Morningstar(US:MORN)2020-03-02 17:54Part I Business 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 investors13 - 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 markets38394041 - 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 Morningstar2791 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 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%8889334 - 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 services9195 - Workplace Solutions, including managed retirement accounts (MRA), served 36 retirement service providers representing about 286,000 retirement plans as of year-end 201959115 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 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 services153156 - 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)165166167 - 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 clients163 Risk Factors 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 ERISA190191195 - 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 revenues199202203 - 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 disasters213214215 - 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)249250 - 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 funds236237 Properties 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 Legal proceedings information is incorporated by reference from Note 16 of the Consolidated Financial Statements Part II Market for Registrant's Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities 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 - 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 share270 - 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 2019272273 Selected Financial Data 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 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 Direct351354 - 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 plan360361 - 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, 2019382 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 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 Europe354355 - 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 2018373374 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 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 acquisition380 - Cash provided by operating activities increased to $334.4 million in 2019 from $314.8 million in 2018381 - The company had $474.4 million available for future repurchases under its $500.0 million share repurchase program as of December 31, 2019387 Quantitative and Qualitative Disclosures about Market Risk 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 basis424 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 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 assets530534535536 - 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 sheet519555602 - 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 million598 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 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, 2019617 - 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 DBRS619620 Part III Directors, Executive Officers, and Corporate Governance 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 Shareholders626 Executive Compensation 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 Shareholders628 Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters 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 Shareholders629 Certain Relationships and Related Transactions, and Director Independence 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 Shareholders630 Principal Accountant Fees and Services 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 Shareholders631 Part IV Exhibits and Financial Statement Schedules 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 LLP634635