NOTES TO CONSOL I DATED FINANCIAL STATEMENTS

(Unaudited)

Our financial statements and accompanying notes are prepared in accordance with generally accepted accounting principles in the United States (“U.S. GAAP”).  In our opinion, the accompanying consolidated financial statements of Tivity Health, Inc. and its wholly-owned subsidiaries (collectively, “Tivity Health,” the “Company,” or such terms as “we,” "us,” or “our”) reflect all adjustments, consisting only of normal recurring adjustments, necessary for a fair statement.

Our results from continuing operations do not include the results of the total population health services (“TPHS”) business, which we sold to Sharecare, Inc. (“Sharecare”) effective July 31, 2016.  Results of operations for the TPHS business have been classified as discontinued operations for all periods presented in the accompanying consolidated financial statements.  See Note 4 for further information.

We have omitted certain financial information that is normally included in financial statements prepared in accordance with U.S. GAAP but that is not required for interim reporting purposes.  You should read the accompanying consolidated financial statements in conjunction with the financial statements and notes thereto included in our Annual Report on Form 10-K for the year ended December 31, 2017.

On January 1, 2018, we adopted Accounting Standards Codification (“ASC”) Topic 606, “Revenue from Contracts with Customers” (“ASC Topic 606”) using the modified retrospective method, pursuant to which we applied ASC Topic 606 to (i) all new contracts entered into after January 1, 2018 and (ii) contracts that were not completed as of January 1, 2018.  In accordance with this approach, our results for periods prior to January 1, 2018 were not revised and continue to be reported in accordance with our historical accounting under ASC Topic 605, “Revenue Recognition.”  For contracts that were modified prior to January 1, 2018, we have not retrospectively restated the contract for those modifications in accordance with the contract modification guidance in ASC 606-10-25-12 and ASC 606-10-25-13 but instead, using the practical expedient available under ASC 606-10-65-1(f)(4), have reflected the aggregate effect of all modifications when identifying the satisfied and unsatisfied performance obligations, determining the transaction price, and allocating the transaction price.

The cumulative impact of our adoption of ASC Topic 606 was not material to record as of January 1, 2018, and there was no material impact on our consolidated income statement, balance sheet, or cash flows for the quarter ended March 31, 2018.  For example, we do not have any material contract assets or contract liabilities as defined under ASC Topic 606.  In addition, the incremental costs of obtaining a contract with a customer (for example, sales commissions) that would have been recognized as an asset on January 1, 2018 were not material to record.  See Note 3 for a further discussion of revenue recognition.

On January 1, 2018, we adopted Accounting Standards Update (“ASU”) No. 2016-15, “Statement of Cash Flows” (Topic 230) (“ASU 2016-15”).  ASU 2016-15 addresses how certain cash receipts and cash payments are presented and classified in the statement of cash flows and is to be applied using a retrospective approach.  The adoption of this standard did not have a material impact on our consolidated financial statements and related disclosures and did not result in a reclassification to items in prior periods.

On January 1, 2018, we adopted ASU No. 2017-09, “Compensation-Stock Compensation (Topic 718): Scope of Modification Accounting” (“ASU 2017-09”), which clarifies when changes to the terms or conditions of a share-based payment award must be accounted for as modifications.  ASU 2017-09 is to be applied prospectively to awards modified on or after January 1, 2018.  The adoption of this standard did not have an impact on our consolidated financial statements and related disclosures.

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In February 2016, the Financial Accounting Standards Board (“ FASB ”) issu ed ASU No. 2016-02, “ Leases ”   (“ASU 2016-02” ), which requires that lessees recognize assets and liabilities for leases with lease terms greater than twelve months in the statement of financial position , and is effective for us on January 1, 2019 . ASU 2016-02 also requires improved disclosures to help users of financial statements better understand the amount, timing and uncertainty of cash flows arising from leases. The standard is required to be adopted using a modified retrospective transition method, which will require the cumulative effect of initially applying the standard to be recognized as an adjustment to beginning retained earnings as of January 1, 2019.  We are currently conducting analysis to quantify the adoption impact of the provisi ons of the new standard and evaluating our current leases. We believe we are following an appropriate timeline to allow for proper recognition, presentation and disclosure upon adoption effective January 1, 2019 .     

In January 2017, the FASB issued ASU No. 2017-04, “Intangibles - Goodwill and Other” (“ASU 2017-04”), which simplifies the subsequent measurement of goodwill by eliminating step two from the goodwill impairment test.  ASU 2017-04 is effective for annual and interim impairment tests in fiscal years beginning after December 15, 2019 and is required to be applied prospectively. Early adoption is allowed for annual goodwill impairment tests performed on testing dates after January 1, 2017. We do not anticipate that adopting this standard will have an impact on our consolidated financial statements and related disclosures.

Beginning in 2018, we account for revenue from contracts with customers in accordance with ASC Topic 606.  The unit of account in ASC Topic 606 is a performance obligation, which is a promise in a contract to transfer to a customer either a distinct good or service (or bundle of goods or services) or a series of distinct goods or services provided over a period of time. ASC Topic 606 requires that a contract's transaction price, which is the amount of consideration to which an entity expects to be entitled in exchange for transferring promised goods or services to a customer, is to be allocated to each performance obligation in the contract based on relative standalone selling prices and recognized as revenue when or as the performance obligation is satisfied.

We earn revenue from our three programs, SilverSneakers® senior fitness, Prime® Fitness and WholeHealth Living ^TM .  We provide the SilverSneakers senior fitness program to members of Medicare Advantage and Medicare Supplement plans through our contracts with such plans.  We offer Prime Fitness, a fitness facility access program, through contracts with employers, commercial health plans, and other sponsoring organizations that allow their members to individually purchase the program.  We sell our WholeHealth Living program primarily to health plans.

The significant majority of our customer contracts contain one performance obligation - to stand ready to provide access to our network of fitness locations and fitness programming - which is satisfied over time as services are rendered each month over the contract term.  There are generally no performance obligations that are unsatisfied at the end of a particular month.  There was no material revenue recognized during the three and six months ended June 30, 2018 from performance obligations satisfied in a prior period.

Our fees are variable month to month and are generally billed per member per month (“PMPM”), or billed based on a combination of PMPM and member visits to a network location.  We bill PMPM fees by multiplying the contractually negotiated PMPM rate by the number of members eligible for or receiving our services during the month.  We bill for member visits approximately one month in arrears once actual member visits are known.  Payments from customers are typically due within 30 days of invoice date.  When material, we capitalize costs to obtain contracts with customers and amortize them over the expected recovery period. 

Our customer contracts include variable consideration, which is allocated to each distinct month over the contract term based on eligible members and/or member visits each month.  The allocated consideration corresponds directly with the value to our customers of our services completed for the month.  Under the majority of our contracts, we recognize revenue each month using the practical expedient available under ASC 606-10-55-18, which provides that revenue is recognized in the amount for which we have the right to invoice. 

Although we evaluate our financial performance and make resource allocation decisions based upon the results of our single operating and reportable segment, we believe the following information depicts how our revenues and cash flows are affected by economic factors.  For the three and six months ended June 30, 2018, revenue from our SilverSneakers program, which is predominantly contracted with Medicare Advantage and Medicare Supplement plans, comprised approximately 81% of our consolidated revenues, while revenue from our Prime Fitness and WholeHealth Living programs comprised approximately 16% and 3% of our consolidated revenues, respectively.

Sales and usage-based taxes are excluded from revenues.

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On July 27, 2016, we entered into a Membership Interest Purchase Agreement (the “Purchase Agreement”) with Sharecare and Healthways SC, LLC, a newly formed Delaware limited liability company and wholly owned subsidiary of the Company, pursuant to which Sharecare acquired the TPHS business, which closed effective July 31, 2016 (“Closing”).

At Closing, Sharecare delivered to the Company an Adjustable Convertible Equity Right (the “ACER”) with an initial face value of $30.0 million.  The ACER was convertible into shares of common stock of Sharecare on July 31, 2018 at an initial conversion price of $249.87 per share, subject to customary adjustment for stock splits, stock dividends and other reorganizations of Sharecare.  

The Purchase Agreement provided for post-closing adjustments based on, among other things, any successful claims for indemnification by Sharecare (which may result in a reduction in the face amount of the ACER, unless the Company elects, in its sole discretion, to satisfy any such successful claims with cash payments), none of which such claims had been made as of June 30, 2018.

As of each of December 31, 2017 and June 30, 2018, we have recorded the $39.8 million face value of the ACER at an estimated carrying value of $10.8 million, which is classified as an equity receivable included in other assets. 

The following table presents financial results of the TPHS business included in “loss from discontinued operations” for the three and six months ended June 30, 2018 and 2017.

We currently have three types of s h ar e -b a s e d awar d s outst a n d ing to our employees and directors: st oc k optio n s, r e stricted stock units, and market stock u nits. We believe that our s h are- ba sed a w a r d s a lign the inter e sts of o ur emp l oye e s and dir e ct o rs with those of our st o c kho l ders.

We recognize share-based compensation expense for the market stock units if the requisite service period is rendered, even if the market condition is never satisfied. For the three and six months ended June 30, 2018, we recognized share-based compensation costs of $1.8 million and $3.3 million, respectively.  For the three and six months ended June 30, 2017, we recognized share-based compensation costs of $1.9 million and $3.4 million, respectively.  We account for forfeitures as they occur.  

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A summary of our stock options as of June 30, 2018 and the changes during the six months ended June 30, 2018 is presented below:

The weighted-average grant-date fair value of options granted during the three months ended June 30, 2018 was $20.60.

The follow i ng table sh o w s a sum m ary of our r e str i cted st o c k units a s of June 30, 2018, as well a s activit y durin g th e six months ended June 30, 2018:

The follow i ng table sh o w s a sum m ary of our market stock units as of June 30, 2018, a s wel l a s activit y durin g th e six months ended June 30, 2018:

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For the three and six months ended June 30, 2018, we had an effective income tax rate from continuing operations of 25.3% and 25.2%, respectively.   For the three and six months ended June 30, 2017, we had an effective income tax rate from continuing operations of 35.7% and 36.7%, respectively.  The lower effective income tax rate in 2018 is primarily a result of the Tax Cuts and Jobs Act of 2017 (the “Tax Act”).

At June 30, 2018, we had approximately $47.0 million of federal loss carryforwards, approximately $101.7 million of state loss carryforwards, and approximately $4.6 million of foreign tax credits.

We file income tax returns in the U.S. Federal jurisdiction and in various state and foreign jurisdictions.  Tax years remaining subject to examination in the U.S. Federal jurisdiction include 2014 to present.

The C o mp an y's debt, net of unamortized deferred loan costs, c o ns i sted of the followi n g at June 30, 2018 and December 31, 2017:

Credit Facility

On June 8, 2012, we entered into the Fifth Amended and Restated Revolving Credit and Term Loan Agreement (as amended, the “Prior Credit Agreement”).  The Prior Credit Agreement provided us with a $125 million revolving credit facility that included a swingline sub facility of $20 million and a $75 million sub facility for letters of credit.  The Prior Credit Agreement also provided a $200 million term loan facility and an uncommitted incremental accordion facility of $100 million.  Borrowings under the Prior Credit Agreement generally bore interest at variable rates based on a margin or spread in excess of either (1) the one-month, two-month, three-month or six-month rate (or with the approval of affected lenders, nine-month or twelve-month rate) for Eurodollar deposits (“LIBOR”), which may not be less than zero), or (2) the greatest of (a) the SunTrust Bank prime lending rate, (b) the federal funds rate plus 0.50% and (c) one-month LIBOR plus 1.00% (the “Base Rate”), as selected by the Company.  The LIBOR margin varied between 1.75% and 3.00%, and the Base Rate margin varied between 0.75% and 2.00%, depending on our leverage ratio.  The Prior Credit Agreement also provided for an annual fee ranging between 0.30% and 0.50% of the unused commitments under the revolving credit facility. 

On April 21, 2017, we entered into a new Revolving Credit and Term Loan Agreement (the “ Credit Agreement”) with a group of lenders, which replaced the Prior Credit Agreement.  The Credit Agreement provides us with (1) a $100 million revolving credit facility that includes a $25 million sublimit for swingline loans and a $75 million sublimit for letters of credit, (2) a $70 million term loan A facility, (3) a $150 million delayed draw term loan facility, and (4) an uncommitted incremental accordion facility of $100 million.

We used the proceeds of the term loan A and cash on hand to repay all of the outstanding indebtedness under the Prior Credit Agreement and to pay transaction costs and expenses.  Proceeds of revolving loans and delayed draw term loans may be used to repay outstanding indebtedness (including amounts payable upon or in respect of any conversion of the Cash Convertible Notes discussed below and the repayment of any revolving loans borrowed for such purposes), to finance working capital needs, to finance acquisitions, to finance the repurchase of our common stock, to finance capital expenditures and for other general corporate purposes of the Company and its subsidiaries.  As further detailed below under “1.50% Cash Convertible Senior Notes Due 2018”, on July 2, 2018, we borrowed $100.0 million under the delayed draw term loan, which was used to repay the principal amount of the Cash Convertible Notes.  No additional amounts may be borrowed under the delayed draw term after July 2, 2018.

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We are requir ed to repay any outstanding revolving loans in full on April 21, 2022.   The term loan A was repaid in full during 2017 and may not be re-borrowed.    W e are required to repay the delayed draw term loan in quarterly principal installments calculated as follow s: (1) for each of the first six quarters following the time of borrowing (beginning with the fourth quarter of 2018 and ending with the first quarter of 2020) , 1.250% of the aggregate principal amount of the delayed draw term loan funded as of the last da y of the immediately preceding quarter; and (2) for each of the remaining quarters prior to maturity on April 21, 2022, 1.875% of the aggregate principal amount of the delayed draw term loan funded as of the last day of the immediately preceding quarter.   At maturity on April 21, 2022, the entire unpaid principal balance of the delayed draw term loan is due and payable. As of June 30, 2018, we had not borrowed any amounts under the delayed draw term loan, and availability under the revolving credit facility totaled $93.7 million.   

Borrowings under the Credit Agreement generally bear interest at variable rates based on a margin or spread in excess of either (1) one-month, two-month, three-month or six-month LIBOR (or with the approval of affected lenders, 12-month LIBOR), which may not be less than zero, or (2) the greatest of (a) the SunTrust Bank prime lending rate, (b) the federal funds rate plus 0.50%, and (c) one-month LIBOR plus 1.00% (the “Base Rate”), as selected by the Company.  The LIBOR margin varies between 1.50% and 2.75%, and the Base Rate margin varies between 0.50% and 1.75%, depending on our net leverage ratio.  The Credit Agreement also provides for annual commitment fees ranging between 0.20% and 0.50% of the unused commitments under the revolving credit facility and the delayed draw term loan facility and annual letter of credit fees on the daily outstanding availability under outstanding letters of credit at the applicable LIBOR margin.  Extensions of credit under the Credit Agreement are secured by guarantees from all of the Company’s active material domestic subsidiaries and by security interests in substantially all of the Company’s and such subsidiaries’ assets.

The Credit Agreement contains financial covenants that require us to maintain, as defined, (1) specified maximum ratios or levels of funded debt to EBITDA and (2) specified minimum ratios or levels of fixed charge coverage. The Credit Agreement also contains various other affirmative and negative covenants that are typical for financings of this type.  Among other things, they limit repurchases of our common stock and the amount of dividends that we can pay to holders of our common stock.

1.50% Cash Convertible Senior Notes Due 2018

On July 16, 2013, we completed the issuance of $150.0 million aggregate principal amount of cash convertible senior notes due July 2018 (the “Cash Convertible Notes”), which bore interest at a rate of 1.50% per year, payable semiannually in arrears on January 1 and July 1 of each year, beginning on January 1, 2014. The Cash Convertible Notes matured on July 2, 2018.  All of the holders elected to convert their Cash Convertible Notes for settlement on July 2, 2018, and none of the Cash Convertible Notes were repurchased or converted into cash prior to such date.  W e classified the Cash Convertible Notes, net of the unamortized discount, and related deferred loan costs as a current liability at June 30, 2018 and at December 31, 2017 .

The cash conversion feature of the Cash Convertible Notes was a derivative liability (the “Cash Conversion Derivative”) that required bifurcation from the Cash Convertible Notes in accordance with FASB ASC Topic 815, “Derivatives and Hedging” (“ASC Topic 815”), and was carried at fair value.   Due to the classification of the Cash Convertible Notes as a current liability at June 30, 2018 and December 31, 2017, the Cash Conversion Derivative was recorded in current liabilities at June 30, 2018 and December 31, 2017.   The fair value of the Cash Conversion Derivative at the time of issuance of the Cash Convertible Notes was $36.8 million, which was recorded as a debt discount for purposes of accounting for the debt component of the Cash Convertible Notes.

The debt discount was amortized over the term of the Cash Convertible Notes using the effective interest method.  For the three and six months ended June 30, 2018, we recorded $2.1 million and $4.1 million, respectively, of interest expense related to the amortization of the debt discount based upon an effective interest rate of 5.7%.  For the three and six months ended June 30, 2017, we recorded $2.0 million and $3.9 million, respectively, of interest expense related to the amortization of the debt discount based upon an effective interest rate of 5.7%.   We also recognized interest expense of $0.6 million and $1.1 million for each of the three and six months ended June 30, 2018 and 2017, respectively, related to the contractual interest rate of 1.50% per year. The net carrying amount of the Cash Convertible Notes at June 30, 2018 and December 31, 2017 was $150.0 million and $145.9 million, respectively, net of the unamortized discount of $0 and $4.1 million, respectively.

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In connection with the issuance of the Ca sh Convertible Notes, we entered into privately negotiated convertibl e note hedge transactions (the “ Cash Convertible Notes Hedges ” ), which were cash-settled and were intended to reduce our exposure to potential cash payments that we would be required to m ake if holders elected to convert the Cash Convertible Notes at a time when our stock price exceeded the conversion price. The initial cost of the Cash Convertible Notes Hedges was $36.8 million. Due to the classification of the Cash Convertible Notes as a current liability at June 30, 2018 and December 31, 2017, the Cash Convertible Notes Hedges were classified in current assets at June 30, 2018 and December 31, 2017.  The Cash Convertible Notes Hedges were recorded as a derivative asset under ASC Topic 81 5 and were carried at fair value.  See Note 9 for additional information regarding the Cash Convertible Notes Hedges and the Cash Conversion Derivative and their fair values.

On July 2, 2018, we repaid the $150.0 million aggregate principal amount of the Cash Convertible Notes using a combination of available cash and proceeds from borrowings under the delayed draw term loan facility of $100.0 million.  In addition, on July 2, 2018 we settled the Cash Conversion Derivative of $141.2 million, which was fully funded by payments made by the counterparties for the settlement of the Cash Convertible Notes Hedges.  Subsequent to July 2, 2018, the Credit Agreement provides capacity to borrow under a $100 million revolving credit facility that includes a $25 million sublimit for swingline loans and a $75 million sublimit for letters of credit.

In July 2013, we also sold separate privately negotiated warrants (the “Warrants”) initially relating, in the aggregate, to a notional number of shares of our common stock underlying the Cash Convertible Notes Hedges. The Warrants have an initial strike price of approximately $25.95 per share.  The Warrants will be net share settled by our issuing a number of shares of our common stock per Warrant with a value corresponding to the excess of the market price per share of our common stock (as measured on each warrant exercise date under the terms of the Warrants) over the applicable strike price of the Warrants. The Warrants meet the definition of derivatives under the guidance in ASC Topic 815; however, because these instruments have been determined to be indexed to our own stock and meet the criteria for equity classification under ASC Topic 815, the Warrants have been accounted for as an adjustment to our additional paid-in-capital.

When the market value per share of our common stock exceeds the strike price of the Warrants, the Warrants have a dilutive effect on net income per share, and the “treasury stock” method is used in calculating the dilutive effect on earnings per share.  See Note 11 for additional information on such dilutive effect.

On November 6, 2017, United Healthcare issued a press release announcing expansion of its fitness benefits (“United Press Release”), and the market price of the Company's shares of common stock dropped on that same day. In connection with the United Press Release, two lawsuits have been filed against the Company as described below.  We intend to vigorously defend ourselves against both complaints.

Weiner and Denham Lawsuits

On November 20, 2017, Eric Weiner, claiming to be a stockholder of the Company, filed a complaint on behalf of stockholders who purchased the Company's common stock between February 24, 2017 and November 3, 2017 (“Weiner Lawsuit”).  The Weiner Lawsuit was filed as a class action in the U.S. District Court for the Middle District of Tennessee, naming the Company, the Company's chief executive officer, chief financial officer and chief accounting officer as defendants.  The complaint alleges that the defendants violated Sections 10(b) and 20(a) of the Securities Exchange Act of 1934 (the “Exchange Act”) and Rule 10b-5 promulgated under the Exchange Act in making false and misleading statements and omissions related to the United Press Release.  The complaint seeks monetary damages on behalf of the purported class.  On April 3, 2018, the Court entered an order appointing the Oklahoma Firefighters Pension and Retirement System as lead plaintiff, designated counsel for the lead plaintiff, and established certain deadlines for the case.

On January 26, 2018, Charles Denham, claiming to be a stockholder of the Company, filed a purported shareholder derivative action, on behalf of the Company, in the U.S. District Court for the Middle District of Tennessee, naming the Company as a nominal defendant and the Company's chief executive officer, chief financial officer, chief accounting officer, current directors of the Company and a former director of the Company, as defendants.  The complaint asserts claims for breach of fiduciary duty, waste, and unjust enrichment, largely tracking allegations in the Weiner Lawsuit.  The complaint further alleges that certain defendants engaged in insider trading.  The plaintiff seeks monetary damages on behalf of the Company, certain corporate governance and internal procedural reforms, and other equitable relief.

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Other

Additionally, from time to time, we are subject to contractual disputes, claims and legal proceedings that arise from time to time in the ordinary course of our business.  While we are unable to estimate a range of potential losses, we do not believe that any of the legal proceedings pending against us as of the date of this report, some of which are expected to be covered by insurance policies, will have a material adverse effect on our financial statements.  As these matters are subject to inherent uncertainties, our view of these matters may change in the future. We expense legal costs as incurred.  

We account for certain assets and liabilities at fair value. Fair value is defined as the price that would be received upon sale of an asset or paid upon transfer of a liability in an orderly transaction between market participants at the measurement date, assuming the transaction occurs in the principal or most advantageous market for that asset or liability.

Fair Value Hierarchy

The hierarchy below lists three levels of fair value based on the extent to which inputs used in measuring fair value are observable in the market. We categorize each of our fair value measurements in one of these three levels based on the lowest level input that is significant to the fair value measurement in its entirety. These levels are:

As described in Note 7, the Cash Convertible Notes Hedges and Cash Conversion Derivative were settled upon their maturity on July 2, 2018.  At June 30, 2018, the fair values of these instruments were measured using their actual values to be settled on July 2, 2018, which were considered Level 2 inputs.  At December 31, 2017, the fair values of the Cash Convertible Notes Hedges and the Cash Conversion Derivative were measured using Level 3 inputs because these instruments were not actively traded. They were valued using an option pricing model that used observable and unobservable market data for inputs, such as expected time to maturity of the derivative instruments, the risk-free interest rate, the expected volatility of our common stock, and other factors. The Cash Convertible Notes Hedges and the Cash Conversion Derivative were designed such that changes in their fair values would offset one another, with minimal impact to the consolidated statements of operations. Therefore, the sensitivity of changes in the unobservable inputs to the option pricing model for such instruments was mitigated.

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The follow i ng table pr e sen t s our fin a nc ia l instru m ents measured at fair value on a rec u rr i ng b a sis us i ng u n o b serv a ble in pu t s (Leve l 3):

The gai n s a n d loss e s inc lu ded in e a rni n gs not e d ab o ve represent the c h an g e in the fair value of these fina n cial i n stru me nts and were r e c o rded e a ch p er i od in the c on solidated sta t ements of operations as sell i ng, gen e ral a nd admin i str a tive expens e s.

Fair Value of Other Financial Instruments

In addition to the Cash Convertible Not e s He d g e s and the C a s h Conv e rsio n D e rivative , th e estimate d fai r val u e s o f whic h a re d i sc l ose d above , th e e s timate d f a ir value of each class of fina n cial i n stru m ents at June 30, 2018 w a s as foll o ws:

C a sh and c a sh equival e nts – The carr y ing amount of $67.0 million app r oximat e s fair value b e ca u se of the sh o rt maturity of those i n str um ents (l e s s th a n three m o nths).

D e bt – The est i mated fair v a lue of outst a nding b orr o w i ngs u nd e r t h e Credit A gre e m ent, which incl u d e s a r e volving cr e dit facility and a term loan f a cility (see Note 7), and the C a sh Conv e rtible Not e s ar e det e r m ine d b a s e d o n th e fai r val u e hierarch y a s disc u sse d a bove .

The r e volving credit facility is not actively trad e d and theref o re is c l assif i ed as a Level 2 valuation based on the market for s i milar ins t ru m ents. The estimated fair value is b a s e d on the average of the pr i c e s set by the issu i ng b an k given c u rr e nt market co n ditions a n d is not nec e ssarily indicative of the amount we cou l d rea l ize in a c u rr e nt market exchan g e. There were no outstanding borrowings under the Credit Agreement at June 30, 2018 .

Prior to their maturity on July 2, 2018, the Cash Convertible Notes were actively traded and therefore are classified as Level 1 valuations. The fair value at June 30, 2018 was $291.2 million, which is based on the actual settlement value of the Cash Convertible Notes on July 2, 2018, and the par value was $150.0 million. The carrying amount of the Cash Convertible Notes at June 30, 2018 was $150.0 million.

We use derivative instruments to manage risks related to the Cash Convertible Notes, which matured and were repaid on July 2, 2018.  We account for derivatives in accordance with ASC Topic 815, which establishes accounting and reporting standards requiring that certain derivative instruments be recorded on the balance sheet as either an asset or liability measured at fair value. Additionally, changes in the derivative's fair value will be recognized currently in earnings unless specific hedge accounting criteria are met.  We do not execute transactions or hold derivative financial instruments for trading or other purposes.

Der i vat i ve Instru m ents Not D e sig n ated a s H e dgi n g Instru m ents

The C a sh C o nvers i on Der i vative and Cash Conv e rtible Notes H ed g es were settled on July 2, 2018 in conjunction with the maturity of the Cash Convertible Notes.  They did no t qualif y fo r hedg e accountin g treatmen t unde r U.S . GAA P an d were m easure d a t fai r valu e, wit h gain s and loss e s r e co g niz e d immed i ately in the con s olidated statements of operations. T hes e derivativ e instrumen t s no t des i gnat e d a s he d gin g i n strument s di d no t hav e a materia l im p a c t o n our co n sol i dated statemen t s of comprehensive income for the three and six months ended June 30, 2018 a n d 2017.

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The Cash Convers i on Der i vative was accounted for as a derivative liability and carried at fair value. In order to offset the r i s k ass o ciated w i th the Cash Conversion D e rivative, we entered into Cash Conv e rtible Not e s H e dg e s, wh i ch were c a s h -settl e d and were intend e d to r e duce our ex p os u re to pot e ntial c a sh pa y ments that we wou l d be r e quir e d to make if holders e l ected to conv e rt the C a sh Conv e rtible Notes at a time when o ur st o ck p rice exc e eds the con v ers i on p rice. The C a sh C o nvertible Notes Hed g es were acco u nted for as a d eri v ative asset and c a rr i ed at fair value.

The gains and losses resulting from a change in fair values of the Cash Conversion Derivative and the Cash Convertible Notes Hedges are reported in the consolidated statements of comprehensive income (loss).

See Note 9 for more information on fair value measurements.

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The follow i ng is a r e c o ncili a tion of the n u merat o r a n d denom i nat o r of bas i c and d iluted earnin g s (l o s s) p e r share f o r the three and six months ended June 30, 2018 a n d 2017 :

Market stock units outstanding are considered contingently issuable shares, and certain of these stock units were excluded from the calculations of diluted earnings per share for all periods presented as the performance criteria had not been met as of the end of the reporting periods.

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There were no changes in accumulated other comprehensive income (loss) (“OCI”) for the six months ended June 30, 2018.   The following tables summarize the changes in accumulated OCI, net of tax, for the six months ended June 30, 2017:

T here were no reclassifications out of accumulated OCI for the six months ended June 30, 2018 and 2017.

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