Debt

12 Months Ended

Feb. 05, 2023

Convertible Senior Notes

In April 2018, we issued $575.0 million in principal amount of 0.125% convertible senior notes due 2023, in a private placement to qualified institutional buyers pursuant to Rule 144A under the Securities Act and received proceeds of $562.1 million, after deducting the underwriters’ discounts and commissions. The Notes are governed by an indenture (the Indenture) between us, as the issuer, and U.S. Bank National Association, as trustee. The Notes are our senior unsecured obligations. The Indenture does 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. The Notes will mature on April 15, 2023. Interest is payable semi-annually in arrears on April 15 and October 15 of each year.

The Notes are convertible for up to 21,884,155 shares of our common stock at an initial conversion rate of approximately 38.0594 shares of common stock per $1,000 principal amount, which is equal to an initial conversion price of approximately $26.27 per share of common stock, subject to adjustment. On October 14, 2022, we provided notice to the holders electing to settle all conversions on or after October 15, 2022 with cash up to the principal amount of the Notes and shares for any excess conversion value.

The conversion price will be subject to adjustment in some events. Following certain corporate events that occur prior to the maturity date or following our issuance of a notice of redemption, we will increase the conversion rate for a holder who elects to convert its Notes in connection with such corporate event or during the related redemption period in certain circumstances. Additionally, upon the occurrence of a corporate event that constitutes a “fundamental change” per the Indenture, holders of the Notes may require us to repurchase for cash all or a portion of the Notes at a purchase price equal to 100% of the principal amount of the Notes plus accrued and unpaid contingent interest.

The Notes consisted of the following (in thousands):


	At the End of Fiscal
	2022		2023
Liability:
Principal	$	575,000	$	575,000
Less: debt discount, net of amortization (1)	(35,641)		—
Less: debt issuance costs, net of amortization (1)	(2,580)		(494)
Net carrying amount of the Notes	$	536,779	$	574,506

Stockholders' equity recorded at issuance:
Allocated value of the conversion feature (1)	$	136,333	$	—
Less: debt issuance costs (1)	(3,068)		—
Additional paid-in capital	$	133,265	$	—

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(1) Fiscal 2023 reflects the adoption of ASU 2020-06 on February 7, 2022 using the modified retrospective method as described in Note 2.

The total estimated fair values of the Notes at the end of fiscal 2022 and 2023 were $681.8 million and $660.0 million. The fair values were determined based on the closing trading price per $100 of the Notes as of the last day of trading of fiscal 2022 and 2023. The fair value of the Notes is primarily affected by the trading price of our common stock and market interest rates. Based on the closing price of our common stock of $29.91 on the last day of fiscal 2023, the if-converted value of the Notes of $654.6 million was greater than its principal amount. At the end of fiscal 2023, the remaining term of the Notes is approximately two months.

The following table sets forth total interest expense recognized related to the Notes (in thousands):


	Fiscal Year Ended
		2022			2023
Amortization of debt discount (1)		$	28,874		$	—
Amortization of debt issuance costs (1)		2,091			2,598
Total amortization of debt discount and debt issuance costs		30,965			2,598
Contractual interest expense		732			716
Total interest expense related to the Notes		$	31,697		$	3,314

Effective interest rate of the liability component		5.6		%	0.6		%

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(1) Fiscal 2023 reflects the adoption of ASU 2020-06 on February 7, 2022 using the modified retrospective method as described in Note 2.

In connection with the offering of the Notes, we paid $64.6 million to enter into capped call transactions with certain of the underwriters and their affiliates (the Capped Calls), whereby we have the option to purchase up to a total of 21,884,155 shares of our common stock to offset the dilution and/or any cash payments we are required to make in excess of the principal amount upon conversion of the Notes at maturity, with such offset subject to a cap of $39.66 per share (which represents a premium of 100% over the last reported sales price of our common stock on April 4, 2018), subject to certain adjustments (the Cap Price). However, for conversions prior to maturity, the Capped Calls would be settled at their fair value, which may not completely offset, and may be substantially less than, the value of the consideration in excess of the principal amount of the Notes delivered upon such conversion. The cost of the Capped Calls was accounted for as a reduction to additional paid-in capital on the consolidated balance sheets.

Impact on Earnings Per Share

Subsequent to the adoption of ASU 2020-06, we compute the potentially dilutive shares of common stock related to the Notes for periods we report net income using the if-converted method. Upon conversion at maturity, there will be no economic dilution from the Notes until the average market price of our common stock exceeds the Cap Price of $39.66 per share as the exercise of the Capped Calls would offset any dilution from the Notes from the conversion price up to the Cap Price. Capped Calls are excluded from the calculation of diluted earnings per share, as they would be anti-dilutive.

Revolving Credit Facility

In August 2020, we entered into a Credit Agreement with a consortium of financial institutions and lenders that provides for a five-year, senior secured revolving credit facility of $300.0 million (Credit Facility). Proceeds from the Credit Facility may be used for general corporate purposes and working capital. The Credit Facility expires, absent default or early termination by us, on the earlier of (i) August 24, 2025 or (ii) 91 days prior to the stated maturity of the Notes unless, on such date and each subsequent day until the Notes are paid in full, the sum of our cash, cash equivalents and marketable securities and the aggregate unused commitments then available to us exceed $625.0 million.

The annual interest rates applicable to loans under the Credit Facility are, at our option, equal to either a base rate plus a margin ranging from 0.50% to 1.25% or LIBOR (based on one, three or six-month interest periods), subject to a floor of 0%, plus a margin ranging from 1.50% to 2.25%. Interest on revolving loans is payable quarterly in arrears with respect to loans based on the base rate and at the end of an interest period in the case of loans based on LIBOR (or at each three-month interval if the interest period is longer than three months). We are also required to pay a commitment fee on the unused portion of the commitments ranging from 0.25% to 0.40% per annum, payable quarterly in arrears. In March 2021, the ICE Benchmark Administration, the administrator of LIBOR, announced that it will cease publication of LIBOR by June 2023. In March 2023, we amended the Credit Facility to transition LIBOR to the Secured Overnight Financing Rate (SOFR) effective April 1, 2023. The annual interest rate for SOFR borrowings will be equal to term SOFR (based on one, three or six-month interest periods), subject to a floor of 0%, plus a margin ranging from 1.50% to 2.25%.

In February 2022, we repaid, in full, the $250.0 million outstanding under the Credit Facility. Prior to repayment, the outstanding loan bore weighted-average interest at the one-month LIBOR of approximately 1.65% and 1.60% resulting in interest expense of $1.4 million and $4.1 million during fiscal 2021 and 2022 and 1.61% resulting in interest expense of $0.3 million during the first quarter of fiscal 2023.

Loans under the Credit Facility are collateralized by substantially all of our assets and subject to certain restrictions and two financial ratios measured as of the last day of each fiscal quarter: a Consolidated Leverage Ratio not to exceed 4.5:1 and an Interest Coverage Ratio not to be less than 3:1. We were in compliance with all covenants under the Credit Facility at the end of fiscal 2023.