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, 2022 December 31, 2021 ASSETS Current assets Cash and cash equivalents $ 134,799 $ 122,059 Receivables, net of allowances of $ 3,851 and $ 2,861 , respectively 302,301 320,405 Settlement assets 727,754 452,396 Prepaid expenses 29,766 24,698 Other current assets 16,342 17,876 Total current assets 1,210,962 937,434 Noncurrent assets Accrued receivables, net 248,285 276,164 Property and equipment, net 54,328 63,050 Operating lease right-of-use assets 37,916 47,825 Software, net 134,942 157,782 Goodwill 1,226,026 1,280,226 Intangible assets, net 235,053 283,004 Deferred income taxes, net 55,454 50,778 Other noncurrent assets 60,174 62,478 TOTAL ASSETS $ 3,263,140 $ 3,158,741 LIABILITIES AND STOCKHOLDERS’ EQUITY Current liabilities Accounts payable $ 38,227 $ 41,312 Settlement liabilities 727,237 451,575 Employee compensation 43,637 51,379 Current portion of long-term debt 60,603 45,870 Deferred revenue 53,163 84,425 Other current liabilities 75,107 79,594 Total current liabilities 997,974 754,155 Noncurrent liabilities Deferred revenue 22,440 25,925 Long-term debt 947,750 1,019,872 Deferred income taxes, net 30,465 36,122 Operating lease liabilities 32,235 43,346 Other noncurrent liabilities 34,060 34,544 Total liabilities 2,064,924 1,913,964 Commitments and contingencies Stockholders’ equity Preferred stock; $ 0.01 par value; 5,000,000 shares authorized; no shares issued at September 30, 2022, and December 31, 2021 — — Common stock; $ 0.005 par value; 280,000,000 shares authorized; 140,525,055 shares issued at September 30, 2022, and December 31, 2021 702 702 Additional paid-in capital 697,763 688,313 Retained earnings 1,183,230 1,131,281 Treasury stock, at cost, 27,323,712 and 24,795,009 shares at September 30, 2022, and December 31, 2021, respectively ( 555,753 ) ( 475,972 ) Accumulated other comprehensive loss ( 127,726 ) ( 99,547 ) Total stockholders’ equity 1,198,216 1,244,777 TOTAL LIABILITIES AND STOCKHOLDERS’ EQUITY $ 3,263,140 $ 3,158,741 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, 2022 2021 2022 2021 Revenues Software as a service and platform as a service $ 195,540 $ 191,456 $ 597,080 $ 583,530 License 43,661 54,454 168,260 110,383 Maintenance 49,163 53,519 151,143 159,037 Services 18,227 17,485 53,613 50,819 Total revenues 306,591 316,914 970,096 903,769 Operating expenses Cost of revenue (1) 171,753 158,712 517,372 476,811 Research and development 35,899 35,248 114,348 104,791 Selling and marketing 32,794 33,413 102,793 90,211 General and administrative 30,516 29,717 84,753 89,429 Depreciation and amortization 32,140 31,845 95,218 95,434 Total operating expenses 303,102 288,935 914,484 856,676 Operating income 3,489 27,979 55,612 47,093 Other income (expense) Interest expense ( 14,336 ) ( 11,208 ) ( 37,014 ) ( 33,943 ) Interest income 2,995 2,834 9,205 8,553 Other, net 41,545 ( 1,088 ) 45,801 ( 1,036 ) Total other income (expense) 30,204 ( 9,462 ) 17,992 ( 26,426 ) Income before income taxes 33,693 18,517 73,604 20,667 Income tax expense 10,576 4,753 21,655 2,347 Net income $ 23,117 $ 13,764 $ 51,949 $ 18,320 Income per common share Basic $ 0.20 $ 0.12 $ 0.45 $ 0.16 Diluted $ 0.20 $ 0.12 $ 0.45 $ 0.15 Weighted average common shares outstanding Basic 113,812 117,512 114,584 117,574 Diluted 114,348 118,540 115,211 118,817 (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, 2022 2021 2022 2021 Net income $ 23,117 $ 13,764 $ 51,949 $ 18,320 Other comprehensive loss: Foreign currency translation adjustments ( 13,459 ) ( 4,223 ) ( 28,179 ) ( 5,873 ) Total other comprehensive loss ( 13,459 ) ( 4,223 ) ( 28,179 ) ( 5,873 ) Comprehensive income $ 9,658 $ 9,541 $ 23,770 $ 12,447 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, except share amounts) Three Months Ended September 30, 2022 Common Stock Additional Paid-in Capital Retained Earnings Treasury Stock Accumulated Other Comprehensive Loss Total Balance as of June 30, 2022 $ 702 $ 690,574 $ 1,160,113 $ ( 528,758 ) $ ( 114,267 ) $ 1,208,364 Net income — — 23,117 — — 23,117 Other comprehensive loss — — — — ( 13,459 ) ( 13,459 ) Stock-based compensation — 7,126 — — — 7,126 Shares issued and forfeited, net, under stock plans — 63 — 1,250 — 1,313 Repurchase of 1,154,825 shares of common stock — — — ( 28,227 ) — ( 28,227 ) Repurchase of stock-based compensation awards for tax withholdings — — — ( 18 ) — ( 18 ) Balance as of September 30, 2022 $ 702 $ 697,763 $ 1,183,230 $ ( 555,753 ) $ ( 127,726 ) $ 1,198,216 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 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, 2022 Common Stock Additional Paid-in Capital Retained Earnings Treasury Stock Accumulated Other Comprehensive Loss Total Balance as of December 31, 2021 $ 702 $ 688,313 $ 1,131,281 $ ( 475,972 ) $ ( 99,547 ) $ 1,244,777 Net income — — 51,949 — — 51,949 Other comprehensive loss — — — — ( 28,179 ) ( 28,179 ) Stock-based compensation — 21,884 — — — 21,884 Shares issued and forfeited, net, under stock plans — ( 12,434 ) — 16,973 — 4,539 Repurchase of 3,210,313 shares of common stock — — — ( 90,934 ) — ( 90,934 ) Repurchase of stock-based compensation awards for tax withholdings — — — ( 5,820 ) — ( 5,820 ) Balance as of September 30, 2022 $ 702 $ 697,763 $ 1,183,230 $ ( 555,753 ) $ ( 127,726 ) $ 1,198,216 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 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, 2022 2021 Cash flows from operating activities: Net income $ 51,949 $ 18,320 Adjustments to reconcile net income to net cash flows from operating activities: Depreciation 17,052 15,838 Amortization 78,817 84,528 Amortization of operating lease right-of-use assets 8,296 7,752 Amortization of deferred debt issuance costs 3,435 3,525 Deferred income taxes ( 9,059 ) ( 11,742 ) Stock-based compensation expense 21,884 20,790 Gain on divestiture ( 38,452 ) — Other 2,483 ( 27 ) Changes in operating assets and liabilities: Receivables 5,767 55,953 Accounts payable ( 3,047 ) ( 5,080 ) Accrued employee compensation ( 3,872 ) ( 1,140 ) Deferred revenue ( 6,367 ) 10,339 Other current and noncurrent assets and liabilities ( 26,920 ) ( 54,573 ) Net cash flows from operating activities 101,966 144,483 Cash flows from investing activities: Purchases of property and equipment ( 8,123 ) ( 12,968 ) Purchases of software and distribution rights ( 18,394 ) ( 20,041 ) Proceeds from divestiture 100,139 — Net cash flows from investing activities 73,622 ( 33,009 ) Cash flows from financing activities: Proceeds from issuance of common stock 2,801 2,526 Proceeds from exercises of stock options 1,792 7,252 Repurchase of stock-based compensation awards for tax withholdings ( 5,820 ) ( 14,833 ) Repurchases of common stock ( 90,934 ) ( 39,411 ) Proceeds from revolving credit facility 85,000 — Repayment of revolving credit facility ( 75,000 ) ( 55,000 ) Repayment of term portion of credit agreement ( 70,825 ) ( 29,212 ) Payments on or proceeds from other debt, net ( 10,106 ) ( 10,187 ) Net increase (decrease) in settlement assets and liabilities 20,084 ( 55,470 ) Net cash flows from financing activities ( 143,008 ) ( 194,335 ) Effect of exchange rate fluctuations on cash ( 60 ) 84 Net increase (decrease) in cash and cash equivalents 32,520 ( 82,777 ) Cash and cash equivalents, including settlement deposits, beginning of period 184,142 265,382 Cash and cash equivalents, including settlement deposits, end of period $ 216,662 $ 182,605 Reconciliation of cash and cash equivalents to the Consolidated Balance Sheets Cash and cash equivalents $ 134,799 $ 141,482 Settlement deposits 81,863 41,123 Total cash and cash equivalents, including settlement deposits $ 216,662 $ 182,605 Supplemental cash flow information Income taxes paid $ 24,987 $ 28,131 Interest paid $ 39,217 $ 35,966 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, 2022, and for the three and nine months ended September 30, 2022 and 2021, 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, 2021, 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, 2021, filed on February 24, 2022. Results for the three and nine months ended September 30, 2022, 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. These estimates and assumptions are affected by management’s application of accounting policies, as well as uncertainty in the current economic environment. Actual results could differ from those estimates. Revision of Prior Period Financial Statements As of December 31, 2021, the Company revised the previously reported consolidated statements of cash flows to include settlement deposits in total cash and cash equivalents and settlement receivables and settlement liabilities net activity in cash flows from financing activities, both of which were previously included in cash flows from operating activities. This immaterial revision did not have an effect on its previously reported consolidated balance sheets, statements of operations, statements of comprehensive income, or statements of stockholders' equity. A summary of the revisions to the previously reported balances are presented in the table below for comparative purposes (in thousands): Nine Months Ended September 30, 2021 As reported Revision adjustment As revised Cash flows from operating activities: Other current and noncurrent assets and liabilities $ ( 51,158 ) $ ( 3,415 ) $ ( 54,573 ) Net cash flows from operating activities 147,898 ( 3,415 ) 144,483 Cash flows from financing activities: Net decrease in settlement assets and liabilities $ — $ ( 55,470 ) $ ( 55,470 ) Net cash flows from financing activities ( 138,865 ) ( 55,470 ) ( 194,335 ) Net decrease in cash and cash equivalents $ ( 23,892 ) $ ( 58,885 ) $ ( 82,777 ) Cash and cash equivalents, including settlement deposits, beginning of period 165,374 100,008 265,382 Cash and cash equivalents, including settlement deposits, end of period 141,482 41,123 182,605 9 Table of contents Other Current Liabilities The components of other current liabilities are included in the following table (in thousands): September 30, 2022 December 31, 2021 Vendor financed licenses $ 12,520 $ 12,521 Operating lease liabilities 11,061 11,518 Accrued interest 3,026 8,776 Royalties payable 2,905 4,102 Other 45,595 42,677 Total other current liabilities $ 75,107 $ 79,594 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, 2022, and December 31, 2021, was $ 308.7 million and $ 272.8 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 $ 379.9 million and $ 419.0 million as of September 30, 2022, and December 31, 2021, 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). 10 Table of contents 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 has identified its operating segments, Banks, Merchants, and Billers, as the reporting units. As of September 30, 2022, the Company's goodwill balance of $ 1.2 billion was allocated $ 671.7 million to Banks, $ 137.3 million to Merchants, and $ 417.0 million to Billers. Recoverability of goodwill is measured using a discounted cash flow 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, 2021, annual impairment test and there have been no indications of impairment in the subsequent periods. Changes in the carrying amount of goodwill attributable to each reporting unit during the nine months ended September 30, 2022 were as follows (in thousands): Banks Merchants Billers Total Balance, December 31, 2021 $ 725,903 $ 137,289 $ 417,034 $ 1,280,226 Divestiture (1) ( 54,200 ) — — ( 54,200 ) Balance, September 30, 2022 $ 671,703 $ 137,289 $ 417,034 $ 1,226,026 (1) In connection with the divestiture, $ 54.2 million of goodwill from the Banks segment was allocated to the net assets sold. See Note 3, Divestiture, for further information on the divestiture. 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 $ 17.3 million and $ 19.3 million, which is included in other noncurrent assets in the condensed consolidated balance sheet as of September 30, 2022, and December 31, 2021, respectively. 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 10, 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, 2022 December 31, 2021 Billed receivables $ 137,498 $ 162,479 Allowance for doubtful accounts ( 3,851 ) ( 2,861 ) Billed receivables, net 133,647 159,618 Current accrued receivables, net 168,654 160,787 Long-term accrued receivables, net 248,285 276,164 Total accrued receivables, net 416,939 436,951 Total receivables, net $ 550,586 $ 596,569 One customer accounted for 12.7 % and 13.8 % of the Company's consolidated receivables balance as of September 30, 2022 and December 31, 2021. 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, 2021 $ 110,350 Deferral of revenue 89,117 Recognition of deferred revenue ( 95,593 ) Divestiture ( 21,581 ) Foreign currency translation ( 6,690 ) Balance, September 30, 2022 $ 75,603 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 $ 682.0 million as of September 30, 2022, of which the Company expects to recognize approximately 51 % over the next 12 months and the remainder thereafter. During the three and nine months ended September 30, 2022 and 2021, revenue recognized by the Company from performance obligations satisfied in previous periods was not significant. 12 Table of contents 3. Divestiture Corporate Online Banking Solutions On June 7, 2022, the Company announced a definitive agreement to divest its corporate online banking solutions related assets and liabilities to One Equity Partners ("OEP") for $ 100.1 million, including preliminary net working capital adjustment. The sale included employees and customer contracts as well as technology assets and intellectual property and closed on September 1, 2022. For the three and nine months ended September 30, 2022, the Company recognized a gain of $ 38.5 million on the sale, which is recorded in other, net in the accompanying condensed consolidated statements of operations. This gain is preliminary subject to finalization of post-closing adjustments pursuant to the definitive transaction agreement. The Company and OEP have also entered into a Transition Services Agreement ("TSA"), whereby the Company will continue to perform certain functions on OEP's behalf during a migration period not expected to exceed 18 months. The TSA is meant to reimburse the Company for direct costs in order to provide such functions, which are no longer generating revenue for the Company. 4. Debt As of September 30, 2022, the Company had $ 10.0 million, $ 607.3 million, and $ 400.0 million outstanding under its Revolving Credit Facility, Term Loans, and Senior Notes, respectively, with up to $ 488.5 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. On May 5, 2022, the Company and Bank of America entered into the LIBOR Transition Amendment (the "Amendment") that replaced the LIBOR reference rate with the Secured Overnight Financing Rate ("SOFR") reference rate. No other terms or conditions of the Credit Agreement were changed as a result of the Amendment. 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) SOFR 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 SOFR 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 SOFR rate borrowings. Interest is due and payable monthly. The interest rate in effect for the Credit Facility as of September 30, 2022, was 4.88 %. 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 SOFR 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. 13 Table of contents 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, 2022, are as follows (in thousands): Fiscal Year Ending December 31, Remainder of 2022 $ 14,607 2023 69,906 2024 532,823 2025 — 2026 400,000 Thereafter — Total $ 1,017,336 As of September 30, 2022, and at all times during the period, the Company was in compliance with its financial debt covenants. Total debt is comprised of the following (in thousands): September 30, 2022 December 31, 2021 Term loans $ 607,336 $ 678,160 Revolving credit facility 10,000 — 5.750 % Senior notes, due August 2026 400,000 400,000 Debt issuance costs ( 8,983 ) ( 12,418 ) Total debt 1,008,353 1,065,742 Less: current portion of term loans 65,038 50,431 Less: current portion of debt issuance costs ( 4,435 ) ( 4,561 ) Total long-term debt $ 947,750 $ 1,019,872 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, 2022, there was $ 75.0 million available and no amount outstanding on the overdraft facility. As of December 31, 2021, 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. During the nine months ended September 30, 2022, the Company financed certain multi-year license agreements for internal-use software for $ 10.7 million, with annual payments through April 2024. As of September 30, 2022, $ 9.3 million was outstanding on these and other license agreements previously entered into, of which $ 5.8 million and $ 3.5 million is included in other current liabilities and other noncurrent liabilities, respectively, in the condensed consolidated balance sheet. As of December 31, 2021, $ 2.9 million was outstanding on these agreements, all of which is included in other current liabilities in the condensed consolidated balance sheet. 14 Table of contents 5. 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, 2022 December 31, 2021 Gross Carrying Amount Accumulated Amortization Net Balance Gross Carrying Amount Accumulated Amortization Net Balance Software for internal use $ 446,394 $ ( 311,452 ) $ 134,942 $ 440,242 $ ( 283,109 ) $ 157,133 Software for resale 121,801 ( 121,801 ) — 127,904 ( 127,255 ) 649 Total software $ 568,195 $ ( 433,253 ) $ 134,942 $ 568,146 $ ( 410,364 ) $ 157,782 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, 2022 and 2021, totaled $ 17.3 million and $ 17.5 million, respectively. Software for internal use amortization expense recorded during the nine months ended September 30, 2022 and 2021, totaled $ 51.1 million and $ 51.8 million, respectively. These software amortization expense amounts are reflected in depreciation and amortization in the condensed consolidated statements of operations. 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 totaled $ 1.5 million. There was no software for resale amortization expense recorded during the three months ended September 30, 2022. Software for resale amortization expense recorded during the nine months ended September 30, 2022 and 2021, totaled $ 0.7 million and $ 4.9 million, respectively. These software amortization expense amounts are reflected in cost of revenue in the condensed consolidated statements of operations. 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, 2022 December 31, 2021 Gross Carrying Amount Accumulated Amortization Net Balance Gross Carrying Amount Accumulated Amortization Net Balance Customer relationships $ 457,027 $ ( 225,527 ) $ 231,500 $ 507,962 $ ( 230,152 ) $ 277,810 Trademarks and trade names 22,942 ( 19,389 ) 3,553 23,839 ( 18,645 ) 5,194 Total other intangible assets $ 479,969 $ ( 244,916 ) $ 235,053 $ 531,801 $ ( 248,797 ) $ 283,004 Other intangible assets amortization expense recorded during the three months ended September 30, 2022 and 2021, totaled $ 8.8 million and $ 9.3 million, respectively. Other intangible assets amortization expense recorded during the nine months ended September 30, 2022 and 2021, totaled $ 27.1 million and $ 27.8 million, respectively. Based on capitalized intangible assets as of September 30, 2022, 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 2022 $ 16,699 $ 8,329 2023 51,782 33,310 2024 34,155 28,997 2025 22,985 20,747 2026 8,450 20,747 Thereafter 871 122,923 Total $ 134,942 $ 235,053 15 Table of contents 6. Stock-Based Compensation Plans Employee Stock Purchase Plan Shares issued under the 2017 Employee Stock Purchase Plan during the nine months ended September 30, 2022 and 2021, totaled 108,149 and 86,877 , 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, 2021 1,640,319 $ 18.42 Exercised ( 98,723 ) 18.14 Outstanding as of September 30, 2022 1,541,596 $ 18.44 2.37 $ 3,796,359 Exercisable as of September 30, 2022 1,541,596 $ 18.44 2.37 $ 3,796,359 The total intrinsic value of stock options exercised during the nine months ended September 30, 2022 and 2021, was $ 1.1 million and $ 7.8 million, respectively. There were no stock options granted during the nine months ended September 30, 2022 or 2021. 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, 2021 1,154,721 $ 40.10 Granted 520,020 42.99 Vested ( 212,210 ) 45.86 Forfeited ( 193,979 ) 39.93 Change in payout rate ( 114,355 ) 45.92 Nonvested as of September 30, 2022 1,154,197 $ 39.79 During the nine months ended September 30, 2022, a total of 212,210 TSRs granted in fiscal 2019 vested and achieved a payout rate of 65 % 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 47,612 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, 2022 and 2021, 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, 2022 2021 Expected life (years) 3.1 2.8 Risk-free interest rate 1.5 % 0.3 % Expected volatility 40.0 % 41.2 % Expected dividend yield — — 16 Table of contents 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, 2021 946,151 $ 33.57 Granted 1,071,776 29.97 Vested ( 442,882 ) 33.00 Forfeited ( 193,932 ) 32.63 Nonvested as of September 30, 2022 1,381,113 $ 31.09 During the nine months ended September 30, 2022, a total of 442,882 RSUs vested. The Company withheld 132,707 of those shares to pay the employees’ portion of the minimum payroll withholding taxes. As of September 30, 2022, there were unrecognized compensation costs of $ 33.0 million and $ 23.4 million related to nonvested RSUs and TSRs, respectively, which the Company expects to recognize over weighted average periods of 2.1 years and 2.0 years, respectively. The Company recorded stock-based compensation expense recognized under ASC 718 for the three months ended September 30, 2022 and 2021, of $ 7.1 million and $ 6.4 million, respectively, with corresponding tax bene fits of $ 1.0 million and $ 0.9 million, respectively. The Company recorded stock-based compensation expense recognized under ASC 718 for the nine months ended September 30, 2022 and 2021, of $ 21.9 million and $ 20.8 million, respectively, with corresponding tax benefits of $ 3.0 million and $ 3.1 million, respectively. 7. 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 December 2021, the board approved the repurchase of the Company's common stock of up to $ 250.0 million, in place of the remaining purchase amounts previously authorized. The Company repurchased 3,210,313 shares for $ 90.9 million during the nine months ended September 30, 2022. Under the program to date, the Company has repurchased 52,567,808 shares for approximately $ 810.6 million. As of September 30, 2022, the maximum remaining amount authorized for purchase under the stock repurchase program was $ 125.4 million. 8. 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, 2022 2021 2022 2021 Weighted average shares outstanding: Basic weighted average shares outstanding 113,812 117,512 114,584 117,574 Add: Dilutive effect of stock options and RSUs 536 1,028 627 1,243 Diluted weighted average shares outstanding 114,348 118,540 115,211 118,817 17 Table of contents The diluted earnings per share computation excludes 2.0 million and 1.6 million RSUs and contingently issuable shares during the three months ended September 30, 2022 and 2021, respectively, as their effect would be anti-dilutive. The diluted earnings per share computation excludes 2.0 million and 1.5 million RSUs and contingently issuable shares during the nine months ended September 30, 2022 and 2021, respectively, as their effect would be anti-dilutive. Common stock outstanding as of September 30, 2022, and December 31, 2021, was 113,201,343 and 115,730,046 , respectively. 9. Other, Net Other, net is primarily comprised of foreign currency transaction gains and losses and, for the three and nine months ended September 30, 2022, the $ 38.5 million gain on divestiture. Other, net was $ 41.5 million of income and $ 1.1 million of expense for the three months ended September 30, 2022 and 2021, respectively. Other, net was $ 45.8 million of income and $ 1.0 million of expense for the nine months ended September 30, 2022 and 2021, respectively. 10. Segment Information The Company reports financial performance based on its operating segments, Banks, Merchants, and Billers, and analyzes Segment Adjusted EBITDA as a measure of segment profitability. The Company’s Chief Executive Officer is also the chief operating decision maker ("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, 2022 2021 2022 2021 Revenue Banks $ 117,439 $ 131,744 $ 391,583 $ 341,712 Merchants 35,609 38,989 113,145 115,083 Billers 153,543 146,181 465,368 446,974 Total revenue $ 306,591 $ 316,914 $ 970,096 $ 903,769 Segment Adjusted EBITDA Banks $ 49,793 $ 67,602 $ 184,667 $ 159,262 Merchants 9,781 14,221 32,243 41,987 Billers 26,348 31,969 81,029 100,593 Depreciation and amortization ( 32,140 ) ( 33,380 ) ( 95,869 ) ( 100,366 ) Stock-based compensation expense ( 7,126 ) ( 6,367 ) ( 21,884 ) ( 20,790 ) Corporate and unallocated expenses ( 43,167 ) ( 46,066 ) ( 124,574 ) ( 133,593 ) Interest, net ( 11,341 ) ( 8,374 ) ( 27,809 ) ( 25,390 ) Other, net 41,545 ( 1,088 ) 45,801 ( 1,036 ) Income before income taxes $ 33,693 $ 18,517 $ 73,604 $ 20,667 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, 2022 Banks Merchants Billers Total Primary Solution Categories Bill Payments $ — $ — $ 153,543 $ 153,543 Digital Business Banking 9,001 — — 9,001 Merchant Payments — 35,609 — 35,609 Fraud Management 14,840 — — 14,840 Real-Time Payments 24,904 — — 24,904 Issuing and Acquiring 68,694 — — 68,694 Total $ 117,439 $ 35,609 $ 153,543 $ 306,591 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 Nine Months Ended September 30, 2022 Banks Merchants Billers Total Primary Solution Categories Bill Payments $ — $ — $ 465,368 $ 465,368 Digital Business Banking 34,586 — — 34,586 Merchant Payments — 113,145 — 113,145 Fraud Management 30,169 — — 30,169 Real-Time Payments 71,043 — — 71,043 Issuing and Acquiring 255,785 — — 255,785 Total $ 391,583 $ 113,145 $ 465,368 $ 970,096 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 20 Table of contents Three Months Ended September 30, Nine Months Ended September 30, 2022 2021 2022 2021 Banks Software as a service and platform as a service $ 12,394 $ 14,794 $ 40,331 $ 43,555 License 42,188 51,062 159,569 102,993 Maintenance 44,896 48,829 138,983 146,091 Services 17,961 17,059 52,700 49,073 Total $ 117,439 $ 131,744 $ 391,583 $ 341,712 Merchants Software as a service and platform as a service $ 29,626 $ 30,561 $ 91,451 $ 93,336 License 1,473 3,392 8,691 7,296 Maintenance 4,244 4,610 12,090 12,705 Services 266 426 913 1,746 Total $ 35,609 $ 38,989 $ 113,145 $ 115,083 Billers Software as a service and platform as a service $ 153,520 $ 146,101 $ 465,298 $ 446,639 License — — — 94 Maintenance 23 80 70 241 Services — — — — Total $ 153,543 $ 146,181 $ 465,368 $ 446,974 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, 2022 2021 2022 2021 Revenue United States $ 195,571 $ 199,195 $ 604,345 $ 587,002 Other 111,020 117,719 365,751 316,767 Total $ 306,591 $ 316,914 $ 970,096 $ 903,769 The following is the Company’s long-lived assets by geographic location for the periods indicated (in thousands): September 30, 2022 December 31, 2021 Long-lived Assets United States $ 1,284,306 $ 1,425,391 Other 712,418 745,138 Total $ 1,996,724 $ 2,170,529 No single customer accounted for more than 10% of the Company’s consolidated revenues during the three and nine months ended September 30, 2022 and 2021. 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, 2022 and 2021. 21 Table of contents 11. Income Taxes For the three and nine months ended September 30, 2022, the Company's effective tax rate was 31 % and 29 %, respectively. The Company reported tax expense on pretax income for both the three and nine months ended September 30, 2022, with foreign entities recognizing earnings of $ 28.7 million and $ 87.0 million, respectively. The effective tax rate for the three and nine months ended September 30, 2022, was negatively impacted by excess tax expense on equity-based compensation and state income tax expense on domestic earnings. 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. 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 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, 2022, and December 31, 2021, the amount of unrecognized tax benefits for uncertain tax positions was $ 23.9 million and $ 24.5 million, respectively, excluding related liabilities for interest and penalties of $ 1.0 million and $ 1.1 million as of September 30, 2022, and December 31, 2021, 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 $ 6.0 million, due to the settlement of various audits and the expiration of statutes of limitation. 12. 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 U.S. Consumer Financial Protection Bureau and various state regulatory agencies and attorneys general commenced investigations of this incident. The Company is cooperating with these authorities, including voluntarily furnishing information to them, and seeking to resolve these matters. There can be no assurance that the matters will be resolved without litigation, and the matters could result in material fines, penalties, and statutory damages as well as burdensome and costly injunctive remedies. Separately, the Company was named as a defendant in seven class action lawsuits filed in various federal courts purportedly on behalf of consumers whose mortgage accounts were affected by the inadvertent ACH file transmission. The Company entered into an agreement, which is subject to court approval and other conditions, to settle these lawsuits for the Company's establishment of a $ 5.0 million fund out of which payments would be made to class members and the Company's payment of attorneys’ fees and administrative costs, plus additional funds totaling $ 1.5 million that could be required to be established in certain circumstances. There can be no assurance that the conditions to settlement will be satisfied. The Company has asserted claims for insurance coverage with respect to potential losses associated with these matters. There is no assurance as to the amount of insurance that may be available. 22 Table of contents