Quarterly Report (10-q)

Date : 05/09/2019 @ 5:31PM
Source : Edgar (US Regulatory)
Stock : ACI Worldwide Inc (ACIW)
Quote : 33.61  -0.545 (-1.60%) @ 9:00PM
After Hours
Last Trade
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Quarterly Report (10-q)

Table of Contents

 

 

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

 

 

FORM 10-Q

 

 

(Mark One)

QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the quarterly period ended March 31, 2019

Or

 

TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the transition period from

Commission File Number 0-25346

 

 

ACI WORLDWIDE, INC.

(Exact name of registrant as specified in its charter)

 

 

 

Delaware   47-0772104

(State or other jurisdiction of

incorporation or organization)

 

(I.R.S. Employer

Identification No.)

3520 Kraft Rd, Suite 300

Naples, FL 34105

  (239) 403-4600
(Address of principal executive offices, including zip code)  

(Registrant’s telephone number, including area code)

 

 

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.    Yes  ☒    No  ☐

Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of the Regulation S-T during the preceding 12 months (or for such shorter period that the registrant was required to submit such files).    Yes  ☒    No  ☐

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, smaller reporting company, or an emerging growth company. See definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company,” and “emerging growth company” in Rule 12b-2 of the Exchange Act. (Check one):

 

Large accelerated filer      Accelerated filer  
Non-accelerated filer      Smaller reporting company  
     Emerging growth company  

If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act.  ☐

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).    Yes  ☐    No  ☒

As of May 6, 2019, there were 110,563,189 shares of the registrant’s common stock outstanding.

Securities registered or to be registered pursuant to Section 12(b) of the Act.

 

Title of each class

 

Trading

Symbol(s)

 

Name of each exchange

on which registered

Common Stock, $0.005 par value   ACIW   Nasdaq Global Select Market

 

 

 


Table of Contents

TABLE OF CONTENTS

 

         Page  
PART I – FINANCIAL INFORMATION

 

Item 1.

 

Financial Statements (unaudited)

  
 

Condensed Consolidated Balance Sheets as of March  31, 2019, and December 31, 2018

     3  
 

Condensed Consolidated Statements of Operations for the three months ended March 31, 2019 and 2018

     4  
 

Condensed Consolidated Statements of Comprehensive Income (Loss) for the three months ended March 31, 2019 and 2018

     5  
 

Condensed Consolidated Statements of Stockholders’ Equity for the three months ended March 31, 2019 and 2018

     6  
 

Condensed Consolidated Statements of Cash Flows for the three months ended March 31, 2019 and 2018

     7  
 

Notes to Condensed Consolidated Financial Statements

     8  

Item 2.

 

Management’s Discussion and Analysis of Financial Condition and Results of Operations

     22  

Item 3.

 

Quantitative and Qualitative Disclosures About Market Risk

     33  

Item 4.

 

Controls and Procedures

     34  
PART II – OTHER INFORMATION

 

Item 1.

 

Legal Proceedings

     34  

Item 1A.

 

Risk Factors

     34  

Item 2.

 

Unregistered Sales of Equity Securities and Use of Proceeds

     35  

Item 3.

 

Defaults Upon Senior Securities

     35  

Item 4.

 

Mine Safety Disclosures

     35  

Item 5.

 

Other Information

     35  

Item 6.

 

Exhibits

     36  

Signature

     37  

 

2


Table of Contents

ACI WORLDWIDE, INC. AND SUBSIDIARIES

CONDENSED CONSOLIDATED BALANCE SHEETS

(unaudited and in thousands, except share and per share amounts)

 

     March 31,     December 31,  
     2019     2018  

ASSETS

    

Current assets

    

Cash and cash equivalents

   $ 176,173     $ 148,502  

Receivables, net of allowances of $3,663 and $3,912, respectively

     265,750       348,182  

Prepaid expenses

     31,464       23,277  

Other current assets

     40,830       46,516  
  

 

 

   

 

 

 

Total current assets

     514,217       566,477  
  

 

 

   

 

 

 

Noncurrent assets

    

Accrued receivables, net

     177,407       189,010  

Property and equipment, net

     70,909       72,729  

Operating lease right-of-use assets

     60,978       —    

Software, net

     130,812       137,228  

Goodwill

     909,691       909,691  

Intangible assets, net

     162,845       168,127  

Deferred income taxes, net

     38,408       27,048  

Other noncurrent assets

     48,875       52,145  
  

 

 

   

 

 

 

TOTAL ASSETS

   $ 2,114,142     $ 2,122,455  
  

 

 

   

 

 

 

LIABILITIES AND STOCKHOLDERS’ EQUITY

    

Current liabilities

    

Accounts payable

   $ 28,046     $ 39,602  

Employee compensation

     29,570       38,115  

Current portion of long-term debt

     20,788       20,767  

Deferred revenue

     91,369       104,843  

Other current liabilities

     90,604       93,293  
  

 

 

   

 

 

 

Total current liabilities

     260,377       296,620  
  

 

 

   

 

 

 

Noncurrent liabilities

    

Deferred revenue

     60,853       51,292  

Long-term debt

     645,784       650,989  

Deferred income taxes, net

     24,705       31,715  

Operating lease liabilities

     50,636       —    

Other noncurrent liabilities

     39,203       43,608  
  

 

 

   

 

 

 

Total liabilities

     1,081,558       1,074,224  
  

 

 

   

 

 

 

Commitments and contingencies

    

Stockholders’ equity

    

Preferred stock; $0.01 par value; 5,000,000 shares authorized; no shares issued at March 31, 2019, and December 31, 2018

     —         —    

Common stock; $0.005 par value; 280,000,000 shares authorized; 140,525,055 shares issued at March 31, 2019, and December 31, 2018

     702       702  

Additional paid-in capital

     636,960       632,235  

Retained earnings

     837,805       863,768  

Treasury stock, at cost, 23,994,620 and 24,401,694 shares at March 31, 2019, and December 31, 2018, respectively

     (351,587     (355,857

Accumulated other comprehensive loss

     (91,296     (92,617
  

 

 

   

 

 

 

Total stockholders’ equity

     1,032,584       1,048,231  
  

 

 

   

 

 

 

TOTAL LIABILITIES AND STOCKHOLDERS’ EQUITY

   $ 2,114,142     $ 2,122,455  
  

 

 

   

 

 

 

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
March 31,
 
     2019     2018  

Revenues

    

Software as a service and platform as a service

   $ 108,557     $ 104,280  

License

     21,078       28,046  

Maintenance

     55,111       56,659  

Services

     21,109       20,325  
  

 

 

   

 

 

 

Total revenues

     205,855       209,310  
  

 

 

   

 

 

 

Operating expenses

    

Cost of revenue (1)

     114,941       107,336  

Research and development

     36,194       36,791  

Selling and marketing

     29,430       31,893  

General and administrative

     31,517       28,649  

Depreciation and amortization

     21,866       21,345  
  

 

 

   

 

 

 

Total operating expenses

     233,948       226,014  
  

 

 

   

 

 

 

Operating loss

     (28,093     (16,704
  

 

 

   

 

 

 

Other income (expense)

    

Interest expense

     (11,614     (9,365

Interest income

     3,033       2,744  

Other, net

     (1,912     (55
  

 

 

   

 

 

 

Total other income (expense)

     (10,493     (6,676
  

 

 

   

 

 

 

Loss before income taxes

     (38,586     (23,380

Income tax benefit

     (12,623     (3,952
  

 

 

   

 

 

 

Net loss

   $ (25,963   $ (19,428
  

 

 

   

 

 

 

Loss per common share

    

Basic

   $ (0.22   $ (0.17

Diluted

   $ (0.22   $ (0.17

Weighted average common shares outstanding

    

Basic

     116,090       115,642  

Diluted

     116,090       115,642  

 

(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.

 

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ACI WORLDWIDE, INC. AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (LOSS)

(unaudited and in thousands)

 

     Three Months Ended
March 31,
 
     2019     2018  

Net loss

   $ (25,963   $ (19,428

Other comprehensive income:

    

Foreign currency translation adjustments

     1,321       5,659  
  

 

 

   

 

 

 

Total other comprehensive income

     1,321       5,659  
  

 

 

   

 

 

 

Comprehensive loss

   $ (24,642   $ (13,769
  

 

 

   

 

 

 

The accompanying notes are an integral part of the condensed consolidated financial statements.

 

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Table of Contents

ACI WORLDWIDE, INC. AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS OF STOCKHOLDERS’ EQUITY

(unaudited and in thousands, except share amounts)

 

     Common
Stock
     Additional
Paid-in
Capital
    Retained
Earnings
    Treasury
Stock
    Accumulated
Other
Comprehensive
Income (Loss)
    Total  

Balance as of December 31, 2017

   $ 702      $ 610,345     $ 550,866     $ (319,960   $ (77,356   $ 764,597  

Net loss

     —          —         (19,428     —         —         (19,428

Other comprehensive income

     —          —         —         —         5,659       5,659  

Stock-based compensation

     —          6,362       —         —         —         6,362  

Shares issued and forfeited, net, under stock plans including income tax benefits

     —          206       —         9,671       —         9,877  

Repurchase of 1,346,427 shares of common stock

     —          —         —         (31,113     —         (31,113

Repurchase of restricted share awards for tax
withholdings

     —          —         —         (914     —         (914

Cumulative effect of accounting change, ASC 606

     —          —         243,981       —         —         243,981  
  

 

 

    

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Balance as of March 31, 2018

   $ 702      $ 616,913     $ 775,419     $ (342,316   $ (71,697   $ 979,021  
  

 

 

    

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Balance as of December 31, 2018

   $ 702      $ 632,235     $ 863,768     $ (355,857   $ (92,617   $ 1,048,231  

Net loss

     —          —         (25,963     —         —         (25,963

Other comprehensive income

     —          —         —         —         1,321       1,321  

Stock-based compensation

     —          6,585       —         —         —         6,585  

Shares issued and forfeited, net, under stock plans including income tax benefits

     —          (1,860     —         7,525       —         5,665  

Repurchase of 23,802 shares of common stock

     —          —         —         (631     —         (631

Repurchase of restricted share awards and restricted share
units for tax withholdings

     —          —         —         (2,624     —         (2,624
  

 

 

    

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Balance as of March 31, 2019

   $ 702      $ 636,960     $ 837,805     $ (351,587   $ (91,296   $ 1,032,584  
  

 

 

    

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

The accompanying notes are an integral part of the condensed consolidated financial statements.

 

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Table of Contents

ACI WORLDWIDE, INC. AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

(unaudited and in thousands)

 

     Three Months Ended
March 31,
 
     2019     2018  

Cash flows from operating activities:

    

Net loss

   $ (25,963   $ (19,428

Adjustments to reconcile net loss to net cash flows from operating activities:

    

Depreciation

     5,901       5,926  

Amortization

     18,951       19,067  

Amortization of operating lease right-of-use assets

     3,383       —    

Amortization of deferred debt issuance costs

     753       699  

Deferred income taxes

     (17,414     (4,827

Stock-based compensation expense

     6,585       6,362  

Other

     574       (663

Changes in operating assets and liabilities

    

Receivables

     94,549       68,741  

Accounts payable

     (10,297     (2,611

Accrued employee compensation

     (8,598     (14,743

Current income taxes

     (1,041     (3,569

Deferred revenue

     (4,127     11,326  

Other current and noncurrent assets and liabilities

     (20,829     (21,144
  

 

 

   

 

 

 

Net cash flows from operating activities

     42,427       45,136  
  

 

 

   

 

 

 

Cash flows from investing activities:

    

Purchases of property and equipment

     (5,250     (5,937

Purchases of software and distribution rights

     (4,578     (6,652
  

 

 

   

 

 

 

Net cash flows from investing activities

     (9,828     (12,589
  

 

 

   

 

 

 

Cash flows from financing activities:

    

Proceeds from issuance of common stock

     831       753  

Proceeds from exercises of stock options

     4,857       9,118  

Repurchase of restricted share awards and restricted share units for tax withholdings

     (2,624     (914

Repurchases of common stock

     (631     (31,113

Proceeds from revolving credit facility

     —         48,000  

Repayment of revolving credit facility

     —         (50,000

Repayment of term portion of credit agreement

     (5,937     (5,187

Payments on other debt

     (1,857     (352
  

 

 

   

 

 

 

Net cash flows from financing activities

     (5,361     (29,695
  

 

 

   

 

 

 

Effect of exchange rate fluctuations on cash

     433       1,719  
  

 

 

   

 

 

 

Net increase in cash and cash equivalents

     27,671       4,571  

Cash and cash equivalents, beginning of period

     148,502       69,710  
  

 

 

   

 

 

 

Cash and cash equivalents, end of period

   $ 176,173     $ 74,281  
  

 

 

   

 

 

 

Supplemental cash flow information

    

Income taxes paid

   $ 5,949     $ 8,263  

Interest paid

   $ 14,388     $ 13,127  

The accompanying notes are an integral part of the condensed consolidated financial statements.

 

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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 March 31, 2019, and for the three months ended March 31, 2019 and 2018, 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, 2018, 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, 2018, filed on March 1, 2019. Results for the three months ended March 31, 2019, are not necessarily indicative of results that may be attained in the future.

The preparation of condensed consolidated financial statements in conformity with accounting principles generally accepted in the United States (“U.S. GAAP”) requires management to make judgments, estimates, and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the condensed consolidated financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates.

Other Current Assets and Other Current Liabilitie s

 

(in thousands)

   March 31,
2019
     December 31,
2018
 

Settlement receivables

   $ 13,842      $ 8,605  

Settlement deposits

     10,549        23,651  

Other

     16,439        14,260  
  

 

 

    

 

 

 

Total other current assets

   $ 40,830      $ 46,516  
  

 

 

    

 

 

 

(in thousands)

   March 31,
2019
     December 31,
2018
 

Settlement payables

   $ 23,552      $ 31,605  

Operating lease liabilities

     14,334        —    

Royalties payable

     14,751        11,318  

Vendor financed licenses

     4,152        3,551  

Accrued interest

     4,848        8,407  

Other

     28,967        38,412  
  

 

 

    

 

 

 

Total other current liabilities

   $ 90,604      $ 93,293  
  

 

 

    

 

 

 

Individuals and businesses settle their obligations to the Company’s various clients, primarily utility and other public-sector 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 company 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 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.

Off Balance Sheet Settlement Accounts

The Company also enters into agreements with certain 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, the settlement accounts are not included in the Company’s balance sheet. The Company is entitled to interest earned on the fund balances. The collection of interest on these settlement accounts is considered in the Company’s determination of its fee structure for clients and represents a portion of the payment for services performed by the Company. The amount of settlement funds as of March 31, 2019, and December 31, 2018, was $199.6 million and $256.5 million, respectively.

 

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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”) as of March 31, 2019, and December 31, 2018, was $409.5  million and $395.0  million 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, ACI On Demand and ACI On Premise, as its reporting units. As of March 31, 2019, the Company’s goodwill of $909.7 million was allocated to its two reporting units, with $725.9 million allocated to ACI On Premise and $183.8 million allocated to ACI On Demand.

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, 2018, annual impairment test and there have been no indications of impairment in the subsequent periods.

New Accounting Standards Recently Adopted

In February 2016, the Financial Accounting Standards Board (“FASB”) issued Accounting Standards Update (“ASU”) 2016-02,  Leases (codified as “ASC 842”). ASC 842 requires lessees to recognize right-of-use (“ROU”) assets and lease liabilities on the balance sheet for all leases unless, as a policy election, a lessee elects not to apply ASC 842 to short-term leases. In addition, this standard requires both lessees and lessors to disclose certain key information about lease transactions. The Company adopted ASC 842 on January 1, 2019 (the effective date), using the optional transition method to not apply the new lease standard in the comparative periods presented and elected the “practical expedient package”, which permits the Company to not reassess prior conclusions about lease identification, lease classification, and initial direct costs. ASC 842 also provides practical expedients for the Company’s ongoing accounting including the combination of lease and non-lease components into a single lease component which the Company has elected to apply to its facilities leases. As of January 1, 2019, the Company recognized ROU assets and operating lease liabilities of $63.3 million and $68.6 million, respectively. Refer to Note 13, Leases , for further details.

In February 2018, the FASB issued ASU 2018-02, Income Statement-Reporting Comprehensive Income:  Reclassification of Certain Tax Effects from Accumulated Other Comprehensive Income.  This ASU provides an option to reclassify stranded tax effects within accumulated other comprehensive income (“AOCI”) to retained earnings in each period in which the effect of the change in the U.S. federal corporate income tax rate in the 2017 U.S. Tax Cuts and Jobs Act (or portion thereof) is recorded. This ASU requires disclosure of a description of the accounting policy for releasing income tax effects from AOCI; whether election is made to reclassify the stranded income tax effects from the 2017 U.S. Tax Cuts and Jobs Act; and information about the income tax effects that are reclassified. The Company adopted ASU 2018-02 as of January 1, 2019. The adoption of ASU 2018-02 did not have an impact on the condensed consolidated balance sheet, results of operations, and statement of cash flows.

Recently Issued Accounting Standards Not Yet Effective

In June 2016, the FASB issued ASU 2016-13,  Financial Instruments – Credit Losses: Measurement of Credit Losses on Financial Instruments.  This ASU provides financial statement users with more decision-useful information about the expected credit losses on financial instruments and other commitments to extend credit held by a reporting entity at each reporting date. The amendments in ASU 2016-13 replace the incurred loss impairment methodology in current U.S. GAAP with a methodology that reflects expected credit losses and requires consideration of a broader range of reasonable and supportable information to inform credit loss estimates. The Company will be required to use a forward-looking expected credit loss model for accounts receivables and other financial instruments. Subsequent to issuing ASU 2016-13, the FASB issued ASU 2018-19,  Codification Improvements to Topic 326, Financial Instruments - Credit Losses , for the purpose of clarifying certain aspects of ASU 2016-13. ASU 2018-19 has the same effective date and transition requirements as ASU 2016-13. ASU 2016-13 is effective for annual and interim periods beginning after December 15, 2019. The Company is currently assessing the impact the adoption of ASU 2016-13 will have on its condensed consolidated balance sheet, results of operations, and cash flow.

 

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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. Refer to Note 11, Segment Information, for further details, including disaggregation of revenue based on primary solution category and geographic location.

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 and SaaS and 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.

 

     March 31,      December 31,  

(in thousands)

   2019      2018  

Billed receivables

   $ 158,807      $ 239,275  

Allowance for doubtful accounts

     (3,663      (3,912
  

 

 

    

 

 

 

Billed receivables, net

   $ 155,144      $ 235,363  
  

 

 

    

 

 

 

Accrued receivables

     320,575        336,858  

Significant financing component

     (32,562      (35,029
  

 

 

    

 

 

 

Total accrued receivables, net

     288,013        301,829  

Less: current accrued receivables

     120,569        123,053  

Less: current significant financing component

     (9,963      (10,234
  

 

 

    

 

 

 

Total long-term accrued receivables, net

   $ 177,407      $ 189,010  
  

 

 

    

 

 

 

Total receivables, net

   $ 443,157      $ 537,192  
  

 

 

    

 

 

 

No customer accounted for more than 10% of the Company’s consolidated receivables balance as of March 31, 2019, or December 31, 2018.

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, 2018

   $ 156,135  

Deferral of revenue

     42,533  

Recognition of deferred revenue

     (46,701

Foreign currency translation

     255  
  

 

 

 

Balance, March 31, 2019

   $ 152,222  
  

 

 

 

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.

 

   

SaaS and PaaS revenue from variable consideration that will be recognized in accordance with the direct allocation method.

Revenue allocated to remaining performance obligations was $628.3 million as of March 31, 2019, of which the Company expects to recognize approximately 46% over the next 12 months and the remainder thereafter.

During the three months ended March 31, 2019, revenue recognized by the Company from performance obligations satisfied in previous periods was $3.9 million. During the three months ended March 31, 2018, revenue recognized by the Company from performance obligations satisfied in previous periods was not significant.

 

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3. Acquisition

Speedpay

On May 9, 2019, the Company acquired Speedpay, the U.S. bill pay business of Western Union Company (“WU”) for $750.0 million in cash, subject to adjustments, pursuant to a Stock Purchase Agreement, among the Company, WU, and ACI Worldwide Corp., a wholly owned subsidiary of the Company. The combination of the Company and Speedpay bill pay solutions will serve more than 4,000 customers across the U.S., bringing expanded reach in existing and complementary market segments such as consumer finance, insurance, healthcare, higher education, utilities, government, and mortgage. The acquisition of Speedpay will increase the scale of the Company’s On Demand platform business and allow the acceleration of platform innovation.

The acquisition of Speedpay will be accounted for using the acquisition method of accounting, where the Company will record all assets acquired and liabilities assumed at their respective acquisition-date fair values. The Company has not completed the valuation analysis and calculations necessary to finalize the required purchase price allocations. In addition to goodwill, the final purchase price allocation may include allocations to intangible assets such as trademarks and tradenames, developed technology, and customer-related assets.

Effective April 5, 2019, the Company entered into an amendment agreement (the “amendment”) with ACI Worldwide Corp., Official Payments Corporation, the lenders, and Bank of America, N.A., as administrative agent for the lenders, to amend and restate the Company’s Credit Agreement, dated February 24, 2017. The amendment permitted the Company to borrow up to $500.0 million in the form of a senior secured term loan; extended the revolver and the term loan maturity date from February 24, 2022, to April 5, 2024; and increased the maximum consolidated senior secured net leverage ratio covenant from 3.50:1.00 to 3.75:1.00; among other things. The Company used the funds from the new term loan, in addition to drawing $250.0 million on the available Revolving Credit Facility, to fund the acquisition.

Through March 31, 2019, the Company expensed approximately $4.7 million of costs related to the acquisition of Speedpay. These costs, which consist primarily of consulting and legal fees, are included in general and administrative expenses in the condensed consolidated statements of operations.

4. Debt

As of March 31, 2019, the Company had $279.0 million and $400.0 million outstanding under its Term Credit Facility and Senior Notes, respectively, with up to $500.0 million of unused borrowings under the Revolving Credit Facility portion of the Credit Agreement, as amended.    

Credit Agreement

On February 24, 2017, the Company entered into an amended and restated credit agreement (the “Credit Agreement”) replacing the existing agreement with a syndicate of financial institutions, as lenders, and Bank of America, N.A., as the administrative agent, providing for revolving loans, swingline loans, letters of credit, and a term loan. 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, and (b) a five-year $415.0 million senior secured term loan facility (the “Term Credit Facility” and, together with 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) a London Interbank Offered Rate (“LIBOR”) rate determined by reference to the costs of funds for U.S. dollar deposits for a one-month interest period, adjusted for certain additional costs, plus 1% or (b) a LIBOR rate determined by reference to the costs of funds for U.S. dollar deposits for the interest period relevant to such borrowings, adjusted for certain additional costs, plus an applicable margin. Based on the calculation of the applicable consolidated total leverage ratio, the applicable margin for borrowings under the Credit Facility is between 0.25% to 1.25% with respect to base rate borrowings and between 1.25% and 2.25% with respect to LIBOR rate borrowings. Interest is due and payable monthly. The interest rate in effect as of March 31, 2019, for the Credit Facility was 4.25%.

The Company is also required to pay (a) a commitment fee related to the unutilized commitments under the Revolving Credit Facility, payable quarterly in arrears, (b) letter of credit fees on the maximum amount available to be drawn under all outstanding letters of credit in an amount equal to the applicable margin on LIBOR rate borrowings under the Revolving Credit Facility on an annual basis, payable quarterly in arrears, and (c) customary fronting fees for the issuance of letters of credit fees and agency fees.

The Company’s obligations under the Credit Facility and cash management arrangements entered into with lenders under the Credit Facility (or affiliates thereof) and the obligations of the subsidiary guarantors are secured by first-priority security interests in substantially all assets of the Company and any guarantor, including 100% of the capital stock of ACI Worldwide Corp. and each domestic subsidiary of the Company, each domestic subsidiary of any guarantor, and 65% of the voting capital stock of each foreign subsidiary of the Company that

 

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is directly owned by the Company or a guarantor, in each case subject to certain exclusions set forth in the credit documentation governing the Credit Facility. On October 9, 2018, the Company entered into the first amendment to the collateral agreement of the Credit Agreement. This amendment released the lien on certain assets of Official Payments Corporation (“OPAY”), our electronic bill presentment and payment affiliate, to allow OPAY to comply with certain eligible securities and unencumbered asset requirements related to money transmitter or transfer license rules and regulations.

The Credit Agreement contains a number of covenants that, among other things and subject to certain exceptions, restrict the Company’s ability and, as applicable, the ability of its subsidiaries to: create, incur, assume or suffer to exist any additional indebtedness; create, incur, assume or suffer to exist any liens; enter into agreements and other arrangements that include negative pledge clauses; pay dividends on capital stock or redeem, repurchase or retire capital stock or subordinated indebtedness; create restrictions on the payment of dividends or other distributions by subsidiaries; make investments, loans, advances and acquisitions; merge, consolidate or enter into any similar combination or sell assets, including equity interests of the subsidiaries; enter into sale and leaseback transactions; directly or indirectly engage in transactions with affiliates; alter in any material respect the character or conduct of the business; enter into amendments of or waivers under subordinated indebtedness, organizational documents and certain other material agreements; and hold certain assets and incur certain liabilities.

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, commencing on February 15, 2019. Interest accrued from August 21, 2018. The 2026 Notes will mature on August 15, 2026.

The Company used the net proceeds of the offering described above to redeem in full the Company’s outstanding 6.375% Senior Notes due 2020, including accrued interest, and repaid a portion of the outstanding amount under the Term Credit Facility.

Maturities on long-term debt outstanding as of March 31, 2019, are as follows (in thousands):

 

Fiscal year ending December 31,

      

2019

   $ 17,810  

2020

     23,747  

2021

     31,662  

2022

     205,804  

2023

     —    

Thereafter

     400,000  
  

 

 

 

Total

   $ 679,023  
  

 

 

 

The Credit Agreement and 2026 Notes also contain certain customary mandatory prepayment provisions. As specified in the Credit Agreement and 2026 Notes agreement, if certain events shall occur, the Company may be required to repay all or a portion of the amounts outstanding under the Credit Facility or 2026 Notes.

The Credit Facility will mature on February 24, 2022, and the 2026 Notes will mature on August 15, 2026. The Revolving Credit Facility and 2026 Notes do not amortize. The Term Credit Facility does amortize, with principal payable in consecutive quarterly installments.

The Credit Agreement and 2026 Notes contain certain customary affirmative covenants and negative covenants that limit or restrict, subject to certain exceptions, the incurrence of liens, indebtedness of subsidiaries, mergers, advances, investments, acquisitions, transactions with affiliates, change in nature of business and the sale of the assets. The Company is also required to maintain a consolidated leverage ratio at or below a specified amount and an interest coverage ratio at or above a specified amount. As specified in the Credit Agreement and 2026 Notes agreement, if an event of default shall occur and be continuing, the Company may be required to repay all amounts outstanding under the Credit Facility and 2026 Notes. As of March 31, 2019, and at all times during the period, the Company was in compliance with its financial debt covenants.

 

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Total debt is comprised of the following (in thousands):

 

     March 31,
2019
     December 31,
2018
 

Term credit facility

   $ 279,023      $ 284,959  

5.750% Senior notes, due August 2026

     400,000        400,000  

Debt issuance costs

     (12,451      (13,203
  

 

 

    

 

 

 

Total debt

     666,572        671,756  

Less: current portion of term credit facility

     23,747        23,747  

Less: current portion of debt issuance costs

     (2,959      (2,980
  

 

 

    

 

 

 

Total long-term debt

   $ 645,784      $ 650,989  
  

 

 

    

 

 

 

Other

As of March 31, 2019, $9.4 million is outstanding related to certain multi-year license agreements for internal use software, of which $2.5 million and $6.9 million is included in other current liabilities and other noncurrent liabilities, respectively, in the condensed consolidated balance sheet.

5. Stock-Based Compensation Plans

Employee Stock Purchase Plan

Shares issued under the 2017 Employee Stock Purchase Plan during the three months ended March 31, 2019 and 2018, totaled 32,174 and 38,145, respectively.

Stock Options

A summary of stock option activity is as follows:

 

Stock Options

   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, 2018

     4,864,836      $ 17.76        

Exercised

     (313,282      15.50        

Forfeited

     (3,496      17.89        
  

 

 

    

 

 

       

Outstanding as of March 31, 2019

     4,548,058      $ 17.91        6.02      $ 68,018,687  
  

 

 

    

 

 

    

 

 

    

 

 

 

Exercisable as of March 31, 2019

     3,946,163      $ 17.58        5.80      $ 60,350,648  
  

 

 

    

 

 

    

 

 

    

 

 

 

The weighted-average grant date fair value of stock options granted during the three months ended March 31, 2018, was $7.03. The total intrinsic value of stock options exercised during the three months ended March 31, 2019 and 2018, was $5.3 million and $7.2 million, respectively. There were no stock options granted during the three months ended March 31, 2019.

The fair value of options granted during the three months ended March 31, 2018, were estimated on the date of grant using the Black-Scholes option-pricing model, acceptable under ASC 718, Compensation – Stock Compensation (“ASC 718”), with the following weighted-average assumptions:

 

     Three Months Ended
March 31, 2018
 

Expected life (years)

     5.6  

Risk-free interest rate

     2.7

Expected volatility

     26.4

Expected dividend yield

     —    

Expected volatilities are based on the Company’s historical common stock volatility, derived from historical stock price data for periods commensurate with the options’ expected life. The expected life of the options granted represents the period of time options are expected to be outstanding, based primarily on historical employee option exercise behavior. The risk-free interest rate is based on the implied yield currently available on U.S. Treasury zero coupon bonds issued with a term equal to the expected life at the date of grant of the options. The expected dividend yield is zero, as the Company has historically paid no dividends and does not anticipate dividends to be paid in the future.

 

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Long-term Incentive Program Performance Share Awards

A summary of nonvested long-term incentive program performance share awards (“LTIP performance shares”) is as follows:

 

Nonvested LTIP Performance Shares

   Number of
Shares at
Expected
Attainment
     Weighted-
Average Grant
Date Fair
Value
 

Nonvested as of December 31, 2018

     540,697      $ 19.83  

Forfeited

     (1,036      20.12  
  

 

 

    

 

 

 

Nonvested as of March 31, 2019

     539,661      $ 19.83  
  

 

 

    

 

 

 

Restricted Share Awards

A summary of nonvested restricted share awards (“RSAs”) is as follows:

 

Nonvested Restricted Share Awards

   Number of
Shares
     Weighted-
Average Grant
Date Fair
Value
 

Nonvested as of December 31, 2018

     213,337      $ 20.21  

Vested

     (98,769      20.12  

Forfeited

     (3,975      20.12  
  

 

 

    

 

 

 

Nonvested as of March 31, 2019

     110,593      $ 20.29  
  

 

 

    

 

 

 

During the three months ended March 31, 2019, a total of 98,769 RSAs vested. The Company withheld 30,878 of those shares to pay the employees’ portion of the minimum payroll withholding taxes.

Total Shareholder Return Awards

A summary of nonvested total shareholder return awards (“TSRs”) is as follows:

 

Nonvested Total Shareholder Return Awards

   Number of
Shares
     Weighted-
Average Grant

Date Fair
Value
 

Nonvested as of December 31, 2018

     718,931      $ 29.25  

Granted

     436,674        47.90  

Forfeited

     (5,457      31.31  
  

 

 

    

 

 

 

Nonvested as of March 31, 2019

     1,150,148      $ 36.32  
  

 

 

    

 

 

 

The fair value of TSRs granted during the three months ended March 31, 2019 and 2018, were estimated on the date of grant using the Monte Carlo simulation model, acceptable under ASC 718, using the following weighted-average assumptions:

 

     Three Months Ended
March 31,
 
     2019     2018  

Expected life (years)

     2.8       2.9  

Risk-free interest rate

     2.5     2.4

Expected volatility

     29.3     28.0

Expected dividend yield

     —         —    

 

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Restricted Share Units

A summary of nonvested restricted share unit awards (“RSUs”) is as follows:

 

Nonvested Restricted Share Units

   Number of
Shares
     Weighted-
Average
Grant Date
Fair Value
 

Nonvested as of December 31, 2018

     651,045      $ 23.82  

Granted

     550,091        33.07  

Vested

     (173,547      23.36  

Forfeited

     (8,346      23.36  
  

 

 

    

 

 

 

Nonvested as of March 31, 2019

     1,019,243      $ 28.90  
  

 

 

    

 

 

 

During the three months ended March 31, 2019, a total of 173,547 RSUs vested. The Company withheld 53,274 of those shares to pay the employees’ portion of the minimum payroll withholding taxes.

As of March 31, 2019, there were unrecognized compensation costs of $31.6 million related to nonvested TSRs, $26.7 million related to nonvested RSUs, $3.0 million related to nonvested LTIP performance shares, $1.1 million related to nonvested stock options, and $1.9 million related to nonvested RSAs, which the Company expects to recognize over weighted-average periods of 2.3 years, 1.9 years, 1.0 years, 0.9 years, and 0.9 years, respectively.

The Company recorded stock-based compensation expense recognized under ASC 718 for the three months ended March 31, 2019 and 2018, of $6.6 million and $6.4 million, respectively, with corresponding tax benefits of $1.2 million and $1.0 million, respectively.

6. Software and Other Intangible Assets

As of March 31, 2019, software net book value totaled $130.8 million, net of $261.1 million of accumulated amortization. Included in this net book value amount is software for resale of $24.8 million and software acquired or developed for internal use of $106.0 million.

As of December 31, 2018, software net book value totaled $137.2 million, net of $252.2 million of accumulated amortization. Included in this net book value amount is software for resale of $27.5 million and software acquired or developed for internal use of $109.7 million.

Amortization of software for resale is computed using the greater of (a) the ratio of current revenues to total current and future revenues expected to be derived from the software or (b) the straight-line method over an estimated useful life of generally three to ten years. Software for resale amortization expense recorded during the three months ended March 31, 2019 and 2018, totaled $3.0 million and $3.6 million, respectively. These software amortization expense amounts are reflected in cost of revenue in the condensed consolidated statements of operations.

Amortization of software for internal use is computed using the straight-line method over an estimated useful life of generally three to ten years. Software for internal use amortization expense recorded during the three months ended March 31, 2019 and 2018, totaled $10.4 million and $10.5 million, respectively. These software amortization expense amounts are reflected in depreciation and amortization 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):

 

     March 31, 2019      December 31, 2018  
     Gross
Carrying
Amount
     Accumulated
Amortization
    Net
Balance
     Gross
Carrying
Amount
     Accumulated
Amortization
    Net
Balance
 

Customer relationships

   $ 298,459      $ (136,628   $ 161,831      $ 297,991      $ (131,187   $ 166,804  

Trademarks and tradenames

     16,346        (15,332     1,014        16,348        (15,025     1,323  
  

 

 

    

 

 

   

 

 

    

 

 

    

 

 

   

 

 

 
   $ 314,805      $ (151,960   $ 162,845      $ 314,339      $ (146,212   $ 168,127  
  

 

 

    

 

 

   

 

 

    

 

 

    

 

 

   

 

 

 

Other intangible assets amortization expense during the three months ended March 31, 2019 and 2018, totaled $5.5 million and $4.9 million, respectively.

 

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Table of Contents

Based on capitalized intangible assets as of March 31, 2019, 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 2019

   $ 37,383      $ 16,340  

2020

     40,353        20,992  

2021

     27,637        20,506  

2022

     13,167        20,359  

2023

     6,633        20,053  

Thereafter

     5,639        64,595  
  

 

 

    

 

 

 

Total

   $ 130,812      $ 162,845  
  

 

 

    

 

 

 

7. Corporate Restructuring and Other Organizational Changes

The components of corporate restructuring and other reorganization from prior acquisitions are included in the following table (in thousands):

 

Balance, December 31, 2018

   $ 4,127  

Amounts paid during the period

     (389

Foreign currency translation adjustments

     42  
  

 

 

 

Balance, March 31, 2019

   $ 3,780  
  

 

 

 

Of the $3.8 million restructuring liability, $1.6 million and $2.2 million are recorded in other current liabilities and operating lease liabilities, respectively, in the condensed consolidated balance sheet as of March 31, 2019.

8. Common Stock and Treasury Stock

In 2005, the board approved a stock repurchase program authorizing the Company, as market and business conditions warrant, to acquire its common stock and periodically authorize additional funds for the program. In February 2018, the board approved the repurchase of up to $200.0 million of the Company’s common stock, in place of the remaining purchase amounts previously authorized.

The Company repurchased 23,802 shares for $0.6 million under the program during the three months ended March 31, 2019. Under the program to date, the Company has repurchased 44,153,195 shares for approximately $548.5 million. As of March 31, 2019, the maximum remaining amount authorized for purchase under the stock repurchase program was $176.0 million.

9. Loss Per Share

Basic loss per share is computed in accordance with ASC 260, Earnings per Share , based on weighted average outstanding common shares. Diluted loss per share is computed based on basic weighted average outstanding common shares adjusted for the dilutive effect of stock options and RSUs.

The following table reconciles the weighted average share amounts used to compute both basic and diluted loss per share (in thousands):

 

     Three Months Ended
March 31,
 
     2019      2018  

Weighted average shares outstanding:

     

Basic weighted average shares outstanding

     116,090        115,642  

Add: Dilutive effect of stock options and RSUs

     —          —    
  

 

 

    

 

 

 

Diluted weighted average shares outstanding

     116,090        115,642  
  

 

 

    

 

 

 

The diluted loss per share computation excludes 7.4 million and 8.6 million options to purchase shares, RSUs, and contingently issuable shares during the three months ended March 31, 2019 and 2018, respectively, as their effect would be anti-dilutive.

Common stock outstanding as of March 31, 2019, and December 31, 2018, was 116,530,435 and 116,123,361, respectively.

 

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Table of Contents

10. Other, Net

Other, net is comprised of foreign currency transaction losses of $1.9 million and $0.1 million for the three months ended March 31, 2019 and 2018, respectively.

11. Segment Information

The Company reports financial performance based on its segments, ACI On Premise and ACI On Demand, 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.

ACI On Premise serves customers who manage their software on site. These on-premise customers use the Company’s software to develop sophisticated solutions, which are often part of a larger system located and managed at the customer specified site. These customers require a level of control and flexibility that ACI On Premise solutions can offer, and they have the resources and expertise to take a lead role in managing these solutions.

ACI On Demand serves the needs of banks, merchants and corporates who use payments to facilitate their core business. These on-demand solutions are maintained and delivered through the cloud via our global data centers and are available in either a single-tenant environment for SaaS offerings, or in a multi-tenant environment for PaaS offerings.

Revenue is attributed to the reportable segments based upon the product sold and mechanism for delivery to 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 products, or (3) costs that are allocated. Allocated costs are generally marketing and sales related activities as well as information technology and facilities related expense for which multiple segments benefit. The Company also allocates certain depreciation costs to the segments.

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 stock-based compensation, and net other income (expense).

Corporate and unallocated expenses consists of the corporate overhead costs that are not allocated to reportable segments. These overhead costs relate to human resources, finance, legal, accounting, merger and acquisition activity, and other costs that are not considered when management evaluates segment performance.

 

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The following is selected financial data for the Company’s reportable segments (in thousands):

 

     Three Months Ended March 31,  
     2019      2018  

Revenue

     

ACI On Premise

   $ 96,007      $ 105,030  

ACI On Demand

     109,848        104,280  
  

 

 

    

 

 

 

Total revenue

   $ 205,855      $ 209,310  
  

 

 

    

 

 

 

Segment Adjusted EBITDA

     

ACI On Premise

   $ 28,268      $ 38,898  

ACI On Demand

     (262      (4,233

Depreciation and amortization

     (24,852      (24,993

Stock-based compensation expense

     (6,585      (6,362

Corporate and unallocated expenses

     (24,662      (20,014

Interest, net

     (8,581      (6,621

Other, net

     (1,912      (55
  

 

 

    

 

 

 

Loss before income taxes

   $ (38,586    $ (23,380
  

 

 

    

 

 

 

Depreciation and amortization

     

ACI On Premise

   $ 3,030      $ 2,975  

ACI On Demand

     7,562        7,736  

Corporate

     14,260        14,282  
  

 

 

    

 

 

 

Total depreciation and amortization

   $ 24,852      $ 24,993  
  

 

 

    

 

 

 

Stock-based compensation expense

     

ACI On Premise

   $ 1,956      $ 1,467  

ACI On Demand

     1,951        1,463  

Corporate

     2,678        3,432  
  

 

 

    

 

 

 

Total stock-based compensation expense

   $ 6,585      $ 6,362  
  

 

 

    

 

 

 

Assets are not allocated to segments, and the Company’s CODM does not evaluate operating segments using discrete asset information.

 

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The following is revenue by primary geographic market and primary solution category for the Company’s reportable segments (in thousands):

 

     Three Months Ended March 31, 2019      Three Months Ended March 31, 2018  
     ACI
On Premise
     ACI
On Demand
     Total      ACI
On Premise
     ACI
On Demand
     Total  

Primary Geographic Markets

                 

Americas - United States

   $ 26,422      $ 93,036      $ 119,458      $ 30,864      $ 88,946      $ 119,810  

Americas - Other

     10,945        2,743        13,688        16,784        2,319        19,103  

EMEA

     42,451        12,068        54,519        38,686        12,009        50,695  

Asia Pacific

     16,189        2,001        18,190        18,696        1,006        19,702  
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total

   $ 96,007      $ 109,848      $ 205,855      $ 105,030      $ 104,280      $ 209,310  
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Primary Solution Categories

                 

Bill Payments

   $ —        $ 68,967      $ 68,967      $ —        $ 66,168      $ 66,168  

Digital Channels

     8,725        9,788        18,513        11,363        10,644        22,007  

Merchant Payments

     5,022        19,339        24,361        5,010        12,371        17,381  

Payments Intelligence

     7,037        8,981        16,018        10,420        11,798        22,218  

Real-Time Payments

     14,715        618        15,333        13,641        450        14,091  

Retail Payments

     60,508        2,155        62,663        64,596        2,849        67,445  
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total

   $ 96,007      $ 109,848      $ 205,855      $ 105,030      $ 104,280      $ 209,310  
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

The following is the Company’s long-lived assets by geographic location (in thousands):

 

     March 31,      December 31,  
     2019      2018  

Long-lived assets

     

United States

   $ 829,953      $ 811,435  

Other

     731,564        717,495  
  

 

 

    

 

 

 
     $1,561,517      $1,528,930  
  

 

 

    

 

 

 

No single customer accounted for more than 10% of the Company’s consolidated revenues during the three months ended March 31, 2019 and 2018. No other country outside the United States accounted for more than 10% of the Company’s consolidated revenues during the three months ended March 31, 2019 and 2018.

12. Income Taxes

The effective tax rate for the three months ended March 31, 2019, was 33%. The Company reported an overall tax benefit on a pretax loss for the three months ended March 31, 2019. The losses of the Company’s foreign entities for the three months ended March 31, 2019, were $6.1 million. The effective tax rate for the three months ended March 31, 2019, was positively impacted by equity compensation excess tax benefits and state income tax benefits on domestic loss.

The effective tax rate for the three months ended March 31, 2018, was 17%. The losses of the Company’s foreign entities for the three months ended March 31, 2018, were $1.8 million. The effective tax rate for the three months ended March 31, 2018, was negatively impacted by losses in certain foreign jurisdictions taxed at lower rates and domestic taxes resulting from the current GILTI tax, partially offset by equity compensation tax benefits.

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 March 31, 2019, and December 31, 2018, the amount of unrecognized tax benefits for uncertain tax positions was $28.3 million and $28.4 million, respectively, excluding related liabilities for interest and penalties of $1.2 million as of March 31, 2019 and December 31, 2018.

 

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The Company believes it is reasonably possible that the total amount of unrecognized tax benefits will decrease within the next 12 months by approximately $3.9 million, due to the settlement of various audits and the expiration of statutes of limitation.

13. Leases

The Company has operating leases for corporate offices and datacenters. Excluding office leases, leases with an initial term of 12 months or less (that do not include an option to purchase the underlying asset) are not recorded on the condensed consolidated balance sheet, and are expensed on a straight-line basis over the lease term.

The Company’s leases typically include certain renewal options to extend the leases for up to 25 years, some of which include options to terminate the leases within one year. The exercise of lease renewal options is at the Company’s sole discretion. The Company combines lease and non-lease components of its leases and currently has no leases with options to purchase the leased property. The Company accounts for payments of maintenance and property tax costs paid by it as variable lease cost, which are expensed as incurred.

The components of lease cost are as follows (in thousands):

 

     Three Months Ended
March 31, 2019
 

Operating lease cost

   $ 4,036  

Variable lease cost

     986  

Sublease income

     (139
  

 

 

 

Total lease cost

   $ 4,883  
  

 

 

 

Supplemental cash flow information related to leases is as follows (in thousands):

 

    Three Months Ended
March 31, 2019
 

Cash paid for amounts included in the measurement of lease liabilities:

 

Operating cash flows from operating leases

  $ 5,411  

Right-of-use assets obtained in exchange for new lease obligations:

 

Operating leases

    1,218  

Supplemental balance sheet information related to leases is as follows (in thousands, except lease term and discount rate):

 

     March 31,
2019
 

Assets:

  

Operating lease right-of-use assets

   $ 60,978  
  

 

 

 

Liabilities:

  

Other current liabilities

   $ 14,334  

Operating lease liabilities

     50,636  
  

 

 

 

Total operating lease liabilities

   $ 64,970  
  

 

 

 

Weighted average remaining operating lease term

     7.02  

Weighted average operating lease discount rate

     3.96

 

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The Company uses its incremental borrowing rate as the discount rate. As the Company enters into operating leases in multiple jurisdictions and denominated in currencies other than the U.S. dollar, judgment is used to determine the Company’s incremental borrowing rate including (1) conversion of its subordinated borrowing rate (using published yield curves) to an unsubordinated and collateralized rate (2) adjusting the rate to align with the term of each lease and (3) adjusting the rate to incorporate the effects of the currency in which the lease is denominated.

Maturities on lease liabilities as of March 31, 2019, are as follows (in thousands):

 

Fiscal year ending December 31,

      

2019

   $ 12,471  

2020

     14,895  

2021

     10,915  

2022

     8,387  

2023

     6,698  

Thereafter

     21,122  
  

 

 

 

Total lease payments

     74,488  

Less: imputed interest

     9,518  
  

 

 

 

Total lease liability

   $ 64,970  
  

 

 

 

Future payments under operating lease agreements accounted for under ASC 840, Leases, as of December 31, 2018, were as follows (in thousands):

 

Fiscal Year Ending December 31,

      

2019

   $ 16,925  

2020

     14,212  

2021

     10,538  

2022

     8,178  

2023

     6,529  

Thereafter

     21,196  
  

 

 

 

Total minimum lease payments

   $ 77,578  
  

 

 

 

As of March 31, 2019, the Company has additional operating leases for office facilities that have not yet commenced with minimum lease payments of $3.7 million. These operating leases will commence between fiscal year 2019 and 2020 with lease terms of one to seven years.

 

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ITEM 2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

Forward-Looking Statements

This report contains forward-looking statements based on current expectations that involve a number of risks and uncertainties. Generally, forward-looking statements do not relate strictly to historical or current facts and may include words or phrases such as “believes,” “will,” “expects,” “anticipates,” “intends,” and words and phrases of similar impact. The forward-looking statements are made pursuant to safe harbor provisions of the Private Securities Litigation Reform Act of 1995, as amended.

Forward-looking statements in this report include, but are not limited to, statements regarding future operations, business strategy, business environment, key trends, and, in each case, statements related to expected financial and other benefits. Many of these factors will be important in determining our actual future results. Any or all of the forward-looking statements in this report may turn out to be incorrect. They may be based on inaccurate assumptions or may not account for known or unknown risks and uncertainties. Consequently, no forward-looking statement can be guaranteed. Actual future results may vary materially from those expressed or implied in any forward-looking statements, and our business, financial condition and results of operations could be materially and adversely affected. In addition, we disclaim any obligation to update any forward-looking statements after the date of this report, except as required by law.

All of the forward-looking statements in this report are expressly qualified by the risk factors discussed in our filings with the Securities and Exchange Commission (“SEC”). Such factors include, but are not limited to, risks related to:

 

   

increased competition;

 

   

the performance of our strategic products, Universal Payments solutions;

 

   

demand for our products;

 

   

consolidations and failures in the financial services industry;

 

   

customer reluctance to switch to a new vendor;

 

   

failure to obtain renewals of customer contracts or to obtain such renewals on favorable terms;

 

   

delay or cancellation of customer projects or inaccurate project completion estimates;

 

   

the complexity of our products and services and the risk that they may contain hidden defects;

 

   

compliance of our products with applicable legislation, governmental regulations, and industry standards;

 

   

failing to comply with money transmitter rules and regulations;

 

   

our compliance with privacy regulations;

 

   

being subject to security breaches or viruses;

 

   

our ability to adequately protect our intellectual property;

 

   

increasing intellectual property rights litigation;

 

   

certain payment funding methods expose us to the credit and/or operating risk of our clients;

 

   

business interruptions or failure of our information technology and communication systems;

 

   

our offshore software development activities;

 

   

operating internationally;

 

   

global economic conditions impact on demand for our products and services;

 

   

attracting and retaining employees;

 

   

potential future litigation;

 

   

our sale of Community Financial Services (“CFS”) assets and liabilities to Fiserv, Inc. (“Fiserv”), including potential claims arising under the transaction agreement, the transition services agreement or with respect to retained liabilities;

 

   

future acquisitions, strategic partnerships, and investments;

 

   

impairment of our goodwill or intangible assets;

 

   

restrictions and other financial covenants in our debt;

 

   

difficulty meeting our debt service requirements;

 

   

the accuracy of our backlog estimates;

 

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exposure to unknown tax liabilities;

 

   

the cyclical nature of our revenue and earnings and the accuracy of forecasts due to the concentration of revenue generating activity during the final weeks of each quarter; and

 

   

volatility in our stock price.

The cautionary statements in this report expressly qualify all of our forward-looking statements.

The following discussion should be read together with our financial statements and related notes contained in this report and with the financial statements and related notes and Management’s Discussion & Analysis in our Annual Report on Form 10-K for the fiscal year ended December 31, 2018, filed March 1, 2019. Results for the three months ended March 31, 2019, are not necessarily indicative of results that may be attained in the future.

Overview

ACI Worldwide, Inc., the Universal Payments (“UP”) company, powers electronic payments for more than 5,100 organizations around the world. More than 1,000 of the largest financial institutions and intermediaries, as well as thousands of leading global merchants, rely on ACI to execute approximately $14 trillion each day in payments and securities. In addition, thousands of organizations utilize our electronic bill payment and presentment (“EBPP”) services. Through our comprehensive suite of solutions, we deliver real-time, immediate payments capabilities and enable a complete omni-channel payments experience.

Our products are sold and supported through distribution networks covering three geographic regions – the Americas; Europe, Middle East, and Africa (“EMEA”); and Asia/Pacific. Each distribution network has its own globally coordinated sales force and supplements its sales force with independent reseller and/or distributor networks. Our products and solutions are used globally by banks, financial intermediaries, and merchants and corporates, such as third-party electronic payment processors, payment associations, switch interchanges, and a wide range of transaction-generating endpoints, including ATMs, merchant point-of-sale (“POS”) terminals, bank branches, mobile phones, tablets, corporations, and Internet commerce sites. Accordingly, our business and operating results are influenced by trends such as information technology spending levels, the growth rate of electronic payments, mandated regulatory changes, and changes in the number and type of customers in the financial services industry. Our products are marketed under the ACI Worldwide, ACI Universal Payment, and ACI UP brands.

We derive a majority of our revenues from domestic operations and believe we have large opportunities for growth in international markets as well as continued expansion domestically in the United States. Refining our global infrastructure is a critical component of driving our growth. We have launched a globalization strategy, which includes elements intended to streamline our supply chain and maximize expertise in several geographic locations to support a growing international customer base and competitive needs. We utilize our Irish subsidiaries to manage certain of our intellectual property rights and to oversee and manage certain international product development and commercialization efforts. We increased our SaaS and PaaS capabilities with a data center in Ireland allowing our SaaS and PaaS solutions to be more-broadly offered in the European market. We also continue to grow centers of expertise in Timisoara, Romania and Pune and Bangalore in India, as well as key operational centers such as Cape Town, South Africa and in multiple locations in the United States.

Key trends that currently impact our strategies and operations include:

Increasing electronic payment transaction volumes. Electronic payment volumes continue to increase around the world, taking market share from traditional cash and check transactions. In their World Payments Report, Capgemini predicts non-cash transaction volumes will grow at an annual rate of 12.7%, or from 482.5 billion in 2016 to 876.4 billion in 2021, with varying growth rates based on the type of payment and part of the world. We leverage the growth in transaction volumes through the licensing of new systems to customers whose older systems cannot handle increased volume and through the sale of capacity upgrades to existing customers.

Adoption of real-time payments. Customer expectations, from both consumers and corporate, are driving the payments world to more real-time delivery. In the U.K., payments sent through the traditional ACH multi-day batch service can now be sent through the Faster Payments service giving almost immediate access to the funds, and this is being considered and implemented in several countries including Australia and the United States. In the U.S. market, National Automated Clearinghouse Association (“NACHA”) implemented phase 2 of Same Day ACH in September 2017. Corporate customers expect real-time information on the status of their payments instead of waiting for an end of-day report. Regulators expect banks to be monitoring key measures like liquidity in real time. ACI’s focus has always been on the real-time execution of transactions and delivery of information through real-time tools, such as dashboards, so our experience will be valuable in addressing this trend.

Increasing competition. The electronic payments market is highly competitive and subject to rapid change. Our competition comes from in-house information technology departments, third-party electronic payment processors, and third-party software companies located both within and outside of the United States. Many of these companies are significantly larger than us and have significantly greater financial, technical, and marketing resources. As electronic payment transaction volumes increase, third-party processors tend to provide competition to our solutions, particularly among customers that do not seek to differentiate their electronic payment offerings or are eliminating banks from the payments service, reducing the need for our solutions. As consolidation in the financial services industry continues, we anticipate that competition for those customers will intensify.

 

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Adoption of cloud technology. To leverage lower-cost computing technologies, some banks, financial intermediaries, merchants and corporates are seeking to transition their systems to make use of cloud technology. Our investments provide us the grounding to deliver cloud capabilities in the future. Market sizing data from Ovum indicates that spend on SaaS and PaaS payment systems is growing faster than spend on installed applications.

Electronic payments fraud and compliance . As electronic payment transaction volumes increase, organized criminal organizations continue to find ways to commit a growing volume of fraudulent transactions using a wide range of techniques. Banks, financial intermediaries, and merchants and corporates continue to seek ways to leverage new technologies to identify and prevent fraudulent transactions and other attacks such as denial of service attacks. Due to concerns with international terrorism and money laundering, banks and financial intermediaries in particular are being faced with increasing scrutiny and regulatory pressures. We continue to see opportunity to offer our fraud detection solutions to help customers manage the growing levels of electronic payments fraud and compliance activity.

Adoption of smartcard technology. In many markets, card issuers are being required to issue new cards with embedded chip technology, with the liability shift having gone into effect in 2015 in the United States. Chip-based cards are more secure, harder to copy, and offer the opportunity for multiple functions on one card (e.g., debit, credit, electronic purse, identification, health records, etc.). This results in greater card-not-present fraud (e.g., fraud at eCommerce sites).

Single Euro Payments Area (SEPA). The SEPA, primarily focused on the European economic community and the U.K., is designed to facilitate lower costs for cross-border payments and reduce timeframes for settling electronic payment transactions. The transition to SEPA payment mechanisms will drive more volume to these systems with the potential to cause banks to review the capabilities of the systems supporting these payments. Our Retail Payments and Real-Time Payments solutions facilitate key functions that help banks and financial intermediaries address these mandated regulations.

European Payment Service Directive (PSD2). PSD2, which was ratified by the European Parliament in 2015, required member states to implement new payments regulations in 2018. The XS2A provision effectively creates a new market opportunity where banks in European Union member countries must provide open API standards to customer data, thus allowing authorized third-party providers to enter the market.

Financial institution consolidation. Consolidation continues on a national and international basis, as financial institutions seek to add market share and increase overall efficiency. Such consolidations have increased, and may continue to increase, in their number, size, and market impact as a result of recent economic conditions affecting the banking and financial industries. There are several potential negative effects of increased consolidation activity. Continuing consolidation of financial institutions may result in a smaller number of existing and potential customers for our products and services. Consolidation of two of our customers could result in reduced revenues if the combined entity were to negotiate greater volume discounts or discontinue use of certain of our products. Additionally, if a non-customer and a customer combine and the combined entity decides to forego future use of our products, our revenue would decline. Conversely, we could benefit from the combination of a non-customer and a customer when the combined entity continues use of our products and, as a larger combined entity, increases its demand for our products and services. We tend to focus on larger financial institutions as customers, often resulting in our solutions being the solutions that survive in the consolidated entity.

Global vendor sourcing. Global and regional banks, financial intermediaries, and merchants and corporates are aiming to reduce the costs in supplier management by picking suppliers who can service them across all their geographies instead of allowing each country operation to choose suppliers independently. Our global footprint from both a customer and a delivery perspective enable us to be successful in this global sourced market. However, projects in these environments tend to be more complex and therefore of higher risk.

Electronic payments convergence. As electronic payment volumes grow and pressures to lower overall cost per transaction increase, banks and financial intermediaries are seeking methods to consolidate their payments processing across the enterprise. We believe that the strategy of using service-oriented architectures to allow for re-use of common electronic payment functions, such as authentication, authorization, routing and settlement, will become more common. Using these techniques, banks and financial intermediaries will be able to reduce costs, increase overall service levels, enable one-to-one marketing in multiple bank channels, leverage volumes for improved pricing and liquidity, and manage enterprise risk. Our product strategy is, in part, focused on this trend, by creating integrated payment functions that can be re-used by multiple bank channels, across both the consumer and wholesale bank. While this trend presents an opportunity for us, it may also expand the competition from third-party electronic payment technology and service providers specializing in other forms of electronic payments. Many of these providers are larger than us and have significantly greater financial, technical and marketing resources.

 

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Mobile banking and payments. There is a growing demand for the ability to carry out banking services or make payments using a mobile phone. Recent statistics from Javelin Strategy & Research, a subsidiary of Greenwich Associates, show that 50% of adults in the United States use their phone for mobile banking. The use of phones for mobile banking is expected to grow to 81% in 2020. Our customers have been making use of existing products to deploy mobile banking, mobile payments, and mobile commerce solutions for their customers in many countries. In addition, ACI has invested in mobile products of our own and via partnerships to support mobile functionality in the marketplace.

Electronic bill payment and presentment. EBPP encompasses all facets of bill payment, including biller direct, where customers initiate payments on biller websites, the consolidator model, where customers initiate payments on a financial institution’s website, and walk-in bill payment, as one might find in a convenience store. The EBPP market continues to grow as consumers move away from traditional forms of paper-based payments. Nearly three out of four (73%) online payments are made at the billers’ sites, rather than through banking websites, up 11% since 2010. The biller-direct solutions are seeing strong growth as billers migrate these services to outsourcers, such as ACI, from legacy systems built in house. We believe that EBPP remains ripe for outsourcing, as a significant amount of biller-direct transactions are still processed in house. As billers seek to manage costs and improve efficiency, we believe that they will continue to look to third-party EBPP vendors that can offer a complete solution for their billing needs.

Several other factors related to our business may have a significant impact on our operating results from year to year. For example, the accounting rules governing the timing of revenue recognition are complex and it can be difficult to estimate when we will recognize revenue generated by a given transaction. Factors such as creditworthiness of the customer and timing of transfer of control or acceptance of our products may cause revenues related to sales generated in one period to be deferred and recognized in later periods. For arrangements in which services revenue is deferred, related direct and incremental costs may also be deferred. Additionally, while the majority of our contracts are denominated in the U.S. dollar, a substantial portion of our sales are made, and some of our expenses are incurred, in the local currency of countries other than the United States. Fluctuations in currency exchange rates in a given period may result in the recognition of gains or losses for that period.

We continue to seek ways to grow through organic sources, partnerships, alliances, and acquisitions. We continually look for potential acquisitions designed to improve our solutions’ breadth or provide access to new markets. As part of our acquisition strategy, we seek acquisition candidates that are strategic, capable of being integrated into our operating environment, and accretive to our financial performance.

Acquisition

Speedpay

On May 9, 2019, we acquired Speedpay, the U.S. bill pay business of Western Union Company (“WU”) for $750.0 million in cash, subject to adjustments, pursuant to a Stock Purchase Agreement, among the Company, WU, and ACI Worldwide Corp., our wholly owned subsidiary. The combination of the Company and Speedpay bill pay solutions will serve more than 4,000 customers across the U.S., bringing expanded reach in existing and complementary market segments such as consumer finance, insurance, healthcare, higher education, utilities, government, and mortgage. The acquisition of Speedpay will increase the scale of our On Demand platform business and allow the acceleration of platform innovation.

Effective April 5, 2019, we entered into an amendment agreement (the “amendment”) with ACI Worldwide Corp., Official Payments Corporation, the lenders, and Bank of America, N.A., as administrative agent for the lenders, to amend and restate our Credit Agreement, dated February 24, 2017. The amendment permitted us to borrow up to $500.0 million in the form of a senior secured term loan; extended the revolver and the term loan maturity date from February 24, 2022, to April 5, 2024; and increased the maximum consolidated senior secured net leverage ratio covenant from 3.50:1.00 to 3.75:1.00; among other things. We used the funds from the new term loan, in addition to drawing $250.0 million on the available Revolving Credit Facility, to fund the acquisition.

Backlog

Backlog is comprised of:

 

   

Committed Backlog, which includes (1) contracted revenue that will be recognized in future periods (contracted but not recognized) from software license fees, maintenance fees, services fees, and SaaS and PaaS fees specified in executed contracts (including estimates of variable consideration if required under ASC 606) and included in the transaction price for those contracts, which includes deferred revenue and amounts that will be invoiced and recognized as revenue in future periods and (2) estimated future revenues from software license fees, maintenance fees, services fees, and SaaS and PaaS fees specified in executed contracts.

 

   

Renewal Backlog, which includes estimated future revenues from assumed contract renewals to the extent we believe recognition of the related revenue will occur within the corresponding backlog period.

 

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We have historically included assumed renewals in backlog estimates based upon automatic renewal provisions in the executed contract and our historic experience with customer renewal rates.

Our 60-month backlog estimates are derived using the following key assumptions:

 

   

License arrangements are assumed to renew at the end of their committed term or under the renewal option stated in the contract at a rate consistent with historical experience. If the license arrangement includes extended payment terms, the renewal estimate is adjusted for the effects of a significant financing component.

 

   

Maintenance fees are assumed to exist for the duration of the license term for those contracts in which the committed maintenance term is less than the committed license term.

 

   

SaaS and PaaS arrangements are assumed to renew at the end of their committed term at a rate consistent with our historical experiences.

 

   

Foreign currency exchange rates are assumed to remain constant over the 60-month backlog period for those contracts stated in currencies other than the U.S. dollar.

 

   

Our pricing policies and practices are assumed to remain constant over the 60-month backlog period.

In computing our 60-month backlog estimate, the following items are specifically not taken into account:

 

   

Anticipated increases in transaction, account, or processing volumes by our customers.

 

   

Optional annual uplifts or inflationary increases in recurring fees.

 

   

Services engagements, other than SaaS and PaaS arrangements, are not assumed to renew over the 60-month backlog period.

 

   

The potential impact of consolidation activity within our markets and/or customers.

We review our customer renewal experience on an annual basis. The impact of this review and subsequent updates may result in a revision to the renewal assumptions used in computing the 60-month backlog estimates. In the event a significant revision to renewal assumptions is determined to be necessary, prior periods will be adjusted for comparability purposes.

The following table sets forth our 60-month backlog estimate, by reportable segment, as of March 31, 2019, and December 31, 2018 (in millions). Dollar amounts reflect foreign currency exchange rates as of each period end.

 

     March 31,
2019
     December 31,
2018
 

ACI On Premise

   $ 1,861      $ 1,875  

ACI On Demand

     2,290        2,299  
  

 

 

    

 

 

 

Total

   $ 4,151      $ 4,174  
  

 

 

    

 

 

 
     March 31,
2019
     December 31,
2018
 

Committed

   $ 1,734      $ 1,832  

Renewal

     2,417        2,342  
  

 

 

    

 

 

 

Total

   $ 4,151      $ 4,174  
  

 

 

    

 

 

 

Estimates of future financial results require substantial judgment and are based on several assumptions, as described above. These assumptions may turn out to be inaccurate or wrong for reasons outside of management’s control. For example, our customers may attempt to renegotiate or terminate their contracts for many reasons, including mergers, changes in their financial condition, or general changes in economic conditions in the customer’s industry or geographic location. We may also experience delays in the development or delivery of products or services specified in customer contracts, which may cause the actual renewal rates and amounts to differ from historical experiences. Changes in foreign currency exchange rates may also impact the amount of revenue recognized in future periods. Accordingly, there can be no assurance that amounts included in backlog estimates will generate the specified revenues or that the actual revenues will be generated within the corresponding 60-month period. Additionally, because certain components of Committed Backlog and all of Renewal Backlog estimates are operating metrics, the estimates are not required to be subject to the same level of internal review or controls as contracted but not recognized Committed Backlog.

 

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RESULTS OF OPERATIONS

The following table presents the condensed consolidated statements of operations, as well as the percentage relationship to total revenues for items included in our condensed consolidated statements of operations (in thousands):

Three Month Period Ended March 31, 2019, Compared to the Three Month Period Ended March 31, 2018

 

     Three Months Ended March 31,  
     2019     2018  
     Amount     % of Total
Revenue
    $ Change vs
2018
    % Change
vs 2018
    Amount     % of Total
Revenue
 

Revenues:

            

Software as a service and platform as a service

   $ 108,557       53   $ 4,277       4   $ 104,280       50

License

     21,078       10     (6,968     -25     28,046       13

Maintenance

     55,111       27     (1,548     -3     56,659       27

Services

     21,109       10     784       4     20,325       10
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total revenues

     205,855       100     (3,455     -2     209,310       100
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Operating expenses:

            

Cost of revenue

     114,941       56     7,605       7     107,336       51

Research and development

     36,194       18     (597     -2     36,791       18

Selling and marketing

     29,430       14     (2,463     -8     31,893       15

General and administrative

     31,517       15     2,868       10     28,649       14

Depreciation and amortization

     21,866       11     521       2     21,345       10
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total operating expenses

     233,948       114     7,934       4     226,014       108
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Operating loss

     (28,093     -14     (11,389     68     (16,704     -8

Other income (expense):

            

Interest expense

     (11,614     -6     (2,249     24     (9,365     -4

Interest income

     3,033       1     289       11     2,744       1

Other, net

     (1,912     -1     (1,857     3376     (55     0
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total other income (expense)

     (10,493     -5     (3,817     57     (6,676     -3
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Loss before income taxes

     (38,586     -19     (15,206     65     (23,380     -11

Income tax benefit

     (12,623     -6     (8,671     219     (3,952     -2
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Net loss

   $ (25,963     -13   $ (6,535     34   $ (19,428     -9
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Revenues

Total revenue for the three months ended March 31, 2019, decreased $3.5 million, or 2%, as compared to the same period in 2018.

Total revenue was $3.7 million lower for the three months ended March 31, 2019, compared to the same period in 2018, due to the impact of foreign currencies weakening against the U.S. dollar. Excluding the impact of foreign currency, total revenue for the three months ended March 31, 2019, was flat compared to the same period in 2018.

Software as a Service (“SaaS”) and Platform as a Service (“PaaS”) Revenue

The Company’s SaaS arrangements allow customers to use certain software solutions (without taking possession of the software) in a single-tenant cloud environment on a subscription basis. The Company’s PaaS arrangements allow customers to use certain software solutions (without taking possession of the software) in a multi-tenant cloud environment on a subscription or consumption basis. Included in SaaS and PaaS revenue are fees paid by our customers for use of our Biller solutions. Biller-related fees may be paid by our clients or directly by their customers and may be a percentage of the underlying transaction amount, a fixed fee per executed transaction or a monthly fee for each customer enrolled. SaaS and PaaS costs include payment card interchange fees, the amounts payable to banks and payment card processing fees, which are included in cost of revenue in the condensed consolidated statements of operations. All revenue from SaaS and PaaS arrangements that does not qualify for treatment as a distinct performance obligation, which includes set-up fees, implementation or customization services, and product support services, are included in SaaS and PaaS revenue.

SaaS and PaaS revenue increased $4.3 million, or 4%, during the three months ended March 31, 2019, as compared to the same period in 2018. Total SaaS and PaaS revenue was $0.9 million lower for the three months ended March 31, 2019, compared to the same period in 2018 due to the impact of foreign currencies weakening against the U.S. dollar. Excluding the impact of foreign currency, total SaaS and PaaS revenue for the three months ended March 31, 2019, increased $5.2 million, or 5%, compared to the same period in 2018, which is primarily attributable to new customers adopting our SaaS and PaaS offerings and existing customers adding new functionality or increasing transaction volumes.

 

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License Revenue

Customers purchase the right to license ACI software under multi-year, time-based software license arrangements that vary in length but are generally five years. Under these arrangements the software is installed at the customer’s location (i.e. on-premise). Within these agreements are specified capacity limits typically based on customer transaction volume. ACI employs measurement tools that monitor the number of transactions processed by customers and if contractually specified limits are exceeded, additional fees are charged for the overage. Capacity overages may occur at varying times throughout the term of the agreement depending on the product, the size of the customer, and the significance of customer transaction volume growth. Depending on specific circumstances, multiple overages or no overages may occur during the term of the agreement.

Included in license revenue are license and capacity fees that are payable at the inception of the agreement or annually (initial license fees). License revenue also includes license and capacity fees payable quarterly or monthly due to negotiated customer payment terms (monthly license fees). The Company recognizes revenue in advance of billings for software license arrangements with extended payment terms and adjusts for the effects of the financing component, if significant.

Total license revenue decreased $7.0 million, or 25%, during the three months ended March 31, 2019, as compared to the same period in 2018. Total license revenue was $0.7 million lower for the three months ended March 31, 2019, compared to the same period in 2018 due to the impact of foreign currencies weakening against the U.S. dollar. Excluding the impact of foreign currency, total license revenue for the three months ended March 31, 2019, decreased $6.3 million, or 22%, compared to the same period in 2018.                

The decrease in total license revenue was primarily driven by the timing and relative size of license and capacity events during the three months ended March 31, 2019, as compared to the same period in 2018.

Maintenance Revenue

Maintenance revenue includes standard and premium maintenance and any post contract support fees received from customers for the provision of product support services.

Maintenance revenue decreased $1.5 million, or 3%, during the three months ended March 31, 2019, as compared to the same period in 2018. Total maintenance revenue was $1.6 million lower for the three months ended March 31, 2019, as compared to the same period in 2018 due to the impact of foreign currencies weakening against the U.S. dollar. Excluding the impact of foreign currency, total maintenance revenue for the three months ended March 31, 2019, remained flat compared to the same period in 2018.

Services Revenue

Services revenue includes fees earned through implementation services and other professional services. Implementation services include product installations, product configurations, and custom software modifications (“CSMs”). Other professional services include business consultancy, technical consultancy, on-site support services, CSMs, product education, and testing services. These services include new customer implementations as well as existing customer migrations to new products or new releases of existing products.

Services revenue increased $0.8 million, or 4%, during the three months ended March 31, 2019, as compared to the same period in 2018. Total services revenue was $0.5 million lower for the three months ended March 31, 2019, as compared to the same period in 2018 due to the impact of foreign currencies weakening against the U.S. dollar. Excluding the impact of foreign currency, total services revenue for the three months ended March 31, 2019, increased $1.3 million, or 6%, compared to the same period in 2018.

Operating Expenses

Total operating expenses for the three months ended March 31, 2019, increased $7.9 million, or 4%, as compared to the same period in 2018.

Total operating expenses for the three months ended March 31, 2019, included $4.7 million of significant transaction-related expenses associated with the planned acquisition of Speedpay. Total operating expenses for the three months ended March 31, 2018, included $4.3 million of significant integration and divestiture-related expenses. Total operating expenses were $5.3 million lower for the three months ended March 31, 2019, compared to the same period in 2018, due to the impact of foreign currencies weakening against the U.S. dollar. Excluding the significant acquisition and integration related expenses and the impact of foreign currency, total operating expenses for the three months ended March 31, 2019, increased $12.8 million, or 6%, compared to the same period in 2018, primarily due to higher cost of revenue, general and administrative, and depreciation and amortization expenses, partially offset by lower selling and marketing.

 

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Cost of Revenue

Cost of revenue includes costs to provide SaaS and PaaS services, third-party royalties, amortization of purchased and developed software for resale, the costs of maintaining our software products, as well as the costs required to deliver, install, and support software at customer sites. SaaS and PaaS service costs include payment card interchange fees, amounts payable to banks, and payment card processing fees. Maintenance costs include the efforts associated with providing the customer with upgrades, 24-hour help desk, post go-live (remote) support, and production-type support for software that was previously installed at a customer location. Service costs include human resource costs and other incidental costs such as travel and training required for both pre go-live and post go-live support. Such efforts include project management, delivery, product customization and implementation, installation support, consulting, configuration, and on-site support.

Cost of revenue increased $7.6 million, or 7%, during the three months ended March 31, 2019, compared to the same period in 2018. Cost of revenue was $1.9 million lower for the three months ended March 31, 2019, as compared to the same period in 2018, due to the impact of foreign currencies weakening against the U.S. dollar. Excluding the impact of foreign currency, cost of revenue increased $9.5 million, or 9%, for the three months ended March 31, 2019, as compared to the same period in 2018, primarily due to a $5.1 million increase in payment card interchange and processing fees, a $2.5 million increase in third-party product royalty expenses, and a $1.9 million increase in personnel and related expenses.

Research and Development

Research and development (“R&D”) expenses are primarily human resource costs related to the creation of new products, improvements made to existing products as well as compatibility with new operating system releases and generations of hardware.

R&D expense decreased $0.6 million, or 2%, during the three months ended March 31, 2019, as compared to the same period in 2018. R&D expense was $1.4 million lower for the three months ended March 31, 2019, as compared to the same period in 2018, due to the impact of foreign currencies weakening against the U.S. dollar. Excluding the impact of foreign currency, R&D expense increased $0.8 million, or 2%, for the three months ended March 31, 2019, as compared to the same period in 2018, primarily due to an increase in personnel and related expenses.

Selling and Marketing

Selling and marketing includes both the costs related to selling our products to current and prospective customers as well as the costs related to promoting the Company, its products and the research efforts required to measure customers’ future needs and satisfaction levels. Selling costs are primarily the human resource and travel costs related to the effort expended to license our products and services to current and potential clients within defined territories and/or industries as well as the management of the overall relationship with customer accounts. Selling costs also include the costs associated with assisting distributors in their efforts to sell our products and services in their respective local markets. Marketing costs include costs incurred to promote the Company and its products, perform or acquire market research to help the Company better understand impending changes in customer demand for and of our products, and the costs associated with measuring customers’ opinions toward the Company, our products and personnel.

Selling and marketing expense decreased $2.5 million, or 8%, during the three months ended March 31, 2019, as compared to the same period in 2018. Selling and marketing expense was $1.0 million lower for the three months ended March 31, 2019, as compared to the same period in 2018, due to the impact of foreign currencies weakening against the U.S. dollar. Excluding the impact of foreign currency, selling and marketing expense decreased $1.4 million, or 5%, for the three months ended March 31, 2019, as compared to the same period in 2018, due to a decrease in personnel and related expenses, primarily as the result of a decrease in total bookings.

General and Administrative

General and administrative expenses are primarily human resource costs including executive salaries and benefits, personnel administration costs, and the costs of corporate support functions such as legal, administrative, human resources, and finance and accounting.

General and administrative expense increased $2.9 million, or 10%, during the three months ended March 31, 2019, as compared to the same period in 2018. General and administrative expense for the three months ended March 31, 2019, included $4.7 million of significant transaction-related expenses associated with the planned acquisition of Speedpay. Total operating expenses for the three months ended March 31, 2018, included $4.0 million of significant integration and divestiture-related expenses. General and administrative expense was $0.6 million lower for the three months ended March 31, 2019, as compared to the same period in 2018, due to the impact of foreign currencies weakening against the U.S. dollar. Excluding the significant acquisition and integration expenses and the impact of foreign currency, general and administrative expense increased $2.7 million, or 11%, for the three months ended March 31, 2019, as compared to the same period in 2018, due to an increase in personnel and related expenses.

Depreciation and Amortization

Depreciation and amortization increased $0.5 million, or 2%, during the three months ended March 31, 2019, as compared to the same period in 2018. Depreciation and amortization was $0.4 million lower for the three months ended March 31, 2019, as compared to the same period in 2018, due to the impact of foreign currencies weakening against the U.S. dollar. Excluding the impact of foreign currency, depreciation and amortization increased $0.9 million, or 4%, for the three months ended March 31, 2019, as compared to the same period in 2018.

 

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Other Income and Expense

Interest expense for the three months ended March 31, 2019, increased $2.2 million, or 24%, as compared to the same period in 2018, primarily due to $1.8 million of interest expense related to royalty payments. Excluding the impact of interest expense related to royalty payments, interest expense for the three months ended March 31, 2019, increased $0.4 million, or 5%, as compared to the same period in 2018.

Interest income includes the portion of software license fees paid by customers under extended payment terms that is attributed to the significant financing component. Interest income for the three months ended March 31, 2019, increased $0.3 million, as compared to the same period in 2018.

Other, net consists of foreign currency loss and other non-operating items. Foreign currency loss for the three months ended March 31, 2019 and 2018, was $1.9 million and $0.1 million, respectively.

Income Taxes

Refer to Note 12, Income Taxes, to our unaudited condensed consolidated financial statements in Part I of this Form 10-Q for additional information.

Segment Results

We report financial performance based on our segments, ACI On Premise and ACI On Demand, and analyze Segment Adjusted EBITDA as a measure of segment profitability.

Our Chief Executive Officer is also our 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 the corporate operations.

ACI On Premise serves customers who manage their software on site. These on-premise customers use the Company’s software to develop sophisticated solutions, which are often part of a larger system located and managed at the customer specified site. These customers require a level of control and flexibility that ACI On Premise solutions can offer, and they have the resources and expertise to take a lead role in managing these solutions.

ACI On Demand serves the needs of banks, merchants and corporates who use payments to facilitate their core business. These on-demand solutions are maintained and delivered through the cloud via our global data centers and are available in either a single-tenant environment for SaaS offerings, or in a multi-tenant environment for PaaS offerings.

Revenue is attributed to the reportable segments based upon the product sold and mechanism for delivery to 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 products, or (3) costs that are allocated. Allocated costs are generally marketing and sales related activities as well as information technology and facilities related expense for which multiple segments benefit. We also allocate certain depreciation costs to the segments.

Segment Adjusted EBITDA is the measure reported to the CODM for purposes of making decisions on allocating resources and assessing the performance of our 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 stock-based compensation, and net other income (expense).

Corporate and unallocated expenses consists of the corporate overhead costs that are not allocated to reportable segments. These overhead costs relate to human resources, finance, legal, accounting, merger and acquisition activity, and other costs that are not considered when management evaluates segment performance.

 

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The following is selected financial data for our reportable segments (in thousands):

 

     Three Months Ended
March 31,
 
     2019      2018  

Revenue

     

ACI On Premise

   $ 96,007      $ 105,030  

ACI On Demand

     109,848        104,280  
  

 

 

    

 

 

 

Total revenue

   $ 205,855      $ 209,310  
  

 

 

    

 

 

 

Segment Adjusted EBITDA

     

ACI On Premise

   $ 28,268      $ 38,898  

ACI On Demand

     (262      (4,233

Depreciation and amortization

     (24,852      (24,993

Stock-based compensation expense

     (6,585      (6,362

Corporate and unallocated expenses

     (24,662      (20,014

Interest, net

     (8,581      (6,621

Other, net

     (1,912      (55
  

 

 

    

 

 

 

Loss before income taxes

   $ (38,586    $ (23,380
  

 

 

    

 

 

 

Depreciation and amortization

     

ACI On Premise

   $ 3,030      $ 2,975  

ACI On Demand

     7,562        7,736  

Corporate

     14,260        14,282  
  

 

 

    

 

 

 

Total depreciation and amortization

   $ 24,852      $ 24,993  
  

 

 

    

 

 

 

Stock-based compensation expense

     

ACI On Premise

   $ 1,956      $ 1,467  

ACI On Demand

     1,951        1,463  

Corporate

     2,678        3,432  
  

 

 

    

 

 

 

Total stock-based compensation expense

   $ 6,585      $ 6,362  
  

 

 

    

 

 

 

ACI On Premise Segment Adjusted EBITDA decreased $10.6 million for the three months ended March 31, 2019, compared to the same period in 2018, primarily due to a $9.0 million decrease in revenue driven by timing and size of certain license and capacity events.

ACI On Demand Segment Adjusted EBITDA increased $4.0 million for the three months ended March 31, 2019, compared to the same period in 2018, primarily due to a $5.6 million increase in revenues, a $2.0 million decrease in selling and marketing expense, partially offset by a $5.1 million increase in payment card interchange and processing fees.

Liquidity and Capital Resources

General

Our primary liquidity needs are: (i) to fund normal operating expenses; (ii) to meet the interest and principal requirements of our outstanding indebtedness; and (iii) to fund acquisitions, capital expenditures, and lease payments. We believe these needs will be satisfied using cash flow generated by our operations, our cash and cash equivalents, and available borrowings under our revolving credit facility.

Available Liquidity

The following table sets forth our available liquidity for the periods indicated (in thousands):

 

     March 31,
2019
     December 31,
2018
 

Cash and cash equivalents

   $ 176,173      $ 148,502  

Availability under revolving credit facility

     500,000        500,000  
  

 

 

    

 

 

 

Total liquidity

   $ 676,173      $ 648,502  
  

 

 

    

 

 

 

The increase in total liquidity is primarily attributable to positive operating cash flows of $42.4 million, offset by $9.8 million of payments to purchase property and equipment and software and distribution rights.

 

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Cash and cash equivalents consist of highly liquid investments with original maturities of three months or less. As of March 31, 2019, we had $176.2 million of cash and cash equivalents, of which $79.7 million was held by our foreign subsidiaries. If these funds were needed for our operations in the U.S., we may potentially be required to accrue and pay foreign and U.S. state income taxes to repatriate these funds. As of March 31, 2019, only the earnings in our Indian foreign subsidiaries are indefinitely reinvested. The earnings of all other foreign entities are no longer indefinitely reinvested. We are also permanently reinvested for outside book/tax basis difference related to foreign subsidiaries. These outside basis differences could reverse through sales of the foreign subsidiaries, as well as various other events, none of which are considered probable as of March 31, 2019.

Cash Flows

The following table sets forth summarized cash flow data for the periods indicated (in thousands):

 

     Three Months Ended
March 31,
 
     2019      2018  

Net cash provided by (used by):

     

Operating activities

   $ 42,427      $ 45,136  

Investing activities

     (9,828      (12,589

Financing activities

     (5,361      (29,695

Cash Flows from Operating Activities

Net cash flows provided by operating activities during the three months ended March 31, 2019, were $42.4 million as compared to $45.1 million during the same period in 2018. The comparative period decrease was primarily due to a higher net loss for the three months ended March 31, 2019, compared to the same period in 2018, as well as timing of receipts and payments. Our current policy is to use our operating cash flow primarily for funding capital expenditures, lease payments, stock repurchases, and acquisitions.    

Cash Flows from Investing Activities

During the first three months of 2019, we used cash of $9.8 million to purchase software, property and equipment, as compared to $12.6 million during the same period in 2018.

Cash Flows from Financing Activities

Net cash flows used by financing activities for the three months ended March 31, 2019, were $5.4 million as compared to $29.7 million during the same period in 2018. During the first three months of 2019, we repaid $5.9 million on the Term Credit Facility. In addition, we received proceeds of $5.7 million from the exercise of stock options and the issuance of common stock under our 2017 Employee Stock Purchase Plan, as amended, and used $2.6 million for the repurchase of restricted share awards (“RSAs”) and restricted share units (“RSUs”) for tax withholdings. We also used $0.6 million to repurchase common stock. During the first three months of 2018, we repaid $5.2 million on the Term Credit Facility and repaid a net $2.0 million on the Revolving Credit Facility. In addition, we received proceeds of $9.9 million from the exercise of stock options and the issuance of common stock under our 2017 Employee Stock Purchase Plan, as amended, and used $0.9 million for the repurchase of RSAs for tax withholdings. We also used $31.1 million to repurchase common stock.

We may decide to use cash to acquire new products and services or enhance existing products and services through acquisitions of other companies, product lines, technologies, and personnel, or through investments in other companies.

We believe our existing sources of liquidity, including cash on hand and cash provided by operating activities, will satisfy our projected liquidity requirements, which primarily consists of working capital requirements, for the next twelve months and foreseeable future.    

Debt

As of March 31, 2019, we had $279.0 million outstanding under our Term Credit Facility, with up to $500.0 million of unused borrowings under the Revolving Credit Facility portion of the Credit Agreement, as amended. The interest rate in effect as of March 31, 2019, was 4.25%. As of March 31, 2019, we also had $400.0 million outstanding of 5.750% Senior Notes due 2026 (the “2026 Notes”). Refer to Note 4, Debt, to our unaudited condensed consolidated financial statements in Part I of this Form 10-Q for additional information.

Stock Repurchase Program

In 2005, our board of directors (“the board”) approved a stock repurchase program authorizing us, as market and business conditions warrant, to acquire our common stock and periodically authorize additional funds for the program. In February 2018, the board approved the repurchase of up to $200.0 million of our common stock in place of the remaining purchase amounts previously authorized.

 

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We repurchased 23,802 shares for $0.6 million under the program during the three months ended March 31, 2019. Under the program to date, we have repurchased 44,153,195 shares for approximately $548.5 million. As of March 31, 2019, the maximum remaining amount authorized for purchase under the stock repurchase program was approximately $176.0 million.

There is no guarantee as to the exact number of shares we will repurchase. Repurchased shares are returned to the status of authorized but unissued shares of common stock. In March 2005, our board approved a plan under Rule 10b5-1 of the Securities Exchange Act of 1934 to facilitate the repurchase of shares of common stock under the existing stock repurchase program. Under our Rule 10b5-1 plan, we have delegated authority over the timing and amount of repurchases to an independent broker who does not have access to inside information about the Company. Rule 10b5-1 allows us, through the independent broker, to purchase shares at times when we ordinarily would not be in the market because of self-imposed trading blackout periods, such as the time immediately preceding the end of the fiscal quarter through a period of three business days following our quarterly earnings release.

Contractual Obligations and Commercial Commitments

For the three months ended March 31, 2019, there have been no material changes to the contractual obligations and commercial commitments disclosed in Item 7 of our Form 10-K for the fiscal year ended December 31, 2018.

We are unable to reasonably estimate the ultimate amount or timing of settlement of our reserves for income taxes under Financial Accounting Standards Board (“FASB”) Accounting Standards Codification (“ASC”) 740, Income Tax . The liability for unrecognized tax benefits as of March 31, 2019, is $28.3 million.

Critical Accounting Estimates

The preparation of the condensed consolidated financial statements requires we make estimates and assumptions that affect the reported amounts of assets, liabilities, revenues and expenses, and related disclosure of contingent assets and liabilities. We base our estimates on historical experience and other assumptions we believe to be proper and reasonable under the circumstances. We continually evaluate the appropriateness of estimates and assumptions used in the preparation of our condensed consolidated financial statements. Actual results could differ from those estimates.

The accounting policies that reflect our more significant estimates, judgments, and assumptions, and that we believe are the most critical to aid in fully understanding and evaluating our reported financial results, include the following:

 

   

Revenue Recognition

 

   

Business Combinations

 

   

Intangible Assets and Goodwill

 

   

Stock-Based Compensation

 

   

Accounting for Income Taxes

During the three months ended March 31, 2019, there were no significant changes to our critical accounting policies and estimates. Please refer to Management’s Discussion and Analysis of Financial Condition and Results of Operations contained in Part II, Item 7 of our Annual Report on Form 10-K for our fiscal year ended December 31, 2018, filed on March 1, 2019, for a more complete discussion of our critical accounting policies and estimates.

ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

Excluding the impact of changes in interest rates and the uncertainty in the global financial markets, there have been no material changes to our market risk for the three months ended March 31, 2019. We conduct business in all parts of the world and are thereby exposed to market risks related to fluctuations in foreign currency exchange rates. The U.S. dollar is the single largest currency in which our revenue contracts are denominated. Any decline in the value of local foreign currencies against the U.S. dollar results in our products and services being more expensive to a potential foreign customer. In those instances where our goods and services have already been sold, receivables may be more difficult to collect. Additionally, in jurisdictions where the revenue contracts are denominated in U.S. dollars and operating expenses are incurred in the local currency, any decline in the value of the U.S. dollar will have an unfavorable impact to operating margins. At times, we enter into revenue contracts that are denominated in the country’s local currency, primarily in Australia, Canada, the United Kingdom, and other European countries. This practice serves as a natural hedge to finance the local currency expenses incurred in those locations. We have not entered into any foreign currency hedging transactions. We do not purchase or hold any derivative financial instruments for speculation or arbitrage.

The primary objective of our cash investment policy is to preserve principal without significantly increasing risk. If we maintained similar cash investments for a period of one year based on our cash investments and interest rates on these investments at March 31, 2019, a hypothetical ten percent increase or decrease in effective interest rates would increase or decrease interest income by approximately $0.1 million annually.

 

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We had approximately $679.0 million of debt outstanding as of March 31, 2019, with $400.0 million in Senior Notes and $279.0 million outstanding under our Credit Facility. Our 2026 Notes are fixed-rate long-term debt obligations with a 5.750% interest rate. Our Credit Facility has a floating rate, which was 4.25% as of March 31, 2019. A hypothetical ten percent increase or decrease in effective interest rates would increase or decrease interest expense related to the Credit Facility by approximately $1.2 million.

ITEM 4. CONTROLS AND PROCEDURES

Disclosure Controls and Procedures

Management, under the supervision and with the participation of the Chief Executive Officer and Chief Financial Officer, performed an evaluation of the effectiveness of our disclosure controls and procedures (as defined in Rules 13a-15(e) and 15d-15(e) under the Securities Exchange Act of 1934, as amended (the “Exchange Act”)) as of the end of the period covered by this report. Based on that evaluation, the Chief Executive Officer and Chief Financial Officer have concluded our disclosure controls and procedures are effective as of March 31, 2019.

Changes in Internal Control over Financial Reporting

We adopted ASC 842, Leases , on January 1, 2019, which required management to make changes to our policies and processes and to implement new or modify existing internal controls over financial reporting during the quarter ended March 31, 2019. This included modifications to our existing controls over the review of supplier contracts and other agreements, the implementation of a new lease accounting system, and new controls related to disclosure requirements.

There were no additional changes in our internal control over financial reporting (as defined in Rules 13a-15(f) under the Exchange Act) during the quarter ended March 31, 2019, that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.

PART II – OTHER INFORMATION

ITEM 1. LEGAL PROCEEDINGS

From time to time, we are involved in various litigation matters arising in the ordinary course of our business. We are not currently a party to any legal proceedings, the adverse outcome of which, individually or in the aggregate, we believe would be likely to have a material effect on our financial condition or results of operations.

ITEM 1A. RISK FACTORS

There have been no material changes to the risk factors disclosed in Item 1A of our Form 10-K for the fiscal year ended December 31, 2018. Additional risks and uncertainties, including risks and uncertainties not presently known to us, or that we currently deem immaterial, could also have an adverse effect on our business, financial condition and/or results of operations.

 

34


Table of Contents

ITEM 2. UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS

Issuer Purchases of Equity Securities

The following table provides information regarding our repurchases of common stock during the three months ended March 31, 2019:

 

Period

   Total Number of
Shares
Purchased
    Average Price
Paid per Share
     Total Number of
Shares
Purchased as
Part of Publicly
Announced
Program
     Approximate
Dollar Value of
Shares that
May Yet Be
Purchased
Under the
Program
 

January 1, 2019 through January 31, 2019

     23,802     $ 26.50        23,802      $ 175,956,000  

February 1, 2019 through February 28, 2019

     84,152  (1)      31.18        —          175,956,000  

March 1, 2019 through March 31, 2019

     —         —          —          175,956,000  
  

 

 

   

 

 

    

 

 

    

Total

     107,954     $ 30.15        23,802     
  

 

 

   

 

 

    

 

 

    

 

  (1)

Pursuant to our 2005 Incentive Plan, we granted RSAs and RSUs. Under each arrangement, shares are issued without direct cost to the employee. During the three months ended March 31, 2019, 272,316 shares of the RSAs and RSUs vested. We withheld 84,152 of those shares to pay the employees’ portion of the applicable payroll taxes.

In fiscal 2005, our board approved a stock repurchase program authorizing us, as market and business conditions warrant, to acquire our common stock and periodically authorize additional funds for the program, with the intention of using existing cash and cash equivalents to fund these repurchases. In February 2018, the board approved the repurchase of up to $200.0 million of our common stock in place of the remaining purchase amounts previously authorized. As of March 31, 2019, the maximum remaining amount authorized for purchase under the stock repurchase program was approximately $176.0 million.

There is no guarantee as to the exact number of shares we will repurchase. Repurchased shares are returned to the status of authorized but unissued shares of common stock. In March 2005, our board approved a plan under Rule 10b5-1 of the Securities Exchange Act of 1934 to facilitate the repurchase of shares of common stock under the existing stock repurchase program. Under our Rule 10b5-1 plan, we have delegated authority over the timing and amount of repurchases to an independent broker who does not have access to inside information about the Company. Rule 10b5-1 allows us, through the independent broker, to purchase shares at times when we ordinarily would not be in the market because of self-imposed trading blackout periods, such as the time immediately preceding the end of the fiscal quarter through a period of three business days following our quarterly earnings release.

ITEM 3. DEFAULTS UPON SENIOR SECURITIES

Not applicable.

ITEM 4. MINE SAFETY DISCLOSURES

Not applicable.

ITEM 5. OTHER INFORMATION

Not applicable.

 

35


Table of Contents

ITEM 6. EXHIBITS

The following lists exhibits filed as part of this quarterly report on Form 10-Q:

 

Exhibit
No.
 

Description

  2.01   Stock Purchase Agreement, dated February 28, 2019
  3.01    (1)   2013 Amended and Restated Certificate of Incorporation of the Company
  3.02    (2)   Amended and Restated Bylaws of the Company
  4.01    (3)   Form of Common Stock Certificate (P)
10.01    (4)   Form of Restricted Share Unit Award Agreement CEO (RSUs)
10.02    (5)   Form of Performance Share Award Agreement CEO (rTSR Performance Share Awards)
10.03    (6)   Form of Restricted Share Unit Award Agreement (RSUs)
10.04    (7)   Form of Performance Share Award Agreement (rTSR Performance Share Awards)
10.05    (8)   Amendment Agreement to the Amended and Restated Credit Agreement, dated April 5, 2019
31.01   Certification of Principal Executive Officer pursuant to SEC Rule 13a-14, as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002
31.02   Certification of Principal Financial Officer pursuant to SEC Rule 13a-14, as adopted pursuant to Section  302 of the Sarbanes-Oxley Act of 2002
32.01    *   Certification of Principal Executive Officer pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002
32.02    *   Certification of Principal Financial Officer pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002
101.INS   XBRL Instance Document
101.SCH   XBRL Taxonomy Extension Schema
101.CAL   XBRL Taxonomy Extension Calculation Linkbase
101.LAB   XBRL Taxonomy Extension Label Linkbase
101.PRE   XBRL Taxonomy Extension Presentation Linkbase
101.DEF   XBRL Taxonomy Extension Definition Linkbase

 

*

This certification is not deemed “filed” for purposes of Section 18 of the Securities Exchange Act of 1934, or otherwise subject to the liability of that section. Such certification will not be deemed to be incorporated by reference into any filing under the Securities Act of 1933 or the Securities Exchange Act of 1934, except to the extent that the Company specifically incorporates it by reference.

 

(P)

Paper Exhibit

(1)

Incorporated herein by reference to Exhibit 3.1 to the registrant’s current report on Form 8-K filed August 17, 2017.

(2)

Incorporated herein by reference to Exhibit 3.1 to the registrant’s current report on Form 8-K filed February 27, 2017.

(3)

Incorporated herein by reference to Exhibit 4.01 to the registrant’s Registration Statement No. 33-88292 on Form S-1.

(4)

Incorporated herein by reference to Exhibit 10.1 to the registrant’s current report on Form 8-K filed March 8, 2019.

(5)

Incorporated herein by reference to Exhibit 10.2 to the registrant’s current report on Form 8-K filed March 8, 2019.

(6)

Incorporated herein by reference to Exhibit 10.3 to the registrant’s current report on Form 8-K filed March 8, 2019.

(7)

Incorporated herein by reference to Exhibit 10.4 to the registrant’s current report on Form 8-K filed March 8, 2019.

(8)

Incorporated herein by reference to Exhibit 10.1 to the registrant’s current report on Form 8-K filed April 11, 2019.

 

36


Table of Contents

SIGNATURE

Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.

 

    

ACI WORLDWIDE, INC.

(Registrant)

Date: May 9, 2019    By:   

/s/ S COTT W. B EHRENS

      Scott W. Behrens
     

Senior Executive Vice President, Chief Financial Officer and Chief Accounting Officer

(Principal Financial Officer)

 

37

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