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Convertible Senior Notes

12 Months Ended

Dec. 31, 2018

Convertible Notes Payable [Abstract]

In May and June 2017, we issued the 2022 Notes, which are due June 1, 2022 unless earlier converted or repurchased in accordance with their terms. In November 2013, we issued the 2018 Notes, which were earlier converted prior to, or settled on November 1, 2018, in accordance with their terms. The Notes do not bear interest, and we cannot redeem the Notes prior to maturity.

The Notes are unsecured obligations and do not contain any financial covenants or restrictions on the payments of dividends, the incurrence of indebtedness or the issuance or repurchase of securities by us or any of our subsidiaries.

Upon conversion of the Notes, we may choose to pay or deliver, as the case may be, cash, shares of our common stock or a combination of cash and shares of our common stock upon settlement. We have settled the principal amount of our 2018 Notes with cash and currently intend to settle the principal amount of the 2022 Notes with cash.



	Convertible Date	Initial Conversion Price per Share		Initial Conversion Rate per $1,000 Par Value	Initial Number of Shares
2022 Notes	February 1, 2022	$	134.75	7.42 shares	5,806,936
2018 Notes	July 1, 2018	$	73.88	13.54 shares	7,783,023

Holders of the Notes may convert their Notes at their option at any time prior to the close of business on the business day immediately preceding February 1, 2022 and July 1, 2018, for the 2022 Notes and 2018 Notes, respectively (each, a Convertible Date), only under the following circumstances:

•

during any calendar quarter (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 the 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 applicable conversion price on each applicable trading day (in each case, the Conversion Condition); or


•	during the five-business day period after any five-consecutive trading day period, or the measurement period, in which the trading price per $1,000 principal amount of the Notes 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 applicable conversion rate on each such trading day; or


•	upon the occurrence of specified corporate events.

On or after the applicable Convertible Date, a holder may convert all or any portion of its Notes at any time prior to the close of business on the second scheduled trading day immediately preceding the maturity date regardless of the foregoing conditions, and such conversions will settle upon the applicable maturity date. Upon settlement, we will pay or deliver, as the case may be, cash, shares of our common stock or a combination of cash and shares of our common stock, at our election.

The conversion price will be subject to adjustment in some events. Holders of the Notes who convert their Notes in connection with certain corporate events that constitute a “make-whole fundamental change” are, under certain circumstances, entitled to an increase in the conversion rate. Additionally, in the event of a corporate event that constitutes a “fundamental change,” holders of the Notes may require us to purchase with cash all or a portion of the Notes upon the occurrence of a fundamental change, at a purchase price equal to 100% of the principal amount of the respective Notes plus any accrued and unpaid special interest, if any.

In accounting for the issuance of the Notes and the related transaction costs, we separated the Notes into liability and equity components. The Notes consisted of the following (in thousands):



	December 31, 2018			December 31, 2017
Liability component:
Principal:
2022 Notes	$	782,500		$	782,500
2018 Notes	—			574,994
Less: debt issuance cost and debt discount, net of amortization
2022 Notes	(120,793		)	(152,482		)
2018 Notes	—			(31,576		)
Net carrying amount	$	661,707		$	1,173,436



	2022 Notes			2018 Notes
Equity component recorded at issuance:
Note	$	162,039		$	155,319
Issuance cost	(2,148		)	(3,257		)
Net amount recorded in equity	$	159,891		$	152,062

The Conversion Condition for the 2022 Notes was met for the quarters ended June 30, 2018 and September 30, 2018. Therefore, our 2022 Notes became convertible at the holders’ option beginning on July 1, 2018 through December 31, 2018. The Conversion Condition for the 2022 Notes was not met for the quarter ended December 31, 2018, and therefore the 2022 Notes are not convertible at the holders’ option for the quarter ending March 31, 2019. We have not received any conversion requests for our 2022 Notes.

The Conversion Condition for the 2018 Notes was met for the quarters ended June 30, 2017, September 30, 2017, December 31, 2017 and March 31, 2018. Therefore, our 2018 Notes became convertible at the holders’ option beginning on July 1, 2017 and continued to be convertible at the holders’ option through June 30, 2018. Conversion requests received subsequent to June 30, 2018 were settled on the maturity date. We settled $413.2 million principal amount of the 2018 Notes in early conversions and the remaining principal amount of $161.8 million was settled on November 1, 2018, the maturity date of our 2018 Notes.

The conversion value over the principal amount for the early 2018 Note conversions was settled in cash from the exercise of the 2018 Note Hedges (as defined below). The conversion value over the principal amount for the principal amount settled on November 1, 2018 was satisfied with approximately 1.3 million shares of our common stock, which was entirely offset by shares of our common stock delivered to us by the 2018 Note Hedge counterparties under the 2018 Note Hedge, and cash in lieu of fractional shares. The shares delivered to us by the 2018 Note Hedge counterparties were immediately retired. As a result of the early note conversions, we recorded a loss of $4.1 million for the year ended December 31, 2018. As a result of the settlement of the 2018 Notes and the 2018 Note Hedges, we recorded an aggregate $6.4 million net reduction to additional paid-in capital, reflecting $773.3 million of fair value adjustments to the conversion option settled, offset by a $766.9 million benefit from the exercise of the 2018 Note Hedges.

For statement of cash flow presentation, we bifurcated the principal amount of the 2018 Notes paid during the year ended December 31, 2018 into two components: the portion of the repayment attributable to debt discount is classified as cash outflows from operating activities, and the portion of the repayment attributable to the principal is classified as cash outflows from financing activities.

We consider the fair value of the Notes at December 31, 2018 to be a Level 2 measurement. The estimated fair values of the Notes at December 31, 2018 and December 31, 2017 based on the closing trading price per $100 of the Notes were as follows (in thousands):



	December 31, 2018		December 31, 2017
2022 Notes	$	1,105,281	897,778
2018 Notes	$	—	$	1,015,554

As of December 31, 2018, the remaining life of the 2022 Notes is 41 months, and the 2018 Notes were no longer outstanding. The following table sets forth total interest expense recognized related to the Notes (in thousands):



	Year Ended December 31,
	2018		2017		2016
Amortization of debt issuance cost
2022 Notes	$	1,531	$	860	$	—
2018 Notes	1,131		1,911		1,785
Amortization of debt discount
2022 Notes	30,159		16,921		—
2018 Notes	19,912		33,702		31,493
Total	$	52,733	$	53,394	$	33,278
Effective interest rate of the liability component
2022 Notes	4.75%
2018 Notes	6.50%

Note Hedges

To minimize the impact of potential economic dilution upon conversion of the Notes, we entered into convertible note hedge transactions (the 2022 Note Hedge and 2018 Note Hedge, respectively, and collectively, the Note Hedges) with certain investment banks, with respect to our common stock concurrently with the issuance of the 2022 Notes and 2018 Notes.

The Note Hedges cover shares of our common stock at a strike price per share that corresponds to the initial conversion price of the respective Notes, subject to adjustment, and are exercisable upon conversion of the Notes. If exercised, we may elect to receive cash, shares of our common stock, or a combination of cash and shares. We have accounted for the aggregate amount of purchase price for the Note Hedges as a reduction to additional paid-in capital. The Note Hedges will expire upon the maturity of the Notes. The Note Hedges are intended to reduce the potential economic dilution upon conversion of the Notes in the event that the fair value per share of our common stock at the time of exercise is greater than the conversion price of the Notes. The Note Hedges are separate transactions and are not part of the terms of the Notes. Holders of the Notes will not have any rights with respect to the Note Hedges. The Note Hedges do not impact earnings per share, as they were entered into to offset any dilution from the Notes. As of December 31, 2018, the 2018 Note Hedge is no longer outstanding, and 5,806,936 shares remain subject to the 2022 Note Hedge.

Warrants



	Proceeds		Shares	Strike Price		First Expiration Date
	(in thousands)
2022 Warrants	$	54,071	5,806,936	$	203.40	September 1, 2022
2018 Warrants	$	84,525	7,783,023	$	107.46	February 1, 2019

Separately, we entered into warrant transactions with certain investment banks, whereby we sold warrants to acquire, subject to adjustment, the number of shares of our common stock shown in the table above (the 2022 Warrants and 2018 Warrants, respectively, and collectively, the Warrants). If the average market value per share of our common stock for the reporting period, as measured under the Warrants, exceeds the strike price of the respective Warrants, such Warrants would have a dilutive effect on our earnings per share to the extent we report net income. According to the terms of each of the Warrants, the Warrants will be automatically exercised over a 60 trading day period beginning on the first expiration date of the respective Warrants as set forth above. The Warrants are separate transactions and are not remeasured through earnings each reporting period. The Warrants are not part of the Notes or Note Hedges, and have been accounted for as part of additional paid-in capital.

As the 2018 Warrants and the 2022 Warrants will be net share settled, the total number of shares of our common stock we will issue depends on the daily volume-weighted average stock prices over a 60 trading day period beginning on the first expiration date of the 2018 Warrants, which was February 1, 2019, and the first expiration date of the 2022 Warrants, which will be September 1, 2022. We have issued and expect to continue to issue additional shares of our common stock in the first half of 2019 upon the automatic exercise of the 2018 Warrants. Additionally, we expect to issue additional shares of our common stock in the second half of 2022 upon the automatic exercise of the 2022 Warrants. Based on the volume-weighted average stock price on February 1, 2019, the total number of shares of our common stock to be issued upon the exercise of the 2018 Warrants would be approximately 4.0 million, resulting in immediate and substantial dilution to our existing stockholders. Similarly, the 2022 Warrants could have a dilutive effect to the extent that the daily volume-weighted average stock prices over a 60 trading day period beginning on September 1, 2022 exceeds the strike price of the 2022 Warrants. Based on the volume-weighted average stock price on February 1, 2019, the total number of shares of our common stock to be issued upon the automatic exercise of the 2022 warrants would be approximately 0.4 million. The actual number of shares of our common stock issuable upon the automatic exercise of the 2022 warrants, if any, is unknown at this time.

(in thousands)

2022 Note Hedge

2018 Note Hedge