MORNINGSTAR, INC., 10-Q filed on 10/31/2019
Quarterly Report
v3.19.3
Document and Entity Information - shares
9 Months Ended
Sep. 30, 2019
Oct. 18, 2019
Document and Entity Information Abstract    
Title of 12(b) Security Common stock, no par value  
Entity Incorporation, State or Country Code IL  
Entity Registrant Name MORNINGSTAR, INC.  
Entity Central Index Key 0001289419  
Current Fiscal Year End Date --12-31  
Entity Filer Category Large Accelerated Filer  
Document Type 10-Q  
Document Quarterly Report true  
Document Period End Date Sep. 30, 2019  
Document Transition Report false  
Entity File Number 000-51280  
Document Fiscal Year Focus 2019  
Document Fiscal Period Focus Q3  
Amendment Flag false  
Entity Emerging Growth Company false  
Entity Small Business false  
Entity Common Stock, Shares Outstanding   42,809,867
Entity Tax Identification Number 36-3297908  
Entity Address, Address Line One 22 West Washington Street  
Entity Address, City or Town Chicago  
Entity Address, State or Province IL  
Entity Address, Postal Zip Code 60602  
Trading Symbol MORN  
Security Exchange Name NASDAQ  
City Area Code 312  
Local Phone Number 696-6000  
Entity Current Reporting Status Yes  
Entity Interactive Data Current Yes  
Entity Shell Company false  
v3.19.3
Unaudited Condensed Consolidated Statements of Income - USD ($)
shares in Millions, $ in Millions
3 Months Ended 9 Months Ended
Sep. 30, 2019
Sep. 30, 2018
Sep. 30, 2019
Sep. 30, 2018
Income Statement [Abstract]        
Revenue $ 313.8 $ 261.3 $ 846.6 $ 757.2
Operating expense:        
Cost of revenue 128.4 100.0 341.0 302.2
Sales and marketing 44.0 35.8 129.7 113.7
General and administrative 57.2 35.4 142.0 103.6
Depreciation and amortization 34.6 24.7 84.0 71.2
Total operating expense 264.2 195.9 696.7 590.7
Operating income 49.6 65.4 149.9 166.5
Non-operating income, net:        
Interest expense, net (4.8) (0.2) (4.8) (1.2)
Gain on sale of investments, reclassified from other comprehensive income 0.3 0.3 0.7 0.9
Gain on sale of product line 0.0 0.0 0.0 10.5
Equity Method Investment, Realized Gain (Loss) on Disposal 19.5 5.6 19.5 5.6
Other income (expense), net (1.1) 1.6 (2.5) 2.2
Non-operating income, net 13.9 7.3 12.9 18.0
Income before income taxes and equity in net loss of unconsolidated entities 63.5 72.7 162.8 184.5
Equity in net income (loss) of unconsolidated entities (1.1) 0.3 (1.9) (1.6)
Income tax expense 13.3 16.1 36.5 42.3
Consolidated net income $ 49.1 $ 56.9 $ 124.4 $ 140.6
Net income per share:        
Basic (in dollars per share) $ 1.15 $ 1.33 $ 2.91 $ 3.30
Diluted (in dollars per share) 1.14 1.32 2.89 3.27
Dividends declared (in dollars per share) 0 0 0.56 0.50
Dividends paid per common share (in dollars per share) $ 0.28 $ 0.25 $ 0.84 $ 0.75
Weighted average shares outstanding:        
Basic (in shares) 42.8 42.6 42.7 42.6
Diluted (in shares) 43.2 43.1 43.1 43.0
v3.19.3
Unaudited Condensed Consolidated Statements of Comprehensive Income - USD ($)
$ in Millions
3 Months Ended 9 Months Ended
Sep. 30, 2019
Sep. 30, 2018
Sep. 30, 2019
Sep. 30, 2018
Statement of Comprehensive Income [Abstract]        
Consolidated net income $ 49.1 $ 56.9 $ 124.4 $ 140.6
Other comprehensive loss:        
Foreign currency translation adjustment (18.3) (6.1) (17.7) (20.2)
Unrealized gains on securities, net of tax:        
Unrealized holding gains arising during the period 0.2 0.5 2.4 0.8
Reclassification gains included in net income (0.3) (0.2) (0.6) (0.7)
Other comprehensive loss (18.4) (5.8) (15.9) (20.1)
Comprehensive income $ 30.7 $ 51.1 $ 108.5 $ 120.5
v3.19.3
Unaudited Condensed Consolidated Balance Sheets - USD ($)
$ in Millions
Sep. 30, 2019
Dec. 31, 2018
Current assets:    
Cash and cash equivalents $ 321.8 $ 369.3
Investments 31.0 26.6
Accounts receivable, less allowance of $2.8 and $4.0, respectively 168.0 172.2
Income tax receivable 0.4 1.8
Deferred commissions 15.8 14.8
Other current assets 23.7 16.9
Total current assets 560.7 601.6
Goodwill 1,015.8 556.7
Property, equipment, and capitalized software, less accumulated depreciation and amortization of $400.7 and $351.7, respectively 151.5 143.5
Operating lease assets 138.2 0.0
Intangible assets, net 335.7 73.9
Investments in unconsolidated entities 59.9 63.1
Deferred commissions, non-current 11.7 10.3
Other assets 9.0 4.7
Total assets 2,282.5 1,453.8
Current liabilities:    
Deferred revenue 240.0 195.8
Accrued compensation 107.7 109.5
Accounts payable and accrued liabilities 36.9 54.4
Less: Current portion of long-term debt, net of unamortized debt issuance costs of $0.3 million 11.0 0.0
Operating lease liabilities 33.3 0.0
Other current liabilities 2.8 3.1
Total current liabilities 431.7 362.8
Operating lease liabilities, non-current 132.3 0.0
Accrued compensation 12.5 11.8
Deferred tax liability, net 85.1 22.2
Long-term debt 534.8 70.0
Deferred revenue, non-current 32.0 14.2
Other long-term liabilities 12.2 38.1
Total liabilities 1,240.6 519.1
Morningstar, Inc. shareholders’ equity:    
Common stock, no par value, 200,000,000 shares authorized, of which 42,809,867 and 42,624,118 shares were outstanding as of September 30, 2019 and December 31, 2018, respectively 0.0 0.0
Treasury stock at cost, 10,844,603 and 10,816,672 shares as of September 30, 2019 and December 31, 2018, respectively (729.4) (726.8)
Additional paid-in capital 646.9 621.7
Retained earnings 1,215.3 1,114.8
Accumulated other comprehensive loss:    
Currency translation adjustment (92.2) (74.5)
Unrealized gain (loss) on available-for-sale investments 1.3 (0.5)
Total accumulated other comprehensive loss (90.9) (75.0)
Total equity 1,041.9 934.7
Total liabilities and equity $ 2,282.5 $ 1,453.8
v3.19.3
Condensed Consolidated Balance Sheets (Parenthetical) - USD ($)
$ in Millions
Sep. 30, 2019
Dec. 31, 2018
Statement of Financial Position [Abstract]    
Allowance for doubtful accounts receivable $ 2.8 $ 4.0
Accumulated depreciation and amortization $ 400.7 $ 351.7
Common Stock, No Par Value $ 0 $ 0
Common Stock, Shares Authorized 200,000,000 200,000,000
Common Stock, Shares, Outstanding 42,809,867 42,624,118
Treasury Stock, Shares 10,844,603 10,816,672
v3.19.3
Unaudited Condensed Consolidated Statement of Equity - USD ($)
$ in Millions
Total
Common Stock
Treasury Stock
Additional Paid-In Capital
Retained Earnings
Accumulated Other Comprehensive Loss
Balance at Dec. 31, 2017 $ 804.9 $ 0.0 $ (708.2) $ 601.0 $ 958.7 $ (46.6)
Balance (in shares) at Dec. 31, 2017   42,547,707        
Increase (Decrease) in Stockholders' Equity            
Net income 41.9       41.9  
Other comprehensive income:            
Reclassification of adjustments for gain included in net income, net of income tax (0.4)         (0.4)
Foreign currency translation adjustment 7.5         7.5
Other comprehensive income 7.1         7.1
Issuance of common stock related to stock-option exercises and vesting of restricted stock units, net of shares withheld for taxes on settlements of restricted stock units (in shares)   79,050        
Issuance of common stock related to option exercises and vesting of restricted stock units, net of shares withheld for taxes on settlements of restricted stock units (4.1)     (4.1)    
Reclassification of awards previously liability-classified that were converted to equity 4.4     4.4    
Stock-based compensation 6.6     6.6    
Common share repurchased (in shares)   (92,529)        
Common shares repurchased (8.9)   (8.9)      
Dividends declared (10.6)       (10.6)  
Balance at Mar. 31, 2018 858.3 $ 0.0 (717.1) 607.9 1,007.0 (39.5)
Balance (in shares) at Mar. 31, 2018   42,534,228        
Balance at Dec. 31, 2017 804.9 $ 0.0 (708.2) 601.0 958.7 (46.6)
Balance (in shares) at Dec. 31, 2017   42,547,707        
Increase (Decrease) in Stockholders' Equity            
Net income 140.6          
Other comprehensive income:            
Unrealized gain on available-for-sale investments, net of income tax 0.8          
Reclassification of adjustments for gain included in net income, net of income tax (0.7)          
Foreign currency translation adjustment (20.2)          
Other comprehensive income (20.1)          
Balance at Sep. 30, 2018 927.6 $ 0.0 (717.0) 616.3 1,095.0 (66.7)
Balance (in shares) at Sep. 30, 2018   42,670,728        
Balance at Mar. 31, 2018 858.3 $ 0.0 (717.1) 607.9 1,007.0 (39.5)
Balance (in shares) at Mar. 31, 2018   42,534,228        
Increase (Decrease) in Stockholders' Equity            
Net income 41.8       41.8  
Other comprehensive income:            
Unrealized gain on available-for-sale investments, net of income tax 0.3         0.3
Reclassification of adjustments for gain included in net income, net of income tax (0.1)         (0.1)
Foreign currency translation adjustment (21.6)         (21.6)
Other comprehensive income (21.4)         (21.4)
Issuance of common stock related to stock-option exercises and vesting of restricted stock units, net of shares withheld for taxes on settlements of restricted stock units (in shares)   118,598        
Issuance of common stock related to option exercises and vesting of restricted stock units, net of shares withheld for taxes on settlements of restricted stock units (5.2)   1.2 (6.4)    
Reclassification of awards previously liability-classified that were converted to equity 0.2     0.2    
Stock-based compensation 10.0     10.0    
Common share repurchased (in shares)   (16,760)        
Common shares repurchased (1.6)   (1.6)      
Dividends declared (10.7)       (10.7)  
Balance at Jun. 30, 2018 871.4 $ 0.0 (717.5) 611.7 1,038.1 (60.9)
Balance (in shares) at Jun. 30, 2018   42,636,066        
Increase (Decrease) in Stockholders' Equity            
Net income 56.9       56.9  
Other comprehensive income:            
Unrealized gain on available-for-sale investments, net of income tax 0.5         0.5
Reclassification of adjustments for gain included in net income, net of income tax (0.2)         (0.2)
Foreign currency translation adjustment (6.1)         (6.1)
Other comprehensive income (5.8)         (5.8)
Issuance of common stock related to stock-option exercises and vesting of restricted stock units, net of shares withheld for taxes on settlements of restricted stock units (in shares)   34,662        
Issuance of common stock related to option exercises and vesting of restricted stock units, net of shares withheld for taxes on settlements of restricted stock units (2.1)   0.5 (2.6)    
Reclassification of awards previously liability-classified that were converted to equity (0.1)     (0.1)    
Stock-based compensation 7.3     7.3    
Balance at Sep. 30, 2018 927.6 $ 0.0 (717.0) 616.3 1,095.0 (66.7)
Balance (in shares) at Sep. 30, 2018   42,670,728        
Balance at Dec. 31, 2018 $ 934.7 $ 0.0 (726.8) 621.7 1,114.8 (75.0)
Balance (in shares) at Dec. 31, 2018 42,624,118 42,624,118        
Increase (Decrease) in Stockholders' Equity            
Net income $ 33.2       33.2  
Other comprehensive income:            
Unrealized gain on available-for-sale investments, net of income tax 1.9         1.9
Reclassification of adjustments for gain included in net income, net of income tax (0.5)         (0.5)
Foreign currency translation adjustment 3.4         3.4
Other comprehensive income 4.8         4.8
Issuance of common stock related to stock-option exercises and vesting of restricted stock units, net of shares withheld for taxes on settlements of restricted stock units (in shares)   73,530        
Issuance of common stock related to option exercises and vesting of restricted stock units, net of shares withheld for taxes on settlements of restricted stock units (4.6)     (4.6)    
Reclassification of awards previously liability-classified that were converted to equity 6.6     6.6    
Stock-based compensation 10.0     10.0    
Common share repurchased (in shares)   (41,935)        
Common shares repurchased (4.6)   (4.6)      
Dividends declared (11.9)       (11.9)  
Balance at Mar. 31, 2019 968.2 $ 0.0 (731.4) 633.7 1,136.1 (70.2)
Balance (in shares) at Mar. 31, 2019   42,655,713        
Balance at Dec. 31, 2018 $ 934.7 $ 0.0 (726.8) 621.7 1,114.8 (75.0)
Balance (in shares) at Dec. 31, 2018 42,624,118 42,624,118        
Increase (Decrease) in Stockholders' Equity            
Net income $ 124.4          
Other comprehensive income:            
Unrealized gain on available-for-sale investments, net of income tax 2.4          
Reclassification of adjustments for gain included in net income, net of income tax (0.6)          
Foreign currency translation adjustment (17.7)          
Other comprehensive income (15.9)          
Balance at Sep. 30, 2019 $ 1,041.9 $ 0.0 (729.4) 646.9 1,215.3 (90.9)
Balance (in shares) at Sep. 30, 2019 42,809,867 42,809,867        
Balance at Mar. 31, 2019 $ 968.2 $ 0.0 (731.4) 633.7 1,136.1 (70.2)
Balance (in shares) at Mar. 31, 2019   42,655,713        
Increase (Decrease) in Stockholders' Equity            
Net income 42.1       42.1  
Other comprehensive income:            
Unrealized gain on available-for-sale investments, net of income tax 0.3         0.3
Reclassification of adjustments for gain included in net income, net of income tax 0.2         0.2
Foreign currency translation adjustment (2.8)         (2.8)
Other comprehensive income (2.3)         (2.3)
Issuance of common stock related to stock-option exercises and vesting of restricted stock units, net of shares withheld for taxes on settlements of restricted stock units (in shares)   107,309        
Issuance of common stock related to option exercises and vesting of restricted stock units, net of shares withheld for taxes on settlements of restricted stock units (5.3)   1.0 (6.3)    
Reclassification of awards previously liability-classified that were converted to equity 0.2     0.2    
Stock-based compensation 12.5     12.5    
Dividends declared (12.0)       (12.0)  
Balance at Jun. 30, 2019 1,003.4 $ 0.0 (730.4) 640.1 1,166.2 (72.5)
Balance (in shares) at Jun. 30, 2019   42,763,022        
Increase (Decrease) in Stockholders' Equity            
Net income 49.1       49.1  
Other comprehensive income:            
Unrealized gain on available-for-sale investments, net of income tax 0.2         0.2
Reclassification of adjustments for gain included in net income, net of income tax (0.3)         (0.3)
Foreign currency translation adjustment (18.3)         (18.3)
Other comprehensive income (18.4)         (18.4)
Issuance of common stock related to stock-option exercises and vesting of restricted stock units, net of shares withheld for taxes on settlements of restricted stock units (in shares)   46,845        
Issuance of common stock related to option exercises and vesting of restricted stock units, net of shares withheld for taxes on settlements of restricted stock units (3.0)   1.0 (4.0)    
Stock-based compensation 10.8     10.8    
Balance at Sep. 30, 2019 $ 1,041.9 $ 0.0 $ (729.4) $ 646.9 $ 1,215.3 $ (90.9)
Balance (in shares) at Sep. 30, 2019 42,809,867 42,809,867        
v3.19.3
Condensed Consolidated Statement of Equity (Parenthetical) - USD ($)
$ in Millions
3 Months Ended
Sep. 30, 2019
Jun. 30, 2019
Mar. 31, 2019
Sep. 30, 2018
Jun. 30, 2018
Mar. 31, 2018
Statement of Stockholders' Equity [Abstract]            
Taxes from unrealized gain on available-for-sale investments   $ 0.1 $ 0.7 $ 0.2 $ 0.3  
Reclassification of adjustments for gains included in net income, net of income tax of $ 0.1 $ 0.1 $ 0.2   $ 0.1 $ 0.1
Dividends declared (in dollars per share) $ 0 $ 0.28 $ 0.28 $ 0 $ 0.25 $ 0.25
v3.19.3
Condensed Consolidated Statements of Cash Flows - USD ($)
$ in Millions
9 Months Ended
Sep. 30, 2019
Sep. 30, 2018
Operating activities    
Consolidated net income $ 124.4 $ 140.6
Adjustments to reconcile consolidated net income to net cash flows from operating activities:    
Depreciation and amortization 84.0 71.2
Deferred income taxes (2.8) 6.5
Stock-based compensation expense 33.3 23.9
Provision for bad debt 0.6 2.6
Equity in net loss of unconsolidated entities 1.9 1.6
Gain on sale of product line 0.0 (10.5)
Gain on sale of equity investments (19.5) (5.6)
Other, net 1.4 (3.3)
Changes in operating assets and liabilities:    
Accounts receivable 30.6 (29.1)
Accounts payable and accrued liabilities (5.0) 5.9
Accrued compensation (8.1) (7.6)
Income taxes, current (6.2) (13.7)
Deferred revenue 21.0 21.0
Other assets and liabilities (3.7) 6.0
Cash provided by operating activities 251.9 209.5
Investing activities    
Purchases of investments (28.1) (23.7)
Proceeds from maturities and sales of investments 27.8 22.3
Capital expenditures (57.1) (55.2)
Acquisitions, net of cash acquired (673.9) 0.0
Proceeds from sale of a product line 0.0 10.5
Proceeds from sale of equity investments 17.0 7.9
Purchases of equity investments (1.4) (0.5)
Other, net (0.6) (0.3)
Cash used for investing activities (716.3) (39.0)
Financing activities    
Common shares repurchased (4.9) (10.8)
Dividends paid (35.9) (31.9)
Proceeds from long-term debt 610.0 0.0
Repayment of long-term debt (132.8) (90.0)
Proceeds from stock-option exercises 0.1 0.1
Employee taxes paid from withholding of restricted stock units (12.8) (11.5)
Other, net (0.4) (1.1)
Cash provided by (used for) financing activities 423.3 (145.2)
Effect of exchange rate changes on cash and cash equivalents (6.4) (10.5)
Net increase (decrease) in cash and cash equivalents (47.5) 14.8
Cash and cash equivalents—beginning of period 369.3 308.2
Cash and cash equivalents—end of period 321.8 323.0
Supplemental disclosure of cash flow information:    
Cash paid for income taxes 45.9 55.3
Cash paid for interest 6.5 2.7
Supplemental information of non-cash investing and financing activities:    
Unrealized gain (loss) on available-for-sale investments $ 2.4 $ (0.2)
v3.19.3
Basis of Presentation of Interim Financial Information
9 Months Ended
Sep. 30, 2019
Organization, Consolidation and Presentation of Financial Statements [Abstract]  
Basis of Presentation of Interim Financial Information Basis of Presentation of Interim Financial Information
 
The accompanying unaudited condensed consolidated financial statements of Morningstar, Inc. and subsidiaries (Morningstar, we, our, the Company) have been prepared to conform to the rules and regulations of the Securities and Exchange Commission (SEC). The preparation of financial statements in conformity with accounting principles generally accepted in the United States (U.S. GAAP) requires management to make estimates and assumptions that affect the reported amount of assets, liabilities, revenue, and expenses. Actual results could differ from those estimates. In the opinion of management, the statements reflect all adjustments, which are of a normal recurring nature, necessary to present fairly our financial position, results of operations, equity, and cash flows. These financial statements and notes are unaudited and should be read in conjunction with our Audited Consolidated Financial Statements and Notes thereto included in our Annual Report on Form 10-K for the year ended December 31, 2018, filed with the SEC on March 1, 2019 (our Annual Report).

The acronyms that appear in the Notes to our Unaudited Condensed Consolidated Financial Statements refer to the following:
 
ASC: Accounting Standards Codification
ASU: Accounting Standards Update
FASB: Financial Accounting Standards Board
 
v3.19.3
Summary of Significant Accounting Policies
9 Months Ended
Sep. 30, 2019
Accounting Policies [Abstract]  
Summary of Significant Accounting Policies Summary of Significant Accounting Policies

Significant changes to our accounting policies as a result of adopting ASU No. 2016-02, Leases, are discussed below. We discuss our other significant accounting policies in Note 2 of our Audited Consolidated Financial Statements included in our Annual Report.

Recently adopted accounting pronouncements

Leases: On February 25, 2016, the FASB issued ASU No. 2016-02, Leases (Topic 842), which requires lessees to recognize almost all leases on their balance sheet as a right-of-use asset and a lease liability. Expenses are recognized in the consolidated statement of income in a manner similar to previous accounting guidance. Topic 842 originally required the use of a modified retrospective approach upon adoption. In July 2018, the FASB issued ASU No. 2018-11, Leases (Topic 842) - Targeted Improvements, which allows an additional transition method to adopt the new lease standard at the adoption date instead of the beginning of the earliest period presented. We elected this transition method at the adoption date of January 1, 2019.

We also chose to elect the following practical expedients upon adoption: not to reassess whether any expired or existing contracts are or contain leases, not to reassess the lease classification for any expired or existing leases, not to reassess initial direct costs for any existing leases, and not to separately identify lease and nonlease components (i.e. maintenance costs) except for real estate leases. Additionally, we elected the short-term lease exemption, and are only applying the requirements of Topic 842 to long-term leases (leases greater than 1 year).

The adoption of Topic 842 resulted in the presentation of $118.8 million of operating lease assets and $145.8 million of operating lease liabilities on the consolidated balance sheet as of March 31, 2019. At implementation, we also reclassified $27.9 million in deferred rent liabilities related to these leases, which decreased recognized operating lease assets. The new standard did not have a material impact on the statement of income. See Note 9 for additional information.


Income Statement-Reporting Comprehensive Income: On February 14, 2018, the FASB issued ASU No. 2018-02, Income Statement-Reporting Comprehensive Income (Topic 220): Reclassification of Certain Tax Effects from Accumulated Other Comprehensive Income, to address a specific consequence of the Tax Cuts and Jobs Act of 2017 (the Tax Reform Act) by allowing a reclassification from accumulated other comprehensive income (loss) to retained earnings for stranded tax effects resulting from the Tax Reform Act’s reduction of the U.S. federal corporate income tax rate. The new standard became effective for us on January 1, 2019 and is to be applied either in the period of adoption or retrospectively to each period in which the effect of the change in the U.S. federal corporate income tax rate in the Tax Reform Act is recognized. We did not elect to reclassify any stranded tax effects from accumulated other comprehensive income (loss) to retained earnings; therefore, the adoption did not have an impact on our consolidated financial statements and related disclosures.

Compensation—Stock Compensation: On June 20, 2018, the FASB issued ASU No. 2018-07, Compensation—Stock Compensation (Topic 718) - Improvements to Nonemployee Share-Based Payment Accounting, which aligns the accounting for share-based payment awards issued to employees and nonemployees. Under the new standard, the existing employee guidance will apply to nonemployee share-based transactions (as long as the transaction is not effectively a form of financing), with the exception of specific guidance related to the attribution of compensation cost. The cost of nonemployee awards will continue to be recorded as if the grantor had paid cash for the goods or services. In addition, the contractual term can be used in lieu of an expected term in the option-pricing model for nonemployee awards. The new standard became effective for us on January 1, 2019 and will be applied to all new awards granted after the date of adoption. The adoption did not have an impact on our consolidated financial statements and related disclosures.

Codification Improvements to Investments - Debt and Equity Securities: On July 17, 2018, the FASB issued ASU No. 2018-09, Codification Improvements (ASU No. 2018-09), which modifies the disclosure requirements on debt and equity securities related to ASC 320, Investments - Debt and Equity Securities. ASU No. 2018-09 removes the requirement for these disclosures when an entity provides summarized interim financial information. The new standard became effective for us on January 1, 2019. The adoption did not have an impact on our consolidated financial statements.

Recently issued accounting pronouncements not yet adopted

Current Expected Credit Losses: On June 16, 2016, the FASB issued ASU No. 2016-13, Financial Instruments-Credit Losses (Topic 326): Measurement of Credit Losses on Financial Instruments (ASU No. 2016-13), which requires that expected credit losses relating to financial assets measured on an amortized cost basis and available-for-sale debt securities be recorded through an allowance for credit losses. ASU No. 2016-13 limits the amount of credit losses to be recognized for available-for-sale debt securities to the amount by which carrying value exceeds fair value and also requires the reversal of previously recognized credit losses if fair value increases. The new standard is effective for us on January 1, 2020. Early adoption is permitted. On April 25, 2019, the FASB issued ASU No. 2019-04, Codification Improvements (ASU No. 2019-04), which clarifies certain aspects of accounting for credit losses. On May 15, 2019, the FASB issued ASU No. 2019-05, Financial Instruments-Credit Losses (Topic 326): Targeted Transition Relief (ASU No. 2019-05), which allows entities to elect the fair value option on certain financial instruments. We believe that the most notable impact of these standards may relate to our processes around the assessment of the adequacy of our allowance for doubtful accounts on accounts receivable and the recognition of credit losses. We are finalizing our evaluation of the impact of adopting ASU No. 2016-13, ASU No. 2019-04 and ASU No. 2019-05 on our consolidated financial statements and related disclosures.

Disclosure Framework - Changes to the Disclosure Requirements for Fair Value Measurement: On August 28, 2018, the FASB issued ASU No. 2018-13, Fair Value Measurement (Topic 820): Disclosure Framework - Changes to the Disclosure Requirements for Fair Value Measurement (ASU No. 2018-13), which eliminates, adds and modifies certain disclosure requirements around items such as transfers between Level 1 and 2, policy of timing of transfers, and valuation process for Level 3. The new standard is effective for us on January 1, 2020. We are finalizing our evaluation of the impact of adopting ASU No. 2018-13 on our consolidated financial statements and related disclosures.

Cloud Computing: On August 29, 2018, the FASB issued ASU No. 2018-15, Customer's Accounting for Fees Paid in a Cloud Computing Arrangement (ASU No. 2018-15), which helps entities evaluate the accounting for fees paid by a customer in a cloud computing arrangement (CCA) by providing guidance for determining when an arrangement includes a software license and when an arrangement is solely a hosted CCA service. Under ASU No. 2018-15, customers will apply the same criteria for capitalizing implementation costs as they would for an arrangement that has a software license. The new guidance also prescribes the balance sheet, income statement, and cash flow classification of the capitalized implementation costs and related amortization expense and requires additional quantitative and qualitative disclosures. The new standard is effective for us on January 1, 2020. Early adoption is permitted, including adoption in any interim period for which financial statements have not been issued. Entities can choose to adopt the new guidance prospectively to eligible costs incurred on or after the date this guidance is first applied or retrospectively. We are finalizing our evaluation of the impact of adopting ASU No. 2018-15 on our consolidated financial statements and related disclosures.
v3.19.3
Credit Arrangements
9 Months Ended
Sep. 30, 2019
Debt Disclosure [Abstract]  
Credit Arrangements Credit Arrangements

Long-term debt

The following table summarizes our long-term debt as of September 30, 2019 and December 31, 2018.

(in millions)
 
As of September 30, 2019
 
As of December 31, 2018
July 2019 Term Facility, net of unamortized debt issuance costs of $1.4 million
 
$
445.8

 
$

July 2019 Revolving Credit Facility
 
100.0

 

Prior Revolving Credit Facility
 

 
70.0

Total debt
 
$
545.8

 
$
70.0

Less: Current portion of long-term debt, net of unamortized debt issuance costs of $0.3 million
 
11.0

 

Long-term debt
 
$
534.8

 
$
70.0



Credit Agreement
In connection with the acquisition of Ratings Acquisition Corp (DBRS) on July 2, 2019, the Company entered into a new senior credit agreement (the Credit Agreement). The Credit Agreement provides the Company with a five-year multi-currency credit facility with an initial borrowing capacity of up to $750.0 million, including a $300.0 million revolving credit facility (the Revolving Credit Facility) and a term loan facility of $450.0 million (the Term Facility). The Credit Agreement also provides for the issuance of up to $50.0 million of letters of credit and a $100.0 million sub-limit for a swingline facility under the Revolving Credit Facility. The new Credit Agreement will expire on July 2, 2024.
The interest rate applicable to any loan under the Credit Agreement is, at our option, either: (i) the applicable London interbank offered rate (LIBOR) plus an applicable margin for such loans, which ranges between 1.00% and 1.50%, based on our consolidated leverage ratio or (ii) the lender's base rate plus the applicable margin for such loans, which ranges between 0.00% and 0.50%, based on our consolidated leverage ratio.
The proceeds of the Term Facility and initial borrowings under the Revolving Credit Facility were used to finance the acquisition of DBRS. The proceeds of future borrowings under the Revolving Credit Facility may be used for working capital, capital expenditures and any other lawful corporate purpose.

The portions of deferred debt issuance costs related to the Revolving Credit Facility are included in other current and other non-current assets, and the portion of deferred debt issuance costs related to the Term Facility is reported as a reduction to the carrying amount of the Term Facility. Amortization of debt issuance costs is recorded as interest expense over the term of the Credit Agreement.
Prior Revolving Credit Facility
The new Credit Agreement replaced the prior $300.0 million five-year credit facility (the Prior Revolving Credit Facility), which was scheduled to expire on December 21, 2020. The Prior Revolving Credit Facility was repaid and terminated by the Company upon execution of the Credit Agreement.

In December 2018, we amended the Prior Revolving Credit Facility to extend the maturity date to December 21, 2020 with no other changes in terms. The credit agreement provided us with a borrowing capacity of up to $300.0 million and provided for issuance of up to $25.0 million of letters of credit. The interest rate applicable to any loan under the credit agreement was, at our option, either: (i) the applicable LIBOR plus an applicable margin for such loans, which ranged between 1.00% and 1.75%, based on our consolidated leverage ratio or (ii) the lender’s base rate plus the applicable margin for such loans which ranged between 2.00% and 2.75%, based on our consolidated leverage ratio.
Compliance with Covenants
The Credit Agreement contains financial covenants under which we: (i) may not exceed a maximum consolidated leverage ratio of 3.50 to 1.00 (or 3.75 to 1.00 for the four fiscal quarters following any material acquisition (as defined in the Credit Agreement)) and (ii) are required to maintain a minimum consolidated interest coverage ratio of not less than 3.00 to 1.00. We were in compliance with the financial covenants as of September 30, 2019.
v3.19.3
Acquisitions, Divestitures, Goodwill, and Other Intangible Assets
9 Months Ended
Sep. 30, 2019
Goodwill and Intangible Assets Disclosure [Abstract]  
Acquisitions, Divestitures, Goodwill, and Other Intangible Assets Acquisitions, Divestitures, Goodwill, and Other Intangible Assets

Acquisitions

On July 2, 2019, we acquired 100% of voting equity interests of DBRS for total cash consideration of $682.1 million. DBRS delivers comprehensive credit rating services and ongoing surveillance to customers in various market sectors across Europe, the U.S., and Canada. The combination of DBRS with Morningstar Credit Ratings' business (collectively, DBRS Morningstar) will expand global asset class coverage and provide investors with fixed-income analysis and research through the combined platform.
We began consolidating the financial results of this acquisition in our Consolidated Financial Statements on July 2, 2019. DBRS Morningstar contributed $49.6 million of revenue and $51.6 million of operating expense during the three-month period ended September 30, 2019. We incurred transaction-related costs of $1.1 million and $2.9 million during the third quarter and first nine months of 2019.
The transaction has been accounted for using the acquisition method of accounting, which requires that assets acquired and liabilities assumed be recognized at their fair values as of the acquisition date. Morningstar was the accounting acquirer for purposes of accounting for the business combination. The values assigned to the assets acquired and liabilities assumed are based on preliminary estimates of fair value available as of September 30, 2019, and may be adjusted during the measurement period of up to 12 months from the date of acquisition as further information becomes available. Any changes in the fair values of the assets acquired and liabilities assumed during the measurement period may result in adjustments to goodwill.
As of September 30, 2019, we completed our initial determination of the fair values of the acquired, identifiable assets and liabilities based on the information available. The primary areas that are not yet finalized due to information that may become available subsequently and may result in changes in the values assigned to various assets and liabilities include assumed current and deferred tax assets and liabilities. If additional information that existed as the time of the acquisition date becomes available within 12 months of the acquisition date, there may be adjustments to the initial fair value measurements.
The following table summarizes our allocation of the estimated fair values of the assets acquired and liabilities assumed at the date of acquisition:
 
 
(in millions)
Cash consideration transferred
 
$
682.1

 
 
 
Cash and cash equivalents
 
$
8.5

Accounts receivable
 
30.0

Property, equipment, and capitalized software, net
 
12.9

Intangible assets, net
 
288.2

Goodwill
 
468.3

Operating lease asset
 
33.5

Other current and non-current assets
 
4.4

Deferred revenue
 
(43.3
)
Deferred tax liability, net
 
(65.6
)
Operating lease liability
 
(33.5
)
Other current and non-current liabilities
 
(21.3
)
Total fair value of DBRS
 
$
682.1



Accounts receivable acquired were recorded at gross contractual amounts receivable, which approximates fair value. We expect to collect substantially all of the gross contractual amounts receivable within a reasonable period of time after the acquisition date.
The preliminary allocation of the estimated fair values of the assets acquired and liabilities assumed includes $288.2 million of acquired intangible assets, as follows:
 
(in millions)

Weighted average useful life
(years)
Customer-related assets
$
223.2

10
Technology-based assets
29.4

6
Intellectual property (trademarks)
35.6

6
Total intangible assets
$
288.2

 


We recognized a preliminary net deferred tax liability of $65.6 million mainly because the amortization expense related to certain intangible assets is not deductible for income tax purposes.
Goodwill of $468.3 million represents the excess over the fair value of the net tangible and intangible assets acquired. Goodwill is not deductible for income tax purposes.
Unaudited Pro Forma Information for DBRS Acquisition
The following unaudited pro forma information presents a summary of our Condensed Consolidated Statements of Income for the nine months ended September 30, 2019 and 2018, as if we had completed the acquisition as of January 1, 2018.
This unaudited pro forma information is presented for illustrative purposes and is not intended to represent or be indicative of the actual results of operations or expected synergies of DBRS Morningstar that would have been achieved had the acquisition occurred at the beginning of the earliest period presented, nor is it intended to represent or be indicative of future results of operations.
In calculating the pro forma information below, we included an estimate of amortization expense related to the intangible assets acquired, depreciation expense due to changes in estimated remaining useful lives of long-lived assets, reduction in revenue as a result of the fair value adjustments to deferred revenue, and interest expense incurred on the long-term debt.
Unaudited Pro Forma Financial Information
Nine months ended September 30,
(in millions, except for per share amount)
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



Divestitures

During the third quarter of 2019, we divested our equity interest in one of our unconsolidated entities and recorded a gain of $19.5 million related to the sale and received $16.7 million of proceeds.

Goodwill 

The following table shows the changes in our goodwill balances from December 31, 2018 to September 30, 2019:
 
 
 
(in millions)
Balance as of December 31, 2018
 
$
556.7

Acquisition of DBRS
 
468.3

Foreign currency translation
 
(9.2
)
Balance as of September 30, 2019
 
$
1,015.8



We did not record any impairment losses in the first nine months of 2019 and 2018. We perform our annual impairment reviews in the fourth quarter or when triggering events are identified.

Intangible Assets

The following table summarizes our intangible assets: 

 
 
As of September 30, 2019
 
As of December 31, 2018
(in millions)
 
Gross
 
Accumulated
Amortization
 
Net
 
Weighted
Average
Useful  Life
(years)
 
Gross
 
Accumulated
Amortization
 
Net
 
Weighted
Average
Useful  Life
(years)
Intellectual property
 
$
65.7

 
$
(31.0
)
 
$
34.7

 
8
 
$
30.8

 
$
(29.2
)
 
$
1.6

 
9
Customer-related assets
 
372.9

 
(121.3
)
 
251.6

 
11
 
153.0

 
(111.7
)
 
41.3

 
12
Supplier relationships
 
0.2

 
(0.1
)
 
0.1

 
20
 
0.2

 
(0.1
)
 
0.1

 
20
Technology-based assets
 
155.4

 
(106.3
)
 
49.1

 
7
 
126.9

 
(96.3
)
 
30.6

 
7
Non-competition agreements
 
2.4

 
(2.2
)
 
0.2

 
5
 
2.4

 
(2.1
)
 
0.3

 
5
Total intangible assets
 
$
596.6

 
$
(260.9
)
 
$
335.7

 
10
 
$
313.3

 
$
(239.4
)
 
$
73.9

 
10

 
The following table summarizes our amortization expense related to intangible assets:
 
 
Three months ended September 30,
 
Nine months ended September 30,
(in millions)
 
2019
 
2018
 
2019
 
2018
Amortization expense
 
$
13.3

 
$
5.2

 
$
23.1

 
$
15.7


 
We amortize intangible assets using the straight-line method over their expected economic useful lives.

We expect intangible amortization expense for the remainder of 2019 and subsequent years as follows:
 
 
(in millions)
Remainder of 2019 (from October 1 through December 31)
 
$
10.4

2020
 
50.6

2021
 
47.3

2022
 
39.4

2023
 
39.4

Thereafter
 
148.6


 
Our estimates of future amortization expense for intangible assets may be affected by acquisitions, divestitures, changes in the estimated average useful lives, and foreign currency translation.
Acquisitions, Divestitures, Goodwill, and Other Intangible Assets Acquisitions, Divestitures, Goodwill, and Other Intangible Assets

Acquisitions

On July 2, 2019, we acquired 100% of voting equity interests of DBRS for total cash consideration of $682.1 million. DBRS delivers comprehensive credit rating services and ongoing surveillance to customers in various market sectors across Europe, the U.S., and Canada. The combination of DBRS with Morningstar Credit Ratings' business (collectively, DBRS Morningstar) will expand global asset class coverage and provide investors with fixed-income analysis and research through the combined platform.
We began consolidating the financial results of this acquisition in our Consolidated Financial Statements on July 2, 2019. DBRS Morningstar contributed $49.6 million of revenue and $51.6 million of operating expense during the three-month period ended September 30, 2019. We incurred transaction-related costs of $1.1 million and $2.9 million during the third quarter and first nine months of 2019.
The transaction has been accounted for using the acquisition method of accounting, which requires that assets acquired and liabilities assumed be recognized at their fair values as of the acquisition date. Morningstar was the accounting acquirer for purposes of accounting for the business combination. The values assigned to the assets acquired and liabilities assumed are based on preliminary estimates of fair value available as of September 30, 2019, and may be adjusted during the measurement period of up to 12 months from the date of acquisition as further information becomes available. Any changes in the fair values of the assets acquired and liabilities assumed during the measurement period may result in adjustments to goodwill.
As of September 30, 2019, we completed our initial determination of the fair values of the acquired, identifiable assets and liabilities based on the information available. The primary areas that are not yet finalized due to information that may become available subsequently and may result in changes in the values assigned to various assets and liabilities include assumed current and deferred tax assets and liabilities. If additional information that existed as the time of the acquisition date becomes available within 12 months of the acquisition date, there may be adjustments to the initial fair value measurements.
The following table summarizes our allocation of the estimated fair values of the assets acquired and liabilities assumed at the date of acquisition:
 
 
(in millions)
Cash consideration transferred
 
$
682.1

 
 
 
Cash and cash equivalents
 
$
8.5

Accounts receivable
 
30.0

Property, equipment, and capitalized software, net
 
12.9

Intangible assets, net
 
288.2

Goodwill
 
468.3

Operating lease asset
 
33.5

Other current and non-current assets
 
4.4

Deferred revenue
 
(43.3
)
Deferred tax liability, net
 
(65.6
)
Operating lease liability
 
(33.5
)
Other current and non-current liabilities
 
(21.3
)
Total fair value of DBRS
 
$
682.1



Accounts receivable acquired were recorded at gross contractual amounts receivable, which approximates fair value. We expect to collect substantially all of the gross contractual amounts receivable within a reasonable period of time after the acquisition date.
The preliminary allocation of the estimated fair values of the assets acquired and liabilities assumed includes $288.2 million of acquired intangible assets, as follows:
 
(in millions)

Weighted average useful life
(years)
Customer-related assets
$
223.2

10
Technology-based assets
29.4

6
Intellectual property (trademarks)
35.6

6
Total intangible assets
$
288.2

 


We recognized a preliminary net deferred tax liability of $65.6 million mainly because the amortization expense related to certain intangible assets is not deductible for income tax purposes.
Goodwill of $468.3 million represents the excess over the fair value of the net tangible and intangible assets acquired. Goodwill is not deductible for income tax purposes.
Unaudited Pro Forma Information for DBRS Acquisition
The following unaudited pro forma information presents a summary of our Condensed Consolidated Statements of Income for the nine months ended September 30, 2019 and 2018, as if we had completed the acquisition as of January 1, 2018.
This unaudited pro forma information is presented for illustrative purposes and is not intended to represent or be indicative of the actual results of operations or expected synergies of DBRS Morningstar that would have been achieved had the acquisition occurred at the beginning of the earliest period presented, nor is it intended to represent or be indicative of future results of operations.
In calculating the pro forma information below, we included an estimate of amortization expense related to the intangible assets acquired, depreciation expense due to changes in estimated remaining useful lives of long-lived assets, reduction in revenue as a result of the fair value adjustments to deferred revenue, and interest expense incurred on the long-term debt.
Unaudited Pro Forma Financial Information
Nine months ended September 30,
(in millions, except for per share amount)
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



Divestitures

During the third quarter of 2019, we divested our equity interest in one of our unconsolidated entities and recorded a gain of $19.5 million related to the sale and received $16.7 million of proceeds.

Goodwill 

The following table shows the changes in our goodwill balances from December 31, 2018 to September 30, 2019:
 
 
 
(in millions)
Balance as of December 31, 2018
 
$
556.7

Acquisition of DBRS
 
468.3

Foreign currency translation
 
(9.2
)
Balance as of September 30, 2019
 
$
1,015.8



We did not record any impairment losses in the first nine months of 2019 and 2018. We perform our annual impairment reviews in the fourth quarter or when triggering events are identified.

Intangible Assets

The following table summarizes our intangible assets: 

 
 
As of September 30, 2019
 
As of December 31, 2018
(in millions)
 
Gross
 
Accumulated
Amortization
 
Net
 
Weighted
Average
Useful  Life
(years)
 
Gross
 
Accumulated
Amortization
 
Net
 
Weighted
Average
Useful  Life
(years)
Intellectual property
 
$
65.7

 
$
(31.0
)
 
$
34.7

 
8
 
$
30.8

 
$
(29.2
)
 
$
1.6

 
9
Customer-related assets
 
372.9

 
(121.3
)
 
251.6

 
11
 
153.0

 
(111.7
)
 
41.3

 
12
Supplier relationships
 
0.2

 
(0.1
)
 
0.1

 
20
 
0.2

 
(0.1
)
 
0.1

 
20
Technology-based assets
 
155.4

 
(106.3
)
 
49.1

 
7
 
126.9

 
(96.3
)
 
30.6

 
7
Non-competition agreements
 
2.4

 
(2.2
)
 
0.2

 
5
 
2.4

 
(2.1
)
 
0.3

 
5
Total intangible assets
 
$
596.6

 
$
(260.9
)
 
$
335.7

 
10
 
$
313.3

 
$
(239.4
)
 
$
73.9

 
10

 
The following table summarizes our amortization expense related to intangible assets:
 
 
Three months ended September 30,
 
Nine months ended September 30,
(in millions)
 
2019
 
2018
 
2019
 
2018
Amortization expense
 
$
13.3

 
$
5.2

 
$
23.1

 
$
15.7


 
We amortize intangible assets using the straight-line method over their expected economic useful lives.

We expect intangible amortization expense for the remainder of 2019 and subsequent years as follows:
 
 
(in millions)
Remainder of 2019 (from October 1 through December 31)
 
$
10.4

2020
 
50.6

2021
 
47.3

2022
 
39.4

2023
 
39.4

Thereafter
 
148.6


 
Our estimates of future amortization expense for intangible assets may be affected by acquisitions, divestitures, changes in the estimated average useful lives, and foreign currency translation.
v3.19.3
Income Per Share
9 Months Ended
Sep. 30, 2019
Earnings Per Share [Abstract]  
Income Per Share Income Per Share 

The following table shows how we reconcile our net income and the number of shares used in computing basic and diluted net income per share:

 
 
Three months ended September 30,
 
Nine months ended September 30,
(in millions, except per share amounts)
 
2019
 
2018
 
2019
 
2018
Basic net income per share:
 
 

 
 

 
 
 
 
Consolidated net income
 
$
49.1

 
$
56.9

 
$
124.4

 
$
140.6

 
 
 
 
 
 
 
 
 
Weighted average common shares outstanding
 
42.8

 
42.6

 
42.7

 
42.6

 
 
 
 
 
 
 
 
 
Basic net income per share
 
$
1.15

 
$
1.33

 
$
2.91

 
$
3.30

 
 
 
 
 
 
 
 
 
Diluted net income per share:
 
 
 
 
 
 
 
 
Consolidated net income
 
$
49.1

 
$
56.9

 
$
124.4

 
$
140.6

 
 
 
 
 
 
 
 
 
Weighted average common shares outstanding
 
42.8

 
42.6

 
42.7

 
42.6

Net effect of dilutive stock options, restricted stock units, performance share awards, and market stock units
 
0.4

 
0.5

 
0.4

 
0.4

Weighted average common shares outstanding for computing diluted income per share
 
43.2

 
43.1

 
43.1

 
43.0

 
 
 
 
 
 
 
 
 
Diluted net income per share
 
$
1.14

 
$
1.32

 
$
2.89

 
$
3.27



During the periods presented, there were no anti-dilutive restricted stock units, performance share awards, or market stock units to exclude from our calculation of diluted earnings per share.

v3.19.3
Revenue
9 Months Ended
Sep. 30, 2019
Revenue from Contract with Customer [Abstract]  
Revenue Revenue

Disaggregation of Revenue

The following table presents our revenue disaggregated by revenue type. Sales and usage-based taxes are excluded from revenue.
 
 
Three months ended September 30,
 
Nine months ended September 30,
(in millions)
 
2019
 
2018
 
2019
 
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



License-based performance obligations are generally satisfied over time as the customer has access to the product or service during the term of the subscription license and the level of service is consistent during the contract period. License-based agreements typically have a term of 12 to 36 months. License-based revenue is sourced from Morningstar Data, Morningstar Direct, Morningstar Advisor Workstation, PitchBook, and other similar products.

Asset-based performance obligations are satisfied over time as the customer receives continuous access to a service for the term of the contract or contract period. Asset-based arrangements typically have a term of 12 to 36 months. Asset-based fees represent variable consideration and the customer does not make separate purchasing decisions that result in additional performance obligations. Significant changes in the underlying fund assets, or significant disruptions in the market, are evaluated to determine if revisions of estimates of earned asset-based fees are needed for the current quarter. An estimate of variable consideration is included in the initial transaction price only to the extent it is probable that a significant reversal in the amount of the revenue recognized will not occur. Estimates of asset-based fees are based on the most recently completed quarter, and, as a result, it is unlikely a significant reversal of revenue would occur. Asset-based revenue includes Morningstar Investment Management, Workplace Solutions, and Morningstar Indexes. For the Morningstar Funds Trust, revenue from advisory fees and expenses for sub-advisory fees are recognized on a gross basis in accordance with the applicable revenue recognition guidance.

Transaction-based performance obligations are satisfied when the product or service is completed or delivered. Transaction-based revenue includes DBRS Morningstar, Internet Advertising Sales, and conferences. DBRS Morningstar may include surveillance services, which are recognized over time, as the customer has access to the service during the surveillance period.

Contract liabilities

Our contract liabilities represent deferred revenue. We record contract liabilities when cash payments are received or due in advance of our performance, including amounts which are refundable. The contract liabilities balance as of September 30, 2019 had a net increase of $62.0 million, primarily driven by cash payments received or due in advance of satisfying our performance obligations. We recognized $187.4 million of revenue in the nine-month period ended September 30, 2019 that was included in the contract liabilities balance as of December 31, 2018.

We expect to recognize revenue related to our contract liabilities for the remainder of 2019 and subsequent years as follows:
(in millions)
 
As of September 30, 2019
Remainder of 2019 (from October 1 through December 31)
 
$
157.6

2020
 
276.7

2021
 
79.9

2022
 
32.3

2023
 
13.5

Thereafter
 
58.5

 
 
$
618.5



The aggregate amount of revenue we expect to recognize for the remainder of 2019 and subsequent years is higher than our contract liability balance of $272.0 million as of September 30, 2019. The difference represents the value of future obligations for signed contracts where we have not yet begun to satisfy the performance obligations or have partially satisfied performance obligations.

The table above does not include variable consideration for unsatisfied performance obligations related to certain of our asset-based and transaction-based contracts as of September 30, 2019. We are applying the optional exemption as the variable consideration relates to these unsatisfied performance obligations being fulfilled as a series. The performance obligations related to these contracts are expected to be satisfied over the next 12 to 36 months as services are provided to the client. For license-based contracts, the consideration received for services performed is based on future user count, which will be known at the time the services are performed. The variable consideration for this revenue can be affected by the number of user licenses. For asset-based contracts, the consideration received for services performed is based on future asset values, which will be known at the time the services are performed. The variable consideration for this revenue can be affected by changes in the underlying value of fund assets due to client redemptions, additional investments, or significant movements in the market. For transaction-based contracts, such as internet advertising, the consideration received for services performed is based on the number of impressions, which will be known once impressions are created. The variable consideration for this revenue can be affected by the timing and quantity of impressions in any given period.

The table above does not include revenue for unsatisfied performance obligations related to certain of our license-based and transaction-based contracts as of September 30, 2019. We are applying the optional exemption as the performance obligations for such contracts have an expected duration of one year or less. For certain license-based contracts, the remaining performance obligation is expected to be less than one year based on the corresponding subscription terms. For transaction-based contracts, such as new credit rating issuances and conferences, the related performance obligations are expected to be satisfied within the next 12 months.

Contract Assets

Our contract assets represent accounts receivable, less allowance and deferred commissions. We did not record any impairment losses on receivables or deferred commissions in the first nine months of 2019.

The following table summarizes our contract assets balance:

(in millions)
 
As of September 30, 2019
 
As of December 31, 2018
Accounts receivable, less allowance
 
$
168.0

 
$
172.2

Deferred commissions
 
15.8

 
14.8

Deferred commissions, non-current
 
11.7

 
10.3

Total contract assets
 
$
195.5

 
$
197.3


The following table shows the change in our deferred commissions balance from December 31, 2018 to September 30, 2019:

 
 
(in millions)
Balance as of December 31, 2018
 
$
25.1

Commissions earned and capitalized
 
16.9

Amortization of capitalized amounts
 
(14.5
)
Balance as of September 30, 2019
 
$
27.5


v3.19.3
Segment and Geographical Area Information
9 Months Ended
Sep. 30, 2019
Segment Reporting [Abstract]  
Segment and Geographical Area Information Segment and Geographical Area Information
 
Segment Information

We report our results in a single reportable segment, which reflects how our chief operating decision maker allocates resources and evaluates our financial results. As a result of our acquisition of DBRS, we evaluated our single reportable segment and determined the acquisition had no impact on our segment reporting. Because we have a single reportable segment, all required financial segment information can be found directly in the Consolidated Financial Statements. The accounting policies for our reportable segment are the same as those described in “Note 2. Summary of Significant Accounting Policies” included in the Audited Consolidated Financial Statements and Notes thereto included in our Annual Report. We evaluate the performance of our reporting segment based on revenue and operating income.

Geographical Area Information

The tables below summarize our revenue and long-lived assets, which includes property, equipment, and capitalized software, net and operating lease assets, by geographical area:

Revenue by geographical area
 
 
 
 
 
 
 
 
 
 
Three months ended September 30,
 
Nine months ended September 30,
(in millions)
 
2019
 
2018
 
2019
 
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

Australia
 
9.7

 
9.9

 
29.2

 
31.2

Canada
 
20.7

 
7.4

 
36.4

 
22.6

Asia
 
7.3

 
5.9

 
20.4

 
18.1

Other
 
1.5

 
1.4

 
4.7

 
4.4

Total International
 
88.5

 
62.6

 
218.2

 
191.2

 
 
 
 
 
 
 
 
 
Consolidated revenue
 
$
313.8

 
$
261.3

 
$
846.6

 
$
757.2



Property, equipment, and capitalized software, net by geographical area
 
 
 
 
 
 
 
 
 
(in millions)
 
As of September 30, 2019
 
As of December 31, 2018
United States
 
$
129.4

 
$
126.4

 
 
 
 
 
United Kingdom
 
5.5

 
3.8

Continental Europe
 
2.1

 
1.3

Australia
 
4.2

 
5.0

Canada
 
2.8

 
0.3

Asia
 
6.9

 
6.5

Other
 
0.6

 
0.2

Total International
 
22.1

 
17.1

 
 
 
 
 
Consolidated property, equipment, and capitalized software, net
 
$
151.5

 
$
143.5


Operating lease assets by geographical area
 
 
 
 
 
 
 
 
 
(in millions)
 
As of September 30, 2019
 
As of December 31, 2018
United States
 
$
81.8

 
$

 
 
 
 
 
United Kingdom
 
12.4

 

Continental Europe
 
7.5

 

Australia
 
5.9

 

Canada
 
7.7

 

Asia
 
22.2

 

Other
 
0.7

 

Total International
 
56.4

 

 
 
 
 
 
Consolidated operating lease assets
 
$
138.2

 
$



As of December 31, 2018, there were no operating lease assets on the balance sheet as Topic 842 became effective for the Company on January 1, 2019.

The long-lived assets by geographical area do not include deferred commissions, non-current, as the balance is not significant.
v3.19.3
Investments and Fair Value Measurements
9 Months Ended
Sep. 30, 2019
Fair Value Disclosures [Abstract]  
Investments and Fair Value Measurements Fair Value Measurements

As of September 30, 2019 and December 31, 2018, our investment balances totaled $31.0 million and $26.6 million, respectively. We classify our investments into three categories: available-for-sale, held-to-maturity, and trading securities. Our investment portfolio consists of stocks, bonds, options, mutual funds, money market funds, or exchange-traded products that replicate the model portfolios and strategies created by Morningstar. These investment accounts may also include exchange-traded products where Morningstar is an index provider. All investments in our investment portfolio have valuations based on quoted prices in active markets for identical assets or liabilities that we have the ability to access, and, therefore, are classified as Level 1 within the fair value hierarchy.
v3.19.3
Leases
9 Months Ended
Sep. 30, 2019
Leases [Abstract]  
Leases Leases

We lease office space and certain equipment under various operating and finance leases, with the majority of our lease portfolio consisting of operating leases for office space.

We determine whether an arrangement is or includes an embedded lease at contract inception. Operating lease assets and lease liabilities are recognized at commencement date and initially measured using the present value of lease payments over the defined lease term. Lease expense is recognized on a straight-line basis over the lease term. For finance leases, we also recognize a finance lease asset and finance lease liability at inception, with lease expense recognized as interest expense and amortization.

A contract is or contains an embedded lease if the contract meets all of the below criteria:

There is an identified asset;
We obtain substantially all of the economic benefits of the asset; and
We have the right to direct the use of the asset.

For initial measurement of the present value of lease payments and for subsequent measurement of lease modifications, we are required to use the rate implicit in the lease. However, most of our leases do not provide an implicit rate; therefore, we use our incremental borrowing rate, which is a collateralized rate. To apply the incremental borrowing rate, we used a portfolio approach and grouped leases based on similar lease terms in a manner whereby we reasonably expect that the application does not differ materially from a lease-by-lease approach.

Our leases have remaining lease terms of approximately 1 year to 14 years, which may include the option to extend the lease when it is reasonably certain we will exercise that option. We do not have lease agreements with residual value guarantees, sale leaseback terms, or material restrictive covenants.

Leases with an initial term of 12 months or less are not recognized on the balance sheet. We recognize lease expense for these leases on a straight-line basis over the lease term.

The following table summarizes our operating assets and lease liabilities:
Leases (in millions)
 
Balance Sheet Classification
 
As of September 30, 2019
Assets
 
 
 
 
Operating
 
Operating lease assets
 
$
138.2

 
 
 
 
 
Liabilities
 
 
 
 
Current
 
 
 
 
Operating
 
Operating lease liabilities
 
$
33.3

Non-current
 
 
 
 
Operating
 
Operating lease liabilities, non-current
 
132.3

Total lease liabilities
 
 
 
$
165.6



Our operating lease expense for the three and nine months ended September 30, 2019 was $9.1 million and $24.9 million, respectively. Charges related to our operating leases that are variable and, therefore, not included in the measurement of the lease liabilities, were $3.7 million and $9.4 million for the three and nine months ended September 30, 2019, respectively. We made lease payments of $7.0 million and $21.4 million during the three and nine months ended September 30, 2019, respectively.

The following table summarizes our minimum future lease commitments due in each of the next five years and thereafter for operating leases:

Minimum Future Lease Commitments (in millions)
 
Operating Leases
Remainder of 2019 (October 1 through December 31)
 
$
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



As of September 30, 2019, we had $22.8 million of executed operating leases included in the table above, primarily for office space, that have not yet commenced. These leases will commence over the remainder of 2019 and 2020 with lease terms of 9 years to 10 years.

The following table summarizes the weighted-average lease terms and weighted-average discount rates for our operating leases:

 
 
As of September 30, 2019
Weighted-average remaining lease term (in years)
 
6.60

 
 
 
Weighted-average discount rate
 
4.1
%

v3.19.3
Stock-Based Compensation
9 Months Ended
Sep. 30, 2019
Share-based Payment Arrangement [Abstract]  
Stock-Based Compensation Stock-Based Compensation
 
Stock-Based Compensation Plans
 
All of our employees and our non-employee directors are eligible for awards under the Morningstar 2011 Stock Incentive Plan, which provides for a variety of stock-based awards, including stock options, restricted stock units, performance share awards, market stock units, and restricted stock.

The following table summarizes the stock-based compensation expense included in each of our operating expense categories:
 
 
Three months ended September 30,
 
Nine months ended September 30,
(in millions)
 
2019
 
2018
 
2019
 
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 stock-based compensation expense
 
$
10.8

 
$
7.3

 
$
33.3

 
$
23.9



As of September 30, 2019, the total unrecognized stock-based compensation cost related to outstanding restricted stock units, performance share awards, and market stock units expected to vest was $47.4 million, which we expect to recognize over a weighted average period of 28 months.
v3.19.3
Income Taxes
9 Months Ended
Sep. 30, 2019
Income Tax Disclosure [Abstract]  
Income Taxes Income Taxes

Effective Tax Rate

The following table shows our effective tax rate for the three and nine months ended September 30, 2019 and September 30, 2018:
 
 
 
Three months ended September 30,
 
Nine months ended September 30,
(in millions)
 
2019
 
2018
 
2019
 
2018
Income before income taxes and equity in net income (loss) of unconsolidated entities
 
$
63.5

 
$
72.7

 
$
162.8

 
$
184.5

Equity in net income (loss) of unconsolidated entities
 
(1.1
)
 
0.3

 
(1.9
)
 
(1.6
)
Total
 
$
62.4

 
$
73.0