11	$	2	$	22

Note Hedges and Warrants

Concurrently with the issuance of the Convertible Notes, we entered into the Note Hedges. The Note Hedges have an adjusted strike price of $20.0480 per share and allow us to receive shares of our common stock and/or cash related to the excess conversion value that we would deliver and/or pay, respectively, to the holders of the Convertible Notes upon conversion. During the second quarter of fiscal year 2018, we had received 5 million shares of our common stock from the exercise of a portion of the Note Hedges related to the settlement of $136 million in principal amount of the Convertible Notes. Subsequently, we expect to receive additional shares of our common stock related to at least an additional $62 million in principal amount that is expected to settle during the third quarter of fiscal year 2018.

In addition, concurrent with the offering of the Convertible Notes and the purchase of the Note Hedges, we entered into a separate warrant transaction.

In the fourth quarter of fiscal year 2017, we entered into an agreement to terminate 63 million Warrants and, in consideration, we delivered a total of 48 million shares of common stock to the counterparty bank. In the second quarter of fiscal year 2018, we entered into a second agreement to terminate the remaining 12 million Warrants outstanding and, in consideration, we delivered a total of 10 million shares of common stock to the counterparty bank.

Long-Term Debt

2.20% Notes Due 2021 and 3.20% Notes Due 2026

In the third quarter of fiscal year 2017, we issued $1.00 billion of the 2.20% Notes Due 2021, and $1.00 billion of the 3.20% Notes Due 2026 (collectively, the Notes). Interest on the Notes is payable in March and September of each year, beginning in March 2017. Upon 30 days' notice to holders of the Notes, we may redeem the Notes for cash prior to maturity, at redemption prices that include accrued and unpaid interest, if any, and a make-whole premium. However, no make-whole premium will be paid for redemptions of the Notes Due 2021 on or after August 2021, or for redemptions of the Notes Due 2026 on or after June 2026. The net proceeds from the Notes were $1.98 billion, after deducting debt discount and issuance costs.

The Notes are our unsecured senior obligations and rank equally in right of payment with all of our existing and future unsecured and unsubordinated indebtedness. The Notes are structurally subordinated to the liabilities of our subsidiaries and are effectively subordinated to any secured indebtedness to the extent of the value of the assets securing such indebtedness. All existing and future liabilities of our subsidiaries will be effectively senior to the Notes.

The carrying value of our long-term debt and the associated interest rates were as follows:



	Expected Remaining Term (years)	Effective Interest Rate	July 30, 2017			January 29, 2017
			(In millions)
2.20% Notes Due 2021	4.1	2.38%	$	1,000		$	1,000
3.20% Notes Due 2026	9.1	3.31%	1,000			1,000
Unamortized debt discount and issuance costs			(16		)	(17		)
Net carrying amount			$	1,984		$	1,983