Morningstar(MORN) - 2021 Q3 - Quarterly Report

PART 1: FINANCIAL INFORMATION Item 1. Financial Statements Morningstar, Inc.'s unaudited condensed consolidated financial statements and notes for Q3 and YTD September 30, 2021 are presented Unaudited Condensed Consolidated Statements of Income Revenue for Q3 2021 increased to $428.9 million, driving operating income up to $67.8 million, though consolidated net income decreased to $49.0 million due to a one-time holding gain in Q3 2020 Consolidated Statements of Income Highlights (in millions) | Metric | Q3 2021 | Q3 2020 | YTD 2021 | YTD 2020 | | :--- | :--- | :--- | :--- | :--- | | Revenue | $428.9 | $357.2 | $1,237.1 | $1,009.1 | | Operating Income | $67.8 | $44.3 | $182.2 | $150.1 | | Consolidated Net Income | $49.0 | $76.2 | $136.8 | $148.3 | | Diluted EPS | $1.13 | $1.76 | $3.16 | $3.43 | Unaudited Condensed Consolidated Statements of Comprehensive Income Comprehensive income for Q3 2021 significantly decreased to $28.9 million, primarily due to a negative foreign currency translation adjustment Comprehensive Income (in millions) | Metric | Q3 2021 | Q3 2020 | YTD 2021 | YTD 2020 | | :--- | :--- | :--- | :--- | :--- | | Consolidated Net Income | $49.0 | $76.2 | $136.8 | $148.3 | | Other Comprehensive Income (Loss) | $(20.1) | $24.6 | $(12.8) | $(4.7) | | Comprehensive Income | $28.9 | $100.8 | $124.0 | $143.6 | Unaudited Condensed Consolidated Balance Sheets As of September 30, 2021, total assets increased to $2.74 billion, total liabilities decreased to $1.36 billion, and total equity grew to $1.39 billion Balance Sheet Summary (in millions) | Metric | Sep 30, 2021 | Dec 31, 2020 | | :--- | :--- | :--- | | Cash and cash equivalents | $427.0 | $422.5 | | Total Assets | $2,744.4 | $2,696.0 | | Long-term debt | $374.3 | $449.1 | | Total Liabilities | $1,358.9 | $1,424.6 | | Total Equity | $1,385.5 | $1,271.4 | Unaudited Condensed Consolidated Statements of Equity Total equity increased to $1.39 billion as of September 30, 2021, primarily driven by net income, partially offset by dividends and negative accumulated other comprehensive loss - The increase in total equity during the first nine months of 2021 was mainly due to retained earnings growth from net income, which was partially offset by dividend payments and negative foreign currency translation adjustments[16][17] Unaudited Condensed Consolidated Statements of Cash Flows Cash provided by operating activities increased to $314.0 million for the nine months ended September 30, 2021, while cash used for financing activities rose due to debt repayment and earn-out payments Cash Flow Summary - Nine Months Ended Sep 30 (in millions) | Metric | 2021 | 2020 | | :--- | :--- | :--- | | Cash from Operating Activities | $314.0 | $269.7 | | Cash for Investing Activities | $(125.4) | $(124.7) | | Cash for Financing Activities | $(175.5) | $(124.6) | | Net Change in Cash | $4.5 | $17.0 | Notes to Unaudited Condensed Consolidated Financial Statements The notes detail key accounting policies, including the acquisition of Moorgate Benchmarks, disaggregation of revenue, and information on credit arrangements, leases, and contingencies - On September 3, 2021, the company acquired Moorgate Benchmarks, a European provider of index services. The preliminary allocation of the purchase price includes $14.8 million of goodwill and $13.4 million of acquired intangible assets[36][38] Revenue by Type - Nine Months Ended Sep 30 (in millions) | Revenue Type | 2021 | 2020 | | :--- | :--- | :--- | | License-based | $830.3 | $680.0 | | Asset-based | $194.6 | $164.4 | | Transaction-based | $212.2 | $164.7 | | Total | $1,237.1 | $1,009.1 | - The company reports as a single operating segment. Geographically, the United States accounted for approximately 70% of revenue for the nine months ended September 30, 2021[55][56] - A civil action was filed by the SEC against Morningstar Credit Ratings, LLC (MCR) in February 2021 related to its former commercial mortgage-backed securities ratings methodology. MCR withdrew its NRSRO registration in December 2019 and no longer operates as a credit rating agency[79] Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations Management discusses Q3 and YTD 2021 financial performance, emphasizing revenue growth, operating income, and liquidity Consolidated Results and Revenue Analysis Consolidated revenue increased 20.1% in Q3 2021, driven by broad-based organic growth across license-based, asset-based, and transaction-based revenue streams Q3 2021 Revenue Growth by Type | Revenue Type | Revenue (in millions) | Change vs. Q3 2020 | Organic Change | | :--- | :--- | :--- | :--- | | License-based | $287.0 | 18.2% | 16.9% | | Asset-based | $68.4 | 23.5% | 22.5% | | Transaction-based | $73.5 | 24.8% | 21.6% | | Total | $428.9 | 20.1% | 18.6% | - Key product area revenue growth in Q3 2021 was led by PitchBook (+47.2%), DBRS Morningstar (+22.1%), and Workplace Solutions (+30.5%)[95] - International revenue comprised approximately 30% of consolidated revenue for Q3 2021, consistent with the prior year. International organic revenue grew 10.8% in the quarter[120][123] Operating Expense and Margin Analysis Consolidated operating expense increased 15.4% in Q3 2021, but operating income grew 53.0% due to strong revenue and a decrease in G&A expenses from a prior-year earn-out accrual Q3 Operating Expense Breakdown (in millions) | Expense Category | Q3 2021 | Q3 2020 | Change | | :--- | :--- | :--- | :--- | | Cost of revenue | $183.1 | $138.7 | 32.0% | | Sales and marketing | $72.9 | $52.6 | 38.6% | | General and administrative | $67.0 | $85.8 | (21.9)% | | Depreciation and amortization | $38.1 | $35.8 | 6.4% | | Total operating expense | $361.1 | $312.9 | 15.4% | - The decrease in G&A expense was primarily because Q3 2020 included a $27.8 million earn-out related to the Sustainalytics acquisition recorded in compensation expense[135][140] Operating Margin | Metric | Q3 2021 | Q3 2020 | | :--- | :--- | :--- | | Operating Margin | 15.8% | 12.4% | | Adjusted Operating Margin (Non-GAAP) | 19.4% | 25.6% | Liquidity and Capital Resources The company maintains a strong liquidity position with $487.3 million in cash and investments, a fully available $300.0 million revolving credit facility, and an authorized $400.0 million share repurchase program - As of September 30, 2021, the company had cash, cash equivalents, and investments of $487.3 million and full availability of its $300.0 million revolving credit facility[150][152] Free Cash Flow - Nine Months Ended Sep 30 (in millions) | Metric | 2021 | 2020 | | :--- | :--- | :--- | | Cash provided by operating activities | $314.0 | $269.7 | | Capital expenditures | $(71.6) | $(54.7) | | Free cash flow | $242.4 | $215.0 | - A new share repurchase program authorizes up to $400.0 million in repurchases through December 31, 2023. As of September 30, 2021, $399.7 million was available for future repurchases[158] Item 3. Quantitative and Qualitative Disclosures about Market Risk The company is exposed to market risks from investments, interest rate fluctuations on debt, and foreign currency movements, but does not currently engage in currency hedging - 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 $0.3 million impact on annual interest expense[168] Estimated Effect of a 10% Adverse Currency Fluctuation (in millions) | Currency | On Revenue (YTD) | On Operating Income (YTD) | On Equity (as of Sep 30) | | :--- | :--- | :--- | :--- | | Australian Dollar | $(3.9) | $(0.7) | $(4.9) | | British Pound | $(9.8) | $(0.5) | $(25.9) | | Canadian Dollar | $(8.3) | $(2.0) | $(24.2) | | Euro | $(7.9) | $(0.5) | $(3.2) | Item 4. Controls and Procedures Management concluded that disclosure controls and procedures were effective as of September 30, 2021, with Sustainalytics' internal controls currently being integrated for the annual assessment - The CEO and CFO concluded that the company's disclosure controls and procedures were effective as of September 30, 2021[171] - The company is in the process of integrating the internal controls of Sustainalytics (acquired July 2, 2020) and will include it in the annual assessment of internal control over financial reporting for the year ending December 31, 2021[172] PART 2: OTHER INFORMATION Item 1. Legal Proceedings This section refers to Note 12 of the financial statements, detailing ongoing legal matters including an SEC civil action against a former subsidiary and a settlement by DBRS, Inc - The company incorporates by reference the information on legal proceedings from Note 12 of the financial statements[175] Item 1A. Risk Factors 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 have occurred[176] Item 2. Unregistered Sales of Equity Securities and Use of Proceeds The company has a share repurchase program authorizing up to $400.0 million in repurchases, with 1,200 shares repurchased for approximately $0.3 million during Q3 2021 Share Repurchases in Q3 2021 | Period | Total Shares Purchased | Average Price Paid | Dollar Value (approx.) | | :--- | :--- | :--- | :--- | | July 2021 | 0 | N/A | $0 | | August 2021 | 200 | $257.14 | $51,428 | | September 2021 | 1,000 | $261.65 | $261,650 | | Total Q3 | 1,200 | $260.90 | $313,078 | Item 6. Exhibits This section lists the exhibits filed with the Form 10-Q, including CEO and CFO certifications and financial statements formatted in Inline XBRL - Exhibits filed include certifications from the CEO and CFO pursuant to Rule 13a-14(a) and Section 906 of the Sarbanes-Oxley Act, as well as Inline XBRL financial data[179]