Morningstar(MORN) - 2021 Q1 - Quarterly Report

PART 1 FINANCIAL INFORMATION This section presents the unaudited condensed consolidated financial statements and management's discussion and analysis Financial Statements This section presents the unaudited condensed consolidated financial statements for Morningstar, Inc. for Q1 2021 and 2020 Unaudited Condensed Consolidated Statements of Income The company reported significant growth in Q1 2021, with revenue increasing by 21.2% and operating income growing by 51.0% year-over-year Q1 2021 vs Q1 2020 Income Statement Highlights | Metric | Three months ended March 31, 2021 | Three months ended March 31, 2020 | Change | | :--- | :--- | :--- | :--- | | Revenue | $392.8 million | $324.0 million | +21.2% | | Operating Income | $67.2 million | $44.5 million | +51.0% | | Consolidated Net Income | $54.9 million | $23.9 million | +129.7% | | Diluted Net Income per Share | $1.27 | $0.55 | +130.9% | | Dividends Declared per Share | $0.32 | $0.30 | +6.7% | Unaudited Condensed Consolidated Balance Sheets As of March 31, 2021, total assets were $2.68 billion, a slight decrease from $2.70 billion at year-end 2020 Balance Sheet Summary | Metric | As of March 31, 2021 | As of December 31, 2020 | | :--- | :--- | :--- | | Cash and cash equivalents | $383.6 million | $422.5 million | | Goodwill | $1,201.9 million | $1,205.0 million | | Total Assets | $2,675.3 million | $2,696.0 million | | Deferred Revenue (Current) | $363.1 million | $306.8 million | | Long-term Debt | $404.2 million | $449.1 million | | Total Liabilities | $1,353.9 million | $1,424.6 million | | Total Equity | $1,321.4 million | $1,271.4 million | Unaudited Condensed Consolidated Statements of Cash Flows For the first three months of 2021, cash provided by operating activities increased by 31.8% to $64.2 million Q1 2021 vs Q1 2020 Cash Flow Highlights | Activity (in millions) | Three months ended March 31, 2021 | Three months ended March 31, 2020 | | :--- | :--- | :--- | | Cash provided by operating activities | $64.2 | $48.7 | | Cash used for investing activities | $(33.4) | $(19.5) | | Cash used for financing activities | $(66.0) | $(26.9) | | Net decrease in cash and cash equivalents | $(38.9) | $(11.6) | Notes to Unaudited Condensed Consolidated Financial Statements The notes provide detailed explanations of accounting policies and financial statement items, including debt, revenue, and contingencies - The company continues to monitor the impact of the COVID-19 pandemic and related government relief acts like the CARES Act and American Rescue Plan Act on its business[20][21] - As of March 31, 2021, total long-term debt was $404.2 million, consisting of a Term Facility and 2.32% Senior Notes due 2030, with the company in compliance with all debt covenants[27][34] - The company reports as a single segment, reflecting how the chief operating decision maker allocates resources and evaluates financial results[54] - The company faces contingencies related to an SEC civil action against its former subsidiary MCR and a Wells Notice to DBRS, Inc. from the SEC's Division of Enforcement, but does not believe these matters will have a material adverse effect[76][77][78] Management's Discussion and Analysis of Financial Condition and Results of Operations Management discusses Q1 2021 financial results, highlighting a 21.2% increase in consolidated revenue and a 51.0% rise in operating income Q1 2021 Key Financial Metrics | Key Metrics (in millions) | 2021 | 2020 | Change | | :--- | :--- | :--- | :--- | | Consolidated revenue | $392.8 | $324.0 | 21.2% | | Operating income | $67.2 | $44.5 | 51.0% | | Operating margin | 17.1% | 13.7% | 3.4 pp | | Free cash flow | $41.5 | $33.6 | 23.5% | - Organic revenue, a non-GAAP measure excluding acquisitions and currency effects, increased by 13.0% in Q1 2021, primarily driven by PitchBook, DBRS Morningstar, Morningstar Data, and Morningstar Direct[113][114] - Adjusted operating income, a non-GAAP measure excluding amortization and M&A expenses, was $92.3 million, a 50.3% increase from the prior year, with the adjusted operating margin expanding by 4.7 percentage points to 23.6%[133][134] Revenue Analysis Consolidated revenue grew 21.2% to $392.8 million in Q1 2021, driven by license-based, transaction-based, and international revenue growth Revenue by Type (Q1 2021 vs Q1 2020) | Revenue Type | Q1 2021 (in millions) | Q1 2020 (in millions) | Change | Organic Change | | :--- | :--- | :--- | :--- | :--- | | License-based | $266.1 | $216.0 | +23.2% | +12.1% | | Asset-based | $61.4 | $57.2 | +7.3% | +5.8% | | Transaction-based | $65.3 | $50.8 | +28.5% | +24.8% | - PitchBook revenue increased 36.0% to $61.6 million, while DBRS Morningstar revenue grew 27.0% to $59.3 million[95] - International revenue increased 37.9% to $123.3 million, representing about 30% of consolidated revenue, with international organic revenue growing 14.1%[115][117][118] Operating Expense Analysis Total operating expense increased 16.5% to $325.6 million, primarily due to higher compensation and professional fees - The Sustainalytics acquisition contributed 9.1 percentage points to operating expense growth[119] - Compensation expense, the largest component, increased by $41.8 million, reflecting the addition of approximately 780 employees from the Sustainalytics acquisition and higher M&A-related earn-outs[120][123] - Capitalized software development increased to $19.0 million from $13.5 million in the prior-year period, which reduced operating expenses[126] Liquidity and Capital Resources As of March 31, 2021, the company had $433.7 million in cash, cash equivalents, and investments, with strong free cash flow - Free cash flow for Q1 2021 was $41.5 million, an increase of 23.5% from $33.6 million in Q1 2020[102][151] - As of March 31, 2021, the company had total outstanding debt of $404.2 million and full availability of its $350.0 million in revolving credit facilities[141][142][143] - A new share repurchase program authorizing up to $400.0 million was approved, effective January 1, 2021, and expiring December 31, 2023, with no shares repurchased in Q1 2021[148] Quantitative and Qualitative Disclosures about Market Risk The company is exposed to market risks from fluctuating interest rates, investment portfolio prices, and foreign currency fluctuations - A 100 basis-point change in the LIBOR rate would have an estimated $0.6 million annualized impact on interest expense based on the outstanding debt balance as of March 31, 2021[159] Foreign Currency Exposure on Q1 2021 Operating Income | Currency | Percentage of Operating Income (Loss) | Estimated effect of a 10% adverse currency fluctuation (in millions) | | :--- | :--- | :--- | | Australian Dollar | 4.8% | $(0.3) | | British Pound | 3.2% | $(0.2) | | Canadian Dollar | 10.0% | $(0.7) | | Euro | 4.0% | $(0.3) | | Other Foreign Currencies | (18.5)% | $1.2 | Controls and Procedures Management concluded the company's disclosure controls and procedures were effective as of March 31, 2021, with Sustainalytics integration ongoing - The CEO and CFO concluded that the company's disclosure controls and procedures were effective as of March 31, 2021[162] - The company is in the process of integrating the internal controls of the recently acquired Sustainalytics, which will be incorporated into the annual assessment for the fiscal year ending December 31, 2021[163] PART 2 OTHER INFORMATION This section covers legal proceedings, risk factors, equity security sales, and required exhibits Legal Proceedings This section references Note 12 of the financial statements, detailing ongoing legal matters including SEC actions against MCR and DBRS, Inc - Information regarding legal proceedings is incorporated by reference from Note 12 of the Notes to the Unaudited Condensed Consolidated Financial Statements[166] Risk Factors There have been no material changes to the risk factors previously disclosed in the company's Annual Report on Form 10-K - There have been no material changes to the risk factors disclosed in the company's Annual Report[167] Unregistered Sales of Equity Securities and Use of Proceeds The company discusses its share repurchase activity, noting no shares were repurchased in Q1 2021 under the new $400.0 million program Share Repurchase Activity (Q1 2021) | Period | Total number of shares purchased | Average price paid per share | Approximate dollar value of shares that may yet be purchased | | :--- | :--- | :--- | :--- | | Jan 2021 | 0 | $0.00 | $400,000,000 | | Feb 2021 | 0 | $0.00 | $400,000,000 | | Mar 2021 | 0 | $0.00 | $400,000,000 | | Total | 0 | $0.00 | $400,000,000 | Exhibits This section lists the exhibits filed with the Form 10-Q, including CEO and CFO certifications and financial statements in Inline XBRL - Exhibits filed include CEO and CFO certifications (31.1, 31.2, 32.1, 32.2) and financial data in Inline XBRL format (101, 104)[171]