UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington D.C. 20549
FORM 10-Q
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☑ | QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
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FOR THE QUARTERLY PERIOD ENDED March 31,September 30, 2020
OR
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☐ | TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
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For the transition period from to
Commission File Number: 000-51280
MORNINGSTAR, INC.
(Exact Name of Registrant as Specified in its Charter)
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Illinois | | 36-3297908 |
(State or Other Jurisdiction of | | (I.R.S. Employer |
Incorporation or Organization) | | Identification Number) |
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Illinois | | 36-3297908 |
(State or Other Jurisdiction of | | (I.R.S. Employer |
Incorporation or Organization) | | Identification Number) |
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22 West Washington Street | | |
Chicago | Illinois | | 60602 |
(Address of Principal Executive Offices) | | (Zip Code) |
(312)(312) 696-6000
(Registrant’s Telephone Number, Including Area Code)
Securities registered pursuant to Section 12(b) of the Act:
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Title of Each Class | Trading Symbol | Name of Each Exchange on Which Registered |
Common stock, no par value | MORN | NASDAQ |
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 x No o
Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit such files). Yes x No o
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company, or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company,” and "emerging growth company" in Rule 12b-2 of the Exchange Act.
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Large accelerated filer | ☒
| Accelerated filer | o
| Non-accelerated filer | o
| 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. o
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes ☐ No x
As of April 24, October 23,2020, there were 42,793,12342,832,941 shares of the Company’s common stock, no par value, outstanding.
MORNINGSTAR, INC. AND SUBSIDIARIES
INDEX
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| | | Unaudited Condensed Consolidated Statements of Income for the three and nine months ended March 31,September 30, 2020 and 2019 | |
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| | | Unaudited Condensed Consolidated Statements of Comprehensive Income for the three and nine months ended March 31,September 30, 2020 and 2019 | |
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| | | Unaudited Condensed Consolidated Balance Sheets as of March 31,September 30, 2020 and December 31, 2019 | |
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| | | Unaudited Condensed Consolidated Statements of Equity for the threenine months ended March 31,September 30, 2020 and 2019 | |
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| | | Unaudited Condensed Consolidated Statements of Cash Flows for the threenine months ended March 31,September 30, 2020 and 2019 | |
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PART 1. | FINANCIAL INFORMATION | | |
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PART 1.FINANCIAL INFORMATION
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Item 1. | Financial Statements |
Item 1.Financial Statements Morningstar, Inc. and Subsidiaries
Unaudited Condensed Consolidated Statements of Income
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| | Three months ended March 31, |
(in millions, except share and per share amounts) | | 2020 | | 2019 |
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Revenue | | $ | 324.0 |
| | $ | 258.9 |
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Operating expense: | | | | |
Cost of revenue | | 137.0 |
| | 105.1 |
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Sales and marketing | | 50.9 |
| | 40.0 |
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General and administrative | | 57.4 |
| | 40.8 |
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Depreciation and amortization | | 34.2 |
| | 23.5 |
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Total operating expense | | 279.5 |
| | 209.4 |
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Operating income | | 44.5 |
| | 49.5 |
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Non-operating expense, net: | | |
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Interest expense, net | | (3.2 | ) | | (0.7 | ) |
Gain (loss) on sale of investments, reclassified from other comprehensive income | | (0.4 | ) | | 0.6 |
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Other expense, net | | (7.7 | ) | | (3.2 | ) |
Non-operating expense, net | | (11.3 | ) | | (3.3 | ) |
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Income before income taxes and equity in net loss of unconsolidated entities | | 33.2 |
| | 46.2 |
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Equity in net loss of unconsolidated entities | | (0.8 | ) | | (1.5 | ) |
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Income tax expense | | 8.5 |
| | 11.5 |
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Consolidated net income | | $ | 23.9 |
| | $ | 33.2 |
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Net income per share: | | |
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Basic | | $ | 0.56 |
| | $ | 0.78 |
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Diluted | | $ | 0.55 |
| | $ | 0.77 |
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Dividends per common share: | | | | |
Dividends declared per common share | | $ | 0.30 |
| | $ | 0.28 |
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Dividends paid per common share | | $ | 0.30 |
| | $ | 0.28 |
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Weighted average shares outstanding: | | | | |
Basic | | 42.9 |
| | 42.6 |
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Diluted | | 43.3 |
| | 43.0 |
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| | Three months ended September 30, | | Nine months ended September 30, |
(in millions, except share and per share amounts) | | 2020 | | 2019 | | 2020 | | 2019 |
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Revenue | | $ | 357.2 | | | $ | 313.8 | | | $ | 1,009.1 | | | $ | 846.6 | |
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Operating expense: | | | | | | | | |
Cost of revenue | | 138.7 | | | 128.4 | | | 406.8 | | | 341.0 | |
Sales and marketing | | 52.6 | | | 44.0 | | | 150.7 | | | 129.7 | |
General and administrative | | 85.8 | | | 57.2 | | | 197.8 | | | 142.0 | |
Depreciation and amortization | | 35.8 | | | 34.6 | | | 103.7 | | | 84.0 | |
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Total operating expense | | 312.9 | | | 264.2 | | | 859.0 | | | 696.7 | |
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Operating income | | 44.3 | | | 49.6 | | | 150.1 | | | 149.9 | |
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Non-operating income, net: | | | | | | | | |
Interest expense, net | | (1.4) | | | (4.8) | | | (6.5) | | | (4.8) | |
Realized gains on sale of investments, reclassified from other comprehensive income | | 0.7 | | | 0.3 | | | 1.2 | | | 0.7 | |
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Holding gain on previously-held equity interest | | 50.9 | | | 0 | | | 50.9 | | | 0 | |
Gain on sale of equity method investments | | 0 | | | 19.5 | | | 0 | | | 19.5 | |
Other expense, net | | (2.0) | | | (1.1) | | | (6.1) | | | (2.5) | |
Non-operating income, net | | 48.2 | | | 13.9 | | | 39.5 | | | 12.9 | |
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Income before income taxes and equity in net income (loss) of unconsolidated entities | | 92.5 | | | 63.5 | | | 189.6 | | | 162.8 | |
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Equity in net income (loss) of unconsolidated entities | | 0.6 | | | (1.1) | | | (0.7) | | | (1.9) | |
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Income tax expense | | 16.9 | | | 13.3 | | | 40.6 | | | 36.5 | |
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Consolidated net income | | $ | 76.2 | | | $ | 49.1 | | | $ | 148.3 | | | $ | 124.4 | |
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Net income per share: | | | | | | | | |
Basic | | $ | 1.78 | | | $ | 1.15 | | | $ | 3.46 | | | $ | 2.91 | |
Diluted | | $ | 1.76 | | | $ | 1.14 | | | $ | 3.43 | | | $ | 2.89 | |
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Dividends per common share: | | | | | | | | |
Dividends declared per common share | | $ | 0 | | | $ | 0 | | | $ | 0.60 | | | $ | 0.56 | |
Dividends paid per common share | | $ | 0.30 | | | $ | 0.28 | | | $ | 0.90 | | | $ | 0.84 | |
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Weighted average shares outstanding: | | | | | | | | |
Basic | | 42.9 | | | 42.8 | | | 42.9 | | | 42.7 | |
Diluted | | 43.2 | | | 43.2 | | | 43.2 | | | 43.1 | |
See notes to unaudited condensed consolidated financial statements.
Morningstar, Inc. and Subsidiaries
Unaudited Condensed Consolidated Statements of Comprehensive Income
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| | Three months ended September 30, | | Nine months ended September 30, |
(in millions) | | 2020 | | 2019 | | 2020 | | 2019 |
Consolidated net income | | $ | 76.2 | | | $ | 49.1 | | | $ | 148.3 | | | $ | 124.4 | |
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Other comprehensive income (loss): | | | | | | | | |
Foreign currency translation adjustment | | 24.3 | | | (18.3) | | | (3.3) | | | (17.7) | |
Unrealized gains (losses) on securities, net of tax: | | | | | | | | |
Unrealized holding gains (losses) arising during period | | 0.8 | | | 0.2 | | | (0.5) | | | 2.4 | |
Reclassification gains included in net income | | (0.5) | | | (0.3) | | | (0.9) | | | (0.6) | |
Other comprehensive income (loss) | | 24.6 | | | (18.4) | | | (4.7) | | | (15.9) | |
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Comprehensive income | | $ | 100.8 | | | $ | 30.7 | | | $ | 143.6 | | | $ | 108.5 | |
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| | Three months ended March 31, |
(in millions) | | 2020 | | 2019 |
Consolidated net income | | $ | 23.9 |
| | $ | 33.2 |
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Other comprehensive income (loss): | | | | |
Foreign currency translation adjustment | | (40.4 | ) | | 3.4 |
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Unrealized gains (losses) on securities, net of tax: | | | | |
Unrealized holding gains (losses) arising during period | | (4.1 | ) | | 1.9 |
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Reclassification losses (gains) included in net income | | 0.3 |
| | (0.5 | ) |
Other comprehensive income (loss) | | (44.2 | ) | | 4.8 |
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Comprehensive income (loss) | | $ | (20.3 | ) | | $ | 38.0 |
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See notes to unaudited condensed consolidated financial statements.
Morningstar, Inc. and Subsidiaries
Unaudited Condensed Consolidated Balance Sheets
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(in millions, except share amounts) | | As of September 30, 2020 (unaudited) | | As of December 31, 2019 |
Assets | | | | |
Current assets: | | | | |
Cash and cash equivalents | | $ | 351.1 | | | $ | 334.1 | |
Investments | | 26.7 | | | 33.4 | |
Accounts receivable, less allowance for credit losses of $4.1 million and $4.1 million, respectively | | 186.9 | | | 188.5 | |
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Income tax receivable | | 7.2 | | | 6.3 | |
Deferred commissions | | 18.6 | | | 16.9 | |
Other current assets | | 32.1 | | | 24.0 | |
Total current assets | | 622.6 | | | 603.2 | |
Goodwill | | 1,178.1 | | | 1,039.1 | |
Intangible assets, net | | 382.8 | | | 333.4 | |
Property, equipment, and capitalized software, less accumulated depreciation and amortization of $431.1 million and $377.3 million, respectively | | 150.9 | | | 154.7 | |
Operating lease assets | | 152.4 | | | 144.8 | |
Investments in unconsolidated entities | | 36.9 | | | 59.6 | |
Deferred tax assets, net | | 10.8 | | | 10.7 | |
Deferred commissions | | 15.2 | | | 13.5 | |
Other assets | | 13.3 | | | 11.9 | |
Total assets | | $ | 2,563.0 | | | $ | 2,370.9 | |
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Liabilities and equity | | | | |
Current liabilities: | | | | |
Deferred revenue | | $ | 293.2 | | | $ | 250.1 | |
Accrued compensation | | 128.2 | | | 137.5 | |
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Accounts payable and accrued liabilities | | 53.7 | | | 58.9 | |
Current portion of long-term debt | | 11.0 | | | 11.0 | |
Operating lease liabilities | | 38.6 | | | 35.8 | |
Contingent consideration liabilities | | 33.5 | | | 0 | |
Other current liabilities | | 1.5 | | | 2.5 | |
Total current liabilities | | 559.7 | | | 495.8 | |
Operating lease liabilities | | 141.3 | | | 138.7 | |
Accrued compensation | | 33.5 | | | 12.1 | |
Deferred tax liabilities, net | | 109.3 | | | 95.0 | |
Long-term debt | | 473.9 | | | 502.1 | |
Deferred revenue | | 33.2 | | | 32.2 | |
Other long-term liabilities | | 35.0 | | | 11.4 | |
Total liabilities | | 1,385.9 | | | 1,287.3 | |
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Equity: | | | | |
Morningstar, Inc. shareholders’ equity: | | | | |
Common stock, no par value, 200,000,000 shares authorized, of which 42,848,921 and 42,848,359 shares were outstanding as of September 30, 2020 and December 31, 2019, respectively | | 0 | | | 0 | |
Treasury stock at cost, 11,124,814 and 10,840,173 shares as of September 30, 2020 and December 31, 2019, respectively | | (765.9) | | | (728.7) | |
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(in millions, except share amounts) | | As of March 31, 2020 (unaudited) | | As of December 31, 2019 |
Assets | | |
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Current assets: | | |
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Cash and cash equivalents | | $ | 322.5 |
| | $ | 334.1 |
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Investments | | 26.3 |
| | 33.4 |
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Accounts receivable, less allowance for credit losses of $4.8 and $4.1, respectively | | 184.7 |
| | 188.5 |
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Income tax receivable | | 5.7 |
| | 6.3 |
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Deferred commissions | | 17.1 |
| | 16.9 |
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Other current assets | | 24.4 |
| | 24.0 |
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Total current assets | | 580.7 |
| | 603.2 |
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Goodwill | | 1,013.2 |
| | 1,039.1 |
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Intangible assets, net | | 306.2 |
| | 333.4 |
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Property, equipment, and capitalized software, less accumulated depreciation and amortization of $394.7 and $377.3, respectively | | 149.5 |
| | 154.7 |
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Operating lease assets | | 147.0 |
| | 144.8 |
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Investments in unconsolidated entities | | 58.8 |
| | 59.6 |
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Deferred tax asset, net | | 9.8 |
| | 10.7 |
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Deferred commissions | | 13.6 |
| | 13.5 |
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Other assets | | 13.2 |
| | 11.9 |
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Total assets | | $ | 2,292.0 |
| | $ | 2,370.9 |
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Liabilities and equity | | |
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Current liabilities: | | |
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Deferred revenue | | $ | 279.1 |
| | $ | 250.1 |
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Accrued compensation | | 70.2 |
| | 137.5 |
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Accounts payable and accrued liabilities | | 56.5 |
| | 58.9 |
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Current portion of long-term debt | | 11.0 |
| | 11.0 |
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Operating lease liabilities | | 35.9 |
| | 35.8 |
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Other current liabilities | | 3.7 |
| | 2.5 |
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Total current liabilities | | 456.4 |
| | 495.8 |
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Operating lease liabilities | | 136.0 |
| | 138.7 |
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Accrued compensation | | 12.7 |
| | 12.1 |
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Deferred tax liability, net | | 90.1 |
| | 95.0 |
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Long-term debt | | 519.4 |
| | 502.1 |
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Deferred revenue | | 33.3 |
| | 32.2 |
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Other long-term liabilities | | 11.4 |
| | 11.4 |
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Total liabilities | | 1,259.3 |
| | 1,287.3 |
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Equity: | | |
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Morningstar, Inc. shareholders’ equity: | | |
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Common stock, no par value, 200,000,000 shares authorized, of which 42,793,123 and 42,848,359 shares were outstanding as of March 31, 2020 and December 31, 2019, respectively | | — |
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Treasury stock at cost, 11,017,098 and 10,840,173 shares as of March 31, 2020 and December 31, 2019, respectively | | (748.7 | ) | | (728.7 | ) |
Additional paid-in capital | | 657.2 |
| | 655.0 |
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Retained earnings | | 1,229.0 |
| | 1,217.9 |
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Accumulated other comprehensive loss: | | | | |
Currency translation adjustment | | (103.4 | ) | | (63.0 | ) |
Unrealized gain (loss) on available-for-sale investments | | (1.4 | ) | | 2.4 |
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Total accumulated other comprehensive loss | | (104.8 | ) | | (60.6 | ) |
Total equity | | 1,032.7 |
| | 1,083.6 |
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Total liabilities and equity | | $ | 2,292.0 |
| | $ | 2,370.9 |
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Additional paid-in capital | | 667.8 | | | 655.0 | |
Retained earnings | | 1,340.5 | | | 1,217.9 | |
Accumulated other comprehensive loss: | | | | |
Currency translation adjustment | | (66.3) | | | (63.0) | |
Unrealized gain on available-for-sale investments | | 1.0 | | | 2.4 | |
Total accumulated other comprehensive loss | | (65.3) | | | (60.6) | |
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Total equity | | 1,177.1 | | | 1,083.6 | |
Total liabilities and equity | | $ | 2,563.0 | | | $ | 2,370.9 | |
See notes to unaudited condensed consolidated financial statements.
Morningstar, Inc. and Subsidiaries
Unaudited Condensed Consolidated Statements of Equity
For the threenine months ended March 31,September 30, 2020 and 2019
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| | Morningstar, Inc. Shareholders’ Equity | | | | |
| | | | | | | | | | Accumulated Other Comprehensive Loss | | | | |
| | Common Stock | | | | Additional Paid-in Capital | | | | | | | |
(in millions, except share and per share amounts) | | Shares Outstanding | | Par Value | | Treasury Stock | | | Retained Earnings | | | | Total Equity |
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Balance as of December 31, 2019 | | 42,848,359 | | | $ | 0 | | | $ | (728.7) | | | $ | 655.0 | | | $ | 1,217.9 | | | $ | (60.6) | | | | | $ | 1,083.6 | |
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Net income | | | | — | | | — | | | — | | | 23.9 | | | — | | | | | 23.9 | |
Other comprehensive loss: | | | | | | | | | | | | | | | | |
Unrealized loss on available-for-sale investments, net of income tax of $1.4 million | | | | — | | | — | | | — | | | — | | | (4.1) | | | | | (4.1) | |
Reclassification of adjustments for loss included in net income, net of income tax of $0.1 million | | | | — | | | — | | | — | | | — | | | 0.3 | | | | | 0.3 | |
Foreign currency translation adjustment, net | | | | — | | | — | | | — | | | — | | | (40.4) | | | | | (40.4) | |
Other comprehensive loss, net | | | | — | | | — | | | — | | | — | | | (44.2) | | | | | (44.2) | |
Issuance of common stock related to stock-option exercises and vesting of restricted stock units, net of shares withheld for taxes on settlements of restricted stock units | | 121,689 | | | 0 | | | 0 | | | (10.6) | | | 0 | | | 0 | | | | | (10.6) | |
Reclassification of awards previously liability-classified that were converted to equity | | | | 0 | | | 0 | | | 5.5 | | | 0 | | | 0 | | | | | 5.5 | |
Stock-based compensation | | | | — | | | — | | | 7.3 | | | — | | | — | | | | | 7.3 | |
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Common shares repurchased | | (176,925) | | | — | | | (20.0) | | | — | | | — | | | — | | | | | (20.0) | |
Dividends declared ($0.30 per share) | | | | — | | | — | | | — | | | (12.8) | | | — | | | | | (12.8) | |
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Balance as of March 31, 2020 | | 42,793,123 | | | $ | 0 | | | $ | (748.7) | | | $ | 657.2 | | | $ | 1,229.0 | | | $ | (104.8) | | | | | $ | 1,032.7 | |
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Net income | | | | — | | | — | | | — | | | 48.2 | | | — | | | | | 48.2 | |
Other comprehensive income: | | | | | | | | | | | | | | | | |
Unrealized gain on available-for-sale investments, net of income tax of $0.9 million | | | | — | | | — | | | — | | | — | | | 2.8 | | | | | 2.8 | |
Reclassification of adjustments for gain included in net income, net of income tax of $0.2 million | | | | — | | | — | | | — | | | — | | | (0.7) | | | | | (0.7) | |
Foreign currency translation adjustment, net | | | | — | | | — | | | — | | | — | | | 12.8 | | | | | 12.8 | |
Other comprehensive income, net | | | | — | | | — | | | — | | | — | | | 14.9 | | | | | 14.9 | |
Issuance of common stock related to stock-option exercises and vesting of restricted stock units, net of shares withheld for taxes on settlements of restricted stock units | | 128,060 | | | 0 | | | 1.3 | | | (7.9) | | | 0 | | | 0 | | | | | (6.6) | |
Reclassification of awards previously liability-classified that were converted to equity | | | | 0 | | | 0 | | | 0.3 | | | 0 | | | 0 | | | | | 0.3 | |
Stock-based compensation | | | | — | | | — | | | 10.3 | | | — | | | — | | | | | 10.3 | |
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Dividends declared ($0.30 per share) | | | | — | | | — | | | — | | | (12.9) | | | — | | | | | (12.9) | |
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Balance as of June 30, 2020 | | 42,921,183 | | | $ | 0 | | | $ | (747.4) | | | $ | 659.9 | | | $ | 1,264.3 | | | $ | (89.9) | | | | | $ | 1,086.9 | |
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Net income | | | | — | | | — | | | — | | | 76.2 | | | — | | | | | 76.2 | |
Other comprehensive income: | | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
Unrealized gain on available-for-sale investments, net of income tax of 0.3 million | | | | — | | | — | | | — | | | — | | | 0.8 | | | | | 0.8 | |
Reclassification of adjustments for gain included in net income, net of income tax of $0.2 million | | | | — | | | — | | | — | | | — | | | (0.5) | | | | | (0.5) | |
Foreign currency translation adjustment, net | | | | — | | | — | | | — | | | — | | | 24.3 | | | | | 24.3 | |
Other comprehensive income, net | | | | — | | | — | | | — | | | — | | | 24.6 | | | | | 24.6 | |
Issuance of common stock related to stock-option exercises and vesting of restricted stock units, net of shares withheld for taxes on settlements of restricted stock units | | 49,758 | | | — | | | 0.8 | | | (2.1) | | | 0 | | | 0 | | | | | (1.3) | |
Reclassification of awards previously liability-classified that were converted to equity | | | | — | | | 0 | | | 0.1 | | | 0 | | | 0 | | | | | 0.1 | |
Stock-based compensation | | | | — | | | | | 9.9 | | | — | | | — | | | | | 9.9 | |
| | | | | | | | | | | | | | | | |
Common shares repurchased | | (122,020) | | | — | | | (19.3) | | | — | | | — | | | — | | | | | (19.3) | |
| | | | | | | | | | | | | | | | |
Balance as of September 30, 2020 | | 42,848,921 | | | $ | 0 | | | $ | (765.9) | | | $ | 667.8 | | | $ | 1,340.5 | | | $ | (65.3) | | | | | $ | 1,177.1 | |
| | | | | | | | | | | | | | | | |
|
| | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | Morningstar, Inc. Shareholders’ Equity | | |
| | | | | | | | | | Accumulated Other Comprehensive Loss |
| | |
| | Common Stock | | |
| | Additional Paid-in Capital |
| | | | | |
(in millions, except share and per share amounts) | | Shares Outstanding |
| | Par Value |
| | Treasury Stock |
| | | Retained Earnings |
| | | Total Equity |
|
| | | | | | | | | | | | | | |
Balance as of December 31, 2019 | | 42,848,359 |
| | $ | — |
| | $ | (728.7 | ) | | $ | 655.0 |
| | $ | 1,217.9 |
| | $ | (60.6 | ) | | $ | 1,083.6 |
|
| | | | | | | | | | | | | | |
Net income | | | | — |
| | — |
| | — |
| | 23.9 |
| | — |
| | 23.9 |
|
Other comprehensive loss: | | | | | | | | | | | | | | |
Unrealized loss on available-for-sale investments, net of income tax of $1.4 | | | | — |
| | — |
| | — |
| | — |
| | (4.1 | ) | | (4.1 | ) |
Reclassification of adjustments for loss included in net income, net of income tax of $0.1 | | | | — |
| | — |
| | — |
| | — |
| | 0.3 |
| | 0.3 |
|
Foreign currency translation adjustment, net | | | | — |
| | — |
| | — |
| | — |
| | (40.4 | ) | | (40.4 | ) |
Other comprehensive loss | | | | — |
| | — |
| | — |
| | — |
| | (44.2 | ) | | (44.2 | ) |
Issuance of common stock related to stock-option exercises and vesting of restricted stock units, net of shares withheld for taxes on settlements of restricted stock units | | 121,689 |
| | — |
| | — |
| | (10.6 | ) | | — |
| | — |
| | (10.6 | ) |
Reclassification of awards previously liability-classified that were converted to equity
| | | | — |
| | — |
| | 5.5 |
| | — |
| | — |
| | 5.5 |
|
Stock-based compensation | | | | — |
| | — |
| | 7.3 |
| | — |
| | — |
| | 7.3 |
|
Common shares repurchased | | (176,925 | ) | | — |
| | (20.0 | ) | | — |
| | — |
| | — |
| | (20.0 | ) |
Dividends declared ($0.30 per share) | | | | — |
| | — |
| | — |
| | (12.8 | ) | | — |
| | (12.8 | ) |
Balance as of March 31, 2020 | | 42,793,123 |
| | $ | — |
| | $ | (748.7 | ) | | $ | 657.2 |
| | $ | 1,229.0 |
| | $ | (104.8 | ) | | $ | 1,032.7 |
|
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | Morningstar, Inc. Shareholders’ Equity | | | | |
| | | | | | | | | | Accumulated Other Comprehensive Loss | | | | |
| | Common Stock | | | | Additional Paid-in Capital | | | | | | | |
(in millions, except share and per share amounts) | | Shares Outstanding | | Par Value | | Treasury Stock | | | Retained Earnings | | | | Total Equity |
| | | | | | | | | | | | | | | | |
Balance as of December 31, 2018 | | 42,624,118 | | | $ | 0 | | | $ | (726.8) | | | $ | 621.7 | | | $ | 1,114.8 | | | $ | (75.0) | | | | | $ | 934.7 | |
| | | | | | | | | | | | | | | | |
Net income | | | | — | | | — | | | — | | | 33.2 | | | — | | | | | 33.2 | |
Other comprehensive income: | | | | | | | | | | | | | | | | |
Unrealized gain on available-for-sale investments, net of income tax of $0.7 million | | | | — | | | — | | | — | | | — | | | 1.9 | | | | | 1.9 | |
Reclassification of adjustments for gain included in net income, net of income tax of $0.2 million | | | | — | | | — | | | — | | | — | | | (0.5) | | | | | (0.5) | |
Foreign currency translation adjustment, net | | | | — | | | — | | | — | | | — | | | 3.4 | | | | | 3.4 | |
Other comprehensive income, net | | | | — | | | — | | | — | | | — | | | 4.8 | | | | | 4.8 | |
Vesting of restricted stock units, net of shares withheld for taxes on settlements of restricted stock units | | 73,530 | | | — | | | — | | | (4.6) | | | — | | | — | | | | | (4.6) | |
Reclassification of awards previously liability-classified that were converted to equity | | | | — | | | — | | | 6.6 | | | — | | | — | | | | | 6.6 | |
Stock-based compensation | | | | — | | | — | | | 10.0 | | | — | | | — | | | | | 10.0 | |
Common shares repurchased | | (41,935) | | | — | | | (4.6) | | | — | | | — | | | — | | | | | (4.6) | |
Dividends declared ($0.28 per share) | | | | — | | | — | | | — | | | (11.9) | | | — | | | | | (11.9) | |
| | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | |
Balance as of March 31, 2019 | | 42,655,713 | | | $ | 0 | | | $ | (731.4) | | | $ | 633.7 | | | $ | 1,136.1 | | | $ | (70.2) | | | | | $ | 968.2 | |
| | | | | | | | | | | | | | | | |
Net income | | | | — | | | — | | | — | | | 42.1 | | | — | | | | | 42.1 | |
Other comprehensive loss: | | | | | | | | | | | | | | | | |
Unrealized gain on available-for-sale investments, net of income tax of $0.1 million | | | | — | | | — | | | — | | | — | | | 0.3 | | | | | 0.3 | |
Reclassification of adjustments for loss included in net income, net of income tax of $0.1 million | | | | — | | | — | | | — | | | — | | | 0.2 | | | | | 0.2 | |
Foreign currency translation adjustment, net | | | | — | | | — | | | — | | | — | | | (2.8) | | | | | (2.8) | |
Other comprehensive loss, net | | | | — | | | — | | | — | | | — | | | (2.3) | | | | | (2.3) | |
Vesting of restricted stock units, net of shares withheld for taxes on settlements of restricted stock units | | 107,309 | | | — | | | 1.0 | | | (6.3) | | | — | | | — | | | | | (5.3) | |
Reclassification of awards previously liability-classified that were converted to equity | | | | — | | | — | | | 0.2 | | | — | | | — | | | | | 0.2 | |
Stock-based compensation | | | | — | | | — | | | 12.5 | | | — | | | — | | | | | 12.5 | |
| | | | | | | | | | | | | | | | |
Dividends declared ($0.28 per share) | | | | — | | | — | | | — | | | (12.0) | | | — | | | | | (12.0) | |
| | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | |
Balance as of June 30, 2019 | | 42,763,022 | | | $ | 0 | | | $ | (730.4) | | | $ | 640.1 | | | $ | 1,166.2 | | | $ | (72.5) | | | | | $ | 1,003.4 | |
| | | | | | | | | | | | | | | | |
Net income | | | | — | | | — | | | — | | | 49.1 | | | — | | | | | 49.1 | |
Other comprehensive loss: | | | | | | | | | | | | | | | | |
Unrealized gain on available-for-sale investments | | | | — | | | — | | | — | | | — | | | 0.2 | | | | | 0.2 | |
Reclassification of adjustments for gain included in net income, net of income tax of $0.1 million | | | | — | | | — | | | — | | | — | | | (0.3) | | | | | (0.3) | |
Foreign currency translation adjustment, net | | | | — | | | — | | | — | | | — | | | (18.3) | | | | | (18.3) | |
|
| | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | Morningstar, Inc. Shareholders’ Equity | | |
| | | | | | | | | | Accumulated Other Comprehensive Loss |
| | |
| | Common Stock | | |
| | Additional Paid-in Capital |
| | | | | |
(in millions, except share and per share amounts) | | Shares Outstanding |
| | Par Value |
| | Treasury Stock |
| | | Retained Earnings |
| | | Total Equity |
|
| | | | | | | | | | | | | | |
Balance as of December 31, 2018 | | 42,624,118 |
| | $ | — |
| | $ | (726.8 | ) | | $ | 621.7 |
| | $ | 1,114.8 |
| | $ | (75.0 | ) | | $ | 934.7 |
|
| | | | | | | | | | | | | | |
Net income | | | | — |
| | — |
| | — |
| | 33.2 |
| | — |
| | 33.2 |
|
Other comprehensive income: | | | | | | | | | | | | | | |
Unrealized gain on available-for-sale investments, net of income tax of $0.7 | | | | — |
| | — |
| | — |
| | — |
| | 1.9 |
| | 1.9 |
|
Reclassification of adjustments for gain included in net income, net of income tax of $0.2 | | | | — |
| | — |
| | — |
| | — |
| | (0.5 | ) | | (0.5 | ) |
Foreign currency translation adjustment, net | | | | — |
| | — |
| | — |
| | — |
| | 3.4 |
| | 3.4 |
|
Other comprehensive income, net | | | | — |
| | — |
| | — |
| | — |
| | 4.8 |
| | 4.8 |
|
Vesting of restricted stock units, net of shares withheld for taxes on settlements of restricted stock units | | 73,530 |
| | — |
| | — |
| | (4.6 | ) | | — |
| | — |
| | (4.6 | ) |
Reclassification of awards previously liability-classified that were converted to equity | | | | — |
| | — |
| | 6.6 |
| | — |
| | — |
| | 6.6 |
|
Stock-based compensation | | | | — |
| | — |
| | 10.0 |
| | — |
| | — |
| | 10.0 |
|
Common shares repurchased | | (41,935 | ) | | — |
| | (4.6 | ) | | — |
| | — |
| | — |
| | (4.6 | ) |
Dividends declared ($0.28 per share) | | | | — |
| | — |
| | — |
| | (11.9 | ) | | — |
| | (11.9 | ) |
Balance as of March 31, 2019 | | 42,655,713 |
| | $ | — |
| | $ | (731.4 | ) | | $ | 633.7 |
| | $ | 1,136.1 |
| | $ | (70.2 | ) | | $ | 968.2 |
|
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
Other comprehensive loss, net | | | | — | | | — | | | — | | | — | | | (18.4) | | | | | (18.4) | |
Vesting of restricted stock units, net of shares withheld for taxes on settlements of restricted stock units | | 46,845 | | | — | | | 1.0 | | | (4.0) | | | — | | | — | | | | | (3.0) | |
| | | | | | | | | | | | | | | | |
Stock-based compensation | | | | — | | | — | | | 10.8 | | | — | | | — | | | | | 10.8 | |
| | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | |
Balance as of September 30, 2019 | | 42,809,867 | | | $ | 0 | | | $ | (729.4) | | | $ | 646.9 | | | $ | 1,215.3 | | | $ | (90.9) | | | | | $ | 1,041.9 | |
See notes to unaudited condensed consolidated financial statements.
Morningstar, Inc. and Subsidiaries
Unaudited Condensed Consolidated Statements of Cash Flows
| | | | Three months ended March 31, | | | Nine months ended September 30, |
(in millions) | | 2020 | | 2019 | (in millions) | | 2020 | | 2019 |
Operating activities | | | | |
| Operating activities | | | | |
Consolidated net income | | $ | 23.9 |
| | $ | 33.2 |
| Consolidated net income | | $ | 148.3 | | | $ | 124.4 | |
Adjustments to reconcile consolidated net income to net cash flows from operating activities: | | | | | Adjustments to reconcile consolidated net income to net cash flows from operating activities: | |
Depreciation and amortization | | 34.2 |
| | 23.5 |
| Depreciation and amortization | | 103.7 | | | 84.0 | |
Deferred income taxes | | 0.9 |
| | (0.4 | ) | Deferred income taxes | | (2.1) | | | (2.8) | |
Stock-based compensation expense | | 7.3 |
| | 10.0 |
| Stock-based compensation expense | | 27.5 | | | 33.3 | |
Provision for bad debt | | 1.5 |
| | 0.5 |
| Provision for bad debt | | 2.2 | | | 0.6 | |
Equity in net loss of unconsolidated entities | | 0.8 |
| | 1.5 |
| Equity in net loss of unconsolidated entities | | 0.7 | | | 1.9 | |
| Holding gain on previously-held equity interest | | Holding gain on previously-held equity interest | | (50.9) | | | — | |
| Gain on sale of equity method investments | | Gain on sale of equity method investments | | — | | | (19.5) | |
Acquisition earn-out | | Acquisition earn-out | | 27.8 | | | — | |
Other, net | | 9.0 |
| | 3.2 |
| Other, net | | 4.3 | | | 1.4 | |
Changes in operating assets and liabilities: | |
|
| |
|
| Changes in operating assets and liabilities: | |
Accounts receivable | | (2.3 | ) | | (2.0 | ) | Accounts receivable | | 5.5 | | | 30.6 | |
Accounts payable and accrued liabilities | | (1.4 | ) | | (3.5 | ) | Accounts payable and accrued liabilities | | (7.0) | | | (5.0) | |
Accrued compensation and deferred commissions | | (60.0 | ) | | (47.8 | ) | Accrued compensation and deferred commissions | | (16.1) | | | (8.1) | |
Income taxes, current | | 0.7 |
| | 8.5 |
| Income taxes, current | | 2.7 | | | (6.2) | |
Deferred revenue | | 36.1 |
| | 37.9 |
| Deferred revenue | | 21.5 | | | 21.0 | |
| Other assets and liabilities | | (2.0 | ) | | (5.6 | ) | Other assets and liabilities | | 1.6 | | | (3.7) | |
Cash provided by operating activities | | 48.7 |
| | 59.0 |
| Cash provided by operating activities | | 269.7 | | | 251.9 | |
| | | | | | | | |
Investing activities | | | | |
| Investing activities | | |
Purchases of investment securities | | (13.3 | ) | | (8.9 | ) | Purchases of investment securities | | (40.4) | | | (28.1) | |
Proceeds from maturities and sales of investment securities | | 14.0 |
| | 8.9 |
| Proceeds from maturities and sales of investment securities | | 41.0 | | | 27.8 | |
Capital expenditures | | (15.1 | ) | | (18.7 | ) | Capital expenditures | | (54.7) | | | (57.1) | |
Acquisitions, net of cash acquired | | (4.5 | ) | | — |
| Acquisitions, net of cash acquired | | (67.8) | | | (673.9) | |
| Proceeds from sale of equity method investments | | Proceeds from sale of equity method investments | | — | | | 17.0 | |
Purchases of equity- and cost-method investments | | (0.5 | ) | | (1.1 | ) | Purchases of equity- and cost-method investments | | (4.5) | | | (1.4) | |
Other, net | | (0.1 | ) | | 0.3 |
| Other, net | | 1.7 | | | (0.6) | |
Cash used for investing activities | | (19.5 | ) | | (19.5 | ) | Cash used for investing activities | | (124.7) | | | (716.3) | |
| | | | | | | | |
Financing activities | | | | |
| Financing activities | | |
Common shares repurchased | | (20.0 | ) | | (4.9 | ) | Common shares repurchased | | (37.6) | | | (4.9) | |
Dividends paid | | (12.9 | ) | | (11.9 | ) | Dividends paid | | (38.6) | | | (35.9) | |
Proceeds from long-term debt | | 55.0 |
| | — |
| Proceeds from long-term debt | | 60.0 | | | 610.0 | |
| Repayment of long-term debt | | (37.8 | ) | | (40.0 | ) | Repayment of long-term debt | | (88.4) | | | (132.8) | |
Proceeds from stock-option exercises | | 0.1 |
| | — |
| Proceeds from stock-option exercises | | 1.3 | | | 0.1 | |
Employee taxes paid from withholding of restricted stock units | | (10.7 | ) | | (4.6 | ) | Employee taxes paid from withholding of restricted stock units | | (19.8) | | | (12.8) | |
| Other, net | | (0.6 | ) | | 0.7 |
| Other, net | | (1.5) | | | (0.4) | |
Cash used for financing activities | | (26.9 | ) | | (60.7 | ) | Cash used for financing activities | | (124.6) | | | 423.3 | |
| | | | | | | | |
Effect of exchange rate changes on cash and cash equivalents | | (13.9 | ) | | 1.0 |
| Effect of exchange rate changes on cash and cash equivalents | | (3.4) | | | (6.4) | |
Net decrease in cash and cash equivalents | | (11.6 | ) | | (20.2 | ) | |
Net increase (decrease) in cash and cash equivalents | | Net increase (decrease) in cash and cash equivalents | | 17.0 | | | (47.5) | |
Cash and cash equivalents—beginning of period | | 334.1 |
| | 369.3 |
| Cash and cash equivalents—beginning of period | | 334.1 | | | 369.3 | |
Cash and cash equivalents—end of period | | $ | 322.5 |
| | $ | 349.1 |
| Cash and cash equivalents—end of period | | $ | 351.1 | | | $ | 321.8 | |
| | | | | | | | |
Supplemental disclosure of cash flow information: | | | | |
| Supplemental disclosure of cash flow information: | | |
Cash paid for income taxes | | $ | 6.8 |
| | $ | 3.4 |
| Cash paid for income taxes | | $ | 40.0 | | | $ | 45.9 | |
Cash paid for interest | | $ | 3.7 |
| | $ | 1.1 |
| Cash paid for interest | | $ | 7.7 | | | $ | 6.5 | |
Supplemental information of non-cash investing and financing activities: | | | | | Supplemental information of non-cash investing and financing activities: | |
Unrealized gain (loss) on available-for-sale investments | | $ | (5.1 | ) | | $ | 2.0 |
| Unrealized gain (loss) on available-for-sale investments | | $ | (1.9) | | | $ | 2.4 | |
|
See notes to unaudited condensed consolidated financial statements.
MORNINGSTAR, INC. AND SUBSIDIARIES
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
1.1. Basis of Presentation of Interim Financial Information
The accompanying unaudited condensed consolidated financial statements of Morningstar, Inc. and subsidiaries (Morningstar, we, our, the Company) have been prepared to conform to the rules and regulations of the Securities and Exchange Commission (SEC). The preparation of financial statements in conformity with accounting principles generally accepted in the United States (U.S. GAAP) requires management to make estimates and assumptions that affect the reported amount of assets, liabilities, revenue,revenues, and expenses. Actual results could differ from those estimates. In the opinion of management, the statements reflect all adjustments, which are of a normal recurring nature, necessary to present fairly our financial position, results of operations, equity, and cash flows. These financial statements and notes are unaudited and should be read in conjunction with our Audited Consolidated Financial Statements and Notes thereto included in our Annual Report on Form 10-K for the year ended December 31, 2019,, filed with the SEC on March 2, 2020 (our Annual Report).
The acronyms that appear in the Notes to our Unaudited Condensed Consolidated Financial Statements refer to the following:
ASC: Accounting Standards Codification
ASU: Accounting Standards Update
FASB: Financial Accounting Standards Board
COVID-19 Update
We arecontinue to closely monitoringmonitor the impact of the COVID-19 pandemic on all aspects of our business and in the geographies in which we operate, including how it will affectaffects team members, customers, suppliers, and global markets. Since the situation surrounding the COVID-19 pandemic remains fluid, we are actively managing our response and have assessed potential impacts to our financial position and operating results related to our consolidated financial statements for the three and nine months ended March 31,September 30, 2020.
On March 27, 2020, the Coronavirus Aid, Relief, and Economic Security (CARES) Act was signed into law. The CARES Act provides a substantial stimulus and assistance package intended to address the impact of the COVID-19 pandemic, including tax relief and government loans, grants and investments. The CARES Act had no impact on our consolidated financial statements for the three and nine months ended March 31,September 30, 2020. We continue to monitor any effects that may result from the CARES Act and other similar legislation or governmental actions in geographies in which our business operates.
2. Summary of Significant Accounting Policies
We discuss our otherOur significant accounting policies are included in Note 2 of the Notes to our Audited Consolidated Financial Statements included in our Annual Report. During the quarter, we made updates to our significant accounting policy on business combinations, which is included below.
Business Combinations
When we acquire a business, we account for the business combination in accordance with ASC 805, Business Combinations (ASC 805). We recognize and measure the fair value of the acquired business and allocate the purchase price to the identifiable tangible and intangible assets acquired and liabilities assumed based upon their estimated fair values at the date of acquisition. The difference between the purchase price and the estimated fair value of the net assets acquired or the excess of the aggregate estimated fair values of assets acquired and liabilities assumed is recorded as goodwill. In determining the estimated fair values of assets acquired and liabilities assumed in a business combination, we use various recognized valuation methods, including discounted cash flow, Monte Carlo simulations, and relief from royalty. For a business combination achieved in stages, we remeasure our previously-held equity interest immediately before the acquisition to the acquisition date fair value and recognize any gain in our Consolidated Statements of Income.
We recognize the fair value of any contingent payments at the date of acquisition as part of the consideration transferred to acquire a business. The liability associated with contingent consideration is remeasured to fair value at each reporting period subsequent to the date of acquisition considering factors that may impact the timing and amount of contingent payments until the term of the agreement has expired or the contingency is resolved. Any changes in the fair value measurement will be recorded in our Consolidated Statements of Income. In evaluating the characterization of contingent and deferred payments, we analyze relevant factors, including the nature of the payment, continuing employment requirements, incremental payments to employees of the acquired business, and timing and rationale underlying the transaction, to determine whether the payments should be accounted for as additional purchase consideration or post-combination related services.
We expense direct costs related to the business combination, such as accounting, legal, valuation, and other professional fees, as incurred. We recognize restructuring costs, including severance and relocation for employees of the acquired entity, as post-combination expenses unless the target entity meets the criteria of ASC 420, Exit or Disposal Cost Obligations, on the acquisition date.
As part of the purchase price allocation, we follow the requirements of ASC 740, Income Taxes (ASC 740). This includes establishing deferred tax assets or liabilities reflecting the difference between the values assigned for financial statement purposes and income tax purposes. In certain acquisitions, the goodwill resulting from the purchase price allocation may not be deductible for income tax purposes. ASC 740 prohibits recognition of a deferred tax asset or liability for temporary differences in goodwill if goodwill is not amortizable and deductible for tax purposes.
Recently adopted accounting pronouncements
Current Expected Credit Losses: On June 16, 2016, the FASB issued ASU No. 2016-13, Financial Instruments-Credit Losses (Topic 326): Measurement of Credit Losses on Financial Instruments (ASU No. 2016-13), which requires that expected credit losses relating to financial assets measured on an amortized cost basis and available-for-sale debt securities be recorded through an allowance for credit losses. ASU No. 2016-13 limits the amount of credit losses to be recognized for available-for-sale debt securities to the amount by which carrying value exceeds fair value and requires the reversal of previously recognized credit losses if fair value increases. On April 25, 2019, the FASB issued ASU No. 2019-04, Codification Improvements (ASU No. 2019-04), which clarifies certain aspects of accounting for credit losses. On May 15, 2019, the FASB issued ASU No. 2019-05, Financial Instruments-Credit Losses (Topic 326): Targeted Transition Relief (ASU No. 2019-05), which allows entities to elect the fair value option on certain financial instruments. The new standard became effective for us on January 1, 2020 and was applied prospectively. As a result of the adoption of these standards, we made changes to our processes for the assessment of the adequacy of our allowance for credit losses on certain types of financial instruments, including accounts receivable. The adoption of ASU No. 2016-13, ASU No. 2019-04, and ASU No. 2019-05 did not have a material impact on the consolidated financial statements, related disclosures, andor results of operations.
Cloud Computing: On August 29, 2018, the FASB issued ASU No. 2018-15, Customer's Accounting for Fees Paid in a Cloud Computing Arrangement(ASU No. 2018-15), which helps entities evaluate the accounting for fees paid by a customer in a cloud computing arrangement (CCA) by providing guidance for determining when an arrangement includes a software license and when an arrangement is solely a hosted CCA service. The Company adopted this guidance prospectively beginning on January 1, 2020. Upon adoption, fees paid in a CCA will be evaluated for capitalization as a prepaid asset and expensed within the results of operations in the same financial statement line item as software license fees instead of depreciation and amortization expense. The adoption of this ASU No. 2018-15 did not have a material impact on the consolidated financial statements, related disclosures, andor results of operations.
Disclosure Framework - Changes to the Disclosure Requirements for Fair Value Measurement: On August 28, 2018, the FASB issued ASU No. 2018-13, Fair Value Measurement (Topic(Topic 820): Disclosure Framework - Changes to the Disclosure Requirements for Fair Value Measurement (ASU No. 2018-13), which eliminates, adds, and modifies certain disclosure requirements around items such as transfers between Level 1 and 2, policy of timing of transfers, and valuation process for Level 3. The new standard became effective for us on January 1, 2020. As we only have Level 1 investments, the adoption of ASU No. 2018-13 had no impact on our consolidated financial statements and related disclosures.
Recently issued accounting pronouncements not yet adopted
Income Taxes: On December 18, 2019, the FASB issued ASU No. 2019-12, Simplifying the Accounting for Income Taxes(ASU No. 2019-12), which is intended to simplify the accounting for income taxes by removing certain exceptions to the general principles of ASC 740, Income Taxes, and providing for simplification in several other areas. The new standard is effective for us on January 1, 2021. Early adoption is permitted. We have not decided onwhether to adopt early adoption and are evaluating the effect that ASU No. 2019-12 may have on our consolidated financial statements, related disclosures, and results of operations.
Reference Rate Reform: On March 12, 2020, the FASB issued ASU No. 2020-04: Facilitation of the Effects of Reference Rate Reform on Financial Reporting (Topic 848) (ASU No. 2020-04), which provides temporary optional expedients and exceptions for applying generally accepted accounting principles to contract modifications resulting from reference rate reform initiatives. The intention of the standard is to ease the potential accounting and financial reporting burden associated with transitioning away from the expiring London Interbank Offered Rate (LIBOR), and other interbank offered rates, to alternative benchmark rates. This guidance is temporary and only in effect during the reference rate transition period through December 31, 2022. We are evaluating the effect that ASU No. 2020-04 may have on our consolidated financial statements, related disclosures, and results of operations.
3. Credit Arrangements
Debt
The following table summarizes our total debt and long-term debt as of March 31,September 30, 2020 and December 31, 2019.
| | | | | | | | | | | | | | |
(in millions) | | As of September 30, 2020 | | As of December 31, 2019 |
Term Facility, net of unamortized debt issuance costs of $1.0 million and $1.3 million | | $ | 434.9 | | | $ | 443.1 | |
Revolving Credit Facility | | 50.0 | | | 70.0 | |
| | | | |
Total debt | | $ | 484.9 | | | $ | 513.1 | |
Less: Current portion of long-term debt, net of unamortized debt issuance costs of $0.3 million and $0.3 million | | 11.0 | | | 11.0 | |
| | | | |
Long-term debt | | $ | 473.9 | | | $ | 502.1 | |
|
| | | | | | | | |
(in millions) | | As of March 31, 2020 | | As of December 31, 2019 |
Term Facility, net of unamortized debt issuance costs of $1.2 million and $1.3 million | | $ | 440.4 |
| | $ | 443.1 |
|
Revolving Credit Facility | | 90.0 |
| | 70.0 |
|
Total debt | | $ | 530.4 |
| | $ | 513.1 |
|
Less: Current portion of long-term debt, net of unamortized debt issuance costs of $0.3 million and $0.3 million | | 11.0 |
| | 11.0 |
|
Long-term debt | | $ | 519.4 |
| | $ | 502.1 |
|
Credit Agreement
In connection with the acquisition of Ratings Acquisition Corp (DBRS) on July 2, 2019, the Company entered into a new senior credit agreement (the Credit Agreement). The Credit Agreement provides the Company with a five-year multi-currency credit facility with an initial borrowing capacity of up to $750.0 million, including a $300.0 million revolving credit facility (the Revolving Credit Facility) and a term loan facility of $450.0 million (the Term Facility).
The Credit Agreement also provides for the issuance of up to $50.0 million of letters of credit and a $100.0 million sub-limit for a swingline facility under the Revolving Credit Facility. The Credit Agreement will expire on July 2, 2024. As of March 31,September 30, 2020,, our total outstanding debt under the Credit Agreement was $530.4$484.9 million with borrowing availability of $210.0$250.0 million under the Revolving Credit Facility.
The interest rate applicable to any loan under the Credit Agreement is, at our option, either: (i) the applicable London interbank offered rateInterbank Offered Rate (LIBOR) plus an applicable margin for such loans, which ranges between 1.00% and 1.50%, based on our consolidated leverage ratio or (ii) the lender's base rate plus the applicable margin for such loans, which ranges between 0.00% and 0.50%, based on our consolidated leverage ratio.
The proceeds of the Term Facility and initial borrowings under the Revolving Credit Facility were used to finance the acquisition of DBRS. The proceeds of future borrowings under the Revolving Credit Facility may be used for working capital, capital expenditures or any other lawful corporate purpose.
The portions of deferred debt issuance costs related to the Revolving Credit Facility are included in other current and other non-current assets, and the portion of deferred debt issuance costs related to the Term Facility is reported as a reduction to the carrying amount of the Term Facility. Amortization of debt issuance costs related to the Revolving Credit Facility are amortized on a straight-line to interest expense over the term of the Credit Agreement. Amortization of debt issuance costs related to the Term Facility are amortized to interest expense using the effective interest method over the term of the Credit Agreement.
364-Day Revolving Credit Facility
On June 30, 2020, we entered into a 364-day revolving credit facility (364-Day Revolving Credit Facility) providing for borrowings in an aggregate principal amount of up to $50.0 million. The proceeds of such borrowings may be used for working capital, capital expenditures, and any other lawful corporate purpose. As of September 30, 2020, no borrowings were outstanding.
Compliance with Covenants
The Credit Agreement containsand the 364-Day Revolving Credit Facility contain identical financial covenants under which we: (i) may not exceed a maximum consolidated leverage ratio of 3.50 to 1.00 (or 3.75 to 1.00 for the four fiscal quarters following any material acquisition (as defined in the Credit Agreement))Agreement and 364-Day Revolving Credit Facility) and (ii) are required to maintain a minimum consolidated interest coverage ratio of not less than 3.00 to 1.00. We were in compliance with thethese financial covenants as of March 31,September 30, 2020 and December 31, 2019.
4. Acquisitions, Goodwill, and Other Intangible Assets
2020 Acquisitions
On January 31, 2020, we acquired Hueler Analytics' Stable Value Fund Comparative Universe Data and Stable Value Index (Hueler Analytics). We began consolidating the financial results of Hueler Analytics in our consolidated financial statements on January 31, 2020.
On April 3, 2020, we acquired PlanPlus Global, a financial-planning, risk-profiling, and portfolio tracking software firm. The acquisition expands our financial-planning capabilities for advisors. We began consolidating the financial results of PlanPlus Global in our consolidated financial statements on April 3, 2020.
Increased Ownership Interest in Sustainalytics Holding B.V. (Sustainalytics)
On July 2, 2020, we completed the acquisition of the remaining 60% interest in Sustainalytics, a globally recognized leader in environmental, social, and governance (ESG) ratings and research, for an initial cash payment of $61.2 million. The acquisition was accounted for as a business combination with July 2, 2020 as the date of acquisition, and the Company was determined to be the acquirer. Accordingly, we began consolidating the financial results of Sustainalytics in our consolidated financial statements on July 2, 2020. We previously held an approximately 40% ownership interest in Sustainalytics, which had an estimated fair value of $75.4 million at the date of the acquisition and a book value of $24.5 million immediately prior to the acquisition, and resulted in the recording of a holding gain of $50.9 million.
The transaction has been accounted for as a business combination using the acquisition method of accounting, which requires that assets acquired and liabilities assumed be recognized at their fair values as of the acquisition date. The values assigned to the assets acquired and liabilities assumed are based on preliminary estimates of fair value available as of July 2, 2020, and may be adjusted during the measurement period of up to 12 months from the acquisition date as further information becomes available. Any changes in the fair values of the assets acquired and liabilities assumed during the measurement period may result in adjustments to goodwill. Subsequent measurement changes for certain contingent liabilities will generally be recognized in the Company’s future earnings.
Consideration related to the acquisition consists of an initial cash payment of $61.2 million and contingent payments with an acquisition date fair value of $75.2 million, a portion of which is treated as additional purchase consideration and the remainder, which is sometimes referred to as an earn-out, but accounted for and described as compensation expense for purpose of the following discussion and disclosure. The acquisition date fair values of the additional purchase consideration and compensation are $47.4 million and $27.8 million, respectively. The contingent payments are due on the first and second anniversaries of the acquisition date, and each payment is determined based on a multiple of Sustainalytics' revenues for the years ended December 31, 2020 and 2021, respectively, which are also the measurement periods for determining the final payments. We used a Monte Carlo simulation to arrive at the estimated fair values of the contingent payments at the acquisition date. At subsequent balance sheet dates, the additional purchase consideration, including contingent payments, will continue to be measured at fair value and is classified as "Contingent consideration liabilities" and "Other long-term liabilities" on our condensed Consolidated Balance Sheet as of September 30, 2020. The compensation will be measured based on probability weighted future benefits expected to be paid, and is reflected in "Current liabilities - Accrued compensation" and "Accrued Compensation" on our Condensed Consolidated Balance Sheet as of September 30, 2020.
The book value of our 40% ownership interest immediately prior to the acquisition date was $24.5 million, and we recorded a $50.9 million non-cash holding gain for the difference between the fair value and the book value of our previously-held equity interest. The acquisition of the additional 60% interest was considered an acquisition achieved in stages and resulted in the remeasurement of the previously-held equity interest to fair value. The Company determined the fair value of the previously-held equity interest using a discounted cash flow analysis (an income approach) based on projected cash flows for Sustainalytics to derive total purchase consideration, which was divided by fully diluted outstanding shares to determine the fair value per share. The fair value per share was then applied to the shares of Sustainalytics held by the Company to derive the acquisition date fair value of the previously-held equity interest.The gain is classified as "Holding gain on previously-held equity interest" in our Condensed Consolidated Statement of Income for the three and nine months ended September 30, 2020.
As of September 30, 2020, we completed our initial determination of the fair values of the acquired, identifiable assets and liabilities based on the information available. There are various areas that are not yet finalized due to information that may become available subsequently, which may result in changes in the values assigned to various assets and liabilities, including, but not limited to, assumed current and deferred tax assets and liabilities. If additional information related to the acquisition date fair value determinations becomes available within 12 months of the acquisition date, there may be adjustments to these initial fair value measurements.
The following table summarizes our allocation of the estimated fair values of the assets acquired and liabilities assumed at the acquisition date:
| | | | | | | | |
| | (in millions) |
Fair value of consideration transferred | | $ | 108.6 | |
Fair value of the previously-held equity interest | | 75.4 | |
| | |
Cash and cash equivalents | | $ | 9.8 | |
Accounts receivable | | 6.2 | |
Intangible assets, net | | 79.5 | |
Operating lease assets | | 5.2 | |
Other current and non-current assets | | 7.6 | |
Deferred revenue | | (21.2) | |
Operating lease liability | | (5.2) | |
Deferred tax liability, net | | (17.4) | |
Other current and non-current liabilities | | (15.6) | |
Total fair value of net assets acquired | | $ | 48.9 | |
| | |
Goodwill | | $ | 135.1 | |
Accounts receivable acquired were recorded at gross contractual amounts receivable, which approximates fair value. We expect to collect substantially all of the gross contractual amounts receivable within a reasonable period of time after the acquisition date.
The preliminary allocation of the estimated fair values of the assets acquired and liabilities assumed includes $79.5 million of acquired intangible assets, as follows:
| | | | | | | | |
| (in millions) | Weighted average useful life (years) |
Customer-related assets | $ | 22.9 | | 20 |
Technology-based assets | 46.7 | | 10 |
Intellectual property | 9.9 | | 10 |
Total intangible assets | $ | 79.5 | | |
Goodwill of $135.1 million represents the excess over the fair value of the net tangible and intangible assets acquired. Goodwill is not deductible for income tax purposes.
We recognized a preliminary net deferred tax liability of $17.4 million primarily because the amortization expense related to certain intangible assets is not deductible for income tax purposes.
2019 Acquisitions
During the firstsecond quarter of 2020, we did not record significant adjustments tofinalized the purchase price allocation related to our acquisition of DBRS and did not record any significant adjustments compared with the preliminary estimates disclosed in the Notes ofto the Audited Consolidated Financial Statements included in our Annual Report. The values assigned to various assets and liabilities in the preliminary purchase price allocation are subject to change as a result of information that may become available in the future.
As of March 31, 2020, the primary areas of the preliminary purchase price allocation that are not yet finalized include current and deferred tax assets and liabilities.
The following unaudited pro forma information presents a summary of our Condensed Consolidated Statements of Income for the year ended March 31, 2019 as if we had completed the acquisition as of January 1, 2019.
This unaudited pro forma information is presented for illustrative purposes and is not intended to represent or be indicative of the actual results of operations or expected synergies of DBRS Morningstar that would have been achieved had the acquisition occurred at the beginning of the earliest period presented, nor is it intended to represent or be indicative of future results of operations.
In calculating the pro forma information below, we included an estimate of amortization expense related to the intangible assets acquired, depreciation expense due to changes in estimated remaining useful lives of long-lived assets, and reduction in revenue as a result of the fair value adjustments to deferred revenue as well as the related income tax impacts.
|
| | | | |
Unaudited Pro Forma Financial Information | | Three months ended |
(in millions, except for per share amount) | | March 31, 2019 |
Revenue | | $ | 297.3 |
|
Operating income | | 49.4 |
|
Net income | | 28.6 |
|
| | |
Basic net income per share | | $ | 0.67 |
|
Diluted net income per share | | $ | 0.66 |
|
Goodwill
The following table shows the changes in our goodwill balances from December 31, 2019 to March 31,September 30, 2020:
|
| | | | |
| | (in millions) |
Balance as of December 31, 2019 | | $ | 1,039.1 |
|
Foreign currency translation | | (25.9 | ) |
Balance as of March 31, 2020 | | $ | 1,013.2 |
|
| | | | | | | | |
| | (in millions) |
Balance as of December 31, 2019 | | $ | 1,039.1 | |
Acquisition of Sustainalytics | | 135.1 | |
Other | | 3.9 | |
Balance as of September 30, 2020 | | $ | 1,178.1 | |
We did not record any goodwill impairment losses in the first threenine months of 2020 and 2019. We perform our annual impairment reviews in the fourth quarter or when impairment indicators and triggering events are identified.
Intangible Assets
The following table summarizes our intangible assets:
|
| | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | As of March 31, 2020 | | As of December 31, 2019 |
(in millions) | | Gross | | Accumulated Amortization | | Net | | Weighted Average Useful Life (years) | | Gross | | Accumulated Amortization | | Net | | Weighted Average Useful Life (years) |
Customer-related assets | | 362.0 |
| | (134.3 | ) | | 227.7 |
| | 11 | | 377.9 |
| | (130.3 | ) | | 247.6 |
| | 11 |
Technology-based assets | | 164.4 |
| | (115.6 | ) | | 48.8 |
| | 7 | | 163.7 |
| | (112.0 | ) | | 51.7 |
| | 7 |
Intellectual property & other | | 65.6 |
| | (35.9 | ) | | 29.7 |
| | 8 | | 69.3 |
| | (35.2 | ) | | 34.1 |
| | 8 |
Total intangible assets | | $ | 592.0 |
| | $ | (285.8 | ) | | $ | 306.2 |
| | 9 | | $ | 610.9 |
| | $ | (277.5 | ) | | $ | 333.4 |
| | 10 |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | As of September 30, 2020 | | As of December 31, 2019 |
(in millions) | | Gross | | Accumulated Amortization | | Net | | Weighted Average Useful Life (years) | | Gross | | Accumulated Amortization | | Net | | Weighted Average Useful Life (years) |
Customer-related assets | | $ | 402.9 | | | $ | (152.2) | | | $ | 250.7 | | | 11 | | $ | 377.9 | | | $ | (130.3) | | | $ | 247.6 | | | 11 |
Technology-based assets | | 219.7 | | | (127.9) | | | 91.8 | | | 7 | | 163.7 | | | (112.0) | | | 51.7 | | | 7 |
Intellectual property & other | | 81.1 | | | (40.8) | | | 40.3 | | | 8 | | 69.3 | | | (35.2) | | | 34.1 | | | 8 |
| | | | | | | | | | | | | | | | |
Total intangible assets | | $ | 703.7 | | | $ | (320.9) | | | $ | 382.8 | | | 10 | | $ | 610.9 | | | $ | (277.5) | | | $ | 333.4 | | | 10 |
The following table summarizes our amortization expense related to intangible assets:
|
| | | | | | | | |
| | Three months ended March 31, |
(in millions) | | 2020 | | 2019 |
Amortization expense | | $ | 14.0 |
| | $ | 4.9 |
|
| | | | | | | | | | | | | | | | | | | | | | | | | | |
| | Three months ended September 30, | | Nine months ended September 30, |
(in millions) | | 2020 | | 2019 | | 2020 | | 2019 |
Amortization expense | | $ | 15.6 | | | $ | 13.3 | | | $ | 43.3 | | | $ | 23.1 | |
We amortize intangible assets using the straight-line method over their expected economic useful lives.
We expect intangible amortization expense for the remainder of 2020 and subsequent years to be as follows:
|
| | | | |
| | (in millions) |
Remainder of 2020 (from April 1 through December 31) | | $ | 39.0 |
|
2021 | | 49.6 |
|
2022 | | 41.6 |
|
2023 | | 37.8 |
|
2024 | | 32.2 |
|
Thereafter | | 106.0 |
|
Total | | $ | 306.2 |
|
| | | | | | | | |
| | (in millions) |
Remainder of 2020 (from October 1 through December 31) | | $ | 15.7 | |
2021 | | 59.4 | |
2022 | | 51.4 | |
2023 | | 47.7 | |
2024 | | 41.7 | |
Thereafter | | 166.9 | |
Total | | $ | 382.8 | |
Our estimates of future amortization expense for intangible assets may be affected by additional acquisitions, divestitures,divestitures, changes in the estimated average useful lives, impairments,impairments, and foreign currency translation.
5
.
5. Income Per Share
The following table shows how we reconcile our net income and the number of shares used in computing basic and diluted net income per share:
| | | | | | | | | | | | | | | | | | | | | | | | | | |
| | Three months ended September 30, | | Nine months ended September 30, |
(in millions, except share and per share amounts) | | 2020 | | 2019 | | 2020 | | 2019 |
Basic net income per share: | | | | | | | | |
Consolidated net income | | $ | 76.2 | | | $ | 49.1 | | | $ | 148.3 | | | $ | 124.4 | |
| | | | | | | | |
| | | | | | | | |
| | | | | | | | |
| | | | | | | | |
Weighted average common shares outstanding | | 42.9 | | | 42.8 | | | 42.9 | | | 42.7 | |
| | | | | | | | |
Basic net income per share | | $ | 1.78 | | | $ | 1.15 | | | $ | 3.46 | | | $ | 2.91 | |
| | | | | | | | |
Diluted net income per share: | | | | | | | | |
Consolidated net income | | $ | 76.2 | | | $ | 49.1 | | | $ | 148.3 | | | $ | 124.4 | |
| | | | | | | | |
| | | | | | | | |
| | | | | | | | |
| | | | | | | | |
Weighted average common shares outstanding | | 42.9 | | | 42.8 | | | 42.9 | | | 42.7 | |
Net effect of dilutive stock options, restricted stock units, performance share awards, and market stock units | | 0.3 | | | 0.4 | | | 0.3 | | | 0.4 | |
Weighted average common shares outstanding for computing diluted income per share | | 43.2 | | | 43.2 | | | 43.2 | | | 43.1 | |
| | | | | | | | |
Diluted net income per share | | $ | 1.76 | | | $ | 1.14 | | | $ | 3.43 | | | $ | 2.89 | |
|
| | | | | | | | |
| | Three months ended March 31, |
(in millions, except share and per share amounts) | | 2020 | | 2019 |
Basic net income per share: | | |
| | |
|
Consolidated net income | | $ | 23.9 |
| | $ | 33.2 |
|
| | | | |
Weighted average common shares outstanding | | 42.9 |
| | 42.6 |
|
| | | | |
Basic net income per share | | $ | 0.56 |
| | $ | 0.78 |
|
| | | | |
Diluted net income per share: | | | | |
Consolidated net income | | $ | 23.9 |
| | $ | 33.2 |
|
| | | | |
Weighted average common shares outstanding | | 42.9 |
| | 42.6 |
|
Net effect of dilutive stock options, restricted stock units, performance share awards, and market stock units | | 0.4 |
| | 0.4 |
|
Weighted average common shares outstanding for computing diluted income per share | | 43.3 |
| | 43.0 |
|
| | | | |
Diluted net income per share | | $ | 0.55 |
| | $ | 0.77 |
|
During the periods presented, the number of anti-dilutive restricted stock units, performance share awards, or market stock units to excludeexcluded from our calculation of diluted earnings per share was immaterial.
6. Revenue
Disaggregation of Revenue
The following table presents our revenue disaggregated by revenue type. Sales and usage-based taxes are excluded from revenue.
| | | | | | | | | | | | | | | | | | | | | | | | | | |
| | Three months ended September 30, | | Nine months ended September 30, |
(in millions) | | 2020 | | 2019 | | 2020 | | 2019 |
License-based | | $ | 242.9 | | | $ | 204.6 | | | $ | 680.0 | | | $ | 601.0 | |
Asset-based | | 55.4 | | | 54.5 | | | 164.4 | | | 155.9 | |
Transaction-based | | 58.9 | | | 54.7 | | | 164.7 | | | 89.7 | |
Consolidated revenue | | $ | 357.2 | | | $ | 313.8 | | | $ | 1,009.1 | | | $ | 846.6 | |
|
| | | | | | | | |
| | Three months ended March 31, |
(in millions) | | 2020 | | 2019 |
License-based | | $ | 216.0 |
| | $ | 195.5 |
|
Asset-based | | 57.2 |
| | 48.8 |
|
Transaction-based | | 50.8 |
| | 14.6 |
|
Consolidated revenue | | $ | 324.0 |
| | $ | 258.9 |
|
License-based performance obligations are generally satisfied over time as the customer has access to the product or service during the term of the subscription license and the level of service is consistent during the contract period. License-based agreements typically have a term of 12 to 36 months. License-based revenue is generated from the sale ofby Morningstar Data, Morningstar Direct, Morningstar Advisor Workstation, PitchBook, Sustainalytics, and other similar product lines.
Asset-based performance obligations are satisfied over time as the customer receives continuous access to a service for the term. Asset-based arrangements typically have a term of 12 to 36 months. Asset-based fees represent variable consideration and the customer does not make separate purchasing decisions that result in additional performance obligations. Significant changes in the underlying fund assets and significant disruptions in the market are evaluated to determine whether estimates of earned asset-based fees need to be revised for the current quarter. The timing of client asset reporting and the structure of ourcertain contracts resultscan result in a one-quarter lag between market movements and the impact on earned revenue. An estimate of variable consideration is included in the initial transaction price only to the extent it is probable that a significant reversal in the amount of the revenue recognized will not occur. Estimates of asset-based fees are based on the most recently completed quarter and, as a result, it is unlikely a significant reversal of revenue would occur. Asset-based revenue is generated by Investment Management, Workplace Solutions, and Morningstar Indexes.
Transaction-based performance obligations are satisfied when the product or service is completed or delivered. Transaction-based revenue is generated by DBRS Morningstar, Internet advertising, and Morningstar-sponsored conferences. DBRS Morningstar revenue includes revenue from surveillance services, which is recognized over time, as the customer has access to the service during the surveillance period.
Contract liabilities
Our contract liabilities represent deferred revenue. We record contract liabilities when cash payments are received or due in advance of our performance, including amounts which are refundable. The contract liabilities balance for the three months ended March 31,as of September 30, 2020 had a net increase of $30.1$44.1 million, primarily driven by cash payments received or payable in advance of satisfying our performance obligations. We recognized $116.8$227.8 million of revenue in the three-monthnine month period ended March 31,September 30, 2020 that was included in the contract liabilities balance as of December 31, 2019.
We expect to recognize revenue related to our contract liabilities for the remainder of 2020 and subsequent years as follows:
| | | | | | | | |
(in millions) | | As of September 30, 2020 |
Remainder of 2020 (from October 1 through December 31) | | $ | 193.8 | |
2021 | | 364.3 | |
2022 | | 114.1 | |
2023 | | 34.4 | |
2024 | | 16.3 | |
Thereafter | | 61.4 | |
Total | | $ | 784.3 | |
|
| | | | |
(in millions) | | As of March 31, 2020 |
Remainder of 2020 (from April 1 through December 31) | | $ | 411.4 |
|
2021 | | 162.0 |
|
2022 | | 64.8 |
|
2023 | | 16.5 |
|
2024 | | 9.7 |
|
Thereafter | | 54.7 |
|
Total | | $ | 719.1 |
|
The aggregate amount of revenue we expect to recognize for the remainder of 2020 and subsequent years is higher than our contract liability balance of $312.4$326.4 million as of March 31,September 30, 2020. The difference represents the value of future obligations for signed contracts wherefor which we have not yet begun to satisfy the performance obligations or have not yet billed the customer.
The table above does not include variable consideration for unsatisfied performance obligations related to certain of our license-based, asset-based, and transaction-based contracts as of March 31,September 30, 2020. We are applying the optional exemption available under ASC Topic 606, as the variable consideration relates to these unsatisfied performance obligations being fulfilled as a series. The performance obligations related to these contracts are expected to be satisfied over the next 12 to 36 months as services are provided to the client. For license-based contracts, the consideration received for services performed is based on the number of future users, which is not known until the services are performed. The variable consideration for this revenue can be affected by the number of user licenses, which cannot be reasonably estimated. For asset-based contracts, the consideration received for services performed is based on future asset values, which are not known until the services are performed. The variable consideration for this revenue can be affected by changes in the underlying value of fund assets due to client redemptions, additional investments, or movements in the market. For transaction-based contracts for Internet advertising, the consideration received for services performed is based on the number of impressions, which is not known until the impressions are created. The variable consideration for this revenue can be affected by the timing and quantity of impressions in any given period and cannot be reasonably estimated.
As of March 31,September 30, 2020, the table above also does not include revenue for unsatisfied performance obligations related to certain of our license-based and transaction-based contracts with durations of one year or less since we are applying the optional exemption under ASC Topic 606. For certain license-based contracts, the remaining performance obligation is expected to be less than one year based on the corresponding subscription terms. For transaction-based contracts, such as new credit rating issuances and Morningstar-sponsored conferences, the related performance obligations are expected to be satisfied within the next 12 months.
Contract Assets
Our contract assets represent accounts receivable, less allowance for credit losses, and deferred commissions. We did not record any impairment losses on receivables or deferred commissions in the first threenine months of 2020.
The following table summarizes our contract assets balance:
| | | | | | | | | | | | | | |
(in millions) | | As of September 30, 2020 | | As of December 31, 2019 |
Accounts receivable, less allowance for credit losses | | $ | 186.9 | | | $ | 188.5 | |
Deferred commissions | | 33.8 | | | 30.4 | |
Total contract assets | | $ | 220.7 | | | $ | 218.9 | |
|
| | | | | | | | |
(in millions) | | As of March 31, 2020 | | As of December 31, 2019 |
Accounts receivable, less allowance for credit losses | | $ | 184.7 |
| | $ | 188.5 |
|
Deferred commissions | | 30.7 |
| | 30.4 |
|
Total contract assets | | $ | 215.4 |
| | $ | 218.9 |
|
7
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7. Segment and Geographical Area Information
Segment Information
We report our results in a single reportable segment, which reflects how our chief operating decision maker allocates resources considering our core data which is managed centrally on a company-wide basis, and evaluates our financial results. Because we have a single reportable segment, all required financial segment information can be found directly in the Condensed Consolidated Financial Statements. The accounting policies for our reportable segment are the same as those described in Note 2 of the Notes to the Audited Consolidated Financial Statements included in our Annual Report. We evaluate the performance of our reporting segment based on revenue and operating income.
Geographical Area Information
The tables below summarize our revenue and long-lived assets, which includes property, equipment, and capitalized software, net and operating lease assets, by geographical area:
|
| | | | | | | | |
Revenue by geographical area | | | | |
| | Three months ended March 31, |
(in millions) | | 2020 | | 2019 |
United States | | $ | 234.6 |
| | $ | 195.1 |
|
| | | | |
Asia | | 7.6 |
| | 6.3 |
|
Australia | | 10.6 |
| | 9.5 |
|
Canada | | 20.7 |
| | 7.9 |
|
Continental Europe | | 23.0 |
| | 20.4 |
|
United Kingdom | | 26.0 |
| | 18.1 |
|
Other | | 1.5 |
| | 1.6 |
|
Total International | | 89.4 |
| | 63.8 |
|
| | | | |
Consolidated revenue | | $ | 324.0 |
| | $ | 258.9 |
|
| | | | | | | | | | | | | | | | | | | | | | | | | | |
Revenue by geographical area | | | | | | |
| | Three months ended September 30, | | Nine months ended September 30, |
(in millions) | | 2020 | | 2019 | | 2020 | | 2019 |
United States | | $ | 247.8 | | | $ | 225.3 | | | $ | 710.7 | | | $ | 628.4 | |
| | | | | | | | |
Asia | | 8.6 | | | 7.3 | | | 24.5 | | | 20.4 | |
Australia | | 11.9 | | | 9.7 | | | 32.9 | | | 29.2 | |
Canada | | 25.0 | | | 20.7 | | | 74.0 | | | 36.4 | |
Continental Europe | | 32.3 | | | 22.3 | | | 79.2 | | | 63.6 | |
United Kingdom | | 30.0 | | | 27.0 | | | 83.0 | | | 63.9 | |
Other | | 1.6 | | | 1.5 | | | 4.8 | | | 4.7 | |
Total International | | 109.4 | | | 88.5 | | | 298.4 | | | 218.2 | |
| | | | | | | | |
Consolidated revenue | | $ | 357.2 | | | $ | 313.8 | | | $ | 1,009.1 | | | $ | 846.6 | |
|
| | | | | | | | |
Property, equipment, and capitalized software, net by geographical area | | | | |
| | | | |
(in millions) | | As of March 31, 2020 | | As of December 31, 2019 |
United States | | $ | 127.7 |
| | $ | 131.2 |
|
| | | | |
Asia | | 6.4 |
| | 6.6 |
|
Australia | | 3.5 |
| | 4.2 |
|
Canada | | 2.5 |
| | 2.9 |
|
Continental Europe | | 2.4 |
| | 2.3 |
|
United Kingdom | | 6.6 |
| | 6.9 |
|
Other | | 0.4 |
| | 0.6 |
|
Total International | | 21.8 |
| | 23.5 |
|
| | | | |
Consolidated property, equipment, and capitalized software, net | | $ | 149.5 |
| | $ | 154.7 |
|
|
| | | | | | | | |
Operating lease assets by geographical area | | | | |
| | | | |
(in millions) | | As of March 31, 2020 | | As of December 31, 2019 |
United States | | $ | 83.3 |
| | $ | 86.4 |
|
| | | | |
Asia | | 18.9 |
| | 20.2 |
|
Australia | | 5.6 |
| | 5.8 |
|
Canada | | 7.3 |
| | 7.5 |
|
Continental Europe | | 14.9 |
| | 6.3 |
|
United Kingdom | | 16.3 |
| | 17.9 |
|
Other | | 0.7 |
| | 0.7 |
|
Total International | | 63.7 |
| | 58.4 |
|
| | | | |
Consolidated operating lease assets | | $ | 147.0 |
| | $ | 144.8 |
|
| | | | | | | | | | | | | | |
Property, equipment, and capitalized software, net by geographical area | | |
| | | | |
(in millions) | | As of September 30, 2020 | | As of December 31, 2019 |
United States | | $ | 125.9 | | | $ | 131.2 | |
| | | | |
Asia | | 8.2 | | | 6.6 | |
Australia | | 3.6 | | | 4.2 | |
Canada | | 2.5 | | | 2.9 | |
Continental Europe | | 3.1 | | | 2.3 | |
United Kingdom | | 7.1 | | | 6.9 | |
Other | | 0.5 | | | 0.6 | |
Total International | | 25.0 | | | 23.5 | |
| | | | |
Consolidated property, equipment, and capitalized software, net | | $ | 150.9 | | | $ | 154.7 | |
| | | | | | | | | | | | | | |
Operating lease assets by geographical area | | | | |
| | | | |
(in millions) | | As of September 30, 2020 | | As of December 31, 2019 |
United States | | $ | 92.9 | | | $ | 86.4 | |
| | | | |
Asia | | 13.7 | | | 20.2 | |
Australia | | 5.3 | | | 5.8 | |
Canada | | 7.9 | | | 7.5 | |
Continental Europe | | 17.9 | | | 6.3 | |
United Kingdom | | 14.1 | | | 17.9 | |
Other | | 0.6 | | | 0.7 | |
Total International | | 59.5 | | | 58.4 | |
| | | | |
Consolidated operating lease assets | | $ | 152.4 | | | $ | 144.8 | |
The long-lived assetassets by geographical area doesdo not include deferred commissions, non-current as the balance is not significant.
8
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8. Fair Value Measurements
As of March 31,September 30, 2020 and December 31, 2019, our investment balances totaled $26.3$26.7 million and $33.4 million, respectively. We classify our investments into three categories: available-for-sale, held-to-maturity, and trading securities. Our investment portfolio consists of stocks, bonds, options, mutual funds, money market funds, or exchange-traded products that replicate the model portfolios and strategies created by Morningstar. These investment accounts may also include exchange-traded products where Morningstar is an index provider. All investments in our investment portfolio have valuations based on quoted prices in active markets for identical assets or liabilities that we have the ability to access, and, therefore, are classified as Level 1 within the fair value hierarchy.
Financial liabilities that are classified as Level 3 within the fair value hierarchy include contingent consideration liabilities of $47.4 million resulting from our acquisition of Sustainalytics that involve potential future payments that are contingent upon the achievement of certain revenue metrics. Additional purchase consideration, which is contingent, is recognized at fair value at the date of acquisition using a Monte Carlo simulation and is remeasured each reporting period until the contingency is resolved with the change in fair value recorded in current period earnings.
9. Leases
We lease office space and certain equipment under various operating and finance leases, with most of our lease portfolio consisting of operating leases for office space.
We determine whether an arrangement is, or includes, an embedded lease at contract inception. Operating lease assets and lease liabilities are recognized at the commencement date and initially measured using the present value of lease payments over the defined lease term. Lease expense is recognized on a straight-line basis over the lease term. For finance leases, we also recognize a finance lease asset and finance lease liability at inception, with lease expense recognized as interest expense and amortization.
A contract is or contains an embedded lease if the contract meets all the below criteria:
There•there is an identified asset;
We•we obtain substantially all the economic benefits of the asset; and
We•we have the right to direct the use of the asset.
For initial measurement of the present value of lease payments and for subsequent measurement of lease modifications, we are required to use the rate implicit in the lease.lease if available. However, as most of our leases do not provide an implicit rate, we use our incremental borrowing rate, which is a collateralized rate. To apply the incremental borrowing rate, we used a portfolio approach and grouped leases based on similar lease terms in a manner whereby we reasonably expect that the application does not differ materially from a lease-by-lease approach.
Our leases have remaining lease terms of approximately 1 year to 1413 years, which may include the option to extend the lease when it is reasonably certain we will exercise that option. We do not have lease agreements with residual value guarantees, sale leaseback terms, or material restrictive covenants.
Leases with an initial term of 12 months or less are not recognized on the balance sheet. We recognize lease expense for these leases on a straight-line basis over the lease term.
The following table summarizes our operating lease assets and lease liabilities:
|
| | | | | | | | | | |
Leases (in millions) | | Classification on the Balance Sheet | | As of March 31, 2020 | | As of December 31, 2019 |
Assets | | | | | | |
Operating | | Operating Lease Assets | | $ | 147.0 |
| | $ | 144.8 |
|
| | | | | | |
Liabilities | | | | | | |
Operating | | Operating lease liabilities, current | | $ | 35.9 |
| | $ | 35.8 |
|
Operating | | Operating lease liabilities, non-current | | 136.0 |
| | 138.7 |
|
Total lease liabilities | | | | $ | 171.9 |
| | $ | 174.5 |
|
| | | | | | | | | | | | | | | | | | | | | | | |
Leases (in millions) | | Classification on the Balance Sheet | | As of September 30, 2020 | | As of December 31, 2019 | | | |
Assets | | | | | | | | | |
Operating | | Operating Lease Assets | | $ | 152.4 | | | $ | 144.8 | | | | |
| | | | | | | | | |
Liabilities | | | | | | | | | |
Operating | | Operating lease liabilities, current | | $ | 38.6 | | | $ | 35.8 | | | | |
Operating | | Operating lease liabilities, non-current | | 141.3 | | | 138.7 | | | | |
Total lease liabilities | | | | $ | 179.9 | | | $ | 174.5 | | | | |
Our operating lease expense for the three months ended March 31,September 30, 2020 was $9.7$11.1 million, compared with $7.9$9.1 million for the same period in the prior year.three months ended September 30, 2019. Charges related to our operating leases that are variable and, therefore, not included in the measurement of the lease liabilities, were $3.4$4.0 million for the three months ended March 31,September 30, 2020, and $2.6compared with $3.7 million for the three months ended March 31,September 30, 2019. We made lease payments of $10.5$11.0 million during the three months ended March 31,September 30, 2020, compared with $6.2$7.0 million of payments during the same periodthree months ended September 30, 2019.
Our operating lease expense for the nine months ended September 30, 2020 was $30.9 million, compared with $24.9 million for the nine months ended September 30, 2019. Charges related to our operating leases that are variable and, therefore, not included in the measurement of the lease liabilities, were $10.9 million for the nine months ended September 30, 2020, compared with $9.4 million for the nine months ended September 30, 2019. We made lease payments of $30.5 million during the nine months ended September 30, 2020, compared with $21.4 million during the nine months ended September 30, 2019.
The following table shows our minimum future lease commitments due in each of the next five years and thereafter for operating leases:
|
| | | | |
Minimum Future Lease Commitments (in millions) | | Operating Leases |
Remainder of 2020 (April 1 through December 31) | | $ | 31.4 |
|
2021 | | 39.2 |
|
2022 | | 26.1 |
|
2023 | | 23.6 |
|
2024 | | 18.3 |
|
Thereafter | | 60.8 |
|
Total lease payments | | 199.4 |
|
Adjustment for discount to present value | | 27.5 |
|
Total | | $ | 171.9 |
|
| | | | | | | | |
Minimum Future Lease Commitments (in millions) | | Operating Leases |
Remainder of 2020 (October 1 through December 31) | | $ | 11.5 | |
2021 | | 43.6 | |
2022 | | 30.0 | |
2023 | | 27.2 | |
2024 | | 21.5 | |
Thereafter | | 75.3 | |
Total minimum lease commitments | | 209.1 | |
Adjustment for discount to present value | | 29.2 | |
Total | | $ | 179.9 | |
The following table summarizes the weighted-average lease terms and weighted-average discount rates for our operating leases:
| | | | | | | | | | | |
| | As of September 30, 2020 | | | |
Weighted-average remaining lease term (in years) | | 6.79 | | | |
| | | |
| | As of March 31, 2020 |
Weighted-average remaining lease term (in years) | | 6.7 |
|
| | |
Weighted-average discount rate | | 4.24.25 | % | | | |
10
.
10. Stock-Based Compensation
Stock-Based Compensation Plans
All our employees and our non-employee directors are eligible for awards under the Morningstar 2011 Stock Incentive Plan, which provides for a variety of stock-based awards, including stock options, restricted stock units, performance share awards, market stock units, and restricted stock.
The following table summarizes the stock-based compensation expense included in each of our operating expense categories:
| | | | | | | | | | | | | | | | | | | | | | | | | | |
| | Three months ended September 30, | | Nine months ended September 30, |
(in millions) | | 2020 | | 2019 | | 2020 | | 2019 |
Cost of revenue | | $ | 4.1 | | | $ | 3.2 | | | $ | 10.2 | | | $ | 10.0 | |
Sales and marketing | | 1.3 | | | 1.4 | | | 3.5 | | | 4.2 | |
General and administrative | | 4.5 | | | 6.2 | | | 13.8 | | | 19.1 | |
Total stock-based compensation expense | | $ | 9.9 | | | $ | 10.8 | | | $ | 27.5 | | | $ | 33.3 | |
|
| | | | | | | | |
| | Three months ended March 31, |
(in millions) | | 2020 | | 2019 |
Cost of revenue | | $ | 2.4 |
| | $ | 3.1 |
|
Sales and marketing | | 1.0 |
| | 1.4 |
|
General and administrative | | 3.9 |
| | 5.5 |
|
Total stock-based compensation expense | | $ | 7.3 |
| | $ | 10.0 |
|
As of March 31,September 30, 2020,, the total unrecognized stock-based compensation cost related to outstanding restricted stock units, performance share awards, and market stock units expected to vest was $48.8$54.0 million, which we expect to recognize over a weighted average period of 2615 months.
11
.
11. Income Taxes
Effective Tax Rate
The following table shows our effective tax rate for the three and nine months ended March 31,September 30, 2020 and September 30, 2019:
March 31, 2019:
|
| | | | | | | | |
| | Three months ended March 31, |
(in millions) | | 2020 | | 2019 |
Income before income taxes and equity in net loss of unconsolidated entities | | $ | 33.2 |
| | $ | 46.2 |
|
Equity in net loss of unconsolidated entities | | (0.8 | ) | | (1.5 | ) |
Total | | $ | 32.4 |
| | $ | 44.7 |
|
Income tax expense | | $ | 8.5 |
| | $ | 11.5 |
|
Effective tax rate | | 26.2 | % | | 25.7 | % |
| | | | | | | | | | | | | | | | | | | | | | | | | | |
| | Three months ended September 30, | | Nine months ended September 30, |
(in millions) | | 2020 | | 2019 | | 2020 | | 2019 |
Income before income taxes and equity in net income (loss) of unconsolidated entities | | $ | 92.5 | | | $ | 63.5 | | | $ | 189.6 | | | $ | 162.8 | |
Equity in net income (loss) of unconsolidated entities | | 0.6 | | | (1.1) | | | (0.7) | | | (1.9) | |
| | | | | | | | |
Total | | $ | 93.1 | | | $ | 62.4 | | | $ | 188.9 | | | $ | 160.9 | |
Income tax expense | | $ | 16.9 | | | $ | 13.3 | | | $ | 40.6 | | | $ | 36.5 | |
Effective tax rate | | 18.2 | % | | 21.3 | % | | 21.5 | % | | 22.7 | % |
Our effective tax rate in the third quarter and first quarternine months of 2020 was 26.2%18.2% and 21.5%, an increaserespectively, reflecting respective decreases of 0.53.1 and 1.2 percentage points, compared with the same periodperiods in the prior year. The decreases are primarily attributable to the holding gain recorded in connection with our purchase of the remaining ownership interest in Sustainalytics on July 2, 2020, which is not taxable.
Unrecognized Tax Benefits
The table below provides information concerning our gross unrecognized tax benefits as of March 31,September 30, 2020 and December 31, 2019,, as well as the effect these gross unrecognized tax benefits would have on our income tax expense, if they were recognized.
|
| | | | | | | | |
(in millions) | | As of March 31, 2020 | | As of December 31, 2019 |
Gross unrecognized tax benefits | | $ | 12.9 |
| | $ | 12.6 |
|
Gross unrecognized tax benefits that would affect income tax expense | | $ | 12.9 |
| | $ | 12.6 |
|
Decrease in income tax expense upon recognition of gross unrecognized tax benefits | | $ | 12.7 |
| | $ | 12.4 |
|
| | | | | | | | | | | | | | |
(in millions) | | As of September 30, 2020 | | As of December 31, 2019 |
Gross unrecognized tax benefits | | $ | 11.7 | | | $ | 12.6 | |
Gross unrecognized tax benefits that would affect income tax expense | | $ | 11.7 | | | $ | 12.6 | |
Decrease in income tax expense upon recognition of gross unrecognized tax benefits | | $ | 11.5 | | | $ | 12.4 | |
Our Unaudited Condensed Consolidated Balance Sheets include the following liabilities for unrecognized tax benefits. These amounts include interest and penalties, less any associated tax benefits.
|
| | | | | | | | |
Liabilities for Unrecognized Tax Benefits (in millions) | | As of March 31, 2020 | | As of December 31, 2019 |
Current liability | | $ | 11.0 |
| | $ | 10.8 |
|
Non-current liability | | 3.2 |
| | 3.0 |
|
Total liability for unrecognized tax benefits | | $ | 14.2 |
| | $ | 13.8 |
|
| | | | | | | | | | | | | | |
Liabilities for Unrecognized Tax Benefits (in millions) | | As of September 30, 2020 | | As of December 31, 2019 |
Current liability | | $ | 8.0 | | | $ | 10.8 | |
Non-current liability | | 4.6 | | | 3.0 | |
Total liability for unrecognized tax benefits | | $ | 12.6 | | | $ | 13.8 | |
Because we conduct business globally, we file income tax returns in U.S. federal, state, local, and foreign jurisdictions. We are currently under audit by federal, state, and local tax authorities in the U.S. as well as tax authorities in certain non-U.S. jurisdictions. It is likely that the examination phase of some of these federal, state, local, and non-U.S. audits will conclude in 2020. It is not possible to estimate the effect of current audits on previously recorded unrecognized tax benefits.
Approximately 70%66% of our cash, cash equivalents, and investments balance as of March 31,September 30, 2020 was held by our operations outside of the United States. We generally consider our U.S. directly owneddirectly-owned foreign subsidiary earnings to be permanently reinvested. We believe that our cash balances and investments in the United States, along with cash generated from our U.S. operations, will be sufficient to meet our U.S. operating and cash needs for the foreseeable future, without requiring us to repatriate earnings from these foreign subsidiaries.
Certain of our non-U.S. operations have incurred net operating losses (NOLs), which may become deductible to the extent these operations become profitable. For each of our operations, we evaluate whether it is more likely than not that the tax benefits related to NOLs will be realized. As part of this evaluation, we consider evidence such as tax planning strategies, historical operating results, forecasted taxable income, and recent financial performance. In the year that certain non-U.S. operations record a loss, we do not recognize a corresponding tax benefit, which increases our effective tax rate. Upon determining that it is more likely than not that the NOLs will be realized, we reduce the tax valuation allowances related to these NOLs, which results in a reduction to our income tax expense and our effective tax rate in thethat period.
12. Contingencies
12. Contingencies
We record accrued liabilities for litigation, regulatory, and other business matters when those matters represent loss contingencies that are both probable and estimable. In these cases, there may be an exposure to loss in excess of any amounts accrued. When a loss contingency is not both probable and estimable, we do not establish an accrued liability. As litigation, regulatory, or other business matters develop, we evaluate on an ongoing basis whether such matters present a loss contingency that is probable and estimable on an ongoing basis.estimable.
Data Audits and Reviews
In our global data business, we include in our products, or directly redistribute to our customers, data, and information licensed from third-party vendors. Our compliance with the terms of these licenses is reviewed internally and is also subject to audit by the third-party vendors. We areAt a given time, we may be undergoing several such internal reviews and third-party vendor audits and the results and findings of which may indicate that we may be required to make a payment for prior data usage. Due to a lack of available information and data, as well as potential variations of any audit or internal review findings, we generally are not able to reasonably estimate a possible loss, or range of losses for somethese matters. While we cannot predict the outcome of these processes, we do not believe the results of any audits or reviewsanticipate they will have a material adverse effect on our business, operating results, or financial position.
Credit Ratings MattersMatter
In November 2019, Morningstar Credit Ratings, LLC (“MCR”) reached an agreement in principle withApril 2020, the staff of the SEC provided an oral Wells Notice to settle an investigation relating to certain sales and marketing practices at MCR's asset-backed securities group in 2015 and 2016. Assuming it is approved by the full Commission, the proposed settlement would involve a censure, a cease-and-desist order, certain undertakings by MCR, and a civil money penalty of $3.5 million, which was accrued as of December 31, 2019. The settlement remains subject to approval by the SEC.
In April 2020, in an unrelated matter, the staff of the SEC notified MCR that they had reached a preliminary decision to recommendMorningstar Credit Ratings, LLC (MCR) recommending that the Commission authorize an enforcement action related to MCR’s former commercial mortgage-backed securities ratings methodology. MCR intends to makesubmitted a written submissionresponse regarding this notice to the staff respondingin May 2020. In July 2020, the staff provided a written confirmation of the Wells Notice. In August 2020, MCR met with the staff of the SEC to its recommendation.discuss MCR’s response and in October 2020, MCR submitted a supplemental written response to the staff. At this time, we do not believe any resultoutcome in this matter will have a material adverse effect on our business, operating results, or financial position.
Other Matters
We are involved from time to time in regulatory investigations and legal proceedings that arise in the normal course of our business. While it is difficult to predict the outcome of any particular investigation or proceeding, we do not believe the result of any of these matters will have a material adverse effect on our business, operating results, or financial position.
13
.
13. Share Repurchase Program
In December 2017, the board of directors approved a share repurchase program that authorizes the Company to repurchase up to $500.0 million in shares of the Company's outstanding common stock effective January 1, 2018. The authorization expires on December 31, 2020. We may repurchase shares from time to time at prevailing market prices on the open market or in private transactions in amounts that we deem appropriate.
AsIn the third quarter of March 31, 2020, we repurchased a total of 421,105122,020 shares for $45.6$19.3 million, of which $1.7 million settled in October 2020. As of September 30, 2020, we repurchased a total of 543,125 shares for $64.9 million under this program, leaving approximately $454.4$435.1 million available for future repurchases.
14. Subsequent Events
AcquisitionPrivate Placement Debt Offering
On October 26, 2020, Morningstar completed the issuance and sale of PlanPlus Global
On April 1, 2020, we completed our previously announced acquisition of PlanPlus Global, a financial-planning and risk-profiling software firm. The acquisition expands our financial-planning capabilities for advisors.
Acquisition of Sustainalytics
On April 21, 2020, we announced it reached an agreement to acquire Sustainalytics, a globally recognized leader in environmental, social, and governance (ESG) ratings and research. The Company currently owns an approximate 40% ownership stake in Sustainalytics, first acquired in 2017, and will purchase the remaining approximate 60% of Sustainalytics shares upon closing of the transaction. The transaction consideration includes a cash payment at closing of approximately EUR 55.0$350.0 million (subject to certain potential adjustments) and additional cash payments in 2021 and 2022 based on a multiple of Sustainalytics’ 2020 and 2021 fiscal year revenues. Based on the upfront consideration, the Company estimates the enterprise value of Sustainalytics to be EUR 170.0 million. The closing of the transaction is subject to customary closing conditions and is expected to occur early in the third quarter of 2020.
Senior Revolving Credit Facility
On April 21, 2020, we entered into a commitment with Bank of America to provide a 364-day senior revolving credit facility in an aggregate principal amount of up2.32% senior notes due October 26, 2030 (the 2.32% Notes), in a private placement exempt from the registration requirements of the Securities Act of 1933, as amended, pursuant to $50.0a Note Purchase Agreement entered into on the same date. The Company expects to use the net proceeds from the offering to reduce a portion of the outstanding indebtedness under the Company’s Credit Agreement and for other corporate purposes. Financial covenants under the 2.32% Notes are generally consistent with the Company's credit facilities. Interest on the Notes will be paid semi-annually on each October 30 and April 30 during the term of the 2.32% Notes and at maturity, with the first interest payment date occurring on April 30, 2021.
MJKK Sale
On October 7, 2020, the Company entered into an underwriting agreement for a secondary distribution through underwriters of 3,850,000 shares of Morningstar Japan K.K. (MJKK) owned by the Company at a price per share of ¥437.9. The share sale closed on October 19, 2020 resulting in net proceeds to the Company, after underwriting discounts and commissions, of $16.0 million, which is expectedresulted in a pre-tax gain of $12.2 million. In connection with this distribution, the Company also entered into a share loan agreement with an underwriter providing for the borrowing by the underwriter in connection with its overallotment option of 1,289,000 MJKK shares for the period from October 19, 2020 to close earlyNovember 10, 2020, which shares will either be returned to the Company or purchased in whole or part by the third quarterunderwriter prior to November 6, 2020.
Sale of Investment in Unconsolidated Entity
On October 8, 2020, the Company sold its approximately 19% ownership interest in an unconsolidated entity for cash proceeds of $14.3 million, including accrued but unpaid dividends on preferred shares, which resulted in a pre-tax gain of $12.6 million.
Dividend Declaration
On October 2, 2020, our borrowing under the new facility will be usedboard of directors approved a regular quarterly dividend of $0.30 per share, or $12.9 million, payable on October 30, 2020 to finance our acquisitionshareholders of Sustainalytics and the proceedsrecord as of future borrowings may be used for working capital, capital expenditures, and any other lawful corporate purpose.
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Item 2. | Management’s Discussion and Analysis of Financial Condition and Results of Operations |
Item 2.Management’s Discussion and Analysis of Financial Condition and Results of Operations
The discussion included in this section, as well as other sections of this Quarterly Report on Form 10-Q (this Quarterly Report), contains forward-looking statements as that term is used in the Private Securities Litigation Reform Act of 1995. These statements are based on our current expectations about future events or future financial performance, including the expected impacts of COVID-19. Forward-looking statements by their nature address matters that are, to different degrees, uncertain, and often contain words such as “may,” “could,” “expect,” “intend,” “plan,” “seek,” “anticipate,” “believe,” “estimate,” “predict,” “potential,” or “continue.” These statements involve known and unknown risks and uncertainties that may cause the events we discuss not to occur or to differ significantly from what we expect. For us, these risks and uncertainties include, among others:
•the impact of the current COVID-19 pandemic;pandemic on our business, financial condition, and results of operations;
•liability for any losses that result from an actual or claimed breach of our fiduciary duties;
•failing to maintain and protect our brand, independence, and reputation;
•liability related to cybersecurity and the protection of confidential information, including personal information about individuals;
•failing to differentiate our products and continuously create innovative, proprietary research tools and financial advisor software;
•inadequacy of our operational risk management and business continuity programs in the event of a material disruptive event;
•failing to respond to technological change, keep pace with new technology developments, or adopt a successful technology strategy;
•compliance failures, regulatory action, or changes in laws applicable to our investment advisory or credit ratings operations;
•volatility in the financial sector, global financial markets, and global economy and its effect on our revenue from asset-based fees and credit ratings business;
•trends in the asset management industry, including the increasing adoption of investment strategies and portfolios relying on passively managed investment vehicles and increased industry consolidation;
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• | •liability relating to the collection or distribution of information and data we collect and produce, or errors included therein; •, or errors included therein; |
an outage of our database, technology-based products and services, or network facilities or the movement of parts of our technology and data infrastructure to the public cloud and other outsourced providers;
•the failure of acquisitions and other investments to be efficiently integrated and produce the results we anticipate;
•the failure to recruit, develop, and retain qualified employees;
•challenges faced by our non-U.S. operations, including the concentration of data and development work at our offshore facilities in China and India; and
•the failure to protect our intellectual property rights or claims of intellectual property infringement against us.
A more complete description of these risks and uncertainties can be found in our other filings with the Securities and Exchange Commission (SEC), including our Annual Report on Form 10-K for the year ended December 31, 2019 (our Annual Report). If any of these risks and uncertainties materialize, our actual future results may vary significantly from what we expected. We do not undertake to update our forward-looking statements as a result of new information or future events.
All dollar and percentage comparisons, which are often accompanied by words such as “increase,” “decrease,” “grew,” “declined,” “was up,” “was down,” “was flat,” or “was similar” refer to a comparison with the same period in the previous year unless otherwise stated.
Understanding our Company
Our Business
Our mission is to empower investor success. The investing ecosystem is complex and navigating it with confidence requires a trusted, independent voice. Our perspective is delivered to institutions, advisors, and individuals with a single-minded purpose: to empower every investor with the conviction that he or she can make better-informed decisions and realize success on his or her own terms.
We deliver insights and experiences to clients that are essential to investing. Proprietary data sets, meaningful analytics, independent research and effective investment strategies are at the core of the powerful digital solutions that investors across client segments rely on. We generate revenue through products and services in three major categories:
•Subscriptions and license agreements, which typically generate recurring revenue;
•Asset-based fees for our investment management business; and
•Transaction-based revenue for products that involve primarily one-time, non-recurring revenue.
COVID-19 Update
We areAs of September 30, 2020, we continue to closely monitoringmonitor the impact of the COVID-19 pandemic on all aspects of our business and in the geographies in which we operate, including how it will impactaffects team members, customers, suppliers, and global markets.
Given the dynamic nature of these circumstances, the fulllong-term impact of the COVID-19 pandemic on our ongoing business, results of operations, and overall future financial performance cannot be reasonably estimated at this time. While the recurring nature of our licensed-based revenue is generally more recurringshowed continued resilience in nature, the uncertaintythird quarter, a prolonged economic downturn caused by the COVID-19 pandemic could lead clients to delayadjust purchasing decisions or product and service implementations, or may cause them to cancel or reduce spending with us. Our asset-based revenue is subject to global market conditions and client investment decisions. Duedecisions, although the structure of certain contracts and timing of client asset reporting may cause certain impacts to certain lagsbe reflected in client reporting in this area, the impact of the market volatility in the first quarter of 2020 on asset values will generally not be realized in our results until future reporting periods.with a lag. Transaction-based revenue primarily includes DBRS Morningstar, which is dependent on overall credit market conditions and debt issuance levels. The recent tighteningGlobal structured finance markets began opening up in late August 2020, which led to a rebound in U.S. and European structured finance issuance in the third quarter of 2020. We also continued to benefit from strong Canadian corporate issuances. Nevertheless, credit market conditions remain sensitive to the overall global credit markets and volatility in interest rates began to have an adverse impact on the volume of new issue ratings toward the end of the first quarter, which could persist into future periods.economic environment.
Our operations also have beencontinue to be affected by a range of external factors related to the COVID-19 pandemic that are not within our control. For example, many jurisdictions imposedcontinue to impose a wide range of restrictions on the physical movement of our employees and vendors to limit the spread of COVID-19. We have taken numerous steps, and will continue to take further actions, in our approach to addressing the COVID-19 pandemic. We implementedcontinue to evolve our business continuity plans and our incident management team is in place to respond to changes in our global environment quickly and effectively. To protect the health and safety of our team members, we successfully transitionedcontinue to conduct business with a large portion of our global workforce toin remote work environments.environments, which has had relatively little impact on the productivity of our employees, including our ability to gather data. Based on the guidelines of local authorities and our own safety standards, we continued to re-open certain offices on a limited capacity basis during the third quarter and will continue to do so to provide flexibility for employees with a focus on social distancing and safety. We are also working closely with our clients to support them as they implement their own contingency plans, helping them access our products and services remotely. There have been minimal interruptions in our ability to provide our products, services, and support to our clients.
The situation surrounding the COVID-19 pandemic remains fluid, and we arecontinue to actively managingmanage our response and assessingassess potential impacts to our financial position and operating results. This includes the continued evaluation and implementation of certain cost control efforts to help us mitigate the impact that reduced revenues may have on our 2020 financial results. We are focusing on maintaining a strong balance sheet and liquidity position. On October 26, 2020, we completed the issuance and sale of $350.0 million aggregate principal amount of 2.32% senior notes due October 26, 2030, in a private placement exempt from the registration requirements of the Securities Act of 1933, as amended. Our cash, cash equivalents, and investments totaled $348.8$377.8 million at the end of the firstthird quarter of 2020 and we had $210.0approximately $300.0 million of availability under our $300.0$350.0 million revolving credit facility.facilities. We remain in compliance with our financial covenants under these facilities.
On March 27, 2020, the Coronavirus Aid, Relief, and Economic Security (“CARES”)(CARES) Act was signed into law. The CARES Act provides a substantial stimulus and assistance package intended to address the impact of the COVID-19 pandemic, including tax relief and government loans, grants and investments. The CARES Act had no impact on our consolidated financial statements for the three monthsand nine months ended March 31,September 30, 2020. We continuecontinue to monitor any effects that may result from the CARES Act and other similar legislation or governmental actions in geographies in which our business operates.
For more information, see Item 1A. Risk Factors for further discussion of the impact of the COVID-19 pandemic on our business.
Supplemental Operating Metrics (Unaudited)
The tables below summarize our key product metrics and other supplemental data.
| | | | | | | | | | | | | | | | Three months ended September 30, | | | Nine months ended September 30, | |
| | Three months ended March 31, | | |
| | 2020 | | 2019 | | Change | | Organic Change (1) | | |
(in millions) | | (in millions) | | 2020 | | 2019 | | Change | | Organic Change (1) | | | 2020 | | 2019 | | Change | | Organic Change (1) | |
Revenue by Type | Revenue by Type | | | | | | | | | | Revenue by Type | | | | | | | | | | | | | | | | | | |
License-based (2) | License-based (2) | | $ | 216.0 |
| | $ | 195.5 |
| | 10.5 | % | | 10.8 | % | | License-based (2) | | $ | 242.9 | | | $ | 204.6 | | | 18.7 | % | | 10.0 | % | | | $ | 680.0 | | | $ | 601.0 | | | 13.1 | % | | 10.3 | % | |
Asset-based (3) | Asset-based (3) | | 57.2 |
| | 48.8 |
| | 17.2 | % | | 18.0 | % | | Asset-based (3) | | 55.4 | | | 54.5 | | | 1.7 | % | | 1.3 | % | | | 164.4 | | | 155.9 | | | 5.5 | % | | 5.8 | % | |
Transaction-based (4) | Transaction-based (4) | | 50.8 |
| | 14.6 |
| | 247.9 | % | | (17.2 | )% | | Transaction-based (4) | | 58.9 | | | 54.7 | | | 7.7 | % | | 6.8 | % | | | 164.7 | | | 89.7 | | | 83.6 | % | | (2.3) | % | |
| | | | | | | | | | | | | | | |
Key product area revenue | Key product area revenue | | | | | | | | | | Key product area revenue | | | | |
Morningstar Data | Morningstar Data | | $ | 51.4 |
| | $ | 47.7 |
| | 7.8 | % | | 8.9 | % | | Morningstar Data | | $ | 54.0 | | | $ | 48.9 | | | 10.4 | % | | 8.6 | % | | | $ | 158.7 | | | $ | 146.3 | | | 8.5 | % | | 8.7 | % | |
DBRS Morningstar (5) | DBRS Morningstar (5) | | 46.7 |
| | 9.5 |
| | 391.6 | % | | — | % | (6) | DBRS Morningstar (5) | | 53.3 | | | 49.6 | | | 7.5 | % | | 6.7 | % | | | 149.7 | | | 69.7 | | | 114.8 | % | | 6.7 | % | (6) |
PitchBook | PitchBook | | 45.3 |
| | 32.3 |
| | 40.2 | % | | 40.2 | % | | PitchBook | | 51.3 | | | 38.7 | | | 32.6 | % | | 32.6 | % | | | 144.6 | | | 106.1 | | | 36.3 | % | | 36.3 | % | |
Morningstar Direct | Morningstar Direct | | 38.3 |
| | 36.3 |
| | 5.5 | % | | 6.5 | % | | Morningstar Direct | | 39.9 | | | 37.4 | | | 6.7 | % | | 5.5 | % | | | 116.9 | | | 110.5 | | | 5.8 | % | | 6.2 | % | |
Investment Management | Investment Management | | 30.5 |
| | 26.7 |
| | 14.2 | % | | 16.0 | % | | Investment Management | | 30.3 | | | 29.8 | | | 1.7 | % | | 1.0 | % | | | 88.1 | | | 85.3 | | | 3.3 | % | | 3.8 | % | |
Morningstar Advisor Workstation | Morningstar Advisor Workstation | | 21.8 |
| | 22.4 |
| | (2.7 | )% | | (2.4 | )% | | Morningstar Advisor Workstation | | 21.8 | | | 22.2 | | | (1.8) | % | | (1.7) | % | | | 64.8 | | | 66.8 | | | (3.0) | % | | (2.8) | % | |
Workplace Solutions | Workplace Solutions | | 21.2 |
| | 18.5 |
| | 14.6 | % | | 14.6 | % | | Workplace Solutions | | 20.3 | | | 20.0 | | | 1.5 | % | | 1.5 | % | | | 61.2 | | | 58.2 | | | 5.2 | % | | 5.2 | % | |
| | | | As of March 31, | | | | | | As of September 30, | | | |
| | | 2020 | | 2019 | | Change | | | | | | 2020 | | 2019 | | Change | | | |
Select business metrics | Select business metrics | | | | | | | | | | Select business metrics | | | | | | | | | | |
Morningstar Direct licenses | Morningstar Direct licenses | | 15,998 |
| | 15,401 |
| | 3.9 | % | | | | Morningstar Direct licenses | | 16,282 | | | 15,660 | | | 4.0 | % | | | | |
PitchBook Platform licenses | PitchBook Platform licenses | | 41,308 |
| | 24,655 |
| | 67.5 | % | | | | PitchBook Platform licenses | | 48,331 | | | 32,587 | | | 48.3 | % | | | | |
Advisor Workstation clients (U.S.) | Advisor Workstation clients (U.S.) | | 155 |
| | 171 |
| | (9.4 | )% | | | | Advisor Workstation clients (U.S.) | | 148 | | | 167 | | | (11.4) | % | | | | |
Morningstar.com Premium Membership subscriptions (U.S.) | Morningstar.com Premium Membership subscriptions (U.S.) | | 111,354 |
| | 113,408 |
| | (1.8 | )% | | | | Morningstar.com Premium Membership subscriptions (U.S.) | | 113,103 | | | 111,424 | | | 1.5 | % | | | | |
| | | | | | | | | | | | | |
Assets under management and advisement (approximate) ($bil) | Assets under management and advisement (approximate) ($bil) | | | | | | | | | | Assets under management and advisement (approximate) ($bil) | | | | |
| Workplace Solutions | | | | | | | | | | | Workplace Solutions | | | | |
| Managed Accounts | | $ | 65.3 |
| | $ | 64.9 |
| | 0.6 | % | | | | | Managed Accounts | | $ | 82.5 | | | $ | 65.5 | | | 26.0 | % | | | | |
| Fiduciary Services | | 41.5 |
| | 45.3 |
| | (8.4 | )% | | | | | Fiduciary Services | | 52.4 | | | 47.5 | | | 10.3 | % | | | | |
| Custom Models | | 28.2 |
| | 33.0 |
| | (14.5 | )% | | | | | Custom Models | | 35.4 | | | 34.3 | | | 3.2 | % | | | | |
| Workplace Solutions (total) | | $ | 135.0 |
| | $ | 143.2 |
| | (5.7 | )% | | | | | Workplace Solutions (total) | | $ | 170.3 | | | $ | 147.3 | | | 15.6 | % | | | | |
| Investment Management (7) | | | | | | | | | | | Investment Management (7) | | | | | | | | |
| Morningstar Managed Portfolios | | $ | 23.1 |
| | $ | 44.3 |
| | (47.9 | )% | (8) | | | | Morningstar Managed Portfolios | | $ | 26.4 | | | $ | 45.9 | | | (42.5) | % | (8) | | | | |
| Institutional Asset Management | | 14.0 |
| | 16.1 |
| | (13.0 | )% | | | | | Institutional Asset Management | | 11.2 | | | 15.1 | | (9) | (25.8) | % | (10) | | | | |
| Asset Allocation Services | | 6.4 |
| | 6.7 |
| | (4.5 | )% | | | | | Asset Allocation Services | | 6.6 | | | 7.7 | | | (14.3) | % | | | | |
| Investment Management (total) | | $ | 43.5 |
| | $ | 67.1 |
| | (35.2 | )% | | | | | Investment Management (total) | | $ | 44.2 | | | $ | 68.7 | | | (35.7) | % | | | | |
| | | | | | | | | | | | | | | | | |
Asset value linked to Morningstar Indexes ($bil) | Asset value linked to Morningstar Indexes ($bil) | | $ | 47.2 |
| | $ | 54.4 |
| | (13.2 | )% | | | | Asset value linked to Morningstar Indexes ($bil) | | $ | 65.6 | | | $ | 64.0 | | | 2.5 | % | | | | |
| | | Three months ended March 31, | | | | | | |
| | | 2020 | | 2019 | | Change | | | | | | Three months ended September 30, | | | Nine months ended September 30, | |
| | | | 2020 | | 2019 | | Change | | | 2020 | | 2019 | | Change | |
Average assets under management and advisement ($bil) | Average assets under management and advisement ($bil) | | $ | 205.1 |
| | $ | 201.7 |
| | 1.7 | % | | | | Average assets under management and advisement ($bil) | | $ | 209.8 | | | $ | 215.9 | | | (2.8) | % | | | $ | 207.5 | | | $ | 208.8 | | | (0.6) | % | | |
(1) Organic revenue excludes acquisitions, divestitures, adoption of new accounting changes,standards, and the effect of foreign currency translations.
(2) License-based revenue includes Morningstar Data, Morningstar Direct, Morningstar Advisor Workstation, PitchBook, Sustainalytics, and other similar products.
(3) Asset-based revenue includes Investment Management, Workplace Solutions, and Morningstar Indexes.
(4) Transaction-based revenue includes DBRS Morningstar, Internetinternet advertising, and Morningstar-sponsored conferences.
(5) Revenue for the three months ended March 31, 2019 reflects Morningstar Credit Ratings. Revenue for the three months ended March 31, 2020 reflects DBRS Morningstar, the combined credit ratings operations. For the three and nine months ended March 31,September 30, 2020, transaction-based revenue derived primarily from one-time ratings fees was 58.1%60.3% and 59.4%, respectively, while recurring revenue from surveillance, research, and other services comprised the remainder for the period.
(6) The combination ofRevenue from DBRS and Morningstar’s U.S.-based credit ratings operation in 2019 makes it difficult to ascribe the origin of revenue growth to either entity. As such, revenue from the combined credit ratings operationMorningstar is excluded from the reporting of organic revenue growth through the second quarter of 2020.
(7) Revenue for Investment Management includes Morningstar Managed Portfolios, Institutional Asset Management, and Asset Allocation Services.
(8) The decline in Morningstar Managed Portfolios assets was largely attributed to a client contract change from a variable to fixed-fee arrangement. Excluding the assets from this client contract in the prior year,prior-year period, assets in Morningstar Managed Portfolios declined 6.1%increased 0.4%. The increase in revenue for Investment Management diverged from the decline in assets under management and advisement due to the aforementioned contract change, the impact of average asset calculations on Morningstar Managed Portfolios billing, and increased assets in the Morningstar Funds Trust.
(9) Revised to reflect updated asset reporting. (10) The decline in Institutional Asset Management assets was attributed to the non-renewal of a client contract in the third quarter of 2020.
Three and Nine Months Ended March 31,September 30, 2020 vs. Three and Nine Months Ended March 31,September 30, 2019
Consolidated Results
| | | | Three months ended March 31, | | | | Three months ended September 30, | | Nine months ended September 30, | |
Key Metrics (in millions) | | 2020 | | 2019 | | Change | | Key Metrics (in millions) | | 2020 | | 2019 | | Change | | 2020 | | 2019 | | Change | |
Consolidated revenue | | $ | 324.0 |
| | $ | 258.9 |
| | 25.1 | % | | Consolidated revenue | | $ | 357.2 | | | $ | 313.8 | | | 13.8 | % | | $ | 1,009.1 | | | $ | 846.6 | | | 19.2 | % | |
Operating income | | 44.5 |
| | 49.5 |
| | (10.1 | )% | | Operating income | | 44.3 | | | 49.6 | | | (10.7) | % | | 150.1 | | | 149.9 | | | 0.1 | % | |
Operating margin | | 13.7 | % | | 19.1 | % | | (5.4 | ) | pp | Operating margin | | 12.4 | % | | 15.8 | % | | (3.4) | | pp | 14.9 | % | | 17.7 | % | | (2.8) | | pp |
| | | | | | | | |
Cash provided by operating activities | | $ | 48.7 |
| | $ | 59.0 |
| | (17.5 | )% | | Cash provided by operating activities | | $ | 93.4 | | | $ | 105.7 | | | (11.6) | % | | 269.7 | | | $ | 251.9 | | | 7.1 | % | |
Capital expenditures | | (15.1 | ) | | (18.7 | ) | | (19.3 | )% | | Capital expenditures | | (22.6) | | | (20.1) | | | 12.4 | % | | (54.7) | | | (57.1) | | | (4.2) | % | |
Free cash flow | | $ | 33.6 |
| | $ | 40.3 |
| | (16.6 | )% | | Free cash flow | | $ | 70.8 | | | $ | 85.6 | | | (17.3) | % | | $ | 215.0 | | | $ | 194.8 | | | 10.4 | % | |
pp — percentage points
To supplement our consolidated financial statements presented in accordance with U.S. Generally Accepted Accounting Principles (GAAP), we use the following non-GAAP measures:
•consolidated revenue, excluding acquisitions, divestitures, adoption of new accounting changes,standards, and the effect of foreign currency translations (organic revenue);
•consolidated international revenue, excluding acquisitions, divestitures, adoption of new accounting changes,standards, and the effect of foreign currency translations (international organic revenue);
•consolidated operating income, excluding intangible amortization expense and all merger and acquisition (M&A)-related expenses and amortization(including acquisition earn-outs) (adjusted operating income);
•consolidated operating margin, excluding intangible amortization expense and all M&A-related expenses and amortization(including acquisition earn-outs) (adjusted operating margin); and
•cash provided by or used for operating activities less capital expenditures (free cash flow).
These non-GAAP measures may not be comparable to similarly titled measures reported by other companies and should not be considered an alternative to any measure of performance as promulgated under GAAP.
We present organic revenue and international organic revenue because we believe these non-GAAP measures help investors better compare period-over-period results.
We present adjusted operating income and adjusted operating margin to show the effect of significant acquisition activity, better reflect period-over-period comparisons, and improve overall understanding of the underlying performance of the business absent the impact of the combined DBRS Morningstar operations.
We present free cash flow solely as supplemental disclosure to help investors better understand the level of cash available after capital expenditures. Our management team uses free cash flow to evaluate our business.
Consolidated Revenue
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | Three months ended September 30, | | Nine months ended September 30, |
(in millions) | | 2020 | | 2019 | | Change | | 2020 | | 2019 | | Change |
Consolidated revenue | | $ | 357.2 | | | $ | 313.8 | | | 13.8 | % | | $ | 1,009.1 | | | $ | 846.6 | | | 19.2 | % |
|
| | | | | | | | | | | |
| | Three months ended March 31, |
(in millions) | | 2020 | | 2019 | | Change |
Consolidated revenue | | $ | 324.0 |
| | $ | 258.9 |
| | 25.1 | % |
In the firstthird quarter of 2020,, consolidated revenue increased 25.1%13.8% to $324.0$357.2 million. DBRS Morningstar, our combined credit ratings operation, contributed $37.2 million of revenue growth during the first three months of 2020. Foreign currency movements had a negativepositive impact in the quarter, reducingincreasing revenue by $2.0$2.6 million.
License-based revenue, which represents subscription services available to customers, grew 10.5%18.7% during the firstthird quarter of 2020, driven by demand for license-based products, such as Sustainalytics, PitchBook, Morningstar Data, and Morningstar Direct. PitchBook exhibitedDirect. Licensed-based revenue grew 10.0% on an organic basis during the quarter. Increases in users at new and existing clients continued to support PitchBook’s strong levels of both new account sales as well as existing client renewals and upgrades,growth, which resulted in an increase in revenue of $13.0$12.6 million during the quarter. The number of PitchBook Platform licenses increased to 41,30848,331 at March 31,September 30, 2020, compared with 24,65532,587 at March 31, 2019.September 30, 2019. Continued global demand for our data and research helped to drive revenue growth of $3.7$5.1 million and $2.0$2.5 million for both Morningstar Data and Morningstar Direct, respectively. Morningstar Data and Morningstar Direct reported positive and balanced revenue contribution across geographies in the quarter.
Asset-based revenue increased by 17.2%1.7% during the firstthird quarter of 2020, primarily driven by Morningstar Managed Portfolios, Workplace Solutions, and Morningstar Indexes. Morningstar Managed Portfolios2020. Investment Management revenue increased $3.8 million,by 1.7%, or 1.0% on an organic basis, due primarily to the $1.7 million gross revenue contribution fromof the Morningstar Funds Trust. Workplace Solutions revenue increased $2.7 million, resulting from assetMutual Funds. Continued growth in Managed Retirement Accounts. Strong revenue contributionmanaged retirement account offerings led to 1.5% growth in Morningstar Indexes provided further benefitWorkplace revenues during the third quarter. Morningstar Indexes' licensed data products benefited from rising demand for alternatives to higher-priced offerings from incumbent competitors.
The asset-based revenue we earn in both Investment Management and Workplace Solutions is generally based on average asset levels during each quarter. The structure of our contracts and timing of client asset reporting generallyoften results in a one-quarter lag between market movements and the impact on revenue levels. Average assets under management and advisement (calculated based on available average quarterly or monthly data) were approximately $205.1approximately $209.8 billion in the firstthird quarter of 2020, compared with $201.7$215.9 billion in the firstthird quarter of 2019.2019. The decline in average assets under management and advisement was largely attributed to a client contract change from a variable to fixed-fee arrangement within Morningstar Managed Portfolios. Assets reported within Investment Management only include contracts with variable fees.
Transaction-based revenue more than tripledgrew 7.7% in the third quarter of 2020 compared with the third quarter of 2019, primarily driven by the contribution of DBRS Morningstar. Strong Canadian corporate issuances along with a rebound in U.S. structured finance markets in the latter half of the third quarter primarily drove DBRS Morningstar’s revenue growth. Recurring annual fees tied to surveillance, research, and other services represented 39.7% of credit ratings revenue.
In the first nine months of 2020, consolidated revenue increased 19.2% to $1,009.1 million. Foreign currency movements had a negative impact in the first nine months of 2020, reducing revenue by $1.9 million.
License-based revenue grew 13.1% during the first quarternine months of 2020, driven by positive performancedemand for license-based products, such as PitchBook, Sustainalytics, Morningstar Data, and Morningstar Direct. Licensed-based revenue grew 10.3% when excluding Sustainalytics and other acquisitions during the quarter. Revenue from PitchBook, Morningstar Data, and Morningstar Direct increased $38.5 million, $12.4 million, and $6.4 million, respectively, due to the same factors listed above.
Asset-based revenue increased by 5.5% during the first nine months of 2020, primarily driven by Morningstar Managed Portfolios, Workplace Solutions, and Morningstar Indexes. Morningstar Managed Portfolios revenue increased $4.4 million primarily due to the gross revenue contribution from Morningstar Funds Trust. Workplace Solutions revenue increased $3.0 million, resulting from asset growth in Managed Retirement Accounts. Strong revenue contribution in Morningstar Indexes provided further benefit during the first nine months of 2020.
Transaction-based revenue nearly doubled during the first nine months of 2020 compared with the first nine months of 2019, driven by the contribution of DBRS Morningstar. Recurring annual fees tied to surveillance, research, and other services represented 41.9%40.6% of credit ratings revenue. Excluding the impact of the combined credit ratings contribution, transaction-based revenue declined $1.0 million, or 17.2%, due to decreases in advertising revenue on Morningstar.com.
Organic revenue
To allow for more meaningful comparisons of our results in different periods, we provide information about organic revenue, which reflects our underlying business, excluding acquisitions, divestitures, adoption of new accounting changes,standards, and the effect of foreign currency translations. We exclude revenue from acquired businesses from our organic revenue growth calculation for a period of 12 months after we complete the acquisition. For divestitures, we exclude revenue in the prior period for which there is no comparable revenue in the current period.
We began including DBRS and Morningstar’s U.S.-based credit ratings operationMorningstar revenue in 2019 makes it difficult to ascribe the origin of revenue growth to either entity. As such, revenue from the combined credit ratings operation will be excluded from the reporting ofour organic revenue growth throughcalculation in the secondthird quarter of 2020. Prior period results have been adjusted to conform to this presentation.
In the first quarter of 2020,As such, organic revenue increased 11.6%, as a result of $47.7 million of incrementalfor the nine month period ended September 30, 2020 only includes DBRS Morningstar revenue for the three months ended September 30, 2020. Consistent with our practice, Sustainalytics is excluded from our organic calculation for the three months ended September 30, 2020.
Excluding revenue from acquisitions duringand the first quarter of 2020 offset partially by a $2.0 million unfavorable impact of foreign currency translations.translations, organic revenue increased 8.0% and 8.4% during the third quarter and first nine months of 2020, respectively. PitchBook, Morningstar Data, DBRS Morningstar, and Investment ManagementMorningstar Direct were the main drivers of the increase in organic revenue during the firstthird quarter of 2020. During the first nine months of 2020, Pitchbook, Morningstar Data, and Morningstar Direct were the main drivers of organic revenue growth.
The table below reconciles consolidated revenue with organic revenue:
| | | | Three months ended March 31, | | | Three months ended September 30, | | Nine months ended September 30, |
(in millions) | | 2020 | | 2019 | | Change | (in millions) | | 2020 | | 2019 | | Change | | 2020 | | 2019 | | Change |
Consolidated revenue | | $ | 324.0 |
| | $ | 258.9 |
| | 25.1 | % | Consolidated revenue | | $ | 357.2 | | | $ | 313.8 | | | 13.8 | % | | $ | 1,009.1 | | | $ | 846.6 | | | 19.2 | % |
Less: acquisitions | | (47.7 | ) | | (9.5 | ) | | 402.1 | % | Less: acquisitions | | (15.8) | | | — | | | NMF | | (115.2) | | | (20.1) | | | 473.1 | % |
Less: divestitures | | — |
| | — |
| | — |
| Less: divestitures | | — | | | — | | | — | % | | — | | | — | | | — | % |
Less: adoption of new accounting changes | | — |
| | — |
| | — |
| |
Less: adoption of new accounting standards | | Less: adoption of new accounting standards | | — | | | — | | | — | % | | — | | | — | | | — | % |
Effect of foreign currency translations | | 2.0 |
| | — |
| | NMF |
| Effect of foreign currency translations | | (2.6) | | | — | | | NMF | | 1.9 | | | — | | | NMF |
Organic revenue | | $ | 278.3 |
| | $ | 249.4 |
| | 11.6 | % | Organic revenue | | $ | 338.8 | | | $ | 313.8 | | | 8.0 | % | | $ | 895.8 | | | $ | 826.5 | | | 8.4 | % |
NMF - not meaningful
Revenue by geographical area
| | | | Three months ended March 31, | | | Three months ended September 30, | | Nine months ended September 30, |
(in millions) | | 2020 | | 2019 | | Change | (in millions) | | 2020 | | 2019 | | Change | | 2020 | | 2019 | | Change |
United States | | $ | 234.6 |
| | $ | 195.1 |
| | 20.2 | % | United States | | $ | 247.8 | | | $ | 225.3 | | | 10.0 | % | | $ | 710.7 | | | $ | 628.4 | | | 13.1 | % |
| | | | | | | |
Asia | | 7.6 |
| | 6.3 |
| | 20.6 | % | Asia | | 8.6 | | | 7.3 | | | 17.8 | % | | 24.5 | | | 20.4 | | | 20.1 | % |
Australia | | 10.6 |
| | 9.5 |
| | 11.6 | % | Australia | | 11.9 | | | 9.7 | | | 22.7 | % | | 32.9 | | | 29.2 | | | 12.7 | % |
Canada | | 20.7 |
| | 7.9 |
| | 162.0 | % | Canada | | 25.0 | | | 20.7 | | | 20.8 | % | | 74.0 | | | 36.4 | | | 103.3 | % |
Continental Europe | | 23.0 |
| | 20.4 |
| | 12.7 | % | Continental Europe | | 32.3 | | | 22.3 | | | 44.8 | % | | 79.2 | | | 63.6 | | | 24.5 | % |
United Kingdom | | 26.0 |
| | 18.1 |
| | 43.6 | % | United Kingdom | | 30.0 | | | 27.0 | | | 11.1 | % | | 83.0 | | | 63.9 | | | 29.9 | % |
Other | | 1.5 |
| | 1.6 |
| | (6.3 | )% | Other | | 1.6 | | | 1.5 | | | 6.7 | % | | 4.8 | | | 4.7 | | | 2.1 | % |
Total International | | 89.4 |
| | 63.8 |
| | 40.1 | % | Total International | | 109.4 | | | 88.5 | | | 23.6 | % | | 298.4 | | | 218.2 | | | 36.8 | % |
| | | | | | | |
Consolidated revenue | | $ | 324.0 |
| | $ | 258.9 |
| | 25.1 | % | Consolidated revenue | | $ | 357.2 | | | $ | 313.8 | | | 13.8 | % | | $ | 1,009.1 | | | $ | 846.6 | | | 19.2 | % |
International revenue comprised approximately 28% ofapproximately 30% of our consolidated revenue for the third quarter and first quarternine months of 2020, compared to approximately 25% for the third quarter and first quarternine months of 2019. Approximately 55%50% is generated by Continental Europe and the United Kingdom.
Revenue from international operations increased 40.1% in23.6% during the third quarter of 2020 as a result of our acquisition of Sustainalytics. Revenue during the first quarternine months of 2020 grew 36.8%, primarily as a result of our acquisition of DBRS, which has a significant revenue base in CanadaCanada and the U.K.Europe.
International organic revenue
International organic revenue (international revenue, excluding acquisitions, divestitures, adoption of new accounting changes,standards, and the effect of foreign currency translations) is considered a non-GAAP financial measure. The definition of international organic revenue we use may not be the same as similarly titled measures used by other companies. International organic revenue should not be considered an alternative to any measure of performance as promulgated under GAAP.
International organic revenue for the three and nine months ended September 30, 2020 grew 8.6% as a result of $22.1 million of incremental revenue from acquisitions offset partially by a $2.0 million unfavorable impact of foreign currency translations7.6% and 7.7%, respectively, and mainly reflects growth in Morningstar Data and Morningstar Direct acrossacross all geographies during the third quarter and first quarternine months of 2020.
The table below presents a reconciliation from international revenue to international organic revenue:
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | Three months ended September 30, | | Nine months ended September 30, |
(in millions) | | 2020 | | 2019 | | Change | | 2020 | | 2019 | | Change |
International revenue | | $ | 109.4 | | | $ | 88.5 | | | 23.6 | % | | $ | 298.4 | | | $ | 218.2 | | | 36.8 | % |
Less: acquisitions | | (11.6) | | | — | | | NMF | | (65.3) | | | — | | | NMF |
Less: divestitures | | — | | | — | | | — | % | | — | | | — | | | — | % |
Less: adoption of new accounting standards | | — | | | — | | | — | % | | — | | | — | | | — | % |
Effect of foreign currency translations | | (2.6) | | | — | | | NMF | | 1.9 | | | — | | | NMF |
International organic revenue | | $ | 95.2 | | | $ | 88.5 | | | 7.6 | % | | $ | 235.0 | | | $ | 218.2 | | | 7.7 | % |
|
| | | | | | | | | | | |
| | Three months ended March 31, |
(in millions) | | 2020 | | 2019 | | Change |
International revenue | | $ | 89.4 |
| | $ | 63.8 |
| | 40.1 | % |
Less: acquisitions | | (22.1 | ) | | — |
| | NMF |
|
Less: divestitures | | — |
| | — |
| | — | % |
Less: adoption of new accounting changes | | — |
| | — |
| | — | % |
Effect of foreign currency translations | | 2.0 |
| | — |
| | NMF |
|
International organic revenue | | $ | 69.3 |
| | $ | 63.8 |
| | 8.6 | % |
Consolidated Operating Expense
| | | | Three months ended March 31, | | | | Three months ended September 30, | | Nine months ended September 30, | |
(in millions) | | 2020 | | 2019 | | Change | | (in millions) | | 2020 | | 2019 | | Change | | 2020 | | 2019 | | Change | |
Cost of revenue | | $ | 137.0 |
| | $ | 105.1 |
| | 30.4 | % | | Cost of revenue | | $ | 138.7 | | | $ | 128.4 | | | 8.0 | % | | $ | 406.8 | | | $ | 341.0 | | | 19.3 | % | |
% of consolidated revenue | | 42.3 | % | | 40.6 | % | | 1.7 | pp | % of consolidated revenue | | 38.8 | % | | 40.9 | % | | (2.1) | pp | 40.3 | % | | 40.3 | % | | — | pp |
Sales and marketing | | 50.9 |
| | 40.0 |
| | 27.3 | % | | Sales and marketing | | 52.6 | | | 44.0 | | | 19.5 | % | | 150.7 | | | 129.7 | | | 16.2 | % | |
% of consolidated revenue | | 15.7 | % | | 15.4 | % | | 0.3 | pp | % of consolidated revenue | | 14.7 | % | | 14.0 | % | | 0.7 | pp | 14.9 | % | | 15.3 | % | | (0.4) | pp |
General and administrative | | 57.4 |
| | 40.8 |
| | 40.7 | % | | General and administrative | | 85.8 | | | 57.2 | | | 50.0 | % | | 197.8 | | | 142.0 | | | 39.3 | % | |
% of consolidated revenue | | 17.7 | % | | 15.8 | % | | 1.9 | pp | % of consolidated revenue | | 24.0 | % | | 18.2 | % | | 5.8 | pp | 19.6 | % | | 16.8 | % | | 2.8 | pp |
Depreciation and amortization | | 34.2 |
| | 23.5 |
| | 45.5 | % | | Depreciation and amortization | | 35.8 | | | 34.6 | | | 3.5 | % | | 103.7 | | | 84.0 | | | 23.5 | % | |
% of consolidated revenue | | 10.6 | % | | 9.1 | % | | 1.5 | pp | % of consolidated revenue | | 10.0 | % | | 11.0 | % | | (1.0) | pp | 10.3 | % | | 9.9 | % | | 0.4 | pp |
| Total operating expense | | $ | 279.5 |
| | $ | 209.4 |
| | 33.5 | % | | Total operating expense | | $ | 312.9 | | | $ | 264.2 | | | 18.4 | % | | $ | 859.0 | | | $ | 696.7 | | | 23.3 | % | |
% of consolidated revenue | | 86.3 | % | | 80.9 | % | | 5.4 | pp | % of consolidated revenue | | 87.6 | % | | 84.2 | % | | 3.4 | pp | 85.1 | % | | 82.3 | % | | 2.8 | pp |
Consolidated operating expense increased $70.1$48.7 million, or 18.4%, in the third quarter of 2020, and $162.3 million, or 33.5%23.3%, in the first quarternine months of 2020. DBRS Morningstar contributed 20.1% toThe increase in the third quarter primarily reflects the inclusion of Sustainalytics' purchase accounting adjustments and operating expense growth, including deal-related amortization and integration expenses as well as costs related to regulatory matters. Operatingexpense. Operating expenses for the remainder of Morningstar increased 13.4% as we continue to invest for growth in the business.quarter remained relatively flat, as increases in compensation and benefits, production costs, and professional fees were substantially offset by lower travel and other corporate costs, reflecting the impact of reduced spending in certain categories resulting from the COVID-19 pandemic, as well as deliberate decisions by management to control costs. Foreign currency translations had a favorable impact of $2.0$1.9 million and an unfavorable impact of $2.9 million on operating expense during the third quarter and first quarternine months of 2020.2020, respectively.
Compensation expense (which primarily consists of salaries, bonuses, and other company-sponsored benefits) increased $35.8$48.4 million in the firstthird quarter of 2020.2020, with $27.8 million of the increase due to M&A-related earn-outs.See Note 4 of the Notes to the Unaudited Condensed Consolidated Financial Statements for additional information. The addition of approximately 482584 employees from the DBRSSustainalytics acquisition also contributed $22.5 million ofto the total increase in compensation expense. The remaining increase reflects investments in headcount related to roles in data collection and analysis, product and software development, and sales and service support.
Professional fees increased $5.3 million related to third-party contractors assisting with software development and technology improvements. Sales commission also increased $2.3 million largely due to strong PitchBook sales performance and additional headcount under the sales commission plans throughout the organization. Amortization expense increased $9.2$2.3 million primarily from additional amortization related to new intangibles from the acquisition of DBRS. Professional fees increased $8.1 million due to costs related to regulatory matters and M&A-related activity. Sustainalytics. Production expense increased $4.4 million, mainly due to the$2.2 million, primarily from fees paid to sub-advisors and other costs related to the Morningstar Funds Trust, as well as cloud-based computing costs. The increase in expenses was
These increases were partially mitigated by a declinelower spend in categories directly impacted by the COVID-19 pandemic, such as employee travel-related expense, which decreased $5.0 million during the third quarter of 2020. In addition, stock-based compensation expense of $2.7declined $0.9 million relateddue to the renewal of PitchBook'sPitchBook’s management bonus plan. The new three-year plan, mirrors thewhich features lower incentive structuretargets in years one and two compared with year three, and was renewed in 2020. Given 2019 was year three of the originalprior PitchBook management bonus plan, featuringstock-based compensation expense was lower target payouts in the first two yearsthird quarter of 2020, which is year one of the new plan, compared with the actual 2019 payout.same period in 2019.
We had 6,8967,692 employees worldwide as of March 31,September 30, 2020, compared with 5,6606,557 as of March 31,September 30, 2019. This increase reflects continued investment in resources to support our key growth initiatives, including operations in India and the United States.States. This increase also includes approximately 482584 employees who joined Morningstar as a result of the DBRSSustainalytics acquisition in July 2019.2020.
Cost of revenue
Cost of revenue is our largest category of operating expense, representing close to one-half of ourour total operating expense. Our business relies heavily on human capital, and cost of revenue includes the compensation expense for employees who develop our products and deliver our services. We include compensation expense for approximatelyservices, which represents approximately 80% ofof our employees in this category.employees.
Cost of revenue increased $31.9increased $10.3 million in the firstthird quarter of 2020. Higher compensation expense of $21.7$10.5 million was the largest contributor to the increase. DBRS Morningstar contributed $17.1 millionincrease with Sustainalytics contributing over half of the increase in compensation expense.increase. Professional fees increased $2.8 million during the third quarter of 2020 related to third-party contractors assisting with software development and technology improvements. Higher production expense of $4.4$2.2 million also contributed to the unfavorable variance in this category, mainly due to $1.7$1.3 million in fees paid to sub-advisors and other costs related to the Morningstar Funds Trust, as well as cloud computing costs. These increases were offset by higher capitalized software expense due primarily to an increase in development activity in key growth areas, as well as a decrease in employee travel-related expenses of $2.5 million, resulting from the impact of the COVID-19 pandemic.
Cost of revenue increased $65.8 million in the first nine months of 2020. Higher compensation expense of $50.2 million was the largest contributor to the increase driven primarily by DBRS Morningstar and Sustainalytics. Professional fees alsoand production expense increased $3.3$9.5 million and $8.8 million, respectively, during the first nine months of 2020 due to the same factors listed above. Employee travel-related expenses declined $4.5 million during the first quarternine months of 2020 related to third-party contractors assisting with software development and technology improvements.2020.
Continuous focus on the development of our major software platforms, in addition to bringing new products and capabilities to market, resulted in a slightan increase in capitalized software development over the prior period, which in turn reduced operating expense. During the first quarter of 2020, weWe capitalized $13.5$45.3 million associated with software development activities, mainly related to enhanced capabilities in our products, internal infrastructure, and software in the first nine months of 2020, compared with $13.1$40.5 million in the first quarternine months of 2019.
Sales and marketing
Sales and marketing expense increased $10.9 $8.6 million in the firstthird quarter of 2020, reflecting a $7.9$7.0 million increase in compensation expense. The increase in compensation expense was partially mitigated by lower spend in certain expense categories impacted by the COVID-19 pandemic, such as employee travel-related expense, which was partially driven by additional headcount fromdecreased $1.4 million during the DBRS acquisition.third quarter of 2020.
For the first nine months of 2020, sales and marketing expense increased $21.0 million, reflecting a $21.0 million increase in compensation expense. Sales commission expense was higher by $2.0$4.6 million largely due to strong PitchBook sales performance and additional headcount under the sales commission plans throughout the organization. Travel-related expense declined $2.8 million during the first nine months of 2020 due to the same factor listed above. Marketing expense for Morningstar-sponsored conferences was also impacted by the COVID-19 pandemic and declined by $2.5 million during the first nine months of 2020.
General and administrative
General and administrative expense increased $16.6$28.6 million during the firstthird quarter of 2020. Compensation expense increased $6.2$30.9 million, primarily due to M&A-related earn-outs.See Note 4 of which DBRS Morningstar accountedthe Notes to the Unaudited Condensed Consolidated Financial Statements for $3.9 million.additional information. Rent expense also increased $2.3 million during the third quarter in connection with lease expansion in certain geographies as well as the addition of Sustainalytics leases during the third quarter. Professional fees increased $4.8$2.1 million during the firstthird quarter of 2020, primarily due to regulatory matters and M&A-related activity. Stock-based compensation decreased $1.5$1.7 million as a result of the renewal of PitchBook's management bonus plan. The new three-year plan, mirrors thewhich features lower incentive structuretargets in years one and two compared with year three, and was renewed in 2020. Given 2019 was year three of the originalprior PitchBook management bonus plan, featuringstock-based compensation expense was lower target payouts in the first two yearsthird quarter of 2020, which is year one of the new plan, compared with the actual 2019 payout.same period in 2019.
For the first nine months of 2020, general and administrative expense increased $55.8 million. Compensation expense increased $42.3 million, primarily due to the same factor listed above. Professional fees and rent expense also increased $11.5 million and $7.2 million, respectively, while stock-based compensation decreased $5.2 million due to the same factors described above.
Depreciation and amortization
Depreciation expense increased $1.5expense decreased $1.2 million in the firstthird quarter of 2020 driven mainly by depreciation expense relateddue to capitalized software development incurred over the past several years.timing of fixed assets being placed into service. Intangible amortization expense increased $9.1$2.3 million, primarily from additional amortization related to intangibles generated by the acquisition of DBRS.Sustainalytics.
For the first nine months of 2020, depreciation expense was relatively flat. Intangible amortization expense increased $20.2 million, primarily from additional amortization related to intangibles generated by the acquisitions of DBRS and Sustainalytics.
Amortization of intangible assets will be an ongoing expense. We estimate that this expense will total approximately $39.0$15.7 million forfor the remainder of 2020. Our estimates of future amortization expense for intangible assets may be affected by additional acquisitions, divestitures, changes in the estimated average useful lives, and foreign currency translation.
Consolidated Operating Income and Operating Margin
| | | | Three months ended March 31, | | | | Three months ended September 30, | | Nine months ended September 30, | |
(in millions) | | 2020 | | 2019 | | Change | | (in millions) | | 2020 | | 2019 | | Change | | 2020 | | 2019 | | Change | |
Operating income | | $ | 44.5 |
| | $ | 49.5 |
| | (10.1 | )% | | Operating income | | $ | 44.3 | | | $ | 49.6 | | | (10.7) | % | | $ | 150.1 | | | $ | 149.9 | | | 0.1 | % | |
% of revenue | | 13.7 | % | | 19.1 | % | | (5.4 | ) | pp | % of revenue | | 12.4 | % | | 15.8 | % | | (3.4) | | pp | 14.9 | % | | 17.7 | % | | (2.8) | | pp |
Consolidated operating income increased $5.0decreased $5.3 million in the firstthird quarter of 2020, reflecting an increase in operating expenses of $70.1$48.7 million, which was partially mitigated by an increase in revenue of $65.1$43.4 million. Operating margin was 13.7%12.4%, a decrease of 5.43.4 percentage points, compared with the third quarter of 2019.
Consolidated operating income was relatively flat in the first quarternine months of 2020, reflecting an increase in operating expenses of $162.3 million, which was partially mitigated by an increase in revenue of $162.5 million. Operating margin was 14.9%, a decrease of 2.8 percentage points, compared with the first nine months of 2019.
We reported adjusted operating income, whichwhich excludes intangible amortization expense and M&A-related expenses and amortization expense,(including acquisition earn-outs), of
$61.4 $91.2 million in the third quarter of 2020 and $232.1 million in the first quarternine months of 2020. Adjusted operating income is a non-GAAP financialfinancial measure; the table below shows a reconciliation to the most directly comparable GAAP financial measure.
| | | | Three months ended March 31, | | Three months ended September 30, | | Nine months ended September 30, |
(in millions) | | 2020 | | 2019 | | Change | (in millions) | | 2020 | | 2019 | | Change | | 2020 | | 2019 | | Change |
Operating income | | $ | 44.5 |
| | $ | 49.5 |
| | (10.1 | )% | Operating income | | $ | 44.3 | | | $ | 49.6 | | | (10.7) | % | | $ | 150.1 | | | $ | 149.9 | | | 0.1 | % |
Add: intangible amortization expense | | 14.0 |
| | 4.9 |
| | 185.7 | % | Add: intangible amortization expense | | 15.6 | | | 13.4 | | | 16.4 | % | | 43.3 | | | 23.1 | | | 87.4 | % |
Add: M&A-related expenses | | 2.9 |
| | 0.3 |
| | 866.7 | % | Add: M&A-related expenses | | 3.5 | | | 1.1 | | | 218.2 | % | | 10.9 | | | 2.9 | | | 275.9 | % |
Add: acquisition earn-out | | Add: acquisition earn-out | | 27.8 | | | — | | | NMF | | 27.8 | | | — | | | NMF |
Adjusted operating income | | $ | 61.4 |
| | $ | 54.7 |
| | 12.2 | % | Adjusted operating income | | $ | 91.2 | | | $ | 64.1 | | | 42.3 | % | | $ | 232.1 | | | $ | 175.9 | | | 31.9 | % |
We also reported adjusted operatingoperating margin, which excludes intangible amortization expense and M&A-related expenses and amortization expense, (including acquisition earn-outs), of 18.9%25.6% in the third quarter of 2020 and 23.1% in the first quarternine months of 2020. Adjusted operating margin is a non-GAAP financial measure; the table below shows a reconciliation to the most directly comparable GAAP financial measure.
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | Three months ended September 30, | | Nine months ended September 30, |
| | 2020 | | 2019 | | | | Change | | 2020 | | 2019 | | | Change |
Operating margin | | 12.4 | % | | 15.8 | % | | | | (3.4) pp | | 14.9 | % | | 17.7 | % | | | (2.8) pp |
Add: intangible amortization expense | | 4.4 | % | | 4.3 | % | | | | 0.1 pp | | 4.3 | % | | 2.7 | % | | | 1.6 pp |
Add: M&A-related expenses | | 1.0 | % | | 0.3 | % | | | | 0.7 pp | | 1.1 | % | | 0.4 | % | | | 0.7 pp |
Add: acquisition earn-out | | 7.8 | % | | — | % | | | | 7.8 pp | | 2.8 | % | | — | % | | | 2.8 pp |
Adjusted operating margin | | 25.6 | % | | 20.4 | % | | | | 5.2 pp | | 23.1 | % | | 20.8 | % | | | 2.3 pp |
|
| | | | | | | | |
| | Three months ended March 31, |
| | 2020 | | 2019 | | Change |
Operating margin | | 13.7 | % | | 19.1 | % | | (5.4) pp |
Add: intangible amortization expense | | 4.3 | % | | 1.9 | % | | 2.4 pp |
Add: M&A-related expenses | | 0.9 | % | | 0.1 | % | | 0.8 pp |
Adjusted operating margin | | 18.9 | % | | 21.1 | % | | (2.2) pp |
Non-Operating Expense,Income, Net, Equity in Net LossIncome (Loss) of Unconsolidated Entities, and Effective Tax Rate and Income Tax Expense
Non-operating expense,income, net
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | Three months ended September 30, | | Nine months ended September 30, | | |
(in millions) | | 2020 | | 2019 | | 2020 | | 2019 | | | | |
Interest income | | $ | 0.5 | | | $ | 0.5 | | | $ | 1.2 | | | $ | 1.7 | | | | | |
Interest expense | | (1.9) | | | (5.3) | | | (7.7) | | | (6.5) | | | | | |
Realized gains on sale of investments, reclassified from other comprehensive income | | 0.7 | | | 0.3 | | | 1.2 | | | 0.7 | | | | | |
| | | | | | | | | | | | |
| | | | | | | | | | | | |
Holding gain on previously-held equity interest | | 50.9 | | | — | | | 50.9 | | | — | | | | | |
Gain on sale of equity method investments | | — | | | 19.5 | | | — | | | 19.5 | | | | | |
Other expense, net | | (2.0) | | | (1.1) | | | (6.1) | | | (2.5) | | | | | |
Non-operating income, net | | $ | 48.2 | | | $ | 13.9 | | | $ | 39.5 | | | $ | 12.9 | | | | | |
|
| | | | | | | | |
| | Three months ended March 31, |
(in millions) | | 2020 | | 2019 |
Interest income | | $ | 0.5 |
| | $ | 0.4 |
|
Interest expense | | (3.7 | ) | | (1.1 | ) |
Gain (loss) on sale of investments, net | | (0.4 | ) | | 0.6 |
|
Other expense, net | | (7.7 | ) | | (3.2 | ) |
Non-operating expense, net | | $ | (11.3 | ) | | $ | (3.3 | ) |
Interest income reflects interest from our investment portfolio. Interest expense mainly relates to the outstanding
principal balance under the priorour credit facility and the new senior credit agreement, which we entered infacilities.
During the third quarter and first nine months of 2020, the holding gain on previously-held equity interest relates to our purchase of the remaining interest in Sustainalytics in July 2020.
During the third quarter and first nine months of 2019, the gain on sale of equity method investments relates to fund the acquisitionsale of DBRS.our equity ownership in one of our unconsolidated entities.
Other expense, net primarily includes foreign currency exchange losses.
Equity in net lossincome (loss) of unconsolidated entities
| | | | Three months ended March 31, | | | Three months ended September 30, | | Nine months ended September 30, |
(in millions) | | 2020 | | 2019 | (in millions) | | 2020 | | 2019 | | 2020 | | 2019 |
Equity in net loss of unconsolidated entities | | $ | (0.8 | ) | | $ | (1.5 | ) | |
Equity in net income (loss) of unconsolidated entities | | Equity in net income (loss) of unconsolidated entities | | $ | 0.6 | | | $ | (1.1) | | | $ | (0.7) | | | $ | (1.9) | |
Equity in net lossincome (loss) of unconsolidated entities primarily reflects income from Morningstar Japan K.K. (MJKK) offset by
losses in our other equity method investments.
Effective tax rate and income tax expense
| | | | Three months ended March 31, | | | Three months ended September 30, | | Nine months ended September 30, |
(in millions) | | 2020 | | 2019 | (in millions) | | 2020 | | 2019 | | 2020 | | 2019 |
Income before income taxes and equity in net loss of unconsolidated entities | | $ | 33.2 |
| | $ | 46.2 |
| Income before income taxes and equity in net loss of unconsolidated entities | | $ | 92.5 | | | $ | 63.5 | | | $ | 189.6 | | | $ | 162.8 | |
Equity in net loss of unconsolidated entities | | (0.8 | ) | | (1.5 | ) | |
Equity in net income (loss) of unconsolidated entities | | Equity in net income (loss) of unconsolidated entities | | 0.6 | | | (1.1) | | | (0.7) | | | (1.9) | |
| Total | | $ | 32.4 |
| | $ | 44.7 |
| Total | | $ | 93.1 | | | $ | 62.4 | | | $ | 188.9 | | | $ | 160.9 | |
Income tax expense | | $ | 8.5 |
| | $ | 11.5 |
| Income tax expense | | $ | 16.9 | | | $ | 13.3 | | | $ | 40.6 | | | $ | 36.5 | |
Effective tax rate | | 26.2 | % | | 25.7 | % | Effective tax rate | | 18.2 | % | | 21.3 | % | | 21.5 | % | | 22.7 | % |
Our effective tax rate in the third quarter and first quarternine months of 2020 was 26.2%18.2% and 21.5%, an increase of 0.5 percentagerespectively, reflecting respective decreases of 3.1 and 1.2 percentage points compared with the same periodperiods in the prior year. The decreases are primarily attributable to the holding gain recorded in connection with our purchase of the remaining ownership interest in Sustainalytics on July 2, 2020, which is not taxable.
Liquidity and Capital Resources
As of March 31,September 30, 2020, we had cash, cash equivalents, and investments of $348.8$377.8 million, a decreasean increase of $18.7$10.3 million, compared with $367.5 million as of December 31, 2019. The decreaseincrease reflects cash provided by operating activities and proceeds from long-term debt of $55.0$60.0 million, partially offset by $37.8$88.4 million of repayments of long-term debt, $20.0$67.8 million paid for acquisitions, primarily for the acquisition of Sustainalytics, $54.7 million of capital expenditures, dividends paid of $38.6 million, $37.6 million to repurchase common stock through our share repurchase program, $15.1 million of capital expenditures, dividends paid of $12.9 million, and $10.7$19.8 million for employee taxes paid from withholding of restricted stock units.
Cash provided by operating activities is our main source of cash. In the first quarternine months of 2020, cash provided by operating activities was $48.7$269.7 million, reflecting $77.6$261.5 million of net income, adjusted for non-cash items, and offset by $28.9an additional $8.2 million in negativepositive changes from our net operating assets and liabilities, which included bonus paymentsliabilities. Cash provided by operating activities increased $17.8 million, or 7.1%, for the first nine months of $82.8 million.2020.
On July 2, 2019, we entered into a new senior credit agreement (the Credit Agreement), the initial borrowings under which were made to finance the DBRS acquisition and repaid all outstanding obligations under the prior credit facility. The Credit Agreement provides the Company with a five-year multi-currency credit facility with an initial borrowing capacity of up to $750.0 million, including a $300.0 million revolving credit facility and a term loan facility of $450.0 million. We had an outstanding principal balance of $530.4$484.9 million as of March 31,September 30, 2020 and a revolving credit facility borrowing availabilityavailability of $210.0$250.0 million. TheThe Credit Agreement contains financial covenants under which we: (i) may not exceed a maximum consolidated leverage ratio of 3.50 to 1.00 (or 3.75 to 1.00 for the four fiscal quarters following any material acquisition (as defined in the Credit Agreement)) and (ii) are required to maintain a minimum consolidated interest coverage ratio of not less than 3.00 to 1.00. We were in compliance with the financial covenants as of March 31,September 30, 2020. See Note 3 of the Notes to our Unaudited Condensed Consolidated Financial Statements for additional information on our Credit Agreement.
In conjunction with the recently announced acquisition of Sustainalytics, the CompanyOn June 30, 2020, we entered into a new senior credit agreement that provides us with a $50.0 million commitment for a 364-day senior revolving credit facility. This 364-day revolving facility which is expectedwas undrawn as of September 30, 2020.
On October 26, 2020, Morningstar completed the issuance and sale of $350.0 million aggregate principal amount of 2.32% senior notes due October 26, 2030 (the 2.32% Notes), in a private placement exempt from the registration requirements of the Securities Act of 1933, as amended, pursuant to close early ina Note Purchase Agreement entered into on the third quartersame date. The Company expects to use the net proceeds from the offering to reduce a portion of 2020.the outstanding indebtedness under the Company’s Credit Agreement and for other corporate purposes. Interest on the Notes will be paid semi-annually on each October 30 and April 30 during the term of the 2.32% Notes and at maturity, with the first interest payment date occurring on April 30, 2021.
We believe our available cash balances and investments, along with cash generated from operations and our line of credit, will be sufficient to meet our operating and cash needs for at least the next 12 months. However, the situation surrounding the COVID-19 pandemic remains fluid, and we are actively managing our response and assessing potential impacts to our financial position and operating results. We are focusingfocused on maintaining a strong balance sheet and liquidity position. We hold our cash reserves in cash equivalents and investments and maintain a conservative investment policy. We invest most of our investment balance (approximately $25.8$26.4 million, or 98.5%98.9%, as of March 31,September 30, 2020) in stocks, bonds, options, mutual funds, money market funds, or exchange-traded products that replicate the model portfolios and strategies created by Morningstar. These investment accounts may also include exchange-traded products where Morningstar is an index provider.
Approximately 70%Approximately 66% of our cash, cash equivalents, and investments balance as of March 31,September 30, 2020 and as of December 31, 2019 was held by our operations outside the United States.States, down from 67% as of December 31, 2019. We generally consider our U.S. directlydirectly- owned foreign subsidiary earnings to be permanently reinvested.
We intend to use our cash, cash equivalents, and investments for general corporate purposes, including working capital and funding future growth.
In FebruaryOctober 2020, our board of directors approved a regular quarterly dividend of $0.30 per share, or $12.8$12.9 million, payable on AprilOctober 30, 2020 to shareholders of record as of April 3,October 16, 2020.
In December 2017, the board of directors approved a share repurchase program that authorizes the Company to repurchase up to $500.0 million in shares of the Company's outstanding common stock, effective January 1, 2018. The authorization expires on December 31, 2020. In the first threenine months of 2020, we repurchased a total of 176,925122,020 shares for $20.0$19.3 million, of which $1.7 million settled early in the fourth quarter, and had approximately $454.4$435.1 million available for future repurchases as of March 31,September 30, 2020.
We expect to continue making capital expenditures in 2020, primarily for computer hardware and software provided by third parties, internally developed software, and leasehold improvements for new and existing office locations. We continue to adopt more public cloud and software-as-a-service applications for new initiatives and are in the process of migrating relevant parts of our data centers to the public cloud over the next several years. During this migration, we expect to run certain applications and infrastructure in parallel. These actions will have some transitional effects on our level of capital expenditures and operating expenses. In light
Consolidated Free Cash Flow
We define free cash flow as cash provided by or used for operating activities less capital expenditures.
| | | | Three months ended March 31, | | | Three months ended September 30, | | Nine months ended September 30, |
(in millions) | | 2020 | | 2019 | | Change | (in millions) | | 2020 | | 2019 | | Change | | 2020 | | 2019 | | Change |
Cash provided by operating activities | | 48.7 |
| | 59.0 |
| | (17.5 | )% | Cash provided by operating activities | | $ | 93.4 | | | $ | 105.7 | | | (11.6) | % | | $ | 269.7 | | | $ | 251.9 | | | 7.1 | % |
Capital expenditures | | (15.1 | ) | | (18.7 | ) | | (19.3 | )% | Capital expenditures | | (22.6) | | | (20.1) | | | 12.4 | % | | (54.7) | | | (57.1) | | | (4.2) | % |
Free cash flow | | $ | 33.6 |
| | $ | 40.3 |
| | (16.6 | )% | Free cash flow | | $ | 70.8 | | | $ | 85.6 | | | (17.3) | % | | $ | 215.0 | | | $ | 194.8 | | | 10.4 | % |
We generated free cash flow of $33.6$70.8 million in the firstthird quarter of 2020, a decrease of $6.7$14.8 million, compared with the firstthird quarter of 2019. The change reflects a $10.3$12.3 million decrease in cash provided by operating activities as well as a $3.6$2.5 million increase in capital expenditures. Cash provided by operating activities declined primarily due to the timing of working capital.
In the first nine months of 2020, we generated free cash flow of $215.0 million, an increase of $20.2 million, compared with the first nine months of 2019. The change reflects a $17.8 million increase in cash provided by operating activities as well as a $2.4 million decrease in capital expenditures. The decrease inCash provided by operating activities isincreased primarily due to the additionM&A-related earn-outs as well as timing of DBRS Morningstar to the Company's bonus payout in the first quarter of 2020.working capital.
Application of Critical Accounting Policies and Estimates
We discuss our critical accounting policies and estimates in Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations, included in our Annual Report. We also discuss our significant accounting policies in Note 2 of the Notes to our Audited Consolidated Financial Statements included in our Annual Report and in Note 2 of the Notes to our Unaudited Condensed Consolidated Financial Statements contained in Part 1, Item 1 of this Quarterly Report.
Rule 10b5-1 Sales Plans
Our directors and executive officers may exercise stock options or purchase or sell shares of our common stock in the market from time to time. We encourage them to make these transactions through plans that comply with Exchange Act Rule 10b5-1(c). Morningstar will not receive any proceeds, other than proceeds from the exercise of stock options, related to these transactions. The following table, which we are providing on a voluntary basis, shows the Rule 10b5-1 sales plans entered into by our directors and executive officers that were in effect as of April 27,October 23, 2020:
|
| | | | | | | | | | | | | | | |
Name and Position | | Date of Plan | | Plan Termination Date | | Number of Shares to be Sold under the Plan | | Timing of Sales under the Plan | | Number of Shares Sold under the Plan through April 27, 2020 | | Projected Beneficial Ownership (1) |
Cheryl Francis Director | | 11/1/2019 | | 5/29/2020 | | (2 | ) | | Shares to be sold under the plan upon exercise of option | | — |
| | (3 | ) |
Joe Mansueto Executive Chairman | | 11/26/2018 | | 4/30/2020 | | 1,600,000 |
| | Shares to be sold under the plan if the stock reaches specified prices
| | 1,600,000 |
| | 20,814,144 |
|
Joe Mansueto Executive Chairman | | 11/5/2019 | | 4/30/2021 | | 1,600,000 |
| | Shares to be sold under the plan if the stock reaches specified prices beginning May 1, 2020
| | — |
| | 19,214,144 |
|
Caroline Tsay Director | | 8/6/2019 | | 11/15/2020 | | 964 |
| | Shares to be sold under the plan if the stock reaches specified prices
| | — |
| | 3,624 |
|
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
Name and Position | | Date of Plan | | Plan Termination Date | | Number of Shares to be Sold under the Plan | | Timing of Sales under the Plan | | Number of Shares Sold under the Plan through October 23, 2020 | | Projected Beneficial Ownership (1) | |
Gail Landis Director | | 8/19/2020 | | 11/2/2021 | | 1,382 | | | Shares to be sold under the plan if the stock reaches specified prices | | — | | | 2,905 | | |
Bill Lyons Director | | 8/19/2020 | | 5/14/2021 | | 2,316 | | | Shares to be sold under the plan upon exercise of option
| | — | | | 24,628 | | |
Joe Mansueto Executive Chairman | | 11/5/2019 | | 4/30/2021 | | 1,600,000 | | | Shares to be sold under the plan if the stock reaches specified prices | | 800,000 | | | 19,214,144 | | |
During the firstthird quarter of 2020, the previously disclosed Rule 10b5-1 plan for Steven KaplanBevin Desmond was completed in accordance with its terms.
(1) This column reflects an estimate of the number of shares each identified director and executive officer will beneficially own following the sale of all shares under the Rule 10b5-1 sales plan. This information reflects the beneficial ownership of our common stock on March 31,September 30, 2020 and includes shares of our common stock subject to options that were then exercisable or that will have become exercisable by May 30,November 29, 2020 and restricted stock units that will vest by May 30,November 29, 2020. The
estimates do not reflect any changes to beneficial ownership that may have occurred since March 31,September 30, 2020. Each director and executive officer identified in the table may amend or terminate his or her Rule 10b5-1 sales plan and may adopt additional Rule 10b5-1 plans in the future.
(2) The number of shares to be sold under this plan is such number as are necessary to pay the exercise price under an option for 2,316 shares.
(3) 33,332 minus the number sold under the plan as described in footnote (2).
| |
Item 3. | Quantitative and Qualitative Disclosures about Market Risk |
Item 3.Quantitative and Qualitative Disclosures about Market Risk
Our investment portfolio is actively managed and may suffer losses from fluctuating interest rates, market prices, or adverse security selection. These accounts may consist of stocks, bonds, options, mutual funds, money market funds, or exchange-traded products that replicate the model portfolios and strategies created by Morningstar. These investment accounts may also include exchange-traded products where Morningstar is an index provider. As of March 31,September 30, 2020,, our cash, cash equivalents, and investments balance was $348.8$377.8 million. Based on our estimates, a 100 basis-point change in interest rates would not have a material effect on the fair value of our investment portfolio.
We are subject to risk from fluctuations in the interest rates related to a portion of our long-term debt. The interest rates are based upon the applicable LIBOR rate plus an applicable margin for such loans or the lender's base rate plus an applicable margin for such loans. On an annualized basis, we estimate a 100 basis-point change in the LIBOR rate would have a $5.3 $4.9 million impactimpact on our interest expense, based on our current outstanding principal balance and LIBOR rates around March 31,September 30, 2020.
We are subject to risk from fluctuations in foreign currencies from our operations outside of the United States. To date, we have not engaged in currency hedging, and we do not currently have any positions in derivative instruments to hedge our currency risk.
The table below shows our exposure to foreign currency denominated revenue and operating income for the threenine months ended March 31,September 30, 2020:
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | Nine months ended September 30, 2020 |
(in millions, except foreign currency rates) | | Australian Dollar | | British Pound | | Canadian Dollar | | Euro | | Other Foreign Currencies |
Currency rate in U.S. dollars as of September 30, 2020 | | 0.7141 | | 1.2873 | | 0.7483 | | 1.1726 | | n/a |
| | | | | | | | | | |
Percentage of revenue | | 3.2 | % | | 8.2 | % | | 7.3 | % | | 5.2 | % | | 5.6 | % |
Percentage of operating income (loss) | | 4.5 | % | | 3.2 | % | | 15.4 | % | | (5.3) | % | | (20.6) | % |
| | | | | | | | | | |
Estimated effect of a 10% adverse currency fluctuation on revenue | | $ | (1.7) | | | $ | (7.3) | | | $ | (6.5) | | | $ | (3.4) | | | $ | (4.8) | |
Estimated effect of a 10% adverse currency fluctuation on operating income (loss) | | $ | (0.4) | | | $ | (0.4) | | | $ | (1.9) | | | $ | 1.7 | | | $ | 2.6 | |
|
| | | | | | | | | | | | | | | | | | | | |
| | Three months ended March 31, 2020 |
(in millions, except foreign currency rates) | | Australian Dollar | | British Pound | | Canadian Dollar | | Euro | | Other Foreign Currencies |
Currency rate in U.S. dollars as of March 31, 2020 | | 0.6142 |
| | 1.2376 |
| | 0.7057 |
| | 1.1002 |
| | n/a |
|
| | | | | | | | | | |
Percentage of revenue | | 3.2 | % | | 8.0 | % | | 6.4 | % | | 4.6 | % | | 5.4 | % |
Percentage of operating income (loss) | | 4.8 | % | | (2.5 | )% | | 11.3 | % | | 12.1 | % | | (23.5 | )% |
| | | | | | | | | | |
Estimated effect of a 10% adverse currency fluctuation on revenue | | $ | (1.7 | ) | | $ | (3.4 | ) | | $ | (3.1 | ) | | $ | (1.5 | ) | | $ | (2.2 | ) |
Estimated effect of a 10% adverse currency fluctuation on operating income (loss) | | $ | (0.4 | ) | | $ | 0.1 |
| | $ | (0.7 | ) | | $ | (0.6 | ) | | $ | 1.2 |
|
The table below shows our net investment exposure to foreign currencies as of March 31,September 30, 2020:
| | | | As of March 31, 2020 | | As of September 30, 2020 |
(in millions) | | Australian Dollar | | British Pound | | Canadian Dollar | | Euro | | Other Foreign Currencies | (in millions) | | Australian Dollar | | British Pound | | Canadian Dollar | | Euro | | Other Foreign Currencies |
Assets, net of unconsolidated entities | | $ | 55.8 |
| | $ | 317.9 |
| | $ | 339.6 |
| | $ | 162.8 |
| | $ | 163.3 |
| Assets, net of unconsolidated entities | | $ | 73.0 | | | $ | 306.8 | | | $ | 469.7 | | | $ | 220.5 | | | $ | 198.3 | |
Liabilities | | 22.4 |
| | 66.5 |
| | 221.2 |
| | 52.2 |
| | 13.5 |
| Liabilities | | 27.2 | | | 71.7 | | | 254.4 | | | 170.2 | | | 5.8 | |
Net currency position | | $ | 33.4 |
| | $ | 251.4 |
| | $ | 118.4 |
| | $ | 110.6 |
| | $ | 149.8 |
| Net currency position | | $ | 45.8 | | | $ | 235.1 | | | $ | 215.3 | | | $ | 50.3 | | | $ | 192.5 | |
| | | | | | | | | | | | | | | | | | |
Estimated effect of a 10% adverse currency fluctuation on equity | | $ | (3.3 | ) | | $ | (25.1 | ) | | $ | (11.8 | ) | | $ | (11.1 | ) | | $ | (15.0 | ) | Estimated effect of a 10% adverse currency fluctuation on equity | | $ | (4.6) | | | $ | (23.5) | | | $ | (21.5) | | | $ | (5.0) | | | $ | (19.2) | |
| |
Item 4. | Controls and Procedures |
Item 4.Controls and Procedures
| |
(a) | Evaluation and Disclosure Controls and Procedures |
(a)Evaluation and Disclosure Controls and Procedures
Disclosure controls and procedures are designed to reasonably assure that information required to be disclosed in the reports filed or submitted under the Securities Exchange Act of 1934 (Exchange Act) is recorded, processed, summarized, and reported within the time periods specified in the SEC’s rules and forms. Disclosure controls and procedures include, without limitation, controls and procedures designed to reasonably assure that information required to be disclosed in the reports filed under the Exchange Act is accumulated and communicated to management, including the chief executive officer and chief financial officer, as appropriate, to allow timely decisions regarding required disclosure.
We carried out an evaluation, under the supervision and with the participation of management, including our chief executive officer and chief financial officer, of the effectiveness of the design and operation of our disclosure controls and procedures, as defined in Rules 13a-15(e) and 15d-15(e) of the Exchange Act of 1934, as of March 31, 2020.September 30, 2020. Based on that evaluation, our chief executive officer and chief financial officer concluded that our disclosure controls and procedures are effective to provide reasonable assurance that information required to be disclosed in the reports we file or submit under the Exchange Act is recorded, processed, summarized, and reported as and when required and is accumulated and communicated to management, including the chief executive officer and chief financial officer, as appropriate, to allow timely decisions regarding required disclosure.
(b)Changes in Internal Control Over Financial Reporting
| |
(b) | Changes in Internal Control Over Financial Reporting |
As permitted under the SEC guidelines, management’s assessment of and conclusion on the effectiveness of internal control over financial reporting for the fiscal year endingended December 31, 2019 did not include the internal controls of DBRS, which we acquired on July 2, 2019. We are currently integrating the operations of DBRS into our internal control framework and processes and will incorporate DBRS into our annual assessment of internal control over financial reporting for the fiscal year ending December 31, 2020.
On July 2, 2020, we completed our acquisition of Sustainalytics (See Note 4 of the Notes to the Unaudited Condensed Consolidated Financial Statements for more information). We are currently integrating Sustainalytics into our internal control framework and processes and, pursuant to the SEC's guidance that an assessment of a recently acquired business may be omitted from the scope of an assessment in the year of acquisition, the scope of our assessment of the effectiveness of our internal control over financial reporting as of December 31, 2020 will not include Sustainalytics.
Other than the changes noted above, there were no changes in our internal control over financial reporting during the quarter ended March 31,September 30, 2020 that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.
PART 2.OTHER INFORMATION
Item 1.Legal Proceedings
We incorporate by reference the information regarding legal proceedings set forth in Note 12 of the Notes to our Unaudited Condensed Consolidated Financial Statements contained in Part 1, Item 1 of this Quarterly Report.
Item 1A.Risk Factors
There have been no material changes during the first threenine months of 2020 to the risk factors disclosed in Item 1A. Risk Factors in our Annual Report, except as noted below.
The current COVID-19 pandemic may have material and adverse impacts on our business, financial condition, and results of operation,operations, the nature and extent of which are currentlycontinue to be uncertain and unpredictable.
The current COVID-19 pandemic and the governmental and societal responses to it worldwide have the potential to materially and adversely affect our business, financial condition, and results of operations in ways that arecontinue to be uncertain and unpredictable atunpredictable. The COVID-19 pandemic has created significant public health concerns as well as significant volatility, uncertainty and economic disruption in every country in which we operate. While we have taken numerous steps to respond to this time. Inchanging environment, there can be no assurance that such steps will be successful or that our business, financial condition and results of operations will not be materially and adversely affected by the immediate term,consequences of the pandemic.
During the third quarter of 2020, we saw some fluctuations of government-mandated COVID-19-related restrictions in certain geographies, dependent upon the local extent and severity of COVID-19 infections and other factors. Our approach to preventative and protective actions that governments have implemented, or that we ourselves have taken or will take in the future, in respect of the pandemic, such as travel restrictions, quarantines,has remained similarly flexible and facility closures, have resulted inalthough a significant portion of our workforce workingcontinues to work from remote work environments.environments we have been able to bring back some employees to office locations on a volunteer-only basis. Many of our customers, vendors, and data suppliers have implementedcontinue to operate under similar arrangements.arrangements which may interfere with attendance or productivity. While we have been able to successfully implement our business continuity plans and continue to deliver our core data, research, and ratingshave permitted remote working arrangements without material interruption, prolonged periods of virtual collaboration may have an impact on innovation, productivity and culture over time. Our management is focused on mitigating the Internet-based remote systems and working arrangements by which we and our customers, vendors, and data suppliers have achieved these results have never been tested over an extended period, andeffects of the ability of our employees, vendors, and data suppliers to perform their respective roles in the conduct ofCOVID-19 pandemic on our business, which has required and will continue to require a substantial investment of our customers to successfully use our productstheir time and services, could degrade over time. Remote work arrangements, facility closures, or the unavailability of key personnel due to illness could also adversely affect our control environment, technological capacity, and cybersecurity capabilities.may delay other strategic activities.
In the longer term, the adverse effects of the COVID-19 pandemic on the world’s economies and financial markets may be significant, and long term, with unpredictable effects on the overall demand and pricing environment for our products and services. OurWhile the third quarter of 2020 saw growth in many financial markets, uncertainty around the continuing extent and severity of the COVID-19 pandemic, the willingness of governments and central banks to continue fiscal and monetary stimulus, and national and global political conditions may undermine or reverse such growth. If that turns out to be the case, our asset management businesses could be affected by declines in assets under management and advisement resulting from aany prolonged downturn in financial markets and a concomitant decline of broad-based investment activity, while our credit ratings business could suffer from a decline in new issue activity resulting from a decline in the availability of credit. The financial performance of our customers, including those of our license businesses, could materially deteriorate, which could result in lower demand, cancellations, price reductions, or delays in implementation for our products and services. The uncertainty surrounding the duration and the effects of the COVID-19 pandemic in each of the countries in which we operate could impede our business planning and coordination. While we are not overly dependent on third party global supply chains, many of our customers and suppliers are. In addition, the availability of credit could become constrained even to financially strong companies. These and other potential impacts
We are closely monitoring the impact of the COVID-19 pandemic could therefore materially and adversely affectcontinually assessing its potential effects on our business. Given the dynamic nature of these circumstances, the full impact of the COVID-19 pandemic cannot be reasonably estimated at this time. The extent to which our business, financial condition and results of operations are affected by the COVID-19 pandemic will largely depend on future developments which cannot be reliably predicted, as there are no comparable recent events that provide guidance as to the potential effects of a global pandemic. The impact of the COVID-19 pandemic may also exacerbate other risks discussed in Item 1A. Risk Factors in our Annual Report, including but not limited to those related to cybersecurity threats, technology systems disruption, and volatility in the financial markets, any of which could have a material adverse effect on our business, financial condition and results of operations. This situation is changing rapidly and additional impacts may arise that we are not aware of currently or that we currently do not consider to be significant risks to our operations.
Refer to Management’s Discussion and Analysis of Financial Condition and Results of Operations - COVID-19 Update for additional information.
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Item 2. | Unregistered Sales of Equity Securities and Use of Proceeds |
Item 2.Unregistered Sales of Equity Securities and Use of Proceeds
Issuer Purchases of Equity Securities
Subject to applicable law, we may repurchase shares at prevailing market prices directly on the open market or in privately negotiated transactions in amounts that we deem appropriate.
In December 2017, the board of directors approved a share repurchase program that authorizes the Company to repurchase up to $500.0 million in shares of the Company's outstanding common stock, effective January 1, 2018. The authorization expires on December 31, 2020.
The following table presents information related to repurchases of common stock we made during the three months ended September 30, 2020:
| | | | | | | | | | | | | | | | | | | | | | | | | | |
Period: | | Total number of shares purchased | | Average price paid per share | | Total number of shares purchased as part of publicly announced programs | | Approximate dollar value of shares that may yet be purchased under the programs |
July 1, 2020 - July 31, 2020 | | — | | | $ | — | | | — | | | $ | 454,436,031 | |
August 1, 2020 - August 31, 2020 | | 41,957 | | | 158.90 | | | 41,957 | | | $ | 447,768,055 | |
September 1, 2020 - September 30, 2020 | | 80,063 | | | 158.04 | | | 80,063 | | | $ | 435,113,415 | |
Total | | 122,020 | | | $ | 158.34 | | | 122,020 | | | |
March 31, 2020:
|
| | | | | | | | | | | | | | |
Period: | | Total number of shares purchased | | Average price paid per share | | Total number of shares purchased as part of publicly announced programs | | Approximate dollar value of shares that may yet be purchased under the programs |
January 1, 2020 - January 31, 2020 | | — |
| | $ | — |
| | — |
| | $ | 474,439,476 |
|
February 1, 2020 - February 29, 2020 | | — |
| | — |
| | — |
| | $ | 474,439,476 |
|
March 1, 2020 - March 31, 2020 | | 176,925 |
| | 113.04 |
| | 176,925 |
| | $ | 454,436,031 |
|
Total | | 176,925 |
| | $ | 113.04 |
| | 176,925 |
| |
|
|
Item 6.Exhibits
| | | | | | | | |
Item 6.Exhibit No | Exhibits | Description of Exhibit |
| | Note Purchase Agreement, dated as of October 26, 2020, among Morningstar, Inc., and each of the purchasers signatory thereto (incorporated by reference to Morningstar, Inc.'s Current Report on Form 8-K filed with the SEC on October 26, 2020) |
| | |
Exhibit No | | Description of Exhibit |
| | Certification of Chief Executive Officer pursuant to Rule 13a-14(a) and 15d-14(a) of the Securities Exchange Act of 1934, as amended |
| | |
| | Certification of Chief Financial Officer pursuant to Rule 13a-14(a) and 15d-14(a) of the Securities Exchange Act of 1934, as amended |
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| | Certification of Chief Executive Officer pursuant to 18 U.S.C. 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 |
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| | Certification of Chief Financial Officer pursuant to 18 U.S.C. 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 |
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101 | | The following financial information from Morningstar, Inc.’s Quarterly Report on Form 10-Q for the quarter ended March 31,September 30, 2020, filed with the SEC on May 1,October 30, 2020 formatted in Inline XBRL: (i) Cover Page, (ii) Unaudited Condensed Consolidated Statements of Income, (iii) Unaudited Condensed Consolidated Statements of Comprehensive Income (iv) Unaudited Condensed Consolidated Balance Sheets, (v) Unaudited Condensed Consolidated Statement of Equity, (vi) Unaudited Condensed Consolidated Statements of Cash Flows and (vii) the Notes to Unaudited Condensed Consolidated Financial Statements |
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104 | | Cover Page Interactive Data File (the cover page XBRL tags are embedded in the Inline XBRL document) |
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.
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| | MORNINGSTAR, INC. |
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Date: October 30, 2020 | By: | /s/ Jason Dubinsky |
| | Jason Dubinsky |
| | Chief Financial Officer |
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| | MORNINGSTAR, INC. |
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Date: May 1, 2020 | By: | /s/ Jason Dubinsky
|
| | Jason Dubinsky |
| | Chief Financial Officer |
| | |