Table of Contents UNITED STATES SECURITIES AND EXCHANGE COMMISSION Washington D.C. 20549 FORM 10-Q ☑ QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 FOR THE QUARTERLY PERIOD ENDED September 30, 2020 OR ☐ TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the transition period from to Commission File Number: 000-51280 MORNINGSTAR, INC. (Exact Name of Registrant as Specified in its Charter) (State or Other Jurisdiction of (I.R.S ...

Table of Contents UNITED STATES SECURITIES AND EXCHANGE COMMISSION Washington D.C. 20549 FORM 10-Q QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 FOR THE QUARTERLY PERIOD ENDED June 30, 2020 OR ☐ TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the transition period from to Commission File Number: 000-51280 MORNINGSTAR, INC. (Exact Name of Registrant as Specified in its Charter) (State or Other Jurisdiction of (I.R.S. Emplo ...

PART 1 FINANCIAL INFORMATION [Financial Statements](index=3&type=section&id=Item%201.%20Financial%20Statements) This section presents Morningstar's unaudited condensed consolidated financial statements for Q1 2020, highlighting revenue growth, operating income decline, and a comprehensive loss [Unaudited Condensed Consolidated Statements of Income](index=4&type=section&id=Unaudited%20Condensed%20Consolidated%20Statements%20of%20Income) Q1 2020 saw revenue increase by 25.1% to $324.0 million, but operating income and net income declined due to faster expense growth Q1 2020 vs Q1 2019 Income Statement Highlights | Metric | Three months ended March 31, 2020 | Three months ended March 31, 2019 | Change | | :--- | :--- | :--- | :--- | | **Revenue** | $324.0 million | $258.9 million | +25.1% | | **Operating Income** | $44.5 million | $49.5 million | -10.1% | | **Consolidated Net Income** | $23.9 million | $33.2 million | -28.0% | | **Diluted EPS** | $0.55 | $0.77 | -28.6% | | **Dividends Declared per Share** | $0.30 | $0.28 | +7.1% | [Unaudited Condensed Consolidated Statements of Comprehensive Income](index=5&type=section&id=Unaudited%20Condensed%20Consolidated%20Statements%20of%20Comprehensive%20Income) The company reported a Q1 2020 comprehensive loss of $20.3 million, primarily due to negative foreign currency translation adjustments Comprehensive Income (Loss) Comparison | (in millions) | Three months ended March 31, 2020 | Three months ended March 31, 2019 | | :--- | :--- | :--- | | **Consolidated net income** | $23.9 | $33.2 | | Foreign currency translation adjustment | $(40.4) | $3.4 | | **Comprehensive income (loss)** | **$(20.3)** | **$38.0** | [Unaudited Condensed Consolidated Balance Sheets](index=6&type=section&id=Unaudited%20Condensed%20Consolidated%20Balance%20Sheets) As of March 31, 2020, total assets and equity slightly decreased, primarily due to goodwill reduction from foreign currency translation Balance Sheet Highlights | (in millions) | As of March 31, 2020 | As of December 31, 2019 | | :--- | :--- | :--- | | **Cash and cash equivalents** | $322.5 | $334.1 | | **Goodwill** | $1,013.2 | $1,039.1 | | **Total Assets** | $2,292.0 | $2,370.9 | | **Long-term debt** | $519.4 | $502.1 | | **Total Liabilities** | $1,259.3 | $1,287.3 | | **Total Equity** | $1,032.7 | $1,083.6 | [Unaudited Condensed Consolidated Statements of Cash Flows](index=10&type=section&id=Unaudited%20Condensed%20Consolidated%20Statements%20of%20Cash%20Flows) Cash provided by operating activities decreased to $48.7 million, while cash used for financing activities declined, resulting in an overall cash decrease Cash Flow Summary | (in millions) | Three months ended March 31, 2020 | Three months ended March 31, 2019 | | :--- | :--- | :--- | | **Cash provided by operating activities** | $48.7 | $59.0 | | **Cash used for investing activities** | $(19.5) | $(19.5) | | **Cash used for financing activities** | $(26.9) | $(60.7) | | **Net decrease in cash and cash equivalents** | $(11.6) | $(20.2) | [Notes to Unaudited Condensed Consolidated Financial Statements](index=12&type=section&id=Notes%20to%20Unaudited%20Condensed%20Consolidated%20Financial%20Statements) Notes detail accounting policies, COVID-19 impact, credit, acquisitions, revenue recognition, and contingencies, including SEC settlement and subsequent acquisitions - The company is closely monitoring the impact of the COVID-19 pandemic, which remains fluid, and the CARES Act had no impact on the financial statements for the quarter ended March 31, 2020[21](index=21&type=chunk)[22](index=22&type=chunk) - Total debt stood at **$530.4 million** as of March 31, 2020, primarily from a credit facility used to finance the DBRS acquisition, with **$210.0 million** of borrowing availability under its revolving credit facility[30](index=30&type=chunk)[32](index=32&type=chunk) - Revenue is disaggregated into three types: License-based (**$216.0 million**), Asset-based (**$57.2 million**), and Transaction-based (**$50.8 million**), with license-based revenue from subscriptions being the largest component[50](index=50&type=chunk) - Morningstar Credit Ratings, LLC reached an agreement in principle with SEC staff to settle an investigation for a civil penalty of **$3.5 million**, which was accrued as of December 31, 2019[79](index=79&type=chunk) - Subsequent to the quarter end, Morningstar announced an agreement to acquire the remaining ~60% of Sustainalytics, a leader in ESG ratings and research, for approximately **EUR 55.0 million** upfront plus future performance-based payments[85](index=85&type=chunk) [Management's Discussion and Analysis of Financial Condition and Results of Operations](index=26&type=section&id=Item%202.%20Management%27s%20Discussion%20and%20Analysis%20of%20Financial%20Condition%20and%20Results%20of%20Operations) Management discusses a 25.1% revenue increase driven by DBRS acquisition, offset by rising expenses, leading to an operating income decline and reduced free cash flow [COVID-19 Update](index=27&type=section&id=COVID-19%20Update) The company is managing COVID-19 impacts, anticipating potential delays in client purchases and market volatility effects on revenue streams - The full impact of the COVID-19 pandemic cannot be reasonably estimated, but it could lead clients to delay purchases or reduce spending[93](index=93&type=chunk) - Asset-based revenue will likely see impacts from Q1 market volatility in future periods due to reporting lags[93](index=93&type=chunk) - Transaction-based revenue from DBRS Morningstar was negatively impacted by tightening credit markets and volatility toward the end of Q1[93](index=93&type=chunk) - The company has implemented business continuity plans, transitioned to a remote workforce, and is focused on maintaining a strong balance sheet with **$348.8 million** in cash and investments and **$210.0 million** in credit facility availability[94](index=94&type=chunk)[95](index=95&type=chunk) [Consolidated Results of Operations](index=31&type=section&id=Consolidated%20Results%20of%20Operations) Q1 2020 consolidated revenue grew 25.1% to $324.0 million, primarily due to DBRS acquisition, while operating expenses rose 33.5%, impacting operating margin Revenue by Type (Q1 2020 vs Q1 2019) | Revenue Type | Q1 2020 (in millions) | Q1 2019 (in millions) | Change | Organic Change | | :--- | :--- | :--- | :--- | :--- | | License-based | $216.0 | $195.5 | +10.5% | +10.8% | | Asset-based | $57.2 | $48.8 | +17.2% | +18.0% | | Transaction-based | $50.8 | $14.6 | +247.9% | -17.2% | - PitchBook was a key driver of license-based revenue growth, with revenue up **40.2%** to **$45.3 million** and licenses increasing **67.5%** YoY to **41,308**[99](index=99&type=chunk)[111](index=111&type=chunk) - Total operating expense increased by **$70.1 million** (**33.5%**), with DBRS Morningstar contributing **20.1 percentage points** to this growth[123](index=123&type=chunk) Operating Income and Adjusted Operating Income Reconciliation | (in millions) | Q1 2020 | Q1 2019 | Change | | :--- | :--- | :--- | :--- | | **Operating income (GAAP)** | **$44.5** | **$49.5** | **(10.1)%** | | Add: intangible amortization expense | $14.0 | $4.9 | +185.7% | | Add: M&A-related expenses | $2.9 | $0.3 | +866.7% | | **Adjusted operating income (Non-GAAP)** | **$61.4** | **$54.7** | **+12.2%** | [Liquidity and Capital Resources](index=37&type=section&id=Liquidity%20and%20Capital%20Resources) The company maintained strong liquidity with $348.8 million in cash, despite a decline in free cash flow and ongoing share repurchases - As of March 31, 2020, cash, cash equivalents, and investments totaled **$348.8 million**, with approximately **70%** of this balance held by operations outside the U.S[140](index=140&type=chunk)[145](index=145&type=chunk) - The company has an outstanding principal balance of **$530.4 million** on its credit facility and was in compliance with all financial covenants[142](index=142&type=chunk) - In Q1 2020, the company repurchased **176,925 shares** for **$20.0 million**, with approximately **$454.4 million** remaining under the current repurchase authorization[147](index=147&type=chunk) Free Cash Flow | (in millions) | Three months ended March 31, 2020 | Three months ended March 31, 2019 | Change | | :--- | :--- | :--- | :--- | | Cash provided by operating activities | $48.7 | $59.0 | (17.5)% | | Capital expenditures | $(15.1) | $(18.7) | (19.3)% | | **Free cash flow** | **$33.6** | **$40.3** | **(16.6)%** | [Quantitative and Qualitative Disclosures about Market Risk](index=40&type=section&id=Item%203.%20Quantitative%20and%20Qualitative%20Disclosures%20about%20Market%20Risk) The company faces market risks from interest rate fluctuations and foreign currency exchange rates, with sensitivity analyses provided for both - The company is subject to interest rate risk on its long-term debt, where an annualized **100 basis-point** change in the LIBOR rate would impact interest expense by an estimated **$5.3 million**[157](index=157&type=chunk) - The company is subject to foreign currency risk from its international operations, where a **10%** adverse currency fluctuation would have an estimated negative impact of **$25.1 million** on equity from its British Pound exposure and **$11.8 million** from its Canadian Dollar exposure[158](index=158&type=chunk) [Controls and Procedures](index=41&type=section&id=Item%204.%20Controls%20and%20Procedures) Management concluded disclosure controls were effective as of March 31, 2020, with DBRS internal controls integration ongoing for the 2020 assessment - The CEO and CFO concluded that the company's disclosure controls and procedures are effective to provide reasonable assurance of timely and accurate reporting[160](index=160&type=chunk) - The integration of DBRS's operations into the company's internal control framework is ongoing and will be incorporated into the annual assessment for the fiscal year ending December 31, 2020[161](index=161&type=chunk) PART 2 OTHER INFORMATION [Legal Proceedings](index=42&type=section&id=Item%201.%20Legal%20Proceedings) This section incorporates legal proceedings information from Note 12, detailing a pending SEC settlement for Morningstar Credit Ratings - Information regarding legal proceedings is detailed in Note 12 of the Notes to Unaudited Condensed Consolidated Financial Statements[164](index=164&type=chunk) [Risk Factors](index=42&type=section&id=Item%201A.%20Risk%20Factors) A new material risk factor addresses the uncertain and potentially adverse impacts of the COVID-19 pandemic on operations and financial condition - A new risk factor has been added regarding the uncertain and unpredictable material and adverse impacts of the COVID-19 pandemic[166](index=166&type=chunk) - Risks include operational challenges from extended remote work for employees, vendors, and customers, as well as potential degradation of cybersecurity and internal controls[166](index=166&type=chunk) - Longer-term risks involve a potential decline in demand for products and services due to a prolonged economic downturn, reduced assets under management, and a decline in credit issuance activity[167](index=167&type=chunk) [Unregistered Sales of Equity Securities and Use of Proceeds](index=43&type=section&id=Item%202.%20Unregistered%20Sales%20of%20Equity%20Securities%20and%20Use%20of%20Proceeds) In Q1 2020, Morningstar repurchased 176,925 shares for $20.0 million under its $500.0 million share repurchase program Issuer Purchases of Equity Securities (Q1 2020) | Period | Total Shares Purchased | Average Price Paid per Share | Total Cost (approx.) | | :--- | :--- | :--- | :--- | | Jan 2020 | — | — | — | | Feb 2020 | — | — | — | | Mar 2020 | 176,925 | $113.04 | $20.0 million | | **Total Q1** | **176,925** | **$113.04** | **$20.0 million** | - As of March 31, 2020, approximately **$454.4 million** remained available for repurchase under the existing program, which expires on December 31, 2020[171](index=171&type=chunk) [Exhibits](index=44&type=section&id=Item%206.%20Exhibits) This section lists Form 10-Q exhibits, including CEO and CFO certifications and financial statements in Inline XBRL format - The exhibits include CEO and CFO certifications and financial data in Inline XBRL format[172](index=172&type=chunk)

[Part I](index=4&type=section&id=Part%20I) [Business](index=4&type=section&id=Item%201.%20Business) Morningstar, Inc. delivers independent investment research, data, and design, primarily through license-based services, with growth driven by PitchBook and the DBRS acquisition, targeting empowered investors and market convergence - Morningstar's core competencies are data, research, and design, which it uses to create products for individuals, financial advisors, asset managers, and institutional investors[13](index=13&type=chunk) - The company's strategy focuses on three secular trends: the empowerment of investors with new data and analytics, the increasing demand for value from financial advice, and the convergence of public and private capital markets[38](index=38&type=chunk)[39](index=39&type=chunk)[40](index=40&type=chunk)[41](index=41&type=chunk) - In **July 2019**, Morningstar completed the acquisition of DBRS, the world's **fourth-largest** credit rating agency, and integrated it with Morningstar Credit Ratings to form DBRS Morningstar[27](index=27&type=chunk)[91](index=91&type=chunk) Revenue by Type (FY 2019) | Revenue Type | Percentage of 2019 Revenue | | :--- | :--- | | License-based | 68.9% | | Asset-based | 18.0% | | Transaction-based | 13.1% | [Major Products and Services](index=12&type=section&id=Major%20Products%20and%20Services) This section outlines Morningstar's key products and services, detailing their 2019 revenue contributions and performance metrics, including PitchBook and DBRS Morningstar - PitchBook demonstrated significant growth, with licenses increasing by **59.7% to 36,695** in 2019 and an annual revenue retention rate of approximately **121.1%**[88](index=88&type=chunk)[89](index=89&type=chunk)[334](index=334&type=chunk) - DBRS Morningstar, formed after the July 2019 acquisition of DBRS, derives approximately **63%** of its revenue from transaction-based fees for new-issue ratings, with the remainder from recurring surveillance and research services[91](index=91&type=chunk)[95](index=95&type=chunk) - Workplace Solutions, including managed retirement accounts (MRA), served **36** retirement service providers representing about **286,000** retirement plans as of year-end 2019[59](index=59&type=chunk)[115](index=115&type=chunk) Top 5 Products by 2019 Revenue Contribution | Product | 2019 Revenue % | Key Metric (as of Dec 31, 2019) | | :--- | :--- | :--- | | Morningstar Data | 16.7% | 103.5% annual revenue retention rate | | Morningstar Direct | 12.6% | 15,903 licensed users | | PitchBook | 12.6% | 36,695 licensed users | | DBRS Morningstar | 10.8% | N/A (Acquired mid-2019) | | Morningstar Investment Management | 9.8% | $48.6B in Morningstar Managed Portfolios AUM/AUA | [Government Regulation](index=23&type=section&id=Government%20Regulation) This section details the regulatory environment governing Morningstar's investment advisory and credit rating operations, including SEC, ERISA, and international registrations - The company's investment advisory subsidiaries are registered with the SEC under the Advisers Act of 1940 and are subject to fiduciary duties. Some also act as fiduciaries under ERISA for retirement plan services[153](index=153&type=chunk)[156](index=156&type=chunk) - DBRS Morningstar's U.S. entity is registered with the SEC as a Nationally Recognized Statistical Rating Organization (NRSRO), its Canadian entity is a Designated Rating Organization (DRO), and its European entities are registered with the European Securities and Markets Authority (ESMA)[165](index=165&type=chunk)[166](index=166&type=chunk)[167](index=167&type=chunk) - In response to Brexit, the company is seeking authorization for its French subsidiary to be regulated as an investment firm under MiFID II to ensure continued service to EU institutional clients[163](index=163&type=chunk) [Risk Factors](index=28&type=section&id=Item%201A.%20Risk%20Factors) Morningstar faces risks from fiduciary liabilities on **$232.9 million** in assets, reputational damage, cybersecurity threats, market volatility, technological disruption, acquisition integration challenges, and complex international regulations - The company's investment management operations, with approximately **$232.9 million** in assets under advisement and management, expose it to potential liability for breaches of fiduciary duties under the Advisers Act and ERISA[190](index=190&type=chunk)[191](index=191&type=chunk)[195](index=195&type=chunk) - Cybersecurity incidents represent a major risk, as a failure to protect confidential information could lead to reputational harm, regulatory action, and significant financial losses, with potential GDPR fines up to **4%** of worldwide revenues[199](index=199&type=chunk)[202](index=202&type=chunk)[203](index=203&type=chunk) - The business is subject to disruption at key operational centers, including its Chicago headquarters (**1,750** employees), Shenzhen, China (**1,100** employees), and Mumbai, India (**1,800** employees), due to factors like pandemics, geopolitical tensions, or natural disasters[213](index=213&type=chunk)[214](index=214&type=chunk)[215](index=215&type=chunk) - The **$669 million** acquisition of DBRS introduces risks related to integration, achieving anticipated growth, and managing a significantly higher level of indebtedness (**$513.1 million** outstanding as of Dec 31, 2019)[249](index=249&type=chunk)[250](index=250&type=chunk) - A significant portion of revenue is tied to the asset management industry, which is facing trends like the shift to passive investing and industry consolidation, potentially reducing demand for the company's research and data on actively managed funds[236](index=236&type=chunk)[237](index=237&type=chunk) [Properties](index=40&type=section&id=Item%202.%20Properties) As of February 14, 2020, Morningstar leases approximately **563,000 square feet** in the U.S. and **573,000 square feet** internationally, with major offices in Mumbai and Shenzhen Leased Office Space (as of Feb 14, 2020) | Location | Leased Space (sq. ft.) | | :--- | :--- | | U.S. Operations | ~563,000 | | International Operations | ~573,000 | | - Mumbai, India | ~158,000 | | - Shenzhen, China | ~121,000 | [Legal Proceedings](index=41&type=section&id=Item%203.%20Legal%20Proceedings) Legal proceedings information is incorporated by reference from Note 16 of the Consolidated Financial Statements [Part II](index=42&type=section&id=Part%20II) [Market for Registrant's Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities](index=42&type=section&id=Item%205.%20Market%20for%20Registrant's%20Common%20Equity%2C%20Related%20Stockholder%20Matters%20and%20Issuer%20Purchases%20of%20Equity%20Securities) Morningstar's common stock trades on Nasdaq under "MORN", with a **$0.30 per share** quarterly dividend for 2020 and an active **$500.0 million** share repurchase program - The company's common stock is listed on the Nasdaq Global Select Market under the symbol "MORN"[269](index=269&type=chunk) - In Q4 2019, the quarterly cash dividend was increased from **$0.28 to $0.30 per share**. The expected quarterly dividend for 2020 is **$0.30 per share**[270](index=270&type=chunk) - The company has a board authorization to repurchase up to **$500.0 million** in common stock, which expires on December 31, 2020. No shares were repurchased in the fourth quarter of 2019[272](index=272&type=chunk)[273](index=273&type=chunk) [Selected Financial Data](index=44&type=section&id=Item%206.%20Selected%20Financial%20Data) This section provides a five-year financial summary (2015-2019), highlighting 2019 revenue of **$1,179.0 million**, operating income of **$189.6 million**, and free cash flow of **$254.4 million** Five-Year Selected Financial Data (in millions, except per share data) | Metric | 2019 | 2018 | 2017 | 2016 | 2015 | | :--- | :--- | :--- | :--- | :--- | :--- | | **Revenue** | **$1,179.0** | **$1,019.9** | **$911.7** | **$798.6** | **$788.8** | | Operating Income | $189.6 | $215.8 | $169.8 | $180.8 | $190.6 | | Net Income | $152.0 | $183.0 | $136.9 | $161.0 | $132.6 | | Diluted EPS | $3.52 | $4.25 | $3.18 | $3.72 | $3.00 | | Cash from Operations | $334.4 | $314.8 | $250.1 | $213.7 | $241.5 | | **Free Cash Flow** | **$254.4** | **$238.7** | **$183.5** | **$150.9** | **$184.2** | | Total Assets | $2,370.9 | $1,453.8 | $1,405.7 | $1,350.9 | $1,029.0 | | Long-term Liabilities | $791.5 | $156.3 | $277.6 | $359.2 | $84.0 | [Management's Discussion and Analysis of Financial Condition and Results of Operations](index=47&type=section&id=Item%207.%20Management's%20Discussion%20and%20Analysis%20of%20Financial%20Condition%20and%20Results%20of%20Operations) In FY2019, Morningstar's revenue grew **15.6% to $1,179.0 million**, driven by DBRS and PitchBook, while operating income declined **12.1% to $189.6 million** due to acquisition costs, and free cash flow increased **6.6% to $254.4 million** - Organic revenue, which excludes acquisitions and currency effects, grew by **8.4%** in 2019, primarily driven by PitchBook, Morningstar Data, and Morningstar Direct[351](index=351&type=chunk)[354](index=354&type=chunk) - Operating expenses increased by **23.0% to $989.4 million**, with the DBRS Morningstar integration contributing **10.9%** to this growth. Key drivers included higher compensation, production costs for Morningstar Funds Trust, rent, and stock-based compensation for the PitchBook management plan[360](index=360&type=chunk)[361](index=361&type=chunk) - The company entered into a new **$750.0 million** credit agreement to finance the DBRS acquisition, with an outstanding principal balance of **$513.1 million** as of December 31, 2019[382](index=382&type=chunk) Consolidated Results Summary (FY 2019 vs. FY 2018) | Metric | 2019 | 2018 | Change | | :--- | :--- | :--- | :--- | | Revenue | $1,179.0M | $1,019.9M | +15.6% | | Operating Income | $189.6M | $215.8M | -12.1% | | Operating Margin | 16.1% | 21.2% | -5.1 pp | | Free Cash Flow | $254.4M | $238.7M | +6.6% | [Consolidated Results](index=55&type=section&id=Consolidated%20Results) This section details Morningstar's 2019 consolidated financial performance, highlighting revenue growth drivers, international revenue contribution, and adjusted operating income - International revenue grew **22.3% to $312.6 million**, comprising **27%** of consolidated revenue, largely due to the DBRS acquisition's significant presence in Canada, the U.K., and Europe[354](index=354&type=chunk)[355](index=355&type=chunk) - Adjusted operating income, a non-GAAP measure excluding M&A-related expenses and amortization, was **$233.3 million** in 2019, a slight decrease of **1.4%** from **$236.5 million** in 2018[373](index=373&type=chunk)[374](index=374&type=chunk) Revenue Growth by Type (FY 2019) | Revenue Type | 2019 Revenue (M) | Growth vs. 2018 | Key Drivers | | :--- | :--- | :--- | :--- | | License-based | $812.7 | +8.1% | PitchBook, Morningstar Data, Morningstar Direct | | Asset-based | $211.6 | +5.6% | Morningstar Managed Portfolios, Morningstar Indexes | | Transaction-based | $154.7 | +127.8% | DBRS Morningstar acquisition | [Liquidity and Capital Resources](index=63&type=section&id=Liquidity%20and%20Capital%20Resources) This section reviews Morningstar's liquidity position, cash flow from operations, and available capital for share repurchases as of year-end 2019 - As of December 31, 2019, the company had cash, cash equivalents, and investments of **$367.5 million**, a decrease of **$28.4 million** from year-end 2018, primarily due to the cash paid for the DBRS acquisition[380](index=380&type=chunk) - Cash provided by operating activities increased to **$334.4 million** in 2019 from **$314.8 million** in 2018[381](index=381&type=chunk) - The company had **$474.4 million** available for future repurchases under its **$500.0 million** share repurchase program as of December 31, 2019[387](index=387&type=chunk) [Quantitative and Qualitative Disclosures about Market Risk](index=69&type=section&id=Item%207A.%20Quantitative%20and%20Qualitative%20Disclosures%20about%20Market%20Risk) Morningstar faces market risks from its investment portfolio, interest rate fluctuations on debt, and foreign currency movements, with a **$5.1 million** annualized impact for a 100 basis-point LIBOR change - The company is subject to interest rate risk on its long-term debt. A **100 basis-point** change in the LIBOR rate is estimated to have a **$5.1 million** impact on an annualized basis[424](index=424&type=chunk) Foreign Currency Exposure (FY 2019) | Currency | % of Revenue | % of Operating Income | Net Currency Position (M) | | :--- | :--- | :--- | :--- | | Euro | 4.8% | 12.9% | $112.3 | | British Pound | 8.0% | (0.2)% | $266.9 | | Canadian Dollar | 4.8% | 7.0% | $140.8 | | Australian Dollar | 3.3% | 1.3% | $36.5 | [Financial Statements and Supplementary Data](index=70&type=section&id=Item%208.%20Financial%20Statements%20and%20Supplementary%20Data) This section presents audited consolidated financial statements for 2017-2019, with 2019 revenue of **$1,179.0 million**, net income of **$152.0 million**, and total assets of **$2,370.9 million**, detailing accounting policies and the DBRS acquisition impact - The acquisition of DBRS for **$682.1 million** in cash resulted in the recognition of **$473.3 million** in goodwill and **$284.1 million** in intangible assets[530](index=530&type=chunk)[534](index=534&type=chunk)[535](index=535&type=chunk)[536](index=536&type=chunk) - The company adopted the new lease accounting standard (Topic 842) on January 1, 2019, resulting in the recognition of **$144.8 million** in operating lease assets and **$174.5 million** in operating lease liabilities on the balance sheet[519](index=519&type=chunk)[555](index=555&type=chunk)[602](index=602&type=chunk) - In November 2019, Morningstar Credit Ratings, LLC reached an agreement in principle with the SEC to settle an investigation, accruing a civil money penalty of **$3.5 million**[598](index=598&type=chunk) Key Financial Statement Data (FY 2019 vs. FY 2018, in millions) | Line Item | 2019 | 2018 | | :--- | :--- | :--- | | **Income Statement** | | | | Revenue | $1,179.0 | $1,019.9 | | Operating Income | $189.6 | $215.8 | | Net Income | $152.0 | $183.0 | | **Balance Sheet** | | | | Total Assets | $2,370.9 | $1,453.8 | | Goodwill | $1,039.1 | $556.7 | | Total Liabilities | $1,287.3 | $519.1 | | Total Equity | $1,083.6 | $934.7 | [Controls and Procedures](index=119&type=section&id=Item%209A.%20Controls%20and%20Procedures) Management concluded that disclosure controls and internal control over financial reporting were effective as of December 31, 2019, with the DBRS acquisition's internal controls excluded from the assessment - The CEO and CFO concluded that the company's disclosure controls and procedures were effective as of December 31, 2019[617](index=617&type=chunk) - Management concluded that internal control over financial reporting was effective as of December 31, 2019. This assessment excluded the internal controls of the recently acquired DBRS[619](index=619&type=chunk)[620](index=620&type=chunk) [Part III](index=121&type=section&id=Part%20III) [Directors, Executive Officers, and Corporate Governance](index=121&type=section&id=Item%2010.%20Directors%2C%20Executive%20Officers%2C%20and%20Corporate%20Governance) Information on directors, executive officers, and corporate governance is incorporated by reference from the 2020 Annual Meeting of Shareholders proxy statement - Information regarding directors, executive officers, and corporate governance is incorporated by reference from the definitive proxy statement for the 2020 Annual Meeting of Shareholders[626](index=626&type=chunk) [Executive Compensation](index=121&type=section&id=Item%2011.%20Executive%20Compensation) Executive compensation information is incorporated by reference from the 2020 Annual Meeting of Shareholders proxy statement - Information regarding executive compensation is incorporated by reference from the definitive proxy statement for the 2020 Annual Meeting of Shareholders[628](index=628&type=chunk) [Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters](index=121&type=section&id=Item%2012.%20Security%20Ownership%20of%20Certain%20Beneficial%20Owners%20and%20Management%20and%20Related%20Stockholder%20Matters) Security ownership and related stockholder matters are incorporated by reference from the 2020 Annual Meeting of Shareholders proxy statement - Information regarding security ownership of certain beneficial owners and management is incorporated by reference from the definitive proxy statement for the 2020 Annual Meeting of Shareholders[629](index=629&type=chunk) [Certain Relationships and Related Transactions, and Director Independence](index=121&type=section&id=Item%2013.%20Certain%20Relationships%20and%20Related%20Transactions%2C%20and%20Director%20Independence) Information on certain relationships, related transactions, and director independence is incorporated by reference from the 2020 Annual Meeting of Shareholders proxy statement - Information regarding certain relationships, related transactions, and director independence is incorporated by reference from the definitive proxy statement for the 2020 Annual Meeting of Shareholders[630](index=630&type=chunk) [Principal Accountant Fees and Services](index=121&type=section&id=Item%2014.%20Principal%20Accountant%20Fees%20and%20Services) Principal accountant fees and services information is incorporated by reference from the 2020 Annual Meeting of Shareholders proxy statement - Information regarding principal accountant fees and services is incorporated by reference from the definitive proxy statement for the 2020 Annual Meeting of Shareholders[631](index=631&type=chunk) [Part IV](index=122&type=section&id=Part%20IV) [Exhibits and Financial Statement Schedules](index=122&type=section&id=Item%2015.%20Exhibits%20and%20Financial%20Statement%20Schedules) This section lists all financial statements, schedules, and exhibits filed with the Form 10-K, including consolidated financial statements and the independent auditor's report - This section contains the list of all financial statements, schedules, and exhibits filed with the Form 10-K, including the consent of the independent registered public accounting firm, KPMG LLP[634](index=634&type=chunk)[635](index=635&type=chunk)

[PART 1. FINANCIAL INFORMATION](index=3&type=section&id=PART%201.%20FINANCIAL%20INFORMATION) Presents Morningstar's unaudited condensed consolidated financial statements and related notes for Q3 and 9M 2019 and 2018 [Item 1. Financial Statements](index=3&type=section&id=Item%201.%20Financial%20Statements) This section presents Morningstar, Inc.'s unaudited condensed consolidated financial statements for Q3 and 9M 2019 and 2018, along with detailed accounting notes [Unaudited Condensed Consolidated Statements of Income](index=4&type=section&id=Unaudited%20Condensed%20Consolidated%20Statements%20of%20Income) This section presents the unaudited condensed consolidated statements of income Consolidated Statements of Income (Three Months Ended September 30, in millions, except per share) | Metric | 2019 | 2018 | | :------------------------------------- | :--- | :--- | | Revenue | $313.8 | $261.3 | | Operating expense | $264.2 | $195.9 | | Operating income | $49.6 | $65.4 | | Non-operating income, net | $13.9 | $7.3 | | Consolidated net income | $49.1 | $56.9 | | Basic net income per share | $1.15 | $1.33 | | Diluted net income per share | $1.14 | $1.32 | | Dividends paid per common share | $0.28 | $0.25 | Consolidated Statements of Income (Nine Months Ended September 30, in millions, except per share) | Metric | 2019 | 2018 | | :------------------------------------- | :--- | :--- | | Revenue | $846.6 | $757.2 | | Operating expense | $696.7 | $590.7 | | Operating income | $149.9 | $166.5 | | Non-operating income, net | $12.9 | $18.0 | | Consolidated net income | $124.4 | $140.6 | | Basic net income per share | $2.91 | $3.30 | | Diluted net income per share | $2.89 | $3.27 | | Dividends declared per common share | $0.56 | $0.50 | | Dividends paid per common share | $0.84 | $0.75 | [Unaudited Condensed Consolidated Statements of Comprehensive Income](index=5&type=section&id=Unaudited%20Condensed%20Consolidated%20Statements%20of%20Comprehensive%20Income) This section presents the unaudited condensed consolidated statements of comprehensive income Consolidated Statements of Comprehensive Income (Three Months Ended September 30, in millions) | Metric | 2019 | 2018 | | :------------------- | :--- | :--- | | Consolidated net income | $49.1 | $56.9 | | Other comprehensive loss | $(18.4) | $(5.8) | | Comprehensive income | $30.7 | $51.1 | Consolidated Statements of Comprehensive Income (Nine Months Ended September 30, in millions) | Metric | 2019 | 2018 | | :------------------- | :--- | :--- | | Consolidated net income | $124.4 | $140.6 | | Other comprehensive loss | $(15.9) | $(20.1) | | Comprehensive income | $108.5 | $120.5 | [Unaudited Condensed Consolidated Balance Sheets](index=6&type=section&id=Unaudited%20Condensed%20Consolidated%20Balance%20Sheets) This section presents the unaudited condensed consolidated balance sheets Consolidated Balance Sheets (As of September 30, 2019 vs. December 31, 2018, in millions) | Metric | Sep 30, 2019 | Dec 31, 2018 | | :------------------- | :----------- | :----------- | | Cash and cash equivalents | $321.8 | $369.3 | | Total current assets | $560.7 | $601.6 | | Goodwill | $1,015.8 | $556.7 | | Total assets | $2,282.5 | $1,453.8 | | Deferred revenue (current) | $240.0 | $195.8 | | Total current liabilities | $431.7 | $362.8 | | Long-term debt | $534.8 | $70.0 | | Total liabilities | $1,240.6 | $519.1 | | Total equity | $1,041.9 | $934.7 | [Unaudited Condensed Consolidated Statements of Equity](index=8&type=section&id=Unaudited%20Condensed%20Consolidated%20Statements%20of%20Equity) This section presents the unaudited condensed consolidated statements of equity Changes in Morningstar, Inc. Shareholders' Equity (Nine Months Ended September 30, 2019, in millions) | Metric | Balance as of Dec 31, 2018 | Net Income | Other Comprehensive Income/Loss | Vesting of RSUs | Stock-based Compensation | Dividends Declared | Balance as of Sep 30, 2019 | | :------------------- | :------------------------- | :--------- | :------------------------------ | :-------------- | :----------------------- | :----------------- | :------------------------- | | Total Equity | $934.7 | $124.4 | $(15.9) | $(12.9) | $33.3 | $(35.9) | $1,041.9 | [Unaudited Condensed Consolidated Statements of Cash Flows](index=11&type=section&id=Unaudited%20Condensed%20Consolidated%20Statements%20of%20Cash%20Flows) This section presents the unaudited condensed consolidated statements of cash flows Consolidated Statements of Cash Flows (Nine Months Ended September 30, in millions) | Metric | 2019 | 2018 | | :------------------- | :--- | :--- | | Cash provided by operating activities | $251.9 | $209.5 | | Cash used for investing activities | $(716.3) | $(39.0) | | Cash provided by (used for) financing activities | $423.3 | $(145.2) | | Net increase (decrease) in cash and cash equivalents | $(47.5) | $14.8 | | Cash and cash equivalents—end of period | $321.8 | $323.0 | - Investing activities saw a significant increase in cash usage in 2019, primarily due to the **$673.9 million** spent on acquisitions, net of cash acquired[16](index=16&type=chunk) - Financing activities shifted from cash usage in 2018 to cash provision in 2019, largely driven by **$610.0 million** in proceeds from long-term debt[16](index=16&type=chunk) [Notes to Unaudited Condensed Consolidated Financial Statements](index=13&type=section&id=Notes%20to%20Unaudited%20Condensed%20Consolidated%20Financial%20Statements) This section provides detailed notes to the unaudited condensed consolidated financial statements [1. Basis of Presentation of Interim Financial Information](index=13&type=section&id=1.%20Basis%20of%20Presentation%20of%20Interim%20Financial%20Information) This note outlines the basis of presentation for interim financial information, adhering to SEC rules and U.S. GAAP - The unaudited condensed consolidated financial statements conform to SEC rules and U.S. GAAP, reflecting management's estimates and assumptions, and should be read with the Annual Report on Form 10-K for December 31, 2018[19](index=19&type=chunk) [2. Summary of Significant Accounting Policies](index=13&type=section&id=2.%20Summary%20of%20Significant%20Accounting%20Policies) This note details the adoption of new accounting standards and the evaluation of upcoming pronouncements - The company adopted ASU No. 2016-02, Leases (Topic 842), on January 1, 2019, recognizing **$118.8 million** in operating lease assets and **$145.8 million** in operating lease liabilities, with no material impact on the income statement[21](index=21&type=chunk)[23](index=23&type=chunk) - Other recently adopted accounting pronouncements (ASU No. 2018-02, ASU No. 2018-07, ASU No. 2018-09) had no material impact on the consolidated financial statements[24](index=24&type=chunk)[25](index=25&type=chunk)[26](index=26&type=chunk) - Upcoming standards (ASU No. 2016-13 on Credit Losses, ASU No. 2018-13 on Fair Value Measurement, ASU No. 2018-15 on Cloud Computing) are effective January 1, 2020, and the company is finalizing its evaluation of their impact[27](index=27&type=chunk)[28](index=28&type=chunk)[29](index=29&type=chunk) [3. Credit Arrangements](index=15&type=section&id=3.%20Credit%20Arrangements) This note describes the company's credit facilities, long-term debt, and compliance with financial covenants Long-term Debt Summary (in millions) | Metric | As of Sep 30, 2019 | As of Dec 31, 2018 | | :------------------------------------------------ | :----------------- | :----------------- | | July 2019 Term Facility, net | $445.8 | — | | July 2019 Revolving Credit Facility | $100.0 | — | | Prior Revolving Credit Facility | — | $70.0 | | Total debt | $545.8 | $70.0 | | Long-term debt (net of current portion) | $534.8 | $70.0 | - The company entered into a new **$750.0 million** senior credit agreement on July 2, 2019, comprising a **$300.0 million** revolving credit facility and a **$450.0 million** term loan, primarily to finance the DBRS acquisition[32](index=32&type=chunk)[34](index=34&type=chunk) - The new Credit Agreement replaced the prior **$300.0 million** revolving credit facility, which was repaid and terminated[36](index=36&type=chunk) - As of September 30, 2019, the company was in compliance with financial covenants, including a maximum consolidated leverage ratio of **3.50 to 1.00** and a minimum consolidated interest coverage ratio of **3.00 to 1.00**[38](index=38&type=chunk) [4. Acquisitions, Divestitures, Goodwill, and Other Intangible Assets](index=16&type=section&id=4.%20Acquisitions,%20Divestitures,%20Goodwill,%20and%20Other%20Intangible%20Assets) This note details the DBRS acquisition, its impact on goodwill, intangible assets, and pro forma financial information - On July 2, 2019, Morningstar acquired DBRS for **$682.1 million** in cash, expanding its global credit rating services and asset class coverage[39](index=39&type=chunk) - DBRS contributed **$49.6 million** in revenue and **$51.6 million** in operating expense for the three months ended September 30, 2019[40](index=40&type=chunk) DBRS Acquisition: Allocation of Estimated Fair Values (in millions) | Asset/Liability | Amount | | :------------------------------------------ | :----- | | Cash consideration transferred | $682.1 | | Intangible assets, net | $288.2 | | Goodwill | $468.3 | | Deferred revenue | $(43.3)| | Deferred tax liability, net | $(65.6)| | Total fair value of DBRS | $682.1 | Unaudited Pro Forma Financial Information (Nine Months Ended September 30, in millions, except per share) | Metric | 2019 | 2018 | | :------------------------------------- | :--- | :--- | | Revenue | $926.8 | $880.6 | | Operating income | $150.6 | $172.4 | | Net income | $120.6 | $138.1 | | Basic net income per share | $2.82 | $3.24 | | Diluted net income per share | $2.80 | $3.21 | - Goodwill increased from **$556.7 million** at December 31, 2018, to **$1,015.8 million** at September 30, 2019, primarily due to the DBRS acquisition (**$468.3 million**)[52](index=52&type=chunk) Intangible Assets (Net, in millions) | Category | As of Sep 30, 2019 | As of Dec 31, 2018 | | :------------------- | :----------------- | :----------------- | | Intellectual property | $34.7 | $1.6 | | Customer related assets | $251.6 | $41.3 | | Technology based assets | $49.1 | $30.6 | | Total intangible assets | $335.7 | $73.9 | Amortization Expense Related to Intangible Assets (in millions) | Period | 2019 | 2018 | | :------------------------------------ | :----- | :----- | | Three months ended September 30 | $13.3 | $5.2 | | Nine months ended September 30 | $23.1 | $15.7 | [5. Income Per Share](index=19&type=section&id=5.%20Income%20Per%20Share) This note provides the reconciliation of net income per share Net Income Per Share Reconciliation (Three Months Ended September 30, in millions, except per share) | Metric | 2019 | 2018 | | :------------------------------------- | :--- | :--- | | Consolidated net income | $49.1 | $56.9 | | Basic net income per share | $1.15 | $1.33 | | Diluted net income per share | $1.14 | $1.32 | Net Income Per Share Reconciliation (Nine Months Ended September 30, in millions, except per share) | Metric | 2019 | 2018 | | :------------------------------------- | :--- | :--- | | Consolidated net income | $124.4 | $140.6 | | Basic net income per share | $2.91 | $3.30 | | Diluted net income per share | $2.89 | $3.27 | [6. Revenue](index=20&type=section&id=6.%20Revenue) This note disaggregates revenue by type and details expected recognition from contract liabilities Revenue Disaggregated by Type (in millions) | Revenue Type | Q3 2019 | Q3 2018 | 9M 2019 | 9M 2018 | | :---------------- | :------ | :------ | :------ | :------ | | License-based | $204.6 | $196.7 | $601.0 | $559.5 | | Asset-based | $54.5 | $50.5 | $155.9 | $149.9 | | Transaction-based | $54.7 | $14.1 | $89.7 | $47.8 | | Consolidated revenue | $313.8 | $261.3 | $846.6 | $757.2 | - Transaction-based revenue significantly increased in Q3 2019 (**287.9%**) and 9M 2019 (**87.7%**), primarily due to the DBRS Morningstar acquisition[58](index=58&type=chunk)[60](index=60&type=chunk) - Contract liabilities (deferred revenue) increased by **$62.0 million** as of September 30, 2019, driven by advance payments for performance obligations[61](index=61&type=chunk) Expected Revenue Recognition from Contract Liabilities (in millions) | Period | Amount | | :---------------------- | :----- | | Remainder of 2019 | $157.6 | | 2020 | $276.7 | | 2021 | $79.9 | | 2022 | $32.3 | | 2023 | $13.5 | | Thereafter | $58.5 | | Total | $618.5 | [7. Segment and Geographical Area Information](index=22&type=section&id=7.%20Segment%20and%20Geographical%20Area%20Information) This note provides revenue and operating lease asset information by geographical area - Morningstar operates as a single reportable segment, and the DBRS acquisition did not impact this structure[69](index=69&type=chunk) Revenue by Geographical Area (in millions) | Region | Q3 2019 | Q3 2018 | 9M 2019 | 9M 2018 | | :----------------- | :------ | :------ | :------ | :------ | | United States | $225.3 | $198.7 | $628.4 | $566.0 | | United Kingdom | $27.0 | $17.9 | $63.9 | $54.6 | | Continental Europe | $22.3 | $20.1 | $63.6 | $60.3 | | Canada | $20.7 | $7.4 | $36.4 | $22.6 | | Total International | $88.5 | $62.6 | $218.2 | $191.2 | | Consolidated revenue | $313.8 | $261.3 | $846.6 | $757.2 | - International revenue comprised approximately **25%** of consolidated revenue in both Q3 and 9M 2019 and 2018[132](index=132&type=chunk) Operating Lease Assets by Geographical Area (in millions) | Region | As of Sep 30, 2019 | As of Dec 31, 2018 | | :----------------- | :----------------- | :----------------- | | United States | $81.8 | — | | Total International | $56.4 | — | | Consolidated operating lease assets | $138.2 | — | [8. Fair Value Measurements](index=23&type=section&id=8.%20Fair%20Value%20Measurements) This note details investment balances and their classification within the fair value hierarchy - Investment balances totaled **$31.0 million** as of September 30, 2019, and **$26.6 million** as of December 31, 2018[76](index=76&type=chunk) - All investments are classified as **Level 1** within the fair value hierarchy, based on quoted prices in active markets[76](index=76&type=chunk) [9. Leases](index=24&type=section&id=9.%20Leases) This note presents operating lease assets, liabilities, and future lease commitments Operating Lease Assets and Liabilities (As of September 30, 2019, in millions) | Category | Amount | | :------------------- | :----- | | Operating lease assets | $138.2 | | Current operating lease liabilities | $33.3 | | Non-current operating lease liabilities | $132.3 | | Total lease liabilities | $165.6 | - Operating lease expense was **$9.1 million** for Q3 2019 and **$24.9 million** for 9M 2019[81](index=81&type=chunk) Minimum Future Lease Commitments for Operating Leases (in millions) | Period | Amount | | :---------------------- | :----- | | Remainder of 2019 | $9.6 | | 2020 | $39.7 | | 2021 | $35.9 | | 2022 | $23.2 | | 2023 | $19.7 | | Thereafter | $63.2 | | Total lease payments | $191.3 | | Adjustment for discount to present value | $25.7 | | Total | $165.6 | [10. Stock-Based Compensation](index=25&type=section&id=10.%20Stock-Based%20Compensation) This note details stock-based compensation expense by category and unrecognized costs Stock-Based Compensation Expense (in millions) | Category | Q3 2019 | Q3 2018 | 9M 2019 | 9M 2018 | | :------------------------ | :------ | :------ | :-------- | :------ | :------ | :-------- | | Cost of revenue | $3.2 | $3.1 | $10.0 | $9.0 | | Sales and marketing | $1.4 | $0.8 | $4.2 | $2.5 | | General and administrative | $6.2 | $3.4 | $19.1 | $12.4 | | Total | $10.8 | $7.3 | $33.3 | $23.9 | - Total unrecognized stock-based compensation cost was **$47.4 million** as of September 30, 2019, expected to be recognized over a weighted average period of **28 months**[84](index=84&type=chunk) [11. Income Taxes](index=26&type=section&id=11.%20Income%20Taxes) This note provides information on effective tax rates, unrecognized tax benefits, and foreign earnings Effective Tax Rate | Metric | Q3 2019 | Q3 2018 | 9M 2019 | 9M 2018 | | :---------------- | :------ | :------ | :------ | :------ | | Income tax expense | $13.3 | $16.1 | $36.5 | $42.3 | | Effective tax rate | 21.3% | 22.1% | 22.7% | 23.1% | - The effective tax rate nominally decreased in Q3 and 9M 2019 compared to the prior year[85](index=85&type=chunk) Unrecognized Tax Benefits (in millions) | Metric | As of Sep 30, 2019 | As of Dec 31, 2018 | | :------------------------------------ | :----------------- | :----------------- | | Gross unrecognized tax benefits | $12.6 | $13.1 | | Total liability for unrecognized tax benefits | $13.7 | $13.7 | - Approximately **72%** of cash, cash equivalents, and investments were held by non-U.S. operations as of September 30, 2019, up from **67%** at December 31, 2018, with **$45.8 million** of foreign earnings repatriated in February 2019[89](index=89&type=chunk) [12. Contingencies](index=28&type=section&id=12.%20Contingencies) This note addresses potential liabilities from litigation, regulatory matters, and data usage audits - The company accrues liabilities for probable and estimable litigation, regulatory, and other business matters[92](index=92&type=chunk) - Ongoing third-party vendor data audits and internal reviews may require payments for prior data usage, but the company does not believe the outcomes will have a material adverse effect[93](index=93&type=chunk)[94](index=94&type=chunk) [13. Share Repurchase Program](index=28&type=section&id=13.%20Share%20Repurchase%20Program) This note outlines the company's share repurchase program and remaining authorization - A share repurchase program authorized up to **$500.0 million** in common stock repurchases, effective January 1, 2018, and expiring December 31, 2020[95](index=95&type=chunk) - As of September 30, 2019, **$25.6 million** had been repurchased under this authorization, leaving **$474.4 million** available[96](index=96&type=chunk) [Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations](index=28&type=section&id=Item%202.%20Management's%20Discussion%20and%20Analysis%20of%20Financial%20Condition%20and%20Results%20of%20Operations) This section provides management's discussion and analysis of Morningstar's financial condition and results of operations, including the DBRS acquisition impact [Forward-Looking Statements](index=28&type=section&id=Forward-Looking%20Statements) This section highlights forward-looking statements, subject to various known and unknown risks and uncertainties - The report contains forward-looking statements based on current expectations, subject to known and unknown risks and uncertainties, including those related to fiduciary duties, brand reputation, product innovation, data storage, business continuity, technological change, industry trends, system outages, regulatory compliance, market volatility, acquisition integration, employee retention, non-U.S. operations, data liability, and intellectual property[97](index=97&type=chunk)[101](index=101&type=chunk) [Understanding our Company](index=30&type=section&id=Understanding%20our%20Company) This section describes Morningstar's mission, revenue generation, and relevant industry trends - Morningstar's mission is to empower investor success through proprietary data, analytics, independent research, and investment strategies[102](index=102&type=chunk) - Revenue is generated through three main categories: subscriptions and license agreements (recurring), asset-based fees (investment management), and transaction-based revenue (one-time)[107](index=107&type=chunk) - Industry trends in Q3 2019 included heightened global equity market volatility, continued investor preference for lower-cost, passively managed funds, strong fixed-income returns, and robust U.S. venture capital and private equity activity[103](index=103&type=chunk)[104](index=104&type=chunk)[105](index=105&type=chunk)[106](index=106&type=chunk)[107](index=107&type=chunk) [Supplemental Operating Metrics (Unaudited)](index=31&type=section&id=Supplemental%20Operating%20Metrics%20(Unaudited)) This section presents key supplemental operating metrics, including revenue by type and product area, and select business metrics Revenue by Type and Key Product Area (in millions) | Category | Q3 2019 | Q3 2018 | Change Q3 | 9M 2019 | 9M 2018 | Change 9M | | :------------------------ | :------ | :------ | :-------- | :------ | :------ | :-------- | | **Revenue by Type** | | | | | | | | License-based | $204.6 | $196.7 | 4.0% | $601.0 | $559.5 | 7.4% | | Asset-based | $54.5 | $50.5 | 7.9% | $155.9 | $149.9 | 4.0% | | Transaction-based | $54.7 | $14.1 | 287.9% | $89.7 | $47.8 | 87.7% | | **Key Product Area Revenue** | | | | | | | | Morningstar Data | $48.9 | $46.5 | 5.2% | $146.3 | $137.6 | 6.3% | | Morningstar Direct | $37.4 | $34.4 | 8.7% | $110.5 | $102.5 | 7.8% | | PitchBook | $38.7 | $25.3 | 53.0% | $106.1 | $70.0 | 51.6% | | DBRS Morningstar | $49.6 | $8.6 | 476.7% | $69.7 | $24.6 | 183.3% | Select Business Metrics (As of September 30) | Metric | 2019 | 2018 | Change | | :-------------------------------------- | :-------- | :-------- | :-------- | | Morningstar Direct licenses | 15,660 | 14,751 | 6.2% | | PitchBook Platform licenses | 32,587 | 20,195 | 61.4% | | Advisor Workstation clients (U.S.) | 167 | 180 | (7.2)% | | Morningstar.com Premium Membership subscriptions (U.S.) | 111,424 | 117,340 | (5.0)% | | Workplace Solutions AUM/A (total, $bil) | $147.3 | $135.7 | 8.5% | | Investment Management AUM/A (total, $bil) | $69.6 | $72.2 | (3.6)% | | Asset value linked to Morningstar Indexes ($bil) | $64.0 | $45.4 | 41.0% | [Three Months Ended September 30, 2019 vs. Three Months Ended September 30, 2018](index=34&type=section&id=Three%20Months%20Ended%20September%2030,%202019%20vs.%20Three%20Months%20Ended%20September%2030,%202018) This section provides a comparative analysis of financial results for the three and nine months ended September 30, 2019, versus 2018 [Consolidated Results](index=34&type=section&id=Consolidated%20Results) This section summarizes key consolidated financial metrics and the use of non-GAAP measures for performance analysis Key Consolidated Metrics (in millions) | Metric | Q3 2019 | Q3 2018 | Change Q3 | 9M 2019 | 9M 2018 | Change 9M | | :---------------------- | :------ | :------ | :-------- | :------ | :------ | :-------- | | Consolidated revenue | $313.8 | $261.3 | 20.1% | $846.6 | $757.2 | 11.8% | | Operating income | $49.6 | $65.4 | (24.2)% | $149.9 | $166.5 | (10.0)% | | Operating margin | 15.8% | 25.0% | (9.2) pp | 17.7% | 22.0% | (4.3) pp | | Cash provided by operating activities | $105.7 | $79.8 | 32.5% | $251.9 | $209.5 | 20.2% | | Capital expenditures | $(20.1) | $(19.6) | 2.6% | $(57.1) | $(55.2) | 3.4% | | Free cash flow | $85.6 | $60.2 | 42.2% | $194.8 | $154.3 | 26.2% | - The company uses non-GAAP measures like organic revenue, international organic revenue, adjusted operating income/margin, and free cash flow to provide better period-over-period comparisons and understanding of underlying business performance[114](index=114&type=chunk)[115](index=115&type=chunk)[116](index=116&type=chunk) [Consolidated Revenue](index=34&type=section&id=Consolidated%20Revenue) This section analyzes consolidated revenue growth, disaggregated by type, and the impact of acquisitions and foreign currency - Consolidated revenue increased **20.1%** to **$313.8 million** in Q3 2019 and **11.8%** to **$846.6 million** in 9M 2019, with foreign currency movements having a negative impact of **$2.6 million** and **$11.1 million**, respectively[117](index=117&type=chunk)[122](index=122&type=chunk) - License-based revenue grew **4.0%** in Q3 2019 and **7.4%** in 9M 2019, driven by PitchBook, Morningstar Direct, and Morningstar Data, noting Q3 2018 included a non-recurring **$10.5 million** license fee[118](index=118&type=chunk)[123](index=123&type=chunk) - Asset-based revenue increased **7.9%** in Q3 2019 and **4.0%** in 9M 2019, supported by positive equity market performance and growth in Morningstar Investment Management, Workplace Solutions, and Morningstar Indexes[119](index=119&type=chunk)[120](index=120&type=chunk)[124](index=124&type=chunk) - Transaction-based revenue nearly tripled in Q3 2019 and grew **87.7%** in 9M 2019, primarily due to the **$41.0 million** (Q3) and **$45.1 million** (9M) contribution from DBRS Morningstar, with other transaction-based revenue declining due to decreased advertising[121](index=121&type=chunk)[125](index=125&type=chunk) Consolidated Revenue to Organic Revenue Reconciliation (in millions) | Metric | Q3 2019 | Q3 2018 | Change Q3 | 9M 2019 | 9M 2018 | Change 9M | | :---------------------- | :------ | :------ | :-------- | :------ | :------ | :-------- | | Consolidated revenue | $313.8 | $261.3 | 20.1% | $846.6 | $757.2 | 11.8% | | Less: acquisitions | $(49.6) | $(8.6) | 476.7% | $(49.6) | $(8.6) | 476.7% | | Effect of foreign currency translations | $2.6 | — | NMF | $11.1 | — | NMF | | Organic revenue | $266.8 | $252.7 | 5.6% | $808.1 | $748.6 | 7.9% | - International revenue increased **41.4%** in Q3 2019 and **14.1%** in 9M 2019, largely due to the DBRS acquisition, while international organic revenue grew **8.5%** and **7.8%** respectively, driven by Morningstar Data and Direct[133](index=133&type=chunk) [Consolidated Operating Expense](index=37&type=section&id=Consolidated%20Operating%20Expense) This section details the changes in consolidated operating expenses, including the impact of the DBRS acquisition and compensation Consolidated Operating Expense (in millions) | Expense Category | Q3 2019 | Q3 2018 | Change Q3 | 9M 2019 | 9M 2018 | Change 9M | | :------------------------ | :------ | :------ | :-------- | :------ | :------ | :-------- | | Cost of revenue | $128.4 | $100.0 | 28.4% | $341.0 | $302.2 | 12.8% | | Sales and marketing | $44.0 | $35.8 | 22.9% | $129.7 | $113.7 | 14.1% | | General and administrative | $57.2 | $35.4 | 61.6% | $142.0 | $103.6 | 37.1% | | Depreciation and amortization | $34.6 | $24.7 | 40.1% | $84.0 | $71.2 | 18.0% | | Total operating expense | $264.2 | $195.9 | 34.9% | $696.7 | $590.7 | 17.9% | - Total operating expense increased by **$68.3 million** (**34.9%**) in Q3 2019 and **$106.0 million** (**17.9%**) in 9M 2019, with DBRS Morningstar contributing **19.9%** to the growth[134](index=134&type=chunk) - Compensation expense increased **$32.9 million** in Q3 2019, driven by headcount investments (data, product development, sales) and **502 employees** from the DBRS acquisition[135](index=135&type=chunk)[137](index=137&type=chunk) - Amortization expense increased **$8.2 million** in Q3 2019 due to DBRS intangibles, production expense rose **$5.1 million** from Morningstar Funds Trust fees and cloud computing costs, and rent expense increased **$4.7 million** due to expansion and renewals[135](index=135&type=chunk) - Stock-based compensation expense increased **$3.5 million** in Q3 2019, mainly from PitchBook management bonus plan targets[135](index=135&type=chunk) [Consolidated Operating Income and Operating Margin](index=40&type=section&id=Consolidated%20Operating%20Income%20and%20Operating%20Margin) This section analyzes consolidated operating income and margin, including adjusted non-GAAP measures Consolidated Operating Income and Margin (in millions) | Metric | Q3 2019 | Q3 2018 | Change Q3 | 9M 2019 | 9M 2018 | Change 9M | | :--------------- | :------ | :------ | :-------- | :------ | :------ | :-------- | | Operating income | $49.6 | $65.4 | (24.2)% | $149.9 | $166.5 | (10.0)% | | % of revenue | 15.8% | 25.0% | (9.2) pp | 17.7% | 22.0% | (4.3) pp | Adjusted Operating Income and Margin (in millions) | Metric | Q3 2019 | Q3 2018 | Change Q3 | 9M 2019 | 9M 2018 | Change 9M | | :---------------------- | :------ | :------ | :-------- | :------ | :------ | :-------- | | Adjusted operating income | $64.1 | $70.6 | (9.2)% | $175.9 | $182.2 | (3.5)% | | Adjusted operating margin | 20.4% | 27.0% | (6.6) pp | 20.8% | 24.1% | (3.3) pp | - Operating income decreased due to a larger increase in operating expenses (**$68.3 million**) compared to revenue growth (**$52.5 million**) in Q3 2019[149](index=149&type=chunk) [Non-Operating Income, Net, Equity in Net Income (Loss) of Unconsolidated Entities, and Effective Tax Rate and Income Tax Expense](index=41&type=section&id=Non-Operating%20Income,%20Net,%20Equity%20in%20Net%20Income%20(Loss)%20of%20Unconsolidated%20Entities,%20and%20Effective%20Tax%20Rate%20and%20Income%20Tax%20Expense) This section details non-operating income, equity in unconsolidated entities, and effective tax rates Non-Operating Income, Net (in millions) | Metric | Q3 2019 | Q3 2018 | 9M 2019 | 9M 2018 | | :-------------------------- | :------ | :------ | :------ | :------ | | Interest income | $0.5 | $0.6 | $1.7 | $1.7 | | Interest expense | $(5.3) | $(0.8) | $(6.5) | $(2.9) | | Gain on sale of equity investments | $19.5 | $5.6 | $19.5 | $5.6 | | Non-operating income, net | $13.9 | $7.3 | $12.9 | $18.0 | - Interest expense increased significantly due to the new senior credit agreement for the DBRS acquisition[154](index=154&type=chunk) - Gain on sale of equity investments in 2019 relates to the sale of an equity interest in an unconsolidated entity, while in 2018 it related to Morningstar Japan K.K[155](index=155&type=chunk) Equity in Net Income (Loss) of Unconsolidated Entities (in millions) | Metric | Q3 2019 | Q3 2018 | 9M 2019 | 9M 2018 | | :-------------------------------------- | :------ | :------ | :------ | :------ | | Equity in net income (loss) of unconsolidated entities | $(1.1) | $0.3 | $(1.9) | $(1.6) | - The effective tax rate for Q3 2019 was **21.3%** (down from **22.1%** in Q3 2018) and for 9M 2019 was **22.7%** (down from **23.1%** in 9M 2018)[157](index=157&type=chunk) [Liquidity and Capital Resources](index=43&type=section&id=Liquidity%20and%20Capital%20Resources) This section discusses the company's cash position, debt, operating cash flow, and capital allocation activities - Cash, cash equivalents, and investments decreased by **$43.1 million** to **$352.8 million** as of September 30, 2019, primarily due to the DBRS acquisition (**$673.9 million**) and debt repayments, partially offset by operating cash flow and new long-term debt proceeds[158](index=158&type=chunk) - Cash provided by operating activities was **$251.9 million** in 9M 2019[159](index=159&type=chunk) - The company had an outstanding principal balance of **$534.8 million** and **$200.0 million** in revolving credit facility borrowing availability as of September 30, 2019[160](index=160&type=chunk) - Approximately **72%** of cash, cash equivalents, and investments were held outside the U.S. as of September 30, 2019, with **$45.8 million** repatriated in February 2019[162](index=162&type=chunk) - The board approved a regular quarterly dividend of **$0.28 per share** (**$12.0 million**) payable on October 31, 2019[164](index=164&type=chunk) - The company repurchased **41,935 shares** for **$4.6 million** in 9M 2019, with **$474.4 million** remaining under the share repurchase program[165](index=165&type=chunk) - Capital expenditures are expected to continue for computer hardware, software, and leasehold improvements, with ongoing migration to public cloud and SaaS applications[166](index=166&type=chunk) [Consolidated Free Cash Flow](index=45&type=section&id=Consolidated%20Free%20Cash%20Flow) This section presents the consolidated free cash flow and its primary drivers Consolidated Free Cash Flow (in millions) | Metric | Q3 2019 | Q3 2018 | Change Q3 | 9M 2019 | 9M 2018 | Change 9M | | :-------------------------------- | :------ | :------ | :-------- | :------ | :------ | :-------- | | Cash provided by operating activities | $105.7 | $79.8 | 32.5% | $251.9 | $209.5 | 20.2% | | Capital expenditures | $(20.1) | $(19.6) | 2.6% | $(57.1) | $(55.2) | 3.4% | | Free cash flow | $85.6 | $60.2 | 42.2% | $194.8 | $154.3 | 26.2% | - Free cash flow increased by **$25.4 million** in Q3 2019 and **$40.5 million** in 9M 2019, primarily due to increased cash from operating activities[169](index=169&type=chunk)[170](index=170&type=chunk) [Application of Critical Accounting Policies and Estimates](index=45&type=section&id=Application%20of%20Critical%20Accounting%20Policies%20and%20Estimates) This section refers to the critical accounting policies and estimates detailed in the Annual Report and financial statement notes - Critical accounting policies and estimates are discussed in the Annual Report on Form 10-K and Note 2 of the Condensed Consolidated Financial Statements[171](index=171&type=chunk) [Rule 10b5-1 Sales Plans](index=45&type=section&id=Rule%2010b5-1%20Sales%20Plans) This section describes the use of Rule 10b5-1 sales plans by directors and executive officers for stock transactions - Directors and executive officers may use Rule 10b5-1 sales plans for stock transactions, with Joe Mansueto having a plan to sell **1,600,000 shares** by April 30, 2020, having sold **800,000 shares** through October 15, 2019[172](index=172&type=chunk) [Item 3. Quantitative and Qualitative Disclosures about Market Risk](index=47&type=section&id=Item%203.%20Quantitative%20and%20Qualitative%20Disclosures%20about%20Market%20Risk) This section outlines Morningstar's exposure to market risks, including fluctuations in interest rates, market prices of investments, and foreign currency exchange rates - The company's investment portfolio (stocks, bonds, options, mutual funds, etc.) is actively managed and subject to market price and interest rate fluctuations, though a **100 basis-point** change in interest rates is not expected to materially affect its fair value[174](index=174&type=chunk) - A **100 basis-point** change in LIBOR would have an estimated **$5.5 million** impact on interest expense, based on outstanding long-term debt[175](index=175&type=chunk) - The company is exposed to foreign currency fluctuations from non-U.S. operations but has not engaged in currency hedging[176](index=176&type=chunk) Estimated Effect of 10% Adverse Currency Fluctuation (Nine Months Ended September 30, 2019, in millions) | Currency | Effect on Revenue | Effect on Operating Income (Loss) | | :---------------- | :---------------- | :-------------------------------- | | Euro | $(5.1) | $(2.6) | | British Pound | $(8.1) | $(0.2) | | Canadian Dollar | $(3.6) | $(1.2) | | Australian Dollar | $(3.7) | $(0.6) | | Other Foreign Currencies | $(5.7) | $3.9 | Estimated Effect of 10% Adverse Currency Fluctuation on Equity (As of September 30, 2019, in millions) | Currency | Net Currency Position | Estimated Effect on Equity | | :---------------- | :-------------------- | :------------------------- | | Euro | $64.9 | $(6.5) | | British Pound | $244.7 | $(24.5) | | Canadian Dollar | $137.9 | $(13.8) | | Australian Dollar | $37.4 | $(3.7) | | Other Foreign Currencies | $138.9 | $(13.9) | [Item 4. Controls and Procedures](index=48&type=section&id=Item%204.%20Controls%20and%20Procedures) This section details the evaluation of the company's disclosure controls and procedures, concluding their effectiveness as of September 30, 2019 - The CEO and CFO concluded that disclosure controls and procedures were effective as of September 30, 2019, providing reasonable assurance for timely and accurate reporting[178](index=178&type=chunk) - The DBRS acquisition on July 2, 2019, is currently being integrated into the internal control framework, and its assessment will be omitted from the scope of the internal control over financial reporting assessment at December 31, 2019, as per SEC guidance[179](index=179&type=chunk) - No other material changes to internal control over financial reporting occurred during the third quarter ended September 30, 2019[180](index=180&type=chunk) [PART 2. OTHER INFORMATION](index=49&type=section&id=PART%202.%20OTHER%20INFORMATION) This part contains other information, including legal proceedings, risk factors, equity sales, exhibits, and the report signature [Item 1. Legal Proceedings](index=49&type=section&id=Item%201.%20Legal%20Proceedings) This section incorporates by reference the information regarding legal proceedings from Note 12 of the Notes to Unaudited Condensed Consolidated Financial Statements - Information on legal proceedings is incorporated by reference from Note 12 of the financial statements[182](index=182&type=chunk) [Item 1A. Risk Factors](index=49&type=section&id=Item%201A.%20Risk%20Factors) This section states that there have been no material changes to the risk factors previously disclosed in the company's Annual Report on Form 10-K - No material changes to the risk factors disclosed in the Annual Report on Form 10-K[183](index=183&type=chunk) [Item 2. Unregistered Sales of Equity Securities and Use of Proceeds](index=49&type=section&id=Item%202.%20Unregistered%20Sales%20of%20Equity%20Securities%20and%20Use%20of%20Proceeds) This section provides details on the company's share repurchase program, including authorization and no repurchases in Q3 2019 - The board approved a share repurchase program in December 2017, authorizing up to **$500.0 million** in common stock repurchases, effective January 1, 2018, and expiring December 31, 2020[185](index=185&type=chunk) - No shares were repurchased under the program during the three months ended September 30, 2019, leaving approximately **$474.4 million** available for future repurchases[185](index=185&type=chunk) [Item 6. Exhibits](index=50&type=section&id=Item%206.%20Exhibits) This section lists the exhibits filed with the Form 10-Q, including amendments to the credit agreement, certifications from the CEO and CFO, and XBRL formatted financial information - Exhibits include Amendment No. 1 to Credit Agreement, CEO and CFO certifications (Rule 13a-14(a), 18 U.S.C. 1350), and Inline XBRL formatted financial statements and notes[186](index=186&type=chunk) [SIGNATURE](index=51&type=section&id=SIGNATURE) This section contains the signature of the registrant, Morningstar, Inc., by its Chief Financial Officer, Jason Dubinsky - The report is signed by Jason Dubinsky, Chief Financial Officer of Morningstar, Inc., on October 30, 2019[189](index=189&type=chunk)

Washington D.C. 20549 FORM 10-Q ☒ QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 FOR THE QUARTERLY PERIOD ENDED June 30, 2019 OR Table of Contents UNITED STATES SECURITIES AND EXCHANGE COMMISSION ☐ TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the transition period from to Commission File Number: 000-51280 MORNINGSTAR, INC. (Exact Name of Registrant as Specified in its Charter) Illinois 36-3297908 (State or Other Jurisdi ...

x QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 FOR THE QUARTERLY PERIOD ENDED March 31, 2019 OR Table of Contents UNITED STATES SECURITIES AND EXCHANGE COMMISSION Washington D.C. 20549 FORM 10-Q o TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the transition period from to Commission File Number: 000-51280 MORNINGSTAR, INC. (Exact Name of Registrant as Specified in its Charter) Illinois 36-3297908 (State or Other Jurisd ...

Table of Contents UNITED STATES SECURITIES AND EXCHANGE COMMISSION Washington D.C. 20549 FORM 10-K x ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 FOR THE FISCAL YEAR ENDED DECEMBER 31, 2018 OR ¨ TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the transition period from to Commission File Number: 000-51280 MORNINGSTAR, INC. Securities registered pursuant to Section 12(g) of the Act: None Indicate by check mark if the Registr ...