ACI WORLDWIDE, INC. 10-Q

ITEM 1. FINANCIAL STATEMENTS ACI WORLDWIDE, INC. AND SUBSIDIARIES CONDENSED CONSOLIDATED BALANCE SHEETS (unaudited and in thousands, except share and per share amounts) September 30, 2021 December 31, 2020 ASSETS Current assets Cash and cash equivalents $ 141,482 $ 165,374 Receivables, net of allowances of $ 2,544 and $ 3,912 , respectively 299,336 342,879 Settlement assets 510,477 605,008 Prepaid expenses 29,820 24,288 Other current assets 30,420 17,365 Total current assets 1,011,535 1,154,914 Noncurrent assets Accrued receivables, net 196,676 215,772 Property and equipment, net 61,689 64,734 Operating lease right-of-use assets 49,438 41,243 Software, net 166,936 196,456 Goodwill 1,280,226 1,280,226 Intangible assets, net 292,659 321,983 Deferred income taxes, net 64,775 57,476 Other noncurrent assets 60,556 54,099 TOTAL ASSETS $ 3,184,490 $ 3,386,903 LIABILITIES AND STOCKHOLDERS’ EQUITY Current liabilities Accounts payable $ 35,318 $ 41,223 Settlement liabilities 512,980 604,096 Employee compensation 46,689 48,560 Current portion of long-term debt 40,967 34,265 Deferred revenue 105,725 95,849 Other current liabilities 61,806 81,612 Total current liabilities 803,485 905,605 Noncurrent liabilities Deferred revenue 32,912 33,564 Long-term debt 1,033,353 1,120,742 Deferred income taxes, net 31,951 40,504 Operating lease liabilities 45,354 39,958 Other noncurrent liabilities 41,881 39,933 Total liabilities 1,988,936 2,180,306 Commitments and contingencies Stockholders’ equity Preferred stock; $ 0.01 par value; 5,000,000 shares authorized; no shares issued at September 30, 2021, and December 31, 2020 — — Common stock; $ 0.005 par value; 280,000,000 shares authorized; 140,525,055 shares issued at September 30, 2021, and December 31, 2020 702 702 Additional paid-in capital 683,044 682,431 Retained earnings 1,021,810 1,003,490 Treasury stock, at cost, 22,994,595 and 23,412,870 shares at September 30, 2021, and December 31, 2020, respectively ( 411,684 ) ( 387,581 ) Accumulated other comprehensive loss ( 98,318 ) ( 92,445 ) Total stockholders’ equity 1,195,554 1,206,597 TOTAL LIABILITIES AND STOCKHOLDERS’ EQUITY $ 3,184,490 $ 3,386,903 The accompanying notes are an integral part of the condensed consolidated financial statements. 3 Table of contents ACI WORLDWIDE, INC. AND SUBSIDIARIES CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS (unaudited and in thousands, except per share amounts) Three Months Ended September 30, Nine Months Ended September 30, 2021 2020 2021 2020 Revenues Software as a service and platform as a service $ 191,456 $ 190,369 $ 583,530 $ 563,892 License 54,454 56,773 110,383 135,038 Maintenance 53,519 53,049 159,037 159,078 Services 17,485 15,692 50,819 49,270 Total revenues 316,914 315,883 903,769 907,278 Operating expenses Cost of revenue (1) 158,712 158,579 476,811 471,762 Research and development 35,248 33,573 104,791 108,175 Selling and marketing 33,413 22,154 90,211 76,692 General and administrative 29,717 37,000 89,429 102,684 Depreciation and amortization 31,845 33,395 95,434 98,928 Total operating expenses 288,935 284,701 856,676 858,241 Operating income 27,979 31,182 47,093 49,037 Other income (expense) Interest expense ( 11,208 ) ( 12,925 ) ( 33,943 ) ( 44,238 ) Interest income 2,834 2,927 8,553 8,781 Other, net ( 1,088 ) 1,356 ( 1,036 ) ( 6,361 ) Total other income (expense) ( 9,462 ) ( 8,642 ) ( 26,426 ) ( 41,818 ) Income before income taxes 18,517 22,540 20,667 7,219 Income tax expense 4,753 6,674 2,347 1,705 Net income $ 13,764 $ 15,866 $ 18,320 $ 5,514 Income per common share Basic $ 0.12 $ 0.14 $ 0.16 $ 0.05 Diluted $ 0.12 $ 0.13 $ 0.15 $ 0.05 Weighted average common shares outstanding Basic 117,512 116,558 117,574 116,217 Diluted 118,540 117,804 118,817 117,644 (1) The cost of revenue excludes charges for depreciation but includes amortization of purchased and developed software for resale. The accompanying notes are an integral part of the condensed consolidated financial statements. 4 Table of contents ACI WORLDWIDE, INC. AND SUBSIDIARIES CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (LOSS) (unaudited and in thousands) Three Months Ended September 30, Nine Months Ended September 30, 2021 2020 2021 2020 Net income $ 13,764 $ 15,866 $ 18,320 $ 5,514 Other comprehensive income (loss): Foreign currency translation adjustments ( 4,223 ) 1,842 ( 5,873 ) ( 4,909 ) Total other comprehensive income (loss) ( 4,223 ) 1,842 ( 5,873 ) ( 4,909 ) Comprehensive income $ 9,541 $ 17,708 $ 12,447 $ 605 The accompanying notes are an integral part of the condensed consolidated financial statements. 5 Table of contents ACI WORLDWIDE, INC. AND SUBSIDIARIES CONDENSED CONSOLIDATED STATEMENTS OF STOCKHOLDERS’ EQUITY (unaudited and in thousands) Three Months Ended September 30, 2021 Common Stock Additional Paid-in Capital Retained Earnings Treasury Stock Accumulated Other Comprehensive Loss Total Balance as of June 30, 2021 $ 702 $ 676,399 $ 1,008,046 $ ( 412,492 ) $ ( 94,095 ) $ 1,178,560 Net income — — 13,764 — — 13,764 Other comprehensive loss — — — — ( 4,223 ) ( 4,223 ) Stock-based compensation — 6,367 — — — 6,367 Shares issued and forfeited, net, under stock plans — 278 — 845 — 1,123 Repurchase of stock-based compensation awards for tax withholdings — — — ( 37 ) — ( 37 ) Balance as of September 30, 2021 $ 702 $ 683,044 $ 1,021,810 $ ( 411,684 ) $ ( 98,318 ) $ 1,195,554 Three Months Ended September 30, 2020 Common Stock Additional Paid-in Capital Retained Earnings Treasury Stock Accumulated Other Comprehensive Loss Total Balance as of June 30, 2020 $ 702 $ 667,554 $ 920,478 $ ( 399,663 ) $ ( 98,334 ) $ 1,090,737 Net income — — 15,866 — — 15,866 Other comprehensive income — — — — 1,842 1,842 Stock-based compensation — 8,061 — — — 8,061 Shares issued and forfeited, net, under stock plans — 326 — 6,038 — 6,364 Repurchase of stock-based compensation awards for tax withholdings — — — ( 26 ) — ( 26 ) Balance as of September 30, 2020 $ 702 $ 675,941 $ 936,344 $ ( 393,651 ) $ ( 96,492 ) $ 1,122,844 The accompanying notes are an integral part of the condensed consolidated financial statements. 6 Table of contents ACI WORLDWIDE, INC. AND SUBSIDIARIES CONDENSED CONSOLIDATED STATEMENTS OF STOCKHOLDERS’ EQUITY (unaudited and in thousands, except share amounts) Nine Months Ended September 30, 2021 Common Stock Additional Paid-in Capital Retained Earnings Treasury Stock Accumulated Other Comprehensive Loss Total Balance as of December 31, 2020 $ 702 $ 682,431 $ 1,003,490 $ ( 387,581 ) $ ( 92,445 ) $ 1,206,597 Net income — — 18,320 — — 18,320 Other comprehensive loss — — — — ( 5,873 ) ( 5,873 ) Stock-based compensation — 20,790 — — — 20,790 Shares issued and forfeited, net, under stock plans — ( 20,177 ) — 30,141 — 9,964 Repurchase of 1,000,000 shares of common stock — — — ( 39,411 ) — ( 39,411 ) Repurchase of stock-based compensation awards for tax withholdings — — — ( 14,833 ) — ( 14,833 ) Balance as of September 30, 2021 $ 702 $ 683,044 $ 1,021,810 $ ( 411,684 ) $ ( 98,318 ) $ 1,195,554 Nine Months Ended September 30, 2020 Common Stock Additional Paid-in Capital Retained Earnings Treasury Stock Accumulated Other Comprehensive Loss Total Balance as of December 31, 2019 $ 702 $ 667,658 $ 930,830 $ ( 377,639 ) $ ( 91,583 ) $ 1,129,968 Net income — — 5,514 — — 5,514 Other comprehensive loss — — — — ( 4,909 ) ( 4,909 ) Stock-based compensation — 22,943 — — — 22,943 Shares issued and forfeited, net, under stock plans — ( 14,660 ) — 24,019 — 9,359 Repurchase of 1,000,000 shares of common stock — — — ( 28,881 ) — ( 28,881 ) Repurchase of stock-based compensation awards for tax withholdings — — — ( 11,150 ) — ( 11,150 ) Balance as of September 30, 2020 $ 702 $ 675,941 $ 936,344 $ ( 393,651 ) $ ( 96,492 ) $ 1,122,844 The accompanying notes are an integral part of the condensed consolidated financial statements. 7 Table of contents ACI WORLDWIDE, INC. AND SUBSIDIARIES CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (unaudited and in thousands) Nine Months Ended September 30, 2021 2020 Cash flows from operating activities: Net income $ 18,320 $ 5,514 Adjustments to reconcile net income to net cash flows from operating activities: Depreciation 15,838 18,012 Amortization 84,528 86,992 Amortization of operating lease right-of-use assets 7,752 14,145 Amortization of deferred debt issuance costs 3,525 3,613 Deferred income taxes ( 11,742 ) ( 10,540 ) Stock-based compensation expense 20,790 22,943 Other ( 27 ) 4,339 Changes in operating assets and liabilities: Receivables 55,953 41,261 Accounts payable ( 5,080 ) 1,680 Accrued employee compensation ( 1,140 ) 13,585 Deferred revenue 10,339 14,361 Other current and noncurrent assets and liabilities ( 51,158 ) ( 23,847 ) Net cash flows from operating activities 147,898 192,058 Cash flows from investing activities: Purchases of property and equipment ( 12,968 ) ( 14,091 ) Purchases of software and distribution rights ( 20,041 ) ( 21,556 ) Net cash flows from investing activities ( 33,009 ) ( 35,647 ) Cash flows from financing activities: Proceeds from issuance of common stock 2,526 2,853 Proceeds from exercises of stock options 7,252 6,518 Repurchase of stock-based compensation awards for tax withholdings ( 14,833 ) ( 11,150 ) Repurchases of common stock ( 39,411 ) ( 28,881 ) Proceeds from revolving credit facility — 30,000 Repayment of revolving credit facility ( 55,000 ) ( 109,000 ) Repayment of term portion of credit agreement ( 29,212 ) ( 29,212 ) Payments on or proceeds from other debt, net ( 10,187 ) ( 10,044 ) Net cash flows from financing activities ( 138,865 ) ( 148,916 ) Effect of exchange rate fluctuations on cash 84 4,952 Net increase (decrease) in cash and cash equivalents ( 23,892 ) 12,447 Cash and cash equivalents, beginning of period 165,374 121,398 Cash and cash equivalents, end of period $ 141,482 $ 133,845 Supplemental cash flow information Income taxes paid $ 28,131 $ 19,733 Interest paid $ 35,966 $ 46,489 The accompanying notes are an integral part of the condensed consolidated financial statements. 8 Table of contents ACI WORLDWIDE, INC. AND SUBSIDIARIES NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (unaudited) 1. Condensed Consolidated Financial Statements The unaudited condensed consolidated financial statements include the accounts of ACI Worldwide, Inc. and its wholly-owned subsidiaries (collectively, the “Company”). All intercompany balances and transactions have been eliminated. The condensed consolidated financial statements as of September 30, 2021, and for the three and nine months ended September 30, 2021 and 2020, are unaudited and reflect all adjustments of a normal recurring nature, which are, in the opinion of management, necessary for a fair presentation, in all material respects, of the financial position and operating results for the interim periods. The condensed consolidated balance sheet as of December 31, 2020, is derived from the audited financial statements. The condensed consolidated financial statements contained herein should be read in conjunction with the consolidated financial statements and notes thereto contained in the Company’s annual report on Form 10-K for the fiscal year ended December 31, 2020, filed on February 25, 2021. Results for the three and nine months ended September 30, 2021, are not necessarily indicative of results that may be attained in the future. The preparation of condensed consolidated financial statements in conformity with accounting principles generally accepted in the United States (“U.S. GAAP”) requires management to make judgments, estimates, and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the condensed consolidated financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates. Risks and Uncertainties The Company is subject to risks and uncertainties as a result of the COVID-19 pandemic that began in early 2020. The COVID-19 pandemic, and the measures imposed by the governments of various countries, states, cities, and other geographic regions to prevent its spread, have negatively impacted global economic and market conditions, including levels of consumer and business spending. The extent of the impact of the COVID-19 pandemic on the Company's business is highly uncertain and difficult to predict, as vaccination rates vary by geography, new variants spread, and the response to the pandemic and available information continues to be evolving. The Company has experienced changes in volumes for certain Merchant and Biller customers and has received limited requests for extended payment terms under existing contracts. Continuing economic disruptions could have a material adverse effect on our business as our customers curtail and reduce capital and overall spending. The severity of the impact of the COVID-19 pandemic on the Company's business will depend on a number of factors, including, but not limited to, the duration and severity of the pandemic and the extent and severity of the impact on the Company's customers, all of which are uncertain and cannot be predicted. The Company's future results of operations and liquidity could be adversely impacted by delays in payments of outstanding receivable amounts beyond normal payment terms, uncertain demand, and the impact of any initiatives or programs that the Company may undertake to address financial and operations challenges faced by its customers. As of the date of issuance of these condensed consolidated financial statements, the extent to which the COVID-19 pandemic may materially impact the Company's financial condition, liquidity, or results of operations is uncertain. Other Current Liabilities The components of other current liabilities are included in the following table (in thousands): September 30, 2021 December 31, 2020 Vendor financed licenses $ 9,776 $ 12,901 Operating lease liabilities 11,214 13,438 Royalties payable 4,897 3,959 Accrued interest 2,983 8,745 Other 32,936 42,569 Total other current liabilities $ 61,806 $ 81,612 9 Table of contents Leases The Company’s operating leases are included in operating lease right-of-use assets, other current liabilities, and operating lease liabilities. During the nine months ended September 30, 2021, the new corporate headquarters operating lease commenced. In recognition of this lease, an operating lease right of use asset of $ 12.9 million and an operating lease liability of $ 15.2 million was incurred. These amounts, less amortization and payments to date, are included within operating lease right-of-use assets and other current liabilities and operating lease liabilities in the condensed consolidated balance sheet as of September 30, 2021. Settlement Assets and Liabilities Individuals and businesses settle their obligations to the Company’s various Biller clients using credit or debit cards or via automated clearing house (“ACH”) payments. The Company creates a receivable for the amount due from the credit or debit card processor and an offsetting payable to the client. Upon confirmation that the funds have been received, the Company settles the obligation to the client. Due to timing, in some instances, the Company may (1) receive the funds into bank accounts controlled by and in the Company’s name that are not disbursed to its clients by the end of the day, resulting in a settlement deposit on the Company’s books and (2) disburse funds to its clients in advance of receiving funds from the credit or debit card processor, resulting in a net settlement receivable position. Off Balance Sheet Settlement Accounts The Company also enters into agreements with certain Biller clients to process payment funds on their behalf. When an ACH or automated teller machine network payment transaction is processed, a transaction is initiated to withdraw funds from the designated source account and deposit them into a settlement account, which is a trust account maintained for the benefit of the Company’s clients. A simultaneous transaction is initiated to transfer funds from the settlement account to the intended destination account. These “back to back” transactions are designed to settle at the same time, usually overnight, such that the Company receives the funds from the source at the same time as it sends the funds to their destination. However, due to the transactions being with various financial institutions there may be timing differences that result in float balances. These funds are maintained in accounts for the benefit of the client, which is separate from the Company’s corporate assets. As the Company does not take ownership of the funds, these settlement accounts are not included in the Company’s balance sheet. The Company is entitled to interest earned on the fund balances. The collection of interest on these settlement accounts is considered in the Company’s determination of its fee structure for clients and represents a portion of the payment for services performed by the Company. The amount of settlement funds as of September 30, 2021, and December 31, 2020, was $ 196.0 million and $ 246.8 million, respectively. Fair Value The fair value of the Company’s Credit Agreement approximates the carrying value due to the floating interest rate (Level 2 of the fair value hierarchy). The Company measures the fair value of its Senior Notes based on Level 2 inputs, which include quoted market prices and interest rate spreads of similar securities. The fair value of the Company’s 5.750 % Senior Notes due 2026 (“2026 Notes”) was $ 420.0 million and $ 424.5 million as of September 30, 2021, and December 31, 2020, respectively. The fair values of cash and cash equivalents approximate the carrying values due to the short period of time to maturity (Level 2 of the fair value hierarchy). Goodwill In accordance with the Accounting Standards Codification (“ASC”) 350, Intangibles – Goodwill and Other, the Company assesses goodwill for impairment annually during the fourth quarter of its fiscal year using October 1 balances or when there is evidence that events or changes in circumstances indicate that the carrying amount of the asset may not be recovered. The Company evaluates goodwill at the reporting unit level and had previously identified ACI On Demand and ACI On Premise, the operating segments at the time, as the reporting units.As of September 30, 2021, the Company's goodwill balance of $ 1.3 billion was allocated to these two reporting units, with $ 554.3 million allocated to ACI On Demand and $ 725.9 million allocated to ACI On Premise. 10 Table of contents Recoverability of goodwill is measured using a discounted cash flow valuation model incorporating discount rates commensurate with the risks involved. Use of a discounted cash flow model is common practice in impairment testing in the absence of available transactional market evidence to determine the fair value. The calculated fair value was substantially in excess of the current carrying value for all reporting units based upon the October 1, 2020, annual impairment test. Given the adverse economic and market conditions caused by the COVID-19 pandemic, the Company considered a variety of qualitative factors to determine if an additional quantitative impairment test was required subsequent to our annual impairment test. Based on a variety of factors, including the excess of the fair value over the carrying amount in the most recent impairment test, we determined that an additional quantitative impairment test was not required. As discussed in Note 9, Segment Information , during the first quarter of 2021, the Company made a change in organizational structure to better align with its strategic direction. This change in the Company’s operating segments will also result in a change in reporting units. The Company is currently in the process of calculating the allocation of goodwill for the new reporting units, which are expected to coincide with the new operating segments - Banks, Merchants, and Billers, and will be completed prior to year-end. Equity Method Investment In July 2019, the Company invested $ 18.3 million for a 30 % non-controlling financial interest in a payment technology and services company in India. The Company accounted for this investment using the equity method in accordance with ASC 323, Investments - Equity Method and Joint Ventures . The Company records its share of earnings and losses in the investment on a one-quarter lag basis. Accordingly, the Company recorded an investment of $ 19.0 million and $ 19.3 million, which is included in other noncurrent assets in the condensed consolidated balance sheet as of September 30, 2021, and December 31, 2020, respectively. New Accounting Standards Recently Adopted In December 2019, the Financial Accounting Standards Board ("FASB") issued Accounting Standards update ("ASU") 2019-12, Income Taxes (Topic 740): Simplifying the Accounting for Income Taxes , as part of its initiative to reduce complexity in accounting standards. The amendments in this update simplify the accounting for income taxes by removing certain exceptions within ASC 740, Income Taxes , as well as clarify and simplify other aspects of the accounting for income taxes to promote consistency among reporting entities. ASU 2019-12 was effective for annual and interim periods beginning after December 15, 2020. The adoption of ASU 2019-12 did not have a material impact on the Company's condensed consolidated financial statements. 2. Revenue In accordance with ASC 606, Revenue From Contracts With Customers , revenue is recognized upon transfer of control of promised products and/or services to customers in an amount that reflects the consideration the Company expects to receive in exchange for those products and services. Revenue is recognized net of any taxes collected from customers and subsequently remitted to governmental authorities. See Note 9, Segment Information, for additional information, including disaggregation of revenue based on primary solution category. Total receivables represent amounts billed and amounts earned that are to be billed in the future (i.e., accrued receivables). Included in accrued receivables are services, software as a service ("SaaS"), and platform as a service ("PaaS") revenues earned in the current period but billed in the following period, and amounts due under multi-year software license arrangements with extended payment terms for which the Company has an unconditional right to invoice and receive payment subsequent to invoicing. 11 Table of contents Total receivables, net is comprised of the following (in thousands): September 30, 2021 December 31, 2020 Billed receivables $ 147,247 $ 179,177 Allowance for doubtful accounts ( 2,544 ) ( 3,912 ) Billed receivables, net 144,703 175,265 Current accrued receivables, net 154,633 167,614 Long-term accrued receivables, net 196,676 215,772 Total accrued receivables, net 351,309 383,386 Total receivables, net $ 496,012 $ 558,651 No customer accounted for more than 10% of the Company’s consolidated receivables balance as of September 30, 2021, or December 31, 2020. Deferred revenue includes amounts due or received from customers for software licenses, maintenance, services, and/or SaaS and PaaS services in advance of recording the related revenue. Changes in deferred revenue were as follows (in thousands): Balance, December 31, 2020 $ 129,413 Deferral of revenue 112,008 Recognition of deferred revenue ( 101,306 ) Foreign currency translation ( 1,478 ) Balance, September 30, 2021 $ 138,637 Revenue allocated to remaining performance obligations represents contracted revenue that will be recognized in future periods, which is comprised of deferred revenue and amounts that will be invoiced and recognized as revenue in future periods. This does not include: • Revenue that will be recognized in future periods from capacity overages that are accounted for as a usage-based royalty. • SaaS and PaaS revenue from variable consideration that will be recognized in accordance with the ‘right to invoice’ practical expedient or meets the allocation objective. Revenue allocated to remaining performance obligations was $ 871.2 million as of September 30, 2021, of which the Company expects to recognize approximately 55 % over the next 12 months and the remainder thereafter. During the three and nine months ended September 30, 2021 and 2020, revenue recognized by the Company from performance obligations satisfied in previous periods was not significant. 3. Debt As of September 30, 2021, the Company had $ 687.9 million and $ 400.0 million outstanding under its Term Loans and Senior Notes, respectively, with up to $ 498.5 million of unused borrowings under the Revolving Credit Facility portion of the Credit Agreement, as amended, and up to $ 1.5 million of unused borrowings under the Letter of Credit agreement. The amount of unused borrowings actually available varies in accordance with the terms of the agreement. Credit Agreement On April 5, 2019, the Company and its wholly-owned subsidiaries, ACI Worldwide Corp. and ACI Payments, Inc. entered into the Second Amended and Restated Credit Agreement (the “Credit Agreement”) with the lenders, and Bank of America, N.A., as administrative agent for the lenders, to amend and restate the Company's existing agreement, as amended, dated February 24, 2017. 12 Table of contents The Credit Agreement consists of (a) a five-year $ 500.0 million senior secured revolving credit facility (the “Revolving Credit Facility”), which includes sublimits for (1) the issuance of standby letters of credit and (2) swingline loans, (b) a five-year $ 279.0 million senior secured term loan facility (the "Initial Term Loan") and (c) a five-year $ 500.0 million Delayed Draw Term Loan (together with the Initial Term Loan, the "Term Loans", and together with the Initial Term Loan and the Revolving Credit Facility, the “Credit Facility”). The Credit Agreement also allows the Company to request optional incremental term loans and increases in the revolving commitment. The Credit Facility will mature on April 5, 2024. At the Company’s option, borrowings under the Credit Facility bear interest at an annual rate equal to, either (a) a base rate determined by reference to the highest of (1) the annual interest rate publicly announced by the administrative agent as its Prime Rate, (2) the federal funds effective rate plus 1/2 of 1%, or (3) a London Interbank Offered Rate (“LIBOR”) rate determined by reference to the costs of funds for U.S. dollar deposits for a one-month interest period, adjusted for certain additional costs, plus 1 % or (b) a LIBOR rate determined by reference to the costs of funds for U.S. dollar deposits for the interest period relevant to such borrowings, adjusted for certain additional costs, plus an applicable margin. Based on the calculation of the applicable consolidated total leverage ratio, the applicable margin for borrowings under the Credit Facility is between 0.25 % to 1.25 % with respect to base rate borrowings and between 1.25 % and 2.25 % with respect to LIBOR rate borrowings. Interest is due and payable monthly. The interest rate in effect for the Credit Facility as of September 30, 2021, was 2.08 %. The Company is also required to pay (a) a commitment fee related to the unutilized commitments under the Revolving Credit Facility, payable quarterly in arrears, (b) letter of credit fees on the maximum amount available to be drawn under all outstanding letters of credit in an amount equal to the applicable margin on LIBOR rate borrowings under the Revolving Credit Facility on an annual basis, payable quarterly in arrears, and (c) customary fronting fees for the issuance of letters of credit fees and agency fees. Expected Discontinuation of LIBOR In July 2017, the United Kingdom’s Financial Conduct Authority, which regulates LIBOR, announced it will no longer compel banks to submit rates for the calculation of LIBOR after 2021. The Alternative Reference Rates Committee has proposed the Secured Overnight Financing Rate ("SOFR") as its recommended alternative to LIBOR, and the first publication of SOFR rates was released in April 2018. The Company is evaluating the potential impact of the transition from LIBOR as an interest rate benchmark to other potential alternative reference rates, including SOFR. The Company's Credit Agreement is currently indexed to LIBOR and the maturity date of the Credit Agreement extends beyond 2021. The Credit Agreement contemplates the discontinuation of LIBOR and provides options for the Company in such an event. The Company will continue to actively assess the related opportunities and risks involved in this transition. Senior Notes On August 21, 2018, the Company completed a $ 400.0 million offering of the 2026 Notes at an issue price of 100 % of the principal amount in a private placement for resale to qualified institutional buyers. The 2026 Notes bear interest at an annual rate of 5.750 %, payable semi-annually in arrears on February 15 and August 15 of each year. The 2026 Notes will mature on August 15, 2026. Maturities on debt outstanding as of September 30, 2021, are as follows (in thousands): Fiscal Year Ending December 31, Remainder of 2021 $ 9,738 2022 50,431 2023 69,906 2024 557,823 2025 — Thereafter 400,000 Total $ 1,087,898 As of September 30, 2021, and at all times during the period, the Company was in compliance with its financial debt covenants. 13 Table of contents Total debt is comprised of the following (in thousands): September 30, 2021 December 31, 2020 Term loans $ 687,898 $ 717,110 Revolving credit facility — 55,000 5.750 % Senior notes, due August 2026 400,000 400,000 Debt issuance costs ( 13,578 ) ( 17,103 ) Total debt 1,074,320 1,155,007 Less: current portion of term loans 45,563 38,950 Less: current portion of debt issuance costs ( 4,596 ) ( 4,685 ) Total long-term debt $ 1,033,353 $ 1,120,742 Overdraft Facility In 2019, the Company and ACI Payments, Inc. entered in to an uncommitted overdraft facility with Bank of America, N.A. The overdraft facility bears interest at the federal funds effective rate plus 2.250 % based on the Company’s average outstanding balance and the frequency in which overdrafts occur. The overdraft facility acts as a secured loan under the terms of the Credit Agreement to provide an additional funding mechanism for timing differences that can occur in the bill payment settlement process. Amounts outstanding on the overdraft facility are included in other current liabilities in the condensed consolidated balance sheet. As of September 30, 2021, there was $ 75.0 million available and no amount outstanding on the overdraft facility. As of December 31, 2020, there was no amount outstanding on the overdraft facility. Other The Company finances certain multi-year license agreements for internal-use software. Upon execution, these arrangements have been treated as a non-cash investing and financing activity for purposes of the condensed consolidated statements of cash flows. As of September 30, 2021, $ 5.1 million was outstanding on these agreements, of which $ 2.9 million and $ 2.2 million are included in other current liabilities and other noncurrent liabilities, respectively, in the condensed consolidated balance sheet. As of December 31, 2020, $ 7.8 million was outstanding on these agreements, of which $ 5.6 million and $ 2.2 million are included in other current liabilities and other noncurrent liabilities, respectively, in the condensed consolidated balance sheet. 4. Software and Other Intangible Assets The carrying amount and accumulated amortization of the Company's software assets subject to amortization at each balance sheet date are as follows (in thousands): September 30, 2021 December 31, 2020 Gross Carrying Amount Accumulated Amortization Net Balance Gross Carrying Amount Accumulated Amortization Net Balance Software for resale $ 129,771 $ ( 127,842 ) $ 1,929 $ 130,261 $ ( 123,418 ) $ 6,843 Software for internal use 435,706 ( 270,699 ) 165,007 430,330 ( 240,717 ) 189,613 Total software $ 565,477 $ ( 398,541 ) $ 166,936 $ 560,591 $ ( 364,135 ) $ 196,456 Amortization of software for resale is computed using the greater of (a) the ratio of current gross revenues to the total of current and future gross revenues expected to be derived from the software or (b) the straight-line method over the remaining estimated useful life of generally five to ten years . Software for resale amortization expense recorded during the three months ended September 30, 2021 and 2020, totaled $ 1.5 million and $ 2.1 million, respectively. Software for resale amortization expense recorded during the nine months ended September 30, 2021 and 2020, totaled $ 4.9 million and $ 6.1 million, respectively. These software amortization expense amounts are reflected in cost of revenue in the condensed consolidated statements of operations. Amortization of software for internal use is computed using the straight-line method over an estimated useful life of generally three to eight years . Software for internal use amortization expense recorded during the three months ended September 30, 2021 and 2020, totaled $ 17.5 million and $ 17.9 million, respectively. Software for internal use amortization expense recorded during the nine months ended September 30, 2021 and 2020, totaled $ 51.8 million and $ 53.1 million, respectively. These software amortization expense amounts are reflected in depreciation and amortization in the condensed consolidated statements of operations. 14 Table of contents The carrying amount and accumulated amortization of the Company’s other intangible assets subject to amortization at each balance sheet date are as follows (in thousands): September 30, 2021 December 31, 2020 Gross Carrying Amount Accumulated Amortization Net Balance Gross Carrying Amount Accumulated Amortization Net Balance Customer relationships $ 508,808 $ ( 221,889 ) $ 286,919 $ 512,389 $ ( 197,787 ) $ 314,602 Trademarks and trade names 23,895 ( 18,155 ) 5,740 24,115 ( 16,734 ) 7,381 Total other intangible assets $ 532,703 $ ( 240,044 ) $ 292,659 $ 536,504 $ ( 214,521 ) $ 321,983 Other intangible assets amortization expense recorded during both the three months ended September 30, 2021 and 2020, totaled $ 9.3 million. Other intangible assets amortization expense recorded during both the nine months ended September 30, 2021 and 2020, totaled $ 27.8 million. Based on capitalized intangible assets as of September 30, 2021, estimated amortization expense amounts in future fiscal years are as follows (in thousands): Fiscal Year Ending December 31, Software Amortization Other Intangible Assets Amortization Remainder of 2021 $ 17,995 $ 9,208 2022 57,903 36,681 2023 39,950 36,364 2024 24,135 31,860 2025 19,171 23,293 Thereafter 7,782 155,253 Total $ 166,936 $ 292,659 5. Stock-Based Compensation Plans Employee Stock Purchase Plan Shares issued under the 2017 Employee Stock Purchase Plan during the nine months ended September 30, 2021 and 2020, totaled 86,877 and 114,709 , respectively. Stock Options A summary of stock option activity is as follows: Number of Shares Weighted Average Exercise Price ($) Weighted Average Remaining Contractual Term (Years) Aggregate Intrinsic Value of In-the-Money Options ($) Outstanding as of December 31, 2020 2,186,511 $ 17.87 Exercised ( 380,676 ) 19.05 Outstanding as of September 30, 2021 1,805,835 $ 17.63 3.27 $ 23,662,370 Exercisable as of September 30, 2021 1,805,835 $ 17.63 3.27 $ 23,662,370 The total intrinsic value of stock options exercised during the nine months ended September 30, 2021 and 2020, was $ 7.8 million and $ 14.3 million, respectively. There were no stock options granted during the nine months ended September 30, 2021 or 2020. 15 Table of contents Long-term Incentive Program Performance Share Awards During the nine months ended September 30, 2021, the Company modified the performance target for the remaining outstanding long-term incentive program performance shares ("LTIP performance shares") in consideration of the impact of the COVID-19 pandemic, resulting in additional stock-based compensation expense of approximately $ 0.4 million. During the nine months ended September 30, 2021, a total of 10,457 LTIP performance shares vested. The Company withheld 4,527 of those shares to pay the employees’ portion of the minimum payroll withholding taxes. Total Shareholder Return Awards A summary of nonvested total shareholder return awards ("TSRs") is as follows: Number of Shares Weighted Average Grant Date Fair Value Nonvested as of December 31, 2020 1,367,728 $ 34.59 Granted 367,317 50.60 Vested ( 782,588 ) 31.31 Forfeited ( 153,681 ) 38.57 Change in payout rate 391,294 31.31 Nonvested as of September 30, 2021 1,190,070 $ 40.10 During the nine months ended September 30, 2021, a total of 782,588 TSRs awards granted in fiscal 2018 vested and achieved a payout rate of 200 % based on the Company's total shareholder return as compared to a group of peer companies over a three-year performance period. The Company withheld 205,373 of those shares to pay the employees’ portion of the minimum payroll withholding taxes. The fair value of TSRs granted during the nine months ended September 30, 2021 and 2020, were estimated on the date of grant using the Monte Carlo simulation model, acceptable under ASC 718, Compensation - Stock Compensation , using the following weighted average assumptions: Nine Months Ended September 30, 2021 2020 Expected life (years) 2.8 2.8 Risk-free interest rate 0.3 % 0.5 % Expected volatility 41.2 % 31.4 % Expected dividend yield — — Restricted Share Units A summary of nonvested restricted share unit awards ("RSUs") is as follows: Number of Shares Weighted Average Grant Date Fair Value Nonvested as of December 31, 2020 1,118,182 $ 27.34 Granted 578,220 39.27 Vested ( 522,608 ) 27.69 Forfeited ( 232,734 ) 30.54 Nonvested as of September 30, 2021 941,060 $ 33.69 During the nine months ended September 30, 2021, a total of 522,608 RSUs vested. The Company withheld 155,031 of those shares to pay the employees’ portion of the minimum payroll withholding taxes. 16 Table of contents As of September 30, 2021, there were unrecognized compensation costs of $ 23.5 million and $ 21.3 million related to nonvested RSUs and TSRs, respectively, which the Company expects to recognize over weighted average periods of 1.9 years and 2.0 years, respectively. The Company recorded stock-based compensation expense recognized under ASC 718 for the three months ended September 30, 2021 and 2020, of $ 6.4 million and $ 8.1 million, respectively, with corresponding tax benefits of $ 0.9 million and $ 1.4 million, respectively. The Company recorded stock-based compensation expense recognized under ASC 718 for the nine months ended September 30, 2021 and 2020, of $ 20.8 million and $ 22.9 million, respectively, with corresponding tax benefits of $ 3.1 million and $ 4.2 million, respectively. 6. Common Stock and Treasury Stock In 2005, the board approved a stock repurchase program authorizing the Company, as market and business conditions warrant, to acquire its common stock and periodically authorize additional funds for the program. In February 2018, the board approved the repurchase of the Company's common stock of up to $ 200.0 million, in place of the remaining purchase amounts previously authorized. The Company repurchased 1,000,000 shares for $ 39.4 million during the nine months ended September 30, 2021. Under the program to date, the Company has repurchased 47,357,495 shares for approximately $ 651.7 million. As of September 30, 2021, the maximum remaining amount authorized for purchase under the stock repurchase program was $ 72.7 million. 7. Earnings Per Share Basic earnings per share is computed in accordance with ASC 260, Earnings Per Share , based on weighted average outstanding common shares. Diluted earnings per share is computed based on basic weighted average outstanding common shares adjusted for the dilutive effect of stock options, RSUs, and certain contingently issuable shares for which performance targets have been achieved. The following table reconciles the weighted average share amounts used to compute both basic and diluted earnings per share (in thousands): Three Months Ended September 30, Nine Months Ended September 30, 2021 2020 2021 2020 Weighted average shares outstanding: Basic weighted average shares outstanding 117,512 116,558 117,574 116,217 Add: Dilutive effect of stock options and RSUs 1,028 1,246 1,243 1,427 Diluted weighted average shares outstanding 118,540 117,804 118,817 117,644 The diluted earnings per share computation excludes 1.6 million and 1.5 million options to purchase shares, RSUs, and contingently issuable shares during the three months ended September 30, 2021 and 2020, respectively, as their effect would be anti-dilutive. The diluted earnings per share computation excludes 1.5 million and 1.7 million options to purchase shares, RSUs, and contingently issuable shares during the nine months ended September 30, 2021 and 2020, respectively, as their effect would be anti-dilutive. Common stock outstanding as of September 30, 2021, and December 31, 2020, was 117,530,460 and 117,112,185 , respectively. 8. Other, Net Other, net is primarily comprised of foreign currency transaction gains and losses. Other, net was $ 1.1 million of expense and $ 1.4 million of income for the three months ended September 30, 2021 and 2020, respectively. Other, net was $ 1.0 million and $ 6.4 million of expense for the nine months ended September 30, 2021 and 2020, respectively. 9. Segment Information In January 2021, the Company made a change in organizational structure to align with its strategic direction. As a result of this change, the Company reassessed its segment reporting structure due to changes in how the Company's chief operating decision maker ("CODM") assesses the Company's performance and allocates resources. Beginning in the first quarter of 2021, the Company reports financial performance based on its new operating segments, Banks, Merchants, and Billers, and analyzes Segment Adjusted EBITDA as a measure of segment profitability. 17 Table of contents The Company’s Chief Executive Officer is also the CODM. The CODM, together with other senior management personnel, focus their review on consolidated financial information and the allocation of resources based on operating results, including revenues and Segment Adjusted EBITDA, for each segment, separate from Corporate operations. No operating segments have been aggregated to form the reportable segments. Banks. ACI provides payment solutions to large and mid-size banks globally for retail banking, real time, digital, and other payment services. These solutions transform banks’ complex payment environments to speed time to market, reduce costs, and deliver a consistent experience to customers across channels while enabling them to prevent and rapidly react to fraudulent activity. In addition, they enable banks to meet the requirements of different real-time payments schemes and to quickly create differentiated products to meet consumer, business, and merchant demands. Merchants. ACI’s support of merchants globally includes Tier 1 and Tier 2 merchants, online-only merchants and the payment service providers, independent selling organizations, value-added resellers, and acquirers who service them. These customers operate in a variety of verticals, including general merchandise, grocery, hospitality, dining, transportation, and others. The Company's solutions provide merchants with a secure, omni-channel payments platform that gives them independence from third-party payment providers. They also offer secure solutions to online-only merchants that provide consumers with a convenient and seamless way to shop. Billers. Within the billers segment, ACI provides electronic bill presentment and payment (“EBPP”) services to companies operating in the consumer finance, insurance, healthcare, higher education, utility, government, and mortgage categories. The solutions enable these customers to support a wide range of payment options and provide a convenient consumer payments experience that drives consumer loyalty and increases revenue. Revenue is attributed to the reportable segments based upon the customer. Expenses are attributed to the reportable segments in one of three methods: (1) direct costs of the segment, (2) labor costs that can be attributed based upon time tracking for individual projects, or (3) costs that are allocated. Allocated costs are generally marketing and sales related activities. Segment Adjusted EBITDA is the measure reported to the CODM for purposes of making decisions on allocating resources and assessing the performance of the Company’s segments, and, therefore, Segment Adjusted EBITDA is presented in conformity with ASC 280, Segment Reporting. Segment Adjusted EBITDA is defined as earnings (loss) from operations before interest, income tax expense (benefit), depreciation and amortization (“EBITDA”) adjusted to exclude net other income (expense). Corporate and unallocated expenses includes global facilities and information technology costs and long-term product roadmap expenses in addition to corporate overhead costs that are not allocated to reportable segments. The overhead costs relate to human resources, finance, legal, accounting, and merger and acquisition activity. These costs along with depreciation and amortization and stock-based compensation are not considered when management evaluates segment performance. 18 Table of contents The following is selected financial data for the Company’s reportable segments for the periods indicated (in thousands): Three Months Ended September 30, Nine Months Ended September 30, 2021 2020 2021 2020 Revenue Banks $ 131,744 $ 125,658 $ 341,712 $ 356,865 Merchants 38,989 40,761 115,083 109,870 Billers 146,181 149,464 446,974 440,543 Total revenue $ 316,914 $ 315,883 $ 903,769 $ 907,278 Segment Adjusted EBITDA Banks $ 67,602 $ 71,666 $ 159,262 $ 182,487 Merchants 14,221 18,954 41,987 38,210 Billers 31,969 33,875 100,593 98,414 Depreciation and amortization ( 33,380 ) ( 35,490 ) ( 100,366 ) ( 105,004 ) Stock-based compensation expense ( 6,367 ) ( 8,061 ) ( 20,790 ) ( 22,943 ) Corporate and unallocated expenses ( 46,066 ) ( 49,762 ) ( 133,593 ) ( 142,127 ) Interest, net ( 8,374 ) ( 9,998 ) ( 25,390 ) ( 35,457 ) Other, net ( 1,088 ) 1,356 ( 1,036 ) ( 6,361 ) Income before income taxes $ 18,517 $ 22,540 $ 20,667 $ 7,219 Assets are not allocated to segments, and the Company’s CODM does not evaluate operating segments using discrete asset information. 19 Table of contents The following is revenue by primary solution category for the Company’s reportable segments for the periods indicated (in thousands): Three Months Ended September 30, 2021 Banks Merchants Billers Total Primary Solution Categories Bill Payments $ — $ — $ 146,181 $ 146,181 Digital Business Banking 16,527 — — 16,527 Merchant Payments — 38,989 — 38,989 Fraud Management 6,882 — — 6,882 Real-Time Payments 27,638 — — 27,638 Issuing and Acquiring 80,697 — — 80,697 Total $ 131,744 $ 38,989 $ 146,181 $ 316,914 Three Months Ended September 30, 2020 Banks Merchants Billers Total Primary Solution Categories Bill Payments $ — $ — $ 149,464 $ 149,464 Digital Business Banking 14,443 — — 14,443 Merchant Payments — 40,761 — 40,761 Fraud Management 11,513 — — 11,513 Real-Time Payments 12,998 — — 12,998 Issuing and Acquiring 86,704 — — 86,704 Total $ 125,658 $ 40,761 $ 149,464 $ 315,883 Nine Months Ended September 30, 2021 Banks Merchants Billers Total Primary Solution Categories Bill Payments $ — $ — $ 446,974 $ 446,974 Digital Business Banking 47,319 — — 47,319 Merchant Payments — 115,083 — 115,083 Fraud Management 23,563 — — 23,563 Real-Time Payments 58,534 — — 58,534 Issuing and Acquiring 212,296 — — 212,296 Total $ 341,712 $ 115,083 $ 446,974 $ 903,769 Nine Months Ended September 30, 2020 Banks Merchants Billers Total Primary Solution Categories Bill Payments $ — $ — $ 440,543 $ 440,543 Digital Business Banking 45,327 — — 45,327 Merchant Payments — 109,870 — 109,870 Fraud Management 25,183 — — 25,183 Real-Time Payments 57,160 — — 57,160 Issuing and Acquiring 229,195 — — 229,195 Total $ 356,865 $ 109,870 $ 440,543 $ 907,278 20 Table of contents The following is revenue by the Company's reportable segments for the periods indicated (in thousands): Three Months Ended September 30, Nine Months Ended September 30, 2021 2020 2021 2020 Banks Software as a service and platform as a service $ 14,794 $ 13,881 $ 43,555 $ 41,036 License 51,062 48,997 102,993 123,735 Maintenance 48,829 48,331 146,091 145,973 Services 17,059 14,449 49,073 46,121 Total $ 131,744 $ 125,658 $ 341,712 $ 356,865 Merchants Software as a service and platform as a service $ 30,561 $ 27,099 $ 93,336 $ 82,648 License 3,392 7,776 7,296 11,209 Maintenance 4,610 4,643 12,705 12,864 Services 426 1,243 1,746 3,149 Total $ 38,989 $ 40,761 $ 115,083 $ 109,870 Billers Software as a service and platform as a service $ 146,101 $ 149,389 $ 446,639 $ 440,208 License — — 94 94 Maintenance 80 75 241 241 Services — — — — Total $ 146,181 $ 149,464 $ 446,974 $ 440,543 The following is the Company's revenue by geographic location for the periods indicated (in thousands): Three Months Ended September 30, Nine Months Ended September 30, 2021 2020 2021 2020 Revenue United States $ 199,195 $ 199,209 $ 587,002 $ 611,383 Other 117,719 116,674 316,767 295,895 Total $ 316,914 $ 315,883 $ 903,769 $ 907,278 The following is the Company’s long-lived assets by geographic location for the periods indicated (in thousands): September 30, 2021 December 31, 2020 Long-lived Assets United States $ 1,383,348 $ 1,423,862 Other 724,832 750,651 Total $ 2,108,180 $ 2,174,513 No single customer accounted for more than 10% of the Company’s consolidated revenues during the three and nine months ended September 30, 2021 and 2020. No other country outside the United States accounted for more than 10% of the Company's consolidated revenues during the three and nine months ended September 30, 2021 and 2020. 10. Income Taxes For the three and nine months ended September 30, 2021, the Company's effective tax rate was 26 % and 11 %, respectively. The Company reported tax expense on pretax income for both the three and nine months ended September 30, 2021, with foreign entities recognizing earnings of $ 18.1 million and $ 27.7 million, respectively. The effective tax rate for the three months ended September 30, 2021, was negatively impacted by excess tax expense on equity-based compensation. The effective tax rate for the nine months ended September 30, 2021, was positively impacted by excess tax benefits on equity-based compensation. 21 Table of contents For the three and nine months ended September 30, 2020, the Company's effective tax rate was 30 % and 24 %, respectively. The Company reported tax expense on pretax income for both the three and nine months ended September 30, 2020, with foreign entities recognizing earnings of $ 23.4 million and losses of $ 19.7 million, respectively. The effective tax rate for the three and nine months ended September 30, 2020, was negatively impacted by a change in tax rates in certain countries. The Company’s effective tax rate could fluctuate on a quarterly basis due to the occurrence of significant and unusual or infrequent items, such as vesting of stock-based compensation or foreign currency gains and losses. The Company’s effective tax rate could also fluctuate due to changes in the valuation of its deferred tax assets or liabilities, or by changes in tax laws, regulations, accounting principles, or interpretations thereof. In addition, the Company is occasionally subject to examination of its income tax returns by tax authorities in the jurisdictions in which it operates. The Company regularly assesses the likelihood of adverse outcomes resulting from these examinations to determine the adequacy of its provision for income taxes. As of September 30, 2021, and December 31, 2020, the amount of unrecognized tax benefits for uncertain tax positions was $ 25.8 million and $ 24.3 million, respectively, excluding related liabilities for interest and penalties of $ 1.3 million and $ 1.2 million as of September 30, 2021, and December 31, 2020, respectively. The Company believes it is reasonably possible that the total amount of unrecognized tax benefits will decrease within the next 12 months by approximately $ 3.5 million, due to the settlement of various audits and the expiration of statutes of limitation. 11. Commitments and Contingencies Legal Proceedings In April 2021, ACH files associated with one of the Company's mortgage servicing customers were inadvertently transmitted to a processing bank during a test of its ACH file production system. Reversal ACH files were promptly issued, restoring affected accounts. The Company has been contacted by the U.S. Consumer Finance Protection Bureau and various state consumer protection and regulatory agencies about this incident, and is cooperating in their investigations, which could result in fines or penalties that could be material. In addition, the Company has been named as a defendant in seven class action lawsuits filed in various federal courts purportedly on behalf of consumers whose mortgage accounts were affected. The complaints vary, but generally allege violations of federal and state consumer protection and other laws and claim that the Company is obligated to pay statutory and other damages. The Company intends to vigorously defend these cases. Defending such cases could be time-consuming and costly, and failure to successfully defend the Company in any or all of these cases could have a material effect.