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, 2023 December 31, 2022 ASSETS Current assets Cash and cash equivalents $ 139,520 $ 124,981 Receivables, net of allowances of $ 4,900 and $ 3,779 , respectively 370,766 403,781 Settlement assets 649,494 540,667 Prepaid expenses 32,176 28,010 Other current assets 34,754 17,366 Total current assets 1,226,710 1,114,805 Noncurrent assets Accrued receivables, net 279,303 297,818 Property and equipment, net 41,098 52,499 Operating lease right-of-use assets 33,609 40,031 Software, net 105,324 129,109 Goodwill 1,226,026 1,226,026 Intangible assets, net 203,137 228,698 Deferred income taxes, net 75,448 53,738 Other noncurrent assets 64,173 67,171 TOTAL ASSETS $ 3,254,828 $ 3,209,895 LIABILITIES AND STOCKHOLDERS’ EQUITY Current liabilities Accounts payable $ 40,951 $ 47,997 Settlement liabilities 648,956 539,087 Employee compensation 42,025 45,289 Current portion of long-term debt 74,350 65,521 Deferred revenue 61,438 58,303 Other current liabilities 77,910 102,645 Total current liabilities 945,630 858,842 Noncurrent liabilities Deferred revenue 23,107 23,233 Long-term debt 987,221 1,024,351 Deferred income taxes, net 33,687 40,371 Operating lease liabilities 28,657 33,910 Other noncurrent liabilities 25,491 36,001 Total liabilities 2,043,793 2,016,708 Commitments and contingencies Stockholders’ equity Preferred stock; $ 0.01 par value; 5,000,000 shares authorized; no shares issued at September 30, 2023, and December 31, 2022 — — Common stock; $ 0.005 par value; 280,000,000 shares authorized; 140,525,055 shares issued at September 30, 2023, and December 31, 2022 702 702 Additional paid-in capital 708,506 702,458 Retained earnings 1,272,351 1,273,458 Treasury stock, at cost, 31,802,520 and 32,456,227 shares at September 30, 2023, and December 31, 2022, respectively ( 653,162 ) ( 665,771 ) Accumulated other comprehensive loss ( 117,362 ) ( 117,660 ) Total stockholders’ equity 1,211,035 1,193,187 TOTAL LIABILITIES AND STOCKHOLDERS’ EQUITY $ 3,254,828 $ 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 September 30, Nine Months Ended September 30, 2023 2022 2023 2022 Revenues Software as a service and platform as a service $ 211,369 $ 195,540 $ 625,975 $ 597,080 License 79,679 43,661 142,681 168,260 Maintenance 51,942 49,163 153,436 151,143 Services 20,025 18,227 53,924 53,613 Total revenues 363,015 306,591 976,016 970,096 Operating expenses Cost of revenue (1) 177,625 171,753 537,522 517,372 Research and development 33,739 35,899 106,122 114,348 Selling and marketing 29,442 32,794 98,166 102,793 General and administrative 29,821 30,516 92,675 84,753 Depreciation and amortization 30,464 32,140 93,439 95,218 Total operating expenses 301,091 303,102 927,924 914,484 Operating income 61,924 3,489 48,092 55,612 Other income (expense) Interest expense ( 19,840 ) ( 14,336 ) ( 58,641 ) ( 37,014 ) Interest income 3,495 2,995 10,458 9,205 Other, net 1,084 41,545 ( 6,403 ) 45,801 Total other income (expense) ( 15,261 ) 30,204 ( 54,586 ) 17,992 Income (loss) before income taxes 46,663 33,693 ( 6,494 ) 73,604 Income tax expense (benefit) 8,752 10,576 ( 5,387 ) 21,655 Net income (loss) $ 37,911 $ 23,117 $ ( 1,107 ) $ 51,949 Income (loss) per common share Basic $ 0.35 $ 0.20 $ ( 0.01 ) $ 0.45 Diluted $ 0.35 $ 0.20 $ ( 0.01 ) $ 0.45 Weighted average common shares outstanding Basic 108,667 113,812 108,428 114,584 Diluted 108,933 114,348 108,428 115,211 (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, 2023 2022 2023 2022 Net income (loss) $ 37,911 $ 23,117 $ ( 1,107 ) $ 51,949 Other comprehensive income (loss): Foreign currency translation adjustments ( 6,310 ) ( 13,459 ) 298 ( 28,179 ) Total other comprehensive income (loss) ( 6,310 ) ( 13,459 ) 298 ( 28,179 ) Comprehensive income (loss) $ 31,601 $ 9,658 $ ( 809 ) $ 23,770 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, 2023 Common Stock Additional Paid-in Capital Retained Earnings Treasury Stock Accumulated Other Comprehensive Loss Total Balance as of June 30, 2023 $ 702 $ 704,096 $ 1,234,440 $ ( 655,660 ) $ ( 111,052 ) $ 1,172,526 Net income — — 37,911 — — 37,911 Other comprehensive loss — — — — ( 6,310 ) ( 6,310 ) Stock-based compensation — 6,822 — — — 6,822 Shares issued and forfeited, net, under stock plans — ( 2,412 ) — 3,381 — 969 Repurchase of stock-based compensation awards for tax withholdings — — — ( 883 ) — ( 883 ) Balance as of September 30, 2023 $ 702 $ 708,506 $ 1,272,351 $ ( 653,162 ) $ ( 117,362 ) $ 1,211,035 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 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, 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 — — ( 1,107 ) — ( 1,107 ) Other comprehensive income — — — — 298 298 Stock-based compensation — 17,537 — — — 17,537 Shares issued and forfeited, net, under stock plans — ( 11,489 ) — 16,812 — 5,323 Repurchase of stock-based compensation awards for tax withholdings — — — ( 4,203 ) — ( 4,203 ) Balance as of September 30, 2023 $ 702 $ 708,506 $ 1,272,351 $ ( 653,162 ) $ ( 117,362 ) $ 1,211,035 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 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, 2023 2022 Cash flows from operating activities: Net income (loss) $ ( 1,107 ) $ 51,949 Adjustments to reconcile net income (loss) to net cash flows from operating activities: Depreciation 18,722 17,052 Amortization 74,716 78,817 Amortization of operating lease right-of-use assets 9,190 8,296 Amortization of deferred debt issuance costs 3,415 3,435 Deferred income taxes ( 25,207 ) ( 9,059 ) Stock-based compensation expense 17,537 21,884 Gain on divestiture — ( 38,452 ) Other 2,168 2,483 Changes in operating assets and liabilities: Receivables 42,012 5,767 Accounts payable ( 7,198 ) ( 3,047 ) Accrued employee compensation ( 2,879 ) ( 3,872 ) Deferred revenue 4,404 ( 6,367 ) Other current and noncurrent assets and liabilities ( 52,999 ) ( 26,920 ) Net cash flows from operating activities 82,774 101,966 Cash flows from investing activities: Purchases of property and equipment ( 7,956 ) ( 8,123 ) Purchases of software and distribution rights ( 22,571 ) ( 18,394 ) Proceeds from divestiture — 100,139 Net cash flows from investing activities ( 30,527 ) 73,622 Cash flows from financing activities: Proceeds from issuance of common stock 2,122 2,801 Proceeds from exercises of stock options 3,132 1,792 Repurchase of stock-based compensation awards for tax withholdings ( 4,203 ) ( 5,820 ) Repurchases of common stock — ( 90,934 ) Proceeds from revolving credit facility 75,000 85,000 Repayment of revolving credit facility ( 51,000 ) ( 75,000 ) Repayment of term portion of credit agreement ( 53,556 ) ( 70,825 ) Payments on or proceeds from other debt, net ( 12,473 ) ( 10,106 ) Payments for debt issuance costs ( 2,160 ) — Net increase (decrease) in settlement assets and liabilities ( 4,635 ) 20,084 Net cash flows from financing activities ( 47,773 ) ( 143,008 ) Effect of exchange rate fluctuations on cash 4,388 ( 60 ) Net increase in cash and cash equivalents 8,862 32,520 Cash and cash equivalents, including settlement deposits, beginning of period 214,672 184,142 Cash and cash equivalents, including settlement deposits, end of period $ 223,534 $ 216,662 Reconciliation of cash and cash equivalents to the Consolidated Balance Sheets Cash and cash equivalents $ 139,520 $ 134,799 Settlement deposits 84,014 81,863 Total cash and cash equivalents, including settlement deposits $ 223,534 $ 216,662 Supplemental cash flow information Income taxes paid $ 43,915 $ 24,987 Interest paid $ 60,597 $ 39,217 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, 2023, and for the three and nine months ended September 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 nine months ended September 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): September 30, 2023 December 31, 2022 Operating lease liabilities $ 9,659 $ 11,218 Vendor financed licenses 8,378 13,525 Accrued interest 3,498 9,067 Royalties payable 2,536 3,726 Other 53,839 65,109 Total other current liabilities $ 77,910 $ 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 September 30, 2023, and December 31, 2022, was $ 278.4 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 $ 388.0 million and $ 390.0 million as of September 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 September 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 $ 18.3 million and $ 17.9 million, which is included in other noncurrent assets in the condensed consolidated balance sheet as of September 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): September 30, 2023 December 31, 2022 Billed receivables $ 177,512 $ 218,611 Allowance for doubtful accounts ( 4,900 ) ( 3,779 ) Billed receivables, net 172,612 214,832 Current accrued receivables, net 198,154 188,949 Long-term accrued receivables, net 279,303 297,818 Total accrued receivables, net 477,457 486,767 Total receivables, net $ 650,069 $ 701,599 No customer accounted for more than 10% of the Company’s consolidated receivables balance as of September 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 87,130 Recognition of deferred revenue ( 83,066 ) Foreign currency translation ( 1,055 ) Balance, September 30, 2023 $ 84,545 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 $ 627.6 million as of September 30, 2023, of which the Company expects to recognize approximately 41 % over the next 12 months and the remainder thereafter. During the three and nine months ended September 30, 2023, revenue recognized by the Company from performance obligations satisfied in previous periods was $ 23.3 million and $ 43.7 million, respectively. 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 and nine months ended September 30, 2022. During the nine months ended September 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 September 30, 2023, the Company had $ 129.0 million, $ 539.2 million, and $ 400.0 million outstanding under its Revolving Credit Facility, Term Loans, and Senior Notes, respectively, with up to $ 368.2 million of unused borrowings under the Revolving Credit Facility portion of the Credit Agreement, as amended, and up to $ 2.8 million of unused borrowings under the Letter of Credit agreements. 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 September 30, 2023, was 7.42 %. 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 September 30, 2023, are as follows (in thousands): Fiscal Year Ending December 31, Remainder of 2023 $ 19,475 2024 77,900 2025 570,798 2026 400,000 2027 — Thereafter — Total $ 1,068,173 As of September 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): September 30, 2023 December 31, 2022 Term loans $ 539,173 $ 592,729 Revolving credit facility 129,000 105,000 5.750 % Senior notes, due August 2026 400,000 400,000 Debt issuance costs ( 6,602 ) ( 7,857 ) Total debt 1,061,571 1,089,872 Less: current portion of term loans 77,900 69,906 Less: current portion of debt issuance costs ( 3,550 ) ( 4,385 ) Total long-term debt $ 987,221 $ 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 September 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 September 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): September 30, 2023 December 31, 2022 Gross Carrying Amount Accumulated Amortization Net Balance Gross Carrying Amount Accumulated Amortization Net Balance Software for internal use $ 456,840 $ ( 351,516 ) $ 105,324 $ 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 September 30, 2023 and 2022, totaled $ 16.3 million and $ 17.3 million, respectively. Software for internal use amortization expense recorded during the nine months ended September 30, 2023 and 2022, totaled $ 49.3 million and $ 51.1 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 nine months ended September 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 September 30, 2022, or the three and nine months ended September 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): September 30, 2023 December 31, 2022 Gross Carrying Amount Accumulated Amortization Net Balance Gross Carrying Amount Accumulated Amortization Net Balance Customer relationships $ 444,046 $ ( 242,276 ) $ 201,770 $ 444,749 $ ( 219,057 ) $ 225,692 Trademarks and trade names 21,667 ( 20,300 ) 1,367 21,678 ( 18,672 ) 3,006 Total other intangible assets $ 465,713 $ ( 262,576 ) $ 203,137 $ 466,427 $ ( 237,729 ) $ 228,698 Other intangible assets amortization expense recorded during the three months ended September 30, 2023 and 2022, totaled $ 8.5 million and $ 8.8 million, respectively. Other intangible assets amortization expense recorded during the nine months ended September 30, 2023 and 2022, totaled $ 25.4 million and $ 27.1 million, respectively. Based on capitalized intangible assets as of September 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 $ 14,853 $ 8,423 2024 44,330 29,311 2025 30,212 20,916 2026 12,752 20,916 2027 2,063 20,652 Thereafter 1,114 102,919 Total $ 105,324 $ 203,137 14 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, 2023 and 2022, totaled 101,565 and 108,149 , 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 ( 164,092 ) 19.09 Expired ( 4,614 ) 19.63 Outstanding as of September 30, 2023 1,052,513 $ 18.98 1.90 $ 8,419,789 Exercisable as of September 30, 2023 1,052,513 $ 18.98 1.90 $ 8,419,789 The total intrinsic value of stock options exercised during the nine months ended September 30, 2023 and 2022, was $ 0.9 million and $ 1.1 million, respectively. There were no stock options granted during the nine months ended September 30, 2023 or 2022. Performance Share Awards During the nine months ended September 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 ( 135,452 ) 40.06 Change in payout rate ( 427,685 ) 30.01 Nonvested as of September 30, 2023 682,148 $ 40.62 In the first quarter of 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 nine months ended September 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: Nine Months Ended September 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 1,457,471 24.75 Vested ( 553,490 ) 29.04 Forfeited ( 433,528 ) 28.34 Nonvested as of September 30, 2023 1,654,477 $ 26.66 During the nine months ended September 30, 2023, a total of 553,490 RSUs vested. The Company withheld 165,440 of those shares to pay the employees’ portion of the minimum payroll withholding taxes. As of September 30, 2023, there were unrecognized compensation costs of $ 36.4 million and $ 10.0 million related to nonvested RSUs and TSRs, respectively, which the Company expects to recognize over weighted average periods of 2.3 years and 1.8 years, respectively. The Company recorded stock-based compensation expense recognized under ASC 718 for the three months ended September 30, 2023 and 2022, of $ 6.8 million and $ 7.1 million, respectively, with corresponding tax benefits of $ 1.2 million and $ 1.0 million, respectively. The Company recorded stock-based compensation expense recognized under ASC 718 for the nine months ended September 30, 2023 and 2022, of $ 17.5 million and $ 21.9 million, respectively, with corresponding tax benefits of $ 3.2 million and $ 3.0 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 nine months ended September 30, 2023. Under the program to date, the Company has repurchased 57,981,733 shares for approximately $ 926.2 million. As of September 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 September 30, Nine Months Ended September 30, 2023 2022 2023 2022 Weighted average shares outstanding: Basic weighted average shares outstanding 108,667 113,812 108,428 114,584 Add: Dilutive effect of stock options and RSUs 266 536 — 627 Diluted weighted average shares outstanding 108,933 114,348 108,428 115,211 The diluted earnings (loss) per share computation excludes 2.0 million options to purchase shares, RSUs, and contingently issuable shares during both the three months ended September 30, 2023 and 2022, as their effect would be anti-dilutive. The diluted earnings (loss) per share computation excludes 3.2 million and 2.0 million options to purchase shares, RSUs, and contingently issuable shares during the nine months ended September 30, 2023 and 2022, respectively, as their effect would be anti-dilutive. Common stock outstanding as of September 30, 2023, and December 31, 2022, was 108,722,535 and 108,068,828 , 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 the divestiture. Other, net was $ 1.1 million and $ 41.5 million of income for the three months ended September 30, 2023 and 2022, respectively. Other, net was $ 6.4 million of expense and $ 45.8 million of income for the nine months ended September 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 September 30, Nine Months Ended September 30, 2023 2022 2023 2022 Revenue Banks $ 155,684 $ 117,439 $ 361,231 $ 391,583 Merchants 36,267 35,609 107,556 113,145 Billers 171,064 153,543 507,229 465,368 Total revenue $ 363,015 $ 306,591 $ 976,016 $ 970,096 Segment Adjusted EBITDA Banks $ 91,010 $ 49,793 $ 167,313 $ 184,667 Merchants 10,296 9,781 26,751 32,243 Billers 39,186 26,348 100,056 81,029 Depreciation and amortization ( 30,463 ) ( 32,140 ) ( 93,438 ) ( 95,869 ) Stock-based compensation expense ( 6,822 ) ( 7,126 ) ( 17,537 ) ( 21,884 ) Corporate and unallocated expenses ( 41,283 ) ( 43,167 ) ( 135,053 ) ( 124,574 ) Interest, net ( 16,345 ) ( 11,341 ) ( 48,183 ) ( 27,809 ) Other, net 1,084 41,545 ( 6,403 ) 45,801 Income (loss) before income taxes $ 46,663 $ 33,693 $ ( 6,494 ) $ 73,604 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 September 30, 2023 Banks Merchants Billers Total Primary Solution Categories Bill Payments $ — $ — $ 171,064 $ 171,064 Digital Business Banking 702 — — 702 Merchant Payments — 36,267 — 36,267 Fraud Management 16,543 — — 16,543 Real-Time Payments 26,374 — — 26,374 Issuing and Acquiring 112,065 — — 112,065 Total $ 155,684 $ 36,267 $ 171,064 $ 363,015 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 Nine Months Ended September 30, 2023 Banks Merchants Billers Total Primary Solution Categories Bill Payments $ — $ — $ 507,229 $ 507,229 Digital Business Banking 2,293 — — 2,293 Merchant Payments — 107,556 — 107,556 Fraud Management 38,051 — — 38,051 Real-Time Payments 72,271 — — 72,271 Issuing and Acquiring 248,616 — — 248,616 Total $ 361,231 $ 107,556 $ 507,229 $ 976,016 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 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 September 30, Nine Months Ended September 30, 2023 2022 2023 2022 Banks Software as a service and platform as a service $ 10,167 $ 12,394 $ 29,158 $ 40,331 License 77,779 42,188 136,980 159,569 Maintenance 48,084 44,896 142,050 138,983 Services 19,654 17,961 53,043 52,700 Total $ 155,684 $ 117,439 $ 361,231 $ 391,583 Merchants Software as a service and platform as a service $ 30,162 $ 29,626 $ 89,660 $ 91,451 License 1,900 1,473 5,701 8,691 Maintenance 3,834 4,244 11,314 12,090 Services 371 266 881 913 Total $ 36,267 $ 35,609 $ 107,556 $ 113,145 Billers Software as a service and platform as a service $ 171,040 $ 153,520 $ 507,157 $ 465,298 License — — — — Maintenance 24 23 72 70 Services — — — — Total $ 171,064 $ 153,543 $ 507,229 $ 465,368 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, 2023 2022 2023 2022 Revenue United States $ 226,911 $ 195,571 $ 633,379 $ 604,345 Other 136,104 111,020 342,637 365,751 Total $ 363,015 $ 306,591 $ 976,016 $ 970,096 The following is the Company’s long-lived assets by geographic location for the periods indicated (in thousands): September 30, 2023 December 31, 2022 Long-lived Assets United States $ 1,218,402 $ 1,286,505 Other 734,268 754,847 Total $ 1,952,670 $ 2,041,352 No single customer accounted for more than 10% of the Company’s consolidated revenues during the three and nine months ended September 30, 2023 and 2022. No other country outside the United States accounted for more than 10% of the Company's consolidated revenues during the nine months ended September 30, 2023 and 2022. 20 Table of contents 11. Income Taxes For the three and nine months ended September 30, 2023, the Company's effective tax rate was 19 % and 83 %, respectively. The Company reported a tax charge on pretax income for the three months ended September 30, 2023 and a tax benefit on pretax loss for the nine months ended September 30, 2023, with foreign entities recognizing earnings of $ 47.9 million and $ 64.9 million, respectively. 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. On July 21, 2023, the Internal Revenue Service issued Notice 2023-55 providing guidance to taxpayers in determining whether a foreign tax is eligible for a U.S. foreign tax credit for tax years 2022 and 2023 effectively delaying the application of an unfavorable foreign tax credit regulation until 2024. As a result of this guidance, the Company recorded a tax benefit of $ 6.0 million during the three months ended September 30, 2023. 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, 2023, and December 31, 2022, the amount of unrecognized tax benefits for uncertain tax positions was $ 22.7 million and $ 26.4 million, respectively, 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. The $ 5.0 million was funded from insurance. 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. Payment was made to the CFPB and funds received from the insurance carriers during the three months ended September 30, 2023. Subsequent to September 30, 2023, the Company settled with the state money transmission regulators and attorneys general for a total of $ 20.0 million plus various undertakings. Funds for the state and money transmission regulator settlements were previously received from the insurance carriers and deposited into an escrow account. The Company believes that the CPFB and state undertakings will not adversely affect it. 21 Table of contents The Company’s customer commenced an action for damages as a result of this event. The customer action remains pending and the Company presently intends to vigorously defend it. The Company expects that insurance will fund payments and costs associated with the defense of the customer action, and other claims that may be asserted against it, subject to the policy limits and other terms of the applicable policies. Funds received from or expected to be received from insurance carriers are generally subject to the respective carriers' reservation of rights. 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. 22 Table of contents