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) June 30, 2023 December 31, 2022 ASSETS Current assets Cash and cash equivalents $ 132,391 $ 124,981 Receivables, net of allowances of $ 3,464 and $ 3,779 , respectively 350,094 403,781 Settlement assets 453,276 540,667 Prepaid expenses 35,563 28,010 Other current assets 57,177 17,366 Total current assets 1,028,501 1,114,805 Noncurrent assets Accrued receivables, net 269,051 297,818 Property and equipment, net 44,998 52,499 Operating lease right-of-use assets 34,544 40,031 Software, net 114,451 129,109 Goodwill 1,226,026 1,226,026 Intangible assets, net 212,260 228,698 Deferred income taxes, net 74,403 53,738 Other noncurrent assets 64,656 67,171 TOTAL ASSETS $ 3,068,890 $ 3,209,895 LIABILITIES AND STOCKHOLDERS’ EQUITY Current liabilities Accounts payable $ 48,137 $ 47,997 Settlement liabilities 452,864 539,087 Employee compensation 40,837 45,289 Current portion of long-term debt 74,294 65,521 Deferred revenue 69,352 58,303 Other current liabilities 96,382 102,645 Total current liabilities 781,866 858,842 Noncurrent liabilities Deferred revenue 24,503 23,233 Long-term debt 991,829 1,024,351 Deferred income taxes, net 37,294 40,371 Operating lease liabilities 29,394 33,910 Other noncurrent liabilities 31,478 36,001 Total liabilities 1,896,364 2,016,708 Commitments and contingencies Stockholders’ equity Preferred stock; $ 0.01 par value; 5,000,000 shares authorized; no shares issued at June 30, 2023, and December 31, 2022 — — Common stock; $ 0.005 par value; 280,000,000 shares authorized; 140,525,055 shares issued at June 30, 2023, and December 31, 2022 702 702 Additional paid-in capital 704,096 702,458 Retained earnings 1,234,440 1,273,458 Treasury stock, at cost, 31,929,614 and 32,456,227 shares at June 30, 2023, and December 31, 2022, respectively ( 655,660 ) ( 665,771 ) Accumulated other comprehensive loss ( 111,052 ) ( 117,660 ) Total stockholders’ equity 1,172,526 1,193,187 TOTAL LIABILITIES AND STOCKHOLDERS’ EQUITY $ 3,068,890 $ 3,209,895 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 June 30, Six Months Ended June 30, 2023 2022 2023 2022 Revenues Software as a service and platform as a service $ 209,676 $ 206,978 $ 414,606 $ 401,540 License 44,671 64,314 63,002 124,599 Maintenance 51,391 50,562 101,494 101,980 Services 17,587 18,571 33,899 35,386 Total revenues 323,325 340,425 613,001 663,505 Operating expenses Cost of revenue (1) 181,343 179,333 359,897 345,619 Research and development 35,265 40,642 72,383 78,449 Selling and marketing 33,289 35,391 68,724 69,999 General and administrative 31,472 28,362 62,854 54,237 Depreciation and amortization 31,436 32,240 62,975 63,078 Total operating expenses 312,805 315,968 626,833 611,382 Operating income (loss) 10,520 24,457 ( 13,832 ) 52,123 Other income (expense) Interest expense ( 19,909 ) ( 11,784 ) ( 38,801 ) ( 22,678 ) Interest income 3,458 3,051 6,963 6,210 Other, net ( 4,092 ) 2,006 ( 7,487 ) 4,256 Total other income (expense) ( 20,543 ) ( 6,727 ) ( 39,325 ) ( 12,212 ) Income (loss) before income taxes ( 10,023 ) 17,730 ( 53,157 ) 39,911 Income tax expense (benefit) ( 3,313 ) 4,388 ( 14,139 ) 11,079 Net income (loss) $ ( 6,710 ) $ 13,342 $ ( 39,018 ) $ 28,832 Income (loss) per common share Basic $ ( 0.06 ) $ 0.12 $ ( 0.36 ) $ 0.25 Diluted $ ( 0.06 ) $ 0.12 $ ( 0.36 ) $ 0.25 Weighted average common shares outstanding Basic 108,455 114,669 108,306 114,976 Diluted 108,455 115,205 108,306 115,649 (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 June 30, Six Months Ended June 30, 2023 2022 2023 2022 Net income (loss) $ ( 6,710 ) $ 13,342 $ ( 39,018 ) $ 28,832 Other comprehensive income (loss): Foreign currency translation adjustments 2,990 ( 12,620 ) 6,608 ( 14,720 ) Total other comprehensive income (loss) 2,990 ( 12,620 ) 6,608 ( 14,720 ) Comprehensive income (loss) $ ( 3,720 ) $ 722 $ ( 32,410 ) $ 14,112 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 June 30, 2023 Common Stock Additional Paid-in Capital Retained Earnings Treasury Stock Accumulated Other Comprehensive Loss Total Balance as of March 31, 2023 $ 702 $ 701,040 $ 1,241,150 $ ( 661,223 ) $ ( 114,042 ) $ 1,167,627 Net loss — — ( 6,710 ) — — ( 6,710 ) Other comprehensive income — — — — 2,990 2,990 Stock-based compensation — 5,414 — — — 5,414 Shares issued and forfeited, net, under stock plans — ( 2,358 ) — 5,882 — 3,524 Repurchase of stock-based compensation awards for tax withholdings — — — ( 319 ) — ( 319 ) Balance as of June 30, 2023 $ 702 $ 704,096 $ 1,234,440 $ ( 655,660 ) $ ( 111,052 ) $ 1,172,526 Three Months Ended June 30, 2022 Common Stock Additional Paid-in Capital Retained Earnings Treasury Stock Accumulated Other Comprehensive Loss Total Balance as of March 31, 2022 $ 702 $ 685,354 $ 1,146,771 $ ( 506,513 ) $ ( 101,647 ) $ 1,224,667 Net income — — 13,342 — — 13,342 Other comprehensive loss — — — — ( 12,620 ) ( 12,620 ) Stock-based compensation — 6,800 — — — 6,800 Shares issued and forfeited, net, under stock plans — ( 1,580 ) — 2,867 — 1,287 Repurchase of 924,240 shares of common stock — — — ( 24,847 ) — ( 24,847 ) Repurchase of stock-based compensation awards for tax withholdings — — — ( 265 ) — ( 265 ) Balance as of June 30, 2022 $ 702 $ 690,574 $ 1,160,113 $ ( 528,758 ) $ ( 114,267 ) $ 1,208,364 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) Six Months Ended June 30, 2023 Common Stock Additional Paid-in Capital Retained Earnings Treasury Stock Accumulated Other Comprehensive Loss Total Balance as of December 31, 2022 $ 702 $ 702,458 $ 1,273,458 $ ( 665,771 ) $ ( 117,660 ) $ 1,193,187 Net loss — — ( 39,018 ) — — ( 39,018 ) Other comprehensive income — — — — 6,608 6,608 Stock-based compensation — 10,715 — — — 10,715 Shares issued and forfeited, net, under stock plans — ( 9,077 ) — 13,431 — 4,354 Repurchase of stock-based compensation awards for tax withholdings — — — ( 3,320 ) — ( 3,320 ) Balance as of June 30, 2023 $ 702 $ 704,096 $ 1,234,440 $ ( 655,660 ) $ ( 111,052 ) $ 1,172,526 Six Months Ended June 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 — — 28,832 — — 28,832 Other comprehensive loss — — — — ( 14,720 ) ( 14,720 ) Stock-based compensation — 14,758 — — — 14,758 Shares issued and forfeited, net, under stock plans — ( 12,497 ) — 15,723 — 3,226 Repurchase of 2,055,488 shares of common stock — — — ( 62,707 ) — ( 62,707 ) Repurchase of stock-based compensation awards for tax withholdings — — — ( 5,802 ) — ( 5,802 ) Balance as of June 30, 2022 $ 702 $ 690,574 $ 1,160,113 $ ( 528,758 ) $ ( 114,267 ) $ 1,208,364 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) Six Months Ended June 30, 2023 2022 Cash flows from operating activities: Net income (loss) $ ( 39,018 ) $ 28,832 Adjustments to reconcile net income (loss) to net cash flows from operating activities: Depreciation 13,091 11,008 Amortization 49,884 52,721 Amortization of operating lease right-of-use assets 6,491 5,489 Amortization of deferred debt issuance costs 2,492 2,299 Deferred income taxes ( 22,641 ) ( 6,385 ) Stock-based compensation expense 10,715 14,758 Other 311 1,124 Changes in operating assets and liabilities: Receivables 81,856 ( 14,040 ) Accounts payable ( 1,954 ) ( 1,319 ) Accrued employee compensation ( 4,628 ) ( 10,201 ) Deferred revenue 12,700 5,532 Other current and noncurrent assets and liabilities ( 51,791 ) ( 22,055 ) Net cash flows from operating activities 57,508 67,763 Cash flows from investing activities: Purchases of property and equipment ( 4,576 ) ( 3,657 ) Purchases of software and distribution rights ( 15,021 ) ( 10,738 ) Net cash flows from investing activities ( 19,597 ) ( 14,395 ) Cash flows from financing activities: Proceeds from issuance of common stock 1,426 1,962 Proceeds from exercises of stock options 2,869 1,397 Repurchase of stock-based compensation awards for tax withholdings ( 3,320 ) ( 5,802 ) Repurchases of common stock — ( 62,707 ) Proceeds from revolving credit facility 55,000 60,000 Repayment of revolving credit facility ( 45,000 ) ( 20,000 ) Repayment of term portion of credit agreement ( 34,081 ) ( 21,219 ) Payments on or proceeds from other debt, net ( 11,830 ) ( 9,369 ) Payments for debt issuance costs ( 2,160 ) — Net decrease in settlement assets and liabilities ( 24,087 ) ( 4,575 ) Net cash flows from financing activities ( 61,183 ) ( 60,313 ) Effect of exchange rate fluctuations on cash 5,427 ( 1,062 ) Net decrease in cash and cash equivalents ( 17,845 ) ( 8,007 ) Cash and cash equivalents, including settlement deposits, beginning of period 214,672 184,142 Cash and cash equivalents, including settlement deposits, end of period $ 196,827 $ 176,135 Reconciliation of cash and cash equivalents to the Consolidated Balance Sheets Cash and cash equivalents $ 132,391 $ 118,953 Settlement deposits 64,436 57,182 Total cash and cash equivalents, including settlement deposits $ 196,827 $ 176,135 Supplemental cash flow information Income taxes paid $ 33,907 $ 18,467 Interest paid $ 36,102 $ 20,296 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 June 30, 2023, and for the three and six months ended June 30, 2023 and 2022, 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, 2022, 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, 2022, filed on March 1, 2023. Results for the three and six months ended June 30, 2023, 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. Other Current Liabilities The components of other current liabilities are included in the following table (in thousands): June 30, 2023 December 31, 2022 Operating lease liabilities $ 10,317 $ 11,218 Vendor financed licenses 8,915 13,525 Accrued interest 9,103 9,067 Royalties payable 2,654 3,726 Other 65,393 65,109 Total other current liabilities $ 96,382 $ 102,645 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 9 Table of contents 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 June 30, 2023, and December 31, 2022, was $ 317.0 million and $ 328.7 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 $ 392.0 million and $ 390.0 million as of June 30, 2023, and December 31, 2022, 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 has identified its operating segments, Banks, Merchants, and Billers, as the reporting units. As of June 30, 2023, 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, 2022, annual impairment test and there have been no indications of impairment in the subsequent periods. 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 $ 18.8 million and $ 17.9 million, which is included in other noncurrent assets in the condensed consolidated balance sheet as of June 30, 2023, and December 31, 2022, 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. 10 Table of contents Total receivables, net is comprised of the following (in thousands): June 30, 2023 December 31, 2022 Billed receivables $ 161,656 $ 218,611 Allowance for doubtful accounts ( 3,464 ) ( 3,779 ) Billed receivables, net 158,192 214,832 Current accrued receivables, net 191,902 188,949 Long-term accrued receivables, net 269,051 297,818 Total accrued receivables, net 460,953 486,767 Total receivables, net $ 619,145 $ 701,599 No customer accounted for more than 10% of the Company’s consolidated receivables balance as of June 30, 2023. One customer accounted for 10.1 % of the Company's consolidated receivables balance as of December 31, 2022. 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, 2022 $ 81,536 Deferral of revenue 65,853 Recognition of deferred revenue ( 53,349 ) Foreign currency translation ( 185 ) Balance, June 30, 2023 $ 93,855 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 $ 684.0 million as of June 30, 2023, of which the Company expects to recognize approximately 50 % over the next 12 months and the remainder thereafter. During the three and six months ended June 30, 2023 and 2022, revenue recognized by the Company from performance obligations satisfied in previous periods was not significant. 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 $ 100.0 million, including a 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. The Company recognized a gain of $ 38.5 million on the sale during the three months ended September 30, 2022. During the three months ended June 30, 2023, the Company recognized a loss for the final post-closing adjustment pursuant to the definitive agreement of $ 0.5 million. 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. 11 Table of contents 4. Debt As of June 30, 2023, the Company had $ 115.0 million, $ 558.6 million, and $ 400.0 million outstanding under its Revolving Credit Facility, Term Loans, and Senior Notes, respectively, with up to $ 383.5 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. On April 28, 2023, the Company and Bank of America entered into the 2023 Extension Amendment to extend the term of the Credit Facility one year to April 5, 2025. All other terms remained the same. 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. 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 June 30, 2023, was 7.20 %. 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. 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. 12 Table of contents Maturities on debt outstanding as of June 30, 2023, are as follows (in thousands): Fiscal Year Ending December 31, Remainder of 2023 $ 38,950 2024 77,900 2025 556,798 2026 400,000 2027 — Thereafter — Total $ 1,073,648 As of June 30, 2023, 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): June 30, 2023 December 31, 2022 Term loans $ 558,648 $ 592,729 Revolving credit facility 115,000 105,000 5.750 % Senior notes, due August 2026 400,000 400,000 Debt issuance costs ( 7,525 ) ( 7,857 ) Total debt 1,066,123 1,089,872 Less: current portion of term loans 77,900 69,906 Less: current portion of debt issuance costs ( 3,606 ) ( 4,385 ) Total long-term debt $ 991,829 $ 1,024,351 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 June 30, 2023, there was $ 75.0 million available and no amount outstanding on the overdraft facility. As of December 31, 2022, 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 June 30, 2023, $ 3.6 million was outstanding on these agreements, all of which is included in other current liabilities in the condensed consolidated balance sheet. As of December 31, 2022, $ 9.3 million was outstanding on these agreements, of which $ 5.8 million and $ 3.5 million is included in other current liabilities and other noncurrent liabilities, respectively . 13 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): June 30, 2023 December 31, 2022 Gross Carrying Amount Accumulated Amortization Net Balance Gross Carrying Amount Accumulated Amortization Net Balance Software for internal use $ 453,419 $ ( 338,968 ) $ 114,451 $ 454,171 $ ( 325,062 ) $ 129,109 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 June 30, 2023 and 2022, totaled $ 16.0 million and $ 17.1 million, respectively. Software for internal use amortization expense recorded during the six months ended June 30, 2023 and 2022, totaled $ 33.0 million and $ 33.8 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 was 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 six months ended June 30, 2022 totaled $ 0.7 million. Software for resale was fully amortized during the first quarter of 2022 and, therefore, there was no amortization expense recorded during the three months ended June 30, 2022, or the three and six months ended June 30, 2023. The software amortization expense amount was 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): June 30, 2023 December 31, 2022 Gross Carrying Amount Accumulated Amortization Net Balance Gross Carrying Amount Accumulated Amortization Net Balance Customer relationships $ 446,472 $ ( 236,125 ) $ 210,347 $ 444,749 $ ( 219,057 ) $ 225,692 Trademarks and trade names 21,844 ( 19,931 ) 1,913 21,678 ( 18,672 ) 3,006 Total other intangible assets $ 468,316 $ ( 256,056 ) $ 212,260 $ 466,427 $ ( 237,729 ) $ 228,698 Other intangible assets amortization expense recorded during the three months ended June 30, 2023 and 2022, totaled $ 8.5 million and $ 9.1 million, respectively. Other intangible assets amortization expense recorded during the six months ended June 30, 2023 and 2022, totaled $ 16.9 million and $ 18.3 million, respectively. Based on capitalized intangible assets as of June 30, 2023, 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 2023 $ 29,158 $ 16,940 2024 41,545 29,448 2025 28,550 20,989 2026 12,057 20,989 2027 1,774 20,725 Thereafter 1,367 103,169 Total $ 114,451 $ 212,260 14 Table of contents 6. Stock-Based Compensation Plans Employee Stock Purchase Plan Shares issued under the 2017 Employee Stock Purchase Plan during the six months ended June 30, 2023 and 2022, totaled 65,770 and 70,242 , 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, 2022 1,221,219 $ 19.00 Exercised ( 150,199 ) 19.10 Expired ( 4,614 ) 19.63 Outstanding as of June 30, 2023 1,066,406 $ 18.98 2.20 $ 8,530,772 Exercisable as of June 30, 2023 1,066,406 $ 18.98 2.20 $ 8,530,772 The total intrinsic value of stock options exercised during the six months ended June 30, 2023 and 2022, was $ 0.8 million and $ 1.1 million, respectively. There were no stock options granted during the six months ended June 30, 2023 or 2022. Performance Share Awards During the six months ended June 30, 2023, pursuant to the Company's 2020 Equity and Incentive Compensation Plan, the Company granted performance share awards with a total shareholder return multiplier. These performance awards are earned based upon achievement, over a specified period that must not be less than one year and is typically a three-year performance period, of performance goals related to (i) net revenue growth and (ii) net adjusted EBITDA margin over the performance period as determined by the Company with a TSR multiplier up to plus or minus 20 %. Up to 200 % of the performance shares could be earned upon achievement of the performance goals, including the multiplier. On a quarterly basis, management evaluates the probability that the threshold performance goals will be achieved, if at all, and the anticipated level of attainment to determine the amount of compensation expense to record in the consolidated financial statements. 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, 2022 1,011,881 $ 39.21 Granted 233,404 26.94 Forfeited ( 112,661 ) 41.08 Change in payout rate ( 427,685 ) 30.01 Nonvested as of June 30, 2023 704,939 $ 40.43 As of June 30, 2023, the TSRs granted in 2020 were earned by the employees. However, the performance goals were not met and no shares were issued. 15 Table of contents The fair value of TSRs granted during the six months ended June 30, 2023 and 2022, 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: Six months ended June 30, 2023 2022 Expected life (years) 2.9 3.1 Risk-free interest rate 3.6 % 1.5 % Expected volatility 37.1 % 40.0 % 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, 2022 1,184,024 $ 30.73 Granted 1,453,429 24.76 Vested ( 438,542 ) 30.08 Forfeited ( 273,607 ) 29.24 Nonvested as of June 30, 2023 1,925,304 $ 26.59 During the six months ended June 30, 2023, a total of 438,542 RSUs vested. The Company withheld 127,898 of those shares to pay the employees’ portion of the minimum payroll withholding taxes. As of June 30, 2023, there were unrecognized compensation costs of $ 45.5 million and $ 12.6 million related to nonvested RSUs and TSRs, respectively, which the Company expects to recognize over weighted average periods of 2.5 years and 2.0 years, respectively. The Company recorded stock-based compensation expense recognized under ASC 718 for the three months ended June 30, 2023 and 2022, of $ 5.4 million and $ 6.8 million, respectively, with corresponding tax benefits of $ 1.0 million and $ 0.9 million, respectively. The Company recorded stock-based compensation expense recognized under ASC 718 for the six months ended June 30, 2023 and 2022, of $ 10.7 million and $ 14.8 million, respectively, with corresponding tax benefits of $ 2.0 million and $ 2.1 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. On February 24, 2023, 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 did no t repurchase any shares under the program during the six months ended June 30, 2023. Under the program to date, the Company has repurchased 57,981,733 shares for approximately $ 926.2 million. As of June 30, 2023, the maximum remaining amount authorized for purchase under the stock repurchase program was $ 200.0 million. 16 Table of contents 8. Earnings (Loss) Per Share Basic earnings (loss) per share is computed in accordance with ASC 260, Earnings Per Share , based on weighted average outstanding common shares. Diluted earnings (loss) 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 June 30, Six Months Ended June 30, 2023 2022 2023 2022 Weighted average shares outstanding: Basic weighted average shares outstanding 108,455 114,669 108,306 114,976 Add: Dilutive effect of stock options and RSUs — 536 — 673 Diluted weighted average shares outstanding 108,455 115,205 108,306 115,649 The diluted earnings (loss) per share computation excludes 3.7 million and 2.2 million options to purchase shares, RSUs, and contingently issuable shares during the three months ended June 30, 2023 and 2022, respectively, as their effect would be anti-dilutive. The diluted earnings (loss) per share computation excludes 3.1 million and 2.0 million options to purchase shares, RSUs, and contingently issuable shares during the six months ended June 30, 2023 and 2022, respectively, as their effect would be anti-dilutive. Common stock outstanding as of June 30, 2023, and December 31, 2022, was 108,595,441 and 108,068,828 , respectively. 9. Other, Net Other, net is primarily comprised of foreign currency transaction gains and losses. Other, net was $ 4.1 million of expense and $ 2.0 million of income for the three months ended June 30, 2023 and 2022, respectively. Other, net was $ 7.5 million of expense and $ 4.3 million of income for the six months ended June 30, 2023 and 2022, 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. 17 Table of contents 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. The following is selected financial data for the Company’s reportable segments for the periods indicated (in thousands): Three Months Ended June 30, Six Months Ended June 30, 2023 2022 2023 2022 Revenue Banks $ 117,507 $ 141,946 $ 205,547 $ 274,144 Merchants 36,508 36,534 71,289 77,536 Billers 169,310 161,945 336,165 311,825 Total revenue $ 323,325 $ 340,425 $ 613,001 $ 663,505 Segment Adjusted EBITDA Banks $ 51,622 $ 70,160 $ 76,303 $ 134,874 Merchants 9,911 7,749 16,455 22,462 Billers 31,229 28,324 60,870 54,681 Depreciation and amortization ( 31,436 ) ( 32,240 ) ( 62,975 ) ( 63,729 ) Stock-based compensation expense ( 5,414 ) ( 6,800 ) ( 10,715 ) ( 14,758 ) Corporate and unallocated expenses ( 45,392 ) ( 42,736 ) ( 93,770 ) ( 81,407 ) Interest, net ( 16,451 ) ( 8,733 ) ( 31,838 ) ( 16,468 ) Other, net ( 4,092 ) 2,006 ( 7,487 ) 4,256 Income (loss) before income taxes $ ( 10,023 ) $ 17,730 $ ( 53,157 ) $ 39,911 Assets are not allocated to segments, and the Company’s CODM does not evaluate operating segments using discrete asset information. 18 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 June 30, 2023 Banks Merchants Billers Total Primary Solution Categories Bill Payments $ — $ — $ 169,310 $ 169,310 Digital Business Banking 742 — — 742 Merchant Payments — 36,508 — 36,508 Fraud Management 12,153 — — 12,153 Real-Time Payments 26,499 — — 26,499 Issuing and Acquiring 78,113 — — 78,113 Total $ 117,507 $ 36,508 $ 169,310 $ 323,325 Three Months Ended June 30, 2022 Banks Merchants Billers Total Primary Solution Categories Bill Payments $ — $ — $ 161,945 $ 161,945 Digital Business Banking 12,097 — — 12,097 Merchant Payments — 36,534 — 36,534 Fraud Management 7,552 — — 7,552 Real-Time Payments 24,212 — — 24,212 Issuing and Acquiring 98,085 — — 98,085 Total $ 141,946 $ 36,534 $ 161,945 $ 340,425 Six Months Ended June 30, 2023 Banks Merchants Billers Total Primary Solution Categories Bill Payments $ — $ — $ 336,165 $ 336,165 Digital Business Banking 1,591 — — 1,591 Merchant Payments — 71,289 — 71,289 Fraud Management 21,508 — — 21,508 Real-Time Payments 45,897 — — 45,897 Issuing and Acquiring 136,551 — — 136,551 Total $ 205,547 $ 71,289 $ 336,165 $ 613,001 Six Months Ended June 30, 2022 Banks Merchants Billers Total Primary Solution Categories Bill Payments $ — $ — $ 311,825 $ 311,825 Digital Business Banking 25,585 — — 25,585 Merchant Payments — 77,536 — 77,536 Fraud Management 15,329 — — 15,329 Real-Time Payments 46,139 — — 46,139 Issuing and Acquiring 187,091 — — 187,091 Total $ 274,144 $ 77,536 $ 311,825 $ 663,505 As discussed in Note 3, Divestiture , the Company divested its corporate online banking solution assets, which were included in the Digital Business Banking solution category. 19 Table of contents Three Months Ended June 30, Six Months Ended June 30, 2023 2022 2023 2022 Banks Software as a service and platform as a service $ 9,742 $ 13,985 $ 18,991 $ 27,937 License 42,885 62,942 59,201 117,381 Maintenance 47,624 46,744 93,966 94,087 Services 17,256 18,275 33,389 34,739 Total $ 117,507 $ 141,946 $ 205,547 $ 274,144 Merchants Software as a service and platform as a service $ 30,648 $ 31,058 $ 59,498 $ 61,825 License 1,786 1,372 3,801 7,218 Maintenance 3,743 3,808 7,480 7,846 Services 331 296 510 647 Total $ 36,508 $ 36,534 $ 71,289 $ 77,536 Billers Software as a service and platform as a service $ 169,286 $ 161,935 $ 336,117 $ 311,778 License — — — — Maintenance 24 10 48 47 Services — — — — Total $ 169,310 $ 161,945 $ 336,165 $ 311,825 The following is the Company's revenue by geographic location for the periods indicated (in thousands): Three Months Ended June 30, Six Months Ended June 30, 2023 2022 2023 2022 Revenue United States $ 205,199 $ 209,459 $ 406,468 $ 408,774 Other 118,126 130,966 206,533 254,731 Total $ 323,325 $ 340,425 $ 613,001 $ 663,505 The following is the Company’s long-lived assets by geographic location for the periods indicated (in thousands): June 30, 2023 December 31, 2022 Long-lived Assets United States $ 1,233,695 $ 1,286,505 Other 732,291 754,847 Total $ 1,965,986 $ 2,041,352 No single customer accounted for more than 10% of the Company’s consolidated revenues during the three and six months ended June 30, 2023 and 2022. No other country outside the United States accounted for more than 10% of the Company's consolidated revenues during the six months ended June 30, 2023 and 2022. 11. Income Taxes For the three and six months ended June 30, 2023, the Company's effective tax rate was 33 % and 27 %, respectively. The Company reported tax benefit on pretax loss for both the three and six months ended June 30, 2023, with foreign entities recognizing earnings of $ 24.3 million and $ 17.1 million, respectively. For the three and six months ended June 30, 2022, the Company's effective tax rate was 25 % and 28 %, respectively. The Company reported tax expense on pretax income for both the three and six months ended June 30, 2022, with foreign entities recognizing earnings of $ 27.4 million and $ 58.3 million, respectively. 20 Table of contents 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 June 30, 2023, and December 31, 2022, the amount of unrecognized tax benefits for uncertain tax positions was $ 26.4 million, excluding related liabilities for interest and penalties of $ 0.6 million. The Company believes it is reasonably possible that the total amount of unrecognized tax benefits will decrease within the next 12 months by approximately $ 4.6 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 into the ACH network during a test of the Company's payment processing system. The Company took immediate corrective action and issued reversing ACH files, restoring affected accounts. 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 settled these lawsuits by establishing a $ 5.0 million fund out of which payments will be made to class members and for attorneys’ fees and administrative costs. Additional funds totaling $ 1.5 million could be required to be established under certain circumstances. The inadvertent ACH file transmission also gave rise to investigations by the U.S. Consumer Financial Protection Bureau (the "CFPB") and state attorneys general in all 50 states, the District of Columbia, and certain U.S. territories as well as money transmission regulators in most of those jurisdictions. The Company settled the CFPB investigation for $ 25.0 million plus various undertakings. The Company is proceeding to document agreements in principle to settle with the state money transmission regulators and attorneys general for a total of $ 20.0 million plus various undertakings. The Company believes that the CPFB and state undertakings will not adversely affect it. The Company expects that insurance will fund substantially all of the settlement payments and costs, including lawyers’ fees, subject to the retained limits and other terms of the applicable policies. The Company recorded the payable to the CFPB and a receivable from its insurance carriers, which are included in other current liabilities and other current assets, respectively, in the accompanying condensed consolidated balance sheet as of June 30, 2023, for the $ 25.0 million settlement. Payment was made to the CFPB and funds received from the insurance carriers subsequent to quarter-end. Funds for the potential state and money transmission regulator settlements have been deposited into an escrow account at a bank by the insurance carriers to be disbursed on finalization of the settlement. The Company is from time to time subject to other claims, litigation and investigations. While the Company believes that none of the currently pending matters is reasonably likely to have material adverse effect on it, there can be no assurance with respect thereto or future matters. 21 Table of contents