Morningstar(MORN) - 2019 Q3 - Quarterly Report

PART 1. FINANCIAL INFORMATION Presents Morningstar's unaudited condensed consolidated financial statements and related notes for Q3 and 9M 2019 and 2018 Item 1. Financial Statements 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 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 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 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 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 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] - 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] Notes to Unaudited Condensed Consolidated Financial Statements This section provides detailed notes to the unaudited condensed consolidated financial statements 1. Basis of Presentation of Interim Financial Information 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] 2. Summary of Significant Accounting Policies 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][23] - 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][25][26] - 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][28][29] 3. Credit Arrangements 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][34] - The new Credit Agreement replaced the prior $300.0 million revolving credit facility, which was repaid and terminated[36] - 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] 4. Acquisitions, Divestitures, Goodwill, and Other Intangible Assets 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] - DBRS contributed $49.6 million in revenue and $51.6 million in operating expense for the three months ended September 30, 2019[40] 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] 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 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 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][60] - Contract liabilities (deferred revenue) increased by $62.0 million as of September 30, 2019, driven by advance payments for performance obligations[61] 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 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] 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] 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 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] - All investments are classified as Level 1 within the fair value hierarchy, based on quoted prices in active markets[76] 9. Leases 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] 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 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] 11. Income Taxes 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] 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] 12. Contingencies 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] - 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][94] 13. Share Repurchase Program 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] - As of September 30, 2019, $25.6 million had been repurchased under this authorization, leaving $474.4 million available[96] Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations 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 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][101] Understanding our Company 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] - Revenue is generated through three main categories: subscriptions and license agreements (recurring), asset-based fees (investment management), and transaction-based revenue (one-time)[107] - 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][104][105][106][107] Supplemental Operating Metrics (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 This section provides a comparative analysis of financial results for the three and nine months ended September 30, 2019, versus 2018 Consolidated Results 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][115][116] Consolidated Revenue 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][122] - 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][123] - 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][120][124] - 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][125] 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] Consolidated Operating Expense 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] - 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][137] - 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] - Stock-based compensation expense increased $3.5 million in Q3 2019, mainly from PitchBook management bonus plan targets[135] Consolidated Operating Income and Operating Margin 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] Non-Operating Income, Net, Equity in Net Income (Loss) of Unconsolidated Entities, and Effective Tax Rate and Income Tax Expense 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] - 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] 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] Liquidity and Capital Resources 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] - Cash provided by operating activities was $251.9 million in 9M 2019[159] - 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] - 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] - The board approved a regular quarterly dividend of $0.28 per share ($12.0 million) payable on October 31, 2019[164] - The company repurchased 41,935 shares for $4.6 million in 9M 2019, with $474.4 million remaining under the share repurchase program[165] - Capital expenditures are expected to continue for computer hardware, software, and leasehold improvements, with ongoing migration to public cloud and SaaS applications[166] Consolidated Free Cash Flow 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][170] Application of Critical Accounting Policies and Estimates 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] Rule 10b5-1 Sales Plans 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] Item 3. Quantitative and Qualitative Disclosures about Market Risk 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] - 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] - The company is exposed to foreign currency fluctuations from non-U.S. operations but has not engaged in currency hedging[176] 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 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] - 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] - No other material changes to internal control over financial reporting occurred during the third quarter ended September 30, 2019[180] PART 2. OTHER INFORMATION This part contains other information, including legal proceedings, risk factors, equity sales, exhibits, and the report signature Item 1. Legal Proceedings 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] Item 1A. Risk Factors 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] Item 2. Unregistered Sales of Equity Securities and Use of Proceeds 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] - 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] Item 6. Exhibits 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] 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]