MORNINGSTAR, INC., 10-K filed on 3/2/2020
Annual Report
v3.19.3.a.u2
Cover Page Cover - USD ($)
$ in Billions
12 Months Ended
Dec. 31, 2019
Feb. 14, 2020
Jun. 28, 2019
Cover page.      
Document Type 10-K    
Document Annual Report true    
Document Period End Date Dec. 31, 2019    
Document Transition Report false    
Entity File Number 000-51280    
Entity Registrant Name MORNINGSTAR, INC.    
Entity Incorporation, State or Country Code IL    
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    
City Area Code 312    
Local Phone Number 696-6000    
Title of 12(b) Security Common stock, no par value    
Trading Symbol MORN    
Security Exchange Name NASDAQ    
Entity Well-known Seasoned Issuer Yes    
Entity Voluntary Filers No    
Entity Current Reporting Status Yes    
Entity Interactive Data Current Yes    
Entity Filer Category Large Accelerated Filer    
Entity Small Business false    
Entity Emerging Growth Company false    
Entity Shell Company false    
Entity Public Float     $ 2.9
Entity Common Stock, Shares Outstanding   42,853,091  
Entity Central Index Key 0001289419    
Current Fiscal Year End Date --12-31    
Document Fiscal Year Focus 2019    
Document Fiscal Period Focus FY    
Amendment Flag false    
Documents Incorporated by Reference [Text Block] Certain parts of the registrant's Definitive Proxy Statement for the 2020 Annual Meeting of Shareholders are incorporated into Part III of this Form 10-K.    
v3.19.3.a.u2
Consolidated Statements of Income - USD ($)
shares in Millions, $ in Millions
12 Months Ended
Dec. 31, 2019
Dec. 31, 2018
Dec. 31, 2017
Revenue $ 1,179.0 $ 1,019.9 $ 911.7
Operating expense:      
Cost of revenue 483.1 411.1 386.6
Sales and marketing 177.9 148.5 134.3
General and administrative 210.7 147.8 129.8
Depreciation and amortization 117.7 96.7 91.2
Total operating expense 989.4 804.1 741.9
Operating income 189.6 215.8 169.8
Non-operating income:      
Interest expense, net (8.7) (1.8) (3.6)
Gain on sale of investments, reclassified from other comprehensive income 1.2 1.0 3.2
Gain on sale of business 0.0 0.0 16.7
Gain on sale of a product line 0.0 10.5 0.0
Gain on sale of equity investments 19.5 5.6 0.0
Other income (expense), net (3.1) 1.8 (5.0)
Non-operating income, net 8.9 17.1 11.3
Income before income taxes and equity in net loss of unconsolidated entities 198.5 232.9 181.1
Equity in net loss of unconsolidated entities (0.9) (2.1) (1.3)
Income tax expense 45.6 47.8 42.9
Consolidated net income $ 152.0 183.0 136.9
Net Income (Loss) Available to Common Stockholders, Basic   $ 183.0 $ 136.9
Net income per share:      
Basic net income per share (in dollars per share) $ 3.56 $ 4.30 $ 3.21
Diluted net income per share (in dollars per share) 3.52 4.25 3.18
Dividends per common share:      
Dividends declared per common share (in dollars per share) 1.14 1.03 0.94
Dividends paid per common share (in dollars per share) $ 1.12 $ 1.00 $ 0.92
Weighted average shares outstanding:      
Basic (in shares) 42.7 42.6 42.7
Diluted (in shares) 43.2 43.0 43.0
v3.19.3.a.u2
Consolidated Statements of Comprehensive Income - USD ($)
$ in Millions
12 Months Ended
Dec. 31, 2019
Dec. 31, 2018
Dec. 31, 2017
Consolidated net income $ 152.0 $ 183.0 $ 136.9
Other comprehensive income (loss), net of tax:      
Foreign currency translation adjustment 11.5 (26.6) 33.4
Unrealized gains (losses) on securities:      
Unrealized holding gains (losses) arising during period 3.8 (1.0) 3.4
Reclassification of gains included in net income (0.9) (0.8) (1.9)
Other comprehensive income (loss) 14.4 (28.4) 34.9
Comprehensive income $ 166.4 $ 154.6 $ 171.8
v3.19.3.a.u2
Consolidated Balance Sheets - USD ($)
$ in Millions
Dec. 31, 2019
Dec. 31, 2018
Current assets:    
Cash and cash equivalents $ 334.1 $ 369.3
Investments 33.4 26.6
Accounts receivable, less allowance for doubtful accounts of $4.1 and $4.0, respectively 188.5 172.2
Income tax receivable, net 6.3 1.8
Deferred commissions 16.9 14.8
Other current assets 24.0 16.9
Total current assets 603.2 601.6
Property, equipment, and capitalized software, net 154.7 143.5
Investments in unconsolidated entities 59.6 63.1
Goodwill 1,039.1 556.7
Operating Lease, Right-of-Use Asset 144.8 0.0
Intangible assets, net 333.4 73.9
Deferred Tax Assets, Net 10.7 0.0
Deferred commissions 13.5 10.3
Other assets 11.9 4.7
Total assets 2,370.9 1,453.8
Current liabilities:    
Accounts payable and accrued liabilities 58.9 54.4
Accrued compensation 137.5 109.5
Deferred revenue 250.1 195.8
Current portion of long-term debt 11.0 0.0
Operating Lease, Liability, Current 35.8 0.0
Other current liabilities 2.5 3.1
Total current liabilities 495.8 362.8
Operating Lease, Liability, Noncurrent 138.7 0.0
Accrued compensation 12.1 11.8
Deferred tax liability, net 95.0 22.2
Long-term debt 502.1 70.0
Deferred revenue 32.2 14.2
Other long-term liabilities 11.4 38.1
Total liabilities 1,287.3 519.1
Morningstar, Inc. shareholders’ equity:    
Common stock, no par value, 200,000,000 shares authorized, of which 42,848,359 and 42,642,118 shares were outstanding as of December 31, 2019 and December 31, 2018, respectively 0.0 0.0
Treasury stock at cost, 10,840,173 and 10,816,672 shares as of December 31, 2019 and December 31, 2018, respectively (728.7) (726.8)
Additional paid-in capital 655.0 621.7
Retained earnings 1,217.9 1,114.8
Accumulated other comprehensive loss:    
Currency translation adjustment (63.0) (74.5)
Unrealized gain (loss) on available-for-sale investments 2.4 (0.5)
Total accumulated other comprehensive loss (60.6) (75.0)
Total equity 1,083.6 934.7
Total liabilities and equity $ 2,370.9 $ 1,453.8
v3.19.3.a.u2
Consolidated Balance Sheets (Parenthetical) - USD ($)
$ in Millions
Dec. 31, 2019
Dec. 31, 2018
Statement of Financial Position [Abstract]    
Allowance for doubtful accounts $ 4.1 $ 4.0
Common stock, no par value $ 0 $ 0
Common stock, shares authorized 200,000,000 200,000,000
Common stock, shares outstanding 42,848,359 46,624,118
Treasury stock, shares 10,840,173 10,816,672
v3.19.3.a.u2
Consolidated Statement of Equity - USD ($)
$ in Millions
Total
Common Stock
Treasury Stock
Additional Paid-In Capital
Retained Earnings
Accumulated Other Comprehensive Income (Loss)
Non Controlling Interests
Balance at Dec. 31, 2016 $ 696.8   $ (667.9) $ 584.0 $ 861.9 $ (81.5) $ 0.3
Balance (in shares) at Dec. 31, 2016   42,932,994          
Increase (Decrease) in Stockholders' Equity              
Consolidated net income 136.9       136.9   0.0
Other Comprehensive Income (loss)              
Unrealized gain on available-for-sale investments, net of income tax 3.4         3.4  
Reclassification of adjustments for gains included in net income, net of income tax (1.9)         (1.9)  
Foreign currency translation adjustment, net 33.4         33.4 0.0
Other comprehensive income (loss) 34.9         34.9 0.0
Issuance of common stock related to stock-option exercises and vesting of restricted stock units, net (4.6)   1.6 (6.2)      
Issuance of common stock related to stock-option exercises and vesting of restricted stock units, net (in shares)   161,445          
APIC, Share-based Payment Arrangement, Increase for Cost Recognition [Abstract]              
Stock-based compensation — restricted stock units 16.5     16.5      
Stock-based compensation — performance share awards 7.1     7.1      
Stock-based compensation — performance share awards 0.5     0.5      
Dividends declared ($1.14 per share) (40.1)       (40.1)    
Purchase of additional interest in majority-owned investment (1.2)     (0.9)     (0.3)
Common share repurchased (41.9)   (41.9)        
Common share repurchased (in shares)   (546,732)          
Balance at Dec. 31, 2017 804.9   (708.2) 601.0 958.7 (46.6) 0.0
Balance (in shares) at Dec. 31, 2017   42,547,707          
Cumulative Effect on Retained Earnings, Net of Tax 17.0       17.0    
Increase (Decrease) in Stockholders' Equity              
Consolidated net income 183.0       183.0   0.0
Other Comprehensive Income (loss)              
Unrealized gain on available-for-sale investments, net of income tax (1.0)         (1.0)  
Reclassification of adjustments for gains included in net income, net of income tax (0.8)         (0.8)  
Foreign currency translation adjustment, net (26.6)         (26.6) 0.0
Other comprehensive income (loss) (28.4)         (28.4) 0.0
Issuance of common stock related to stock-option exercises and vesting of restricted stock units, net (13.2)   2.3 (15.5)      
Reclassification of awards previously liability-classified that were converted to equity 4.5     4.5      
Issuance of common stock related to stock-option exercises and vesting of restricted stock units, net (in shares)   278,656          
APIC, Share-based Payment Arrangement, Increase for Cost Recognition [Abstract]              
Stock-based compensation — restricted stock units 19.8     19.8      
Stock-based compensation — performance share awards 10.2     10.2      
Stock-based compensation — market stock units 1.7     1.7      
Dividends declared ($1.14 per share) (43.9)       (43.9)    
Common share repurchased (20.9)   (20.9)        
Common share repurchased (in shares)   (202,245)          
Balance at Dec. 31, 2018 $ 934.7 $ 0.0 (726.8) 621.7 1,114.8 (75.0) 0.0
Balance (in shares) at Dec. 31, 2018 46,624,118 42,624,118          
Increase (Decrease) in Stockholders' Equity              
Consolidated net income $ 152.0       152.0   0.0
Other Comprehensive Income (loss)              
Unrealized gain on available-for-sale investments, net of income tax 3.8         3.8  
Reclassification of adjustments for gains included in net income, net of income tax (0.9)         (0.9)  
Foreign currency translation adjustment, net 11.5         11.5 0.0
Other comprehensive income (loss) 14.4         14.4 0.0
Issuance of common stock related to stock-option exercises and vesting of restricted stock units, net (15.2)   2.7 (17.9)      
Reclassification of awards previously liability-classified that were converted to equity 6.8     6.8      
Issuance of common stock related to stock-option exercises and vesting of restricted stock units, net (in shares)   266,176          
APIC, Share-based Payment Arrangement, Increase for Cost Recognition [Abstract]              
Stock-based compensation — restricted stock units 20.4     20.4      
Stock-based compensation — performance share awards 20.6     20.6      
Stock-based compensation — market stock units 3.4     3.4      
Dividends declared ($1.14 per share) (48.9)       (48.9)    
Common share repurchased (4.6)   (4.6)        
Common share repurchased (in shares)   (41,935)          
Balance at Dec. 31, 2019 $ 1,083.6 $ 0.0 $ (728.7) $ 655.0 $ 1,217.9 $ (60.6) $ 0.0
Balance (in shares) at Dec. 31, 2019 42,848,359 42,848,359          
v3.19.3.a.u2
Consolidated Statement of Equity (Parenthetical) - USD ($)
$ in Millions
12 Months Ended
Dec. 31, 2019
Dec. 31, 2018
Dec. 31, 2017
Statement of Stockholders' Equity [Abstract]      
Unrealized gain on available-for-sale investments, tax $ 1.3 $ (0.7) $ 1.8
Reclassification of adjustments for gains included in net income, tax $ 0.3 $ 0.3 $ 1.2
v3.19.3.a.u2
Consolidated Statements of Cash Flows - USD ($)
$ in Millions
12 Months Ended
Dec. 31, 2019
Dec. 31, 2018
Dec. 31, 2017
Operating activities      
Consolidated net income $ 152.0 $ 183.0 $ 136.9
Adjustments to reconcile consolidated net income to net cash flows from operating activities:      
Depreciation and amortization 117.7 96.7 91.2
Deferred income taxes (6.0) (1.1) (14.1)
Stock-based compensation expense 44.4 31.7 24.1
Provision for bad debt 2.3 2.5 2.3
Equity in net loss of unconsolidated entities 0.9 2.1 1.3
Gain on sale of business 0.0 0.0 (16.7)
Gain on sale of a product line 0.0 (10.5) 0.0
Gain on sale of equity investments (19.5) (5.6) 0.0
Other, net 1.1 (2.5) 1.8
Changes in operating assets and liabilities      
Accounts receivable 11.3 (29.6) (1.2)
Accounts payable and accrued liabilities 3.2 6.0 0.7
Accrued compensation and deferred commissions 17.1 15.6 20.2
Income taxes—current (11.6) (12.4) 9.7
Deferred revenue 28.1 28.6 2.5
Increase (Decrease) in Other Operating Assets and Liabilities, Net (6.6) 10.3 (8.6)
Cash provided by operating activities 334.4 314.8 250.1
Investing activities      
Purchases of investment securities (36.2) (35.7) (34.9)
Proceeds from maturities and sales of investment securities 35.8 51.2 42.2
Capital expenditures (80.0) (76.1) (66.6)
Acquisitions, net of cash acquired (681.9) (0.4) (1.0)
Proceeds from sale of a business, net 0.0 0.0 23.7
Proceeds from sale of a product line 0.0 10.5 0.0
Proceeds from sale of equity-method investments, net 17.6 7.9 0.0
Purchases of equity- and cost-method investments (1.5) (7.4) (24.8)
Other, net (0.1) 0.1 0.6
Cash used for investing activities (746.3) (49.9) (60.8)
Financing activities      
Common shares repurchased (4.9) (20.9) (42.3)
Dividends paid (47.8) (42.6) (39.3)
Proceeds from long-term debt 610.0 0.0 0.0
Repayment of long-term debt (165.6) (110.0) (70.0)
Proceeds from stock-option exercises 0.2 0.1 0.2
Employee taxes withheld for restricted stock units (15.2) (13.3) (4.8)
Other, net (3.0) (2.1) (1.3)
Cash provided by (used for) financing activities 373.7 (188.8) (157.5)
Effect of exchange rate changes on cash and cash equivalents 3.0 (15.0) 17.3
Net (decrease) increase in cash and cash equivalents (35.2) 61.1 49.1
Cash and cash equivalents—beginning of period 369.3 308.2 259.1
Cash and cash equivalents—end of period 334.1 369.3 308.2
Supplemental disclosure of cash flow information:      
Cash paid for income taxes 63.3 67.0 47.1
Interest Paid, Excluding Capitalized Interest, Operating Activities 11.0 3.7 5.4
Supplemental information of non-cash investing and financing activities:      
Unrealized gain (loss) on available-for-sale investments $ 3.9 $ (2.7) $ 2.0
v3.19.3.a.u2
Description of Business
12 Months Ended
Dec. 31, 2019
Organization, Consolidation and Presentation of Financial Statements [Abstract]  
Description of Business
Description of Business
 
Morningstar, Inc. and its subsidiaries (Morningstar, we, our, the company) provide independent investment research for investors around the world. We offer an extensive line of products and services for individual investors, financial advisors, asset managers, retirement plan providers and sponsors, and private market/venture capital investors. We have operations in 27 countries.
v3.19.3.a.u2
Summary of Significant Accounting Policies
12 Months Ended
Dec. 31, 2019
Accounting Policies [Abstract]  
Summary of Significant Accounting Policies Summary of Significant Accounting Policies

The acronyms that appear in these Notes to our Consolidated Financial Statements refer to the following:
ASC
Accounting Standards Codification
ASU
Accounting Standards Update
EITF
Emerging Issues Task Force
FASB
Financial Accounting Standards Board
SEC
Securities and Exchange Commission


Principles of Consolidation. We conduct our business operations through wholly owned or majority-owned operating subsidiaries. The accompanying consolidated financial statements include the accounts of Morningstar, Inc. and our subsidiaries. We consolidate assets, liabilities, and results of operations of subsidiaries in which we have a controlling interest and eliminate all significant intercompany accounts and transactions.

We account for investments in entities in which we exercise significant influence, but do not control, using the equity method.

As part of our investment management operations, we manage certain funds outside of the U.S. that are considered variable interest entities. For the majority of these variable interest entities, we do not have a variable interest. In cases where we do have a variable interest, we are not the primary beneficiary. Accordingly, we do not consolidate any of these variable interest entities.

Use of Estimates. The preparation of financial statements in conformity with accounting principles generally accepted in the U.S. requires us to make estimates and assumptions that affect the reported amounts of assets, liabilities, revenues, and expenses during the reporting period. Actual results may differ from these estimates.

Cash and Cash Equivalents. Cash and cash equivalents consist of cash and investments with original maturities of three months or less. We state them at cost, which approximates fair value. We state the portion of our cash equivalents that are invested in money market funds at fair value, as these funds are actively traded and have quoted market prices.

Investments. We account for our investments in accordance with FASB ASC 320, Investments—Debt and Equity Securities. We classify our investments into three categories: held-to-maturity, trading, and available-for-sale.

Held-to-maturity: We classify certain investments, primarily certificates of deposit, as held-to-maturity securities, based on our intent and ability to hold these securities to maturity. We record held-to-maturity investments at amortized cost in our Consolidated Balance Sheets.

Trading: We classify certain other investments, primarily equity securities, as trading securities. We include realized and unrealized gains and losses associated with these investments as a component of our operating income in our Consolidated Statements of Income. We record these securities at their fair values in our Consolidated Balance Sheets.

Available-for-sale: Investments not considered held-to-maturity or trading securities are classified as available-for-sale securities. Available-for-sale securities primarily consist of equity securities, exchange-traded funds, and mutual funds. We report unrealized gains and losses for available-for-sale securities as other comprehensive income (loss), net of related income taxes. We record these securities at their fair values in our Consolidated Balance Sheets.

Fair Value Measurements. FASB ASC 820, Fair Value Measurements (FASB ASC 820) defines fair value, establishes a framework for measuring fair value, and expands disclosures about fair value measurements. Under FASB ASC 820, fair value is defined as the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants as of the measurement date. The standard applies whenever other standards require (or permit) assets or liabilities to be measured at fair value.

FASB ASC 820 uses a fair value hierarchy based on three broad levels of valuation inputs:

Level 1: Valuations based on quoted prices in active markets for identical assets or liabilities that we have the ability to access.

Level 2: Valuations based on quoted prices in markets that are not active or for which all significant inputs are observable, either directly or indirectly.

Level 3: Valuations based on inputs that are unobservable and significant to the overall fair value measurement.

We provide additional information about our cash equivalents and investments that are subject to valuation under FASB ASC 820 in Note 7.

Concentration of Credit Risk. For the years ended December 31, 2019, 2018, and 2017, no single customer represented 5% or more of our consolidated revenue. If receivables from our customers become delinquent, we begin a collections process. We maintain an allowance for doubtful accounts based on our estimate of the probable losses of accounts receivable.

Property, Equipment, and Depreciation. We state property and equipment at historical cost, net of accumulated depreciation. We depreciate property and equipment using the straight-line method based on the useful life of the asset, which ranges from three to seven years. We amortize leasehold improvements over the lease term or their useful lives, whichever is shorter.

Computer Software and Internal Product Development Costs. We capitalize certain costs in accordance with FASB ASC 350-40, Internal-Use Software, FASB ASC 350-50, Website Development Costs, and FASB ASC 985, Software. Internal product development costs mainly consist of employee costs for developing new web-based products and certain major enhancements of existing products. We amortize these costs on a straight-line basis over the estimated economic life, which is generally three years. We include capitalized software development costs related to projects that have not been placed into service in our construction in progress balance.

The table below summarizes our depreciation expense related to capitalized developed software for the past three years:
(in millions)
 
2019
 
2018
 
2017
Capitalized developed software depreciation expense
 
$
61.1

 
$
42.8

 
$
30.6



The table below summarizes our capitalized software development costs for the past three years:
(in millions)
 
2019
 
2018
 
2017
Capitalized software development costs
 
$
64.8

 
$
53.5

 
$
46.3



Business Combinations. When we make acquisitions, we allocate the purchase price to the assets acquired, liabilities assumed, and goodwill. We follow FASB ASC 805, Business Combinations. We recognize and measure the fair value of the acquired operation as a whole, as well as the assets acquired and liabilities assumed, at their fair values as of the date we obtain control, regardless of the percentage ownership in the acquired operation or how the acquisition was achieved. We expense direct costs related to the business combination, such as advisory, accounting, legal, valuation, and other professional fees, as incurred. We recognize restructuring costs, including severance and relocation for employees of the acquired entity, as post-combination expenses unless the target entity meets the criteria of FASB ASC 420, Exit or Disposal Cost Obligations, on the acquisition date.

As part of the purchase price allocation, we follow the requirements of FASB ASC 740, Income Taxes (FASB ASC 740). This includes establishing deferred tax assets or liabilities reflecting the difference between the values assigned for financial statement purposes and income tax purposes. In certain acquisitions, the goodwill resulting from the purchase price allocation may not be deductible for income tax purposes. FASB ASC 740 prohibits recognition of a deferred tax asset or liability for temporary differences in goodwill if goodwill is not amortizable and deductible for tax purposes.

Goodwill. Changes in the carrying amount of our recorded goodwill are mainly the result of business acquisitions, divestitures, and the effect of foreign currency translations. In accordance with FASB ASC 350, Intangibles—Goodwill and Other, we do not amortize goodwill; instead, goodwill is subject to an impairment test annually, or whenever indicators of impairment exist. An impairment would occur if the carrying amount of a reporting unit exceeded the fair value of that reporting unit. We performed annual impairment reviews in the fourth quarter of 2019 and 2018. We did not record any impairment losses in 2019, 2018, and 2017.

Intangible Assets. We amortize intangible assets using the straight-line method over their estimated useful lives, which range from one to twenty years. We have no intangible assets with indefinite useful lives. In accordance with FASB ASC 360-10-35, Subsequent Measurement—Impairment or Disposal of Long-Lived Assets, we review intangible assets for impairment whenever events or changes in circumstances indicate that the carrying value may not be recoverable. If the value of future undiscounted cash flows is less than the carrying amount of an asset group, we record an impairment loss based on the excess of the carrying amount over the fair value of the asset group. We did not record any impairment losses in 2019, 2018, and 2017.

Revenue Recognition. On January 1, 2018, we began recognizing revenue in accordance with ASC Topic 606, Revenue from Contracts with Customers (ASC Topic 606). The company has retained similar recognition and measurement upon adoption of ASC Topic 606 as under accounting standards in effect in prior periods.

Under ASC Topic 606, we recognize revenue by applying the following five-step model to each of our customer arrangements:

1.Identify the customer contract;
2.Identify the performance obligations in the contract;
3.Determine the transaction price;
4.Allocate the transaction price to the performance obligations; and
5.Recognize revenue when (or as) performance obligations are satisfied.

Revenues are recognized when (or as) performance obligations are satisfied by transferring a promised product or service to the customer. Products or services are transferred when (or as) the customer obtains control of the product or service. The transaction price for a customer arrangement is the amount we expect to be entitled to in exchange for transferring the promised product or service. The transaction price may include fixed amounts, variable amounts, or both. When the right to payment exceeds revenue recognized the result is an increase to deferred revenue. When a customer’s license-based contract is signed, the customer’s service is activated immediately. License-based arrangements, our largest source of revenue from customers, generally is billed for the entire term, or billed annually (if the contract term is longer than one year). Customers are typically given payment terms of thirty to sixty days, although some customers pay immediately.

Revenue from contracts with customers is derived from license-based arrangements, asset-based arrangements, and transaction-based arrangements.

License-based revenue, which represents subscription services available to customers and not a license under the accounting guidance, is generated through subscription contracts entered into with our customers of Morningstar Data, Morningstar Direct, Morningstar Advisor Workstation, Morningstar Enterprise Components, PitchBook Data, and other similar products. Our performance obligations under these contracts are typically satisfied over time, as the customer has access to the service during the term of the subscription license and the level of service is consistent during the contract period. Each individual day within the contract period is viewed to be a service and the entirety of the service subscription term is determined to be a series combined into a single performance obligation and recognized over-time and on a straight-line basis, typically over terms of 12 to 36 months.

Asset-based revenue is generated through consulting service contracts with our customers of Morningstar Investment Management, Workplace Solutions, and Morningstar Indexes. Our performance obligations under these contracts are a daily asset management performance obligation which is determined to be a daily service and thus satisfied over time as the customer receives continuous access to a service for the contract term. We recognize revenue daily over the contract term based on the value of assets under management and a tiered fee agreed to with the customer (typically in a range of 30-55 basis points of the customer’s average daily portfolio balance). Asset-based arrangements typically have a term of 12 to 36 months. The fees from such arrangements 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 on estimates of earned asset-based fees for the current quarter are needed. An estimate of the average daily portfolio balance is included in determining revenue for a given period. Estimates are based on the most recently reported quarter, and, as a result, it is unlikely a significant reversal of revenue would occur.

Transaction-based revenue is generated through contracts with our customers for the provision of DBRS Morningstar credit ratings, Internet advertising on morningstar.com, and Morningstar conferences. Our performance obligations for Morningstar Credit Ratings include the issuance of the rating and may include surveillance services for a period of time as agreed with the customer. We allocate the transaction price to the deliverables based on their relative selling price, which is generally based on the price we charge when the same deliverable is sold separately. Our performance obligation for the issuance of the rating is satisfied when the rating is issued, which is when we recognize the related revenue. Our performance obligations for surveillance services is satisfied over time, as the customer has access to the service during the surveillance period and the level of service is consistent during the contract period. Therefore, we recognize revenue for this performance obligation on a straight-line basis. Our performance obligations for Internet advertising and Morningstar conferences are satisfied as the service is delivered, and therefore we recognize revenue when the performance obligation is satisfied (as the customer’s advertisements are displayed and at the completion of the Morningstar conference).

Our contracts with customers may include multiple performance obligations. For most of these arrangements, we generally allocate revenue to each performance obligation based on its estimated standalone selling price. We generally determine standalone selling prices based on prices charged to customers when the same performance obligation is sold separately.

Our contracts with customers may include third-party involvement in providing goods or services to the customer. The inclusion of third-party content does not result in separate performance obligations because is it not delivered separately from the other service offerings. In these arrangements, the customer has contracted to receive a single, integrated and bundled solution with third-party and Morningstar content delivered via Morningstar’s subscription services. Revenue and related costs of revenue from third-party content is presented on a gross basis within the condensed consolidated financial statements.

Deferred revenue represents the portion of licenses or subscriptions billed or collected in advance of the service being provided which we expect to recognize as revenue in future periods.

Sales Commissions. Under prior accounting standards, the company expensed sales incentive compensation costs, (sales commissions) as incurred. However, upon adopting ASC Topic 606 and ASC 340-40, Other Assets and Deferred Costs - Contracts with Customers, on January 1, 2018, we began capitalizing sales commissions, which are considered directly attributable to obtaining a customer contract. Such costs are capitalized using a portfolio approach that aggregates these costs by legal entity within their geographical regions. Capitalized sales commissions are amortized using the straight-line method over a period that is consistent with the transfer of the products or services to the customer to which the sales commission relates. The period of transfer for each portfolio is the shorter of the weighted-average customer life, or the economic life of the underlying technology that delivers the products or services. As of December 31, 2019, the period of transfer was determined to be approximately two to three years. Discretionary amounts which are added to sales commission payments are expensed as incurred, as they are not considered to be directly attributable to obtaining a customer contract.

Stock-Based Compensation Expense. We account for our stock-based compensation expense in accordance with FASB ASC 718, Compensation—Stock Compensation (FASB ASC 718). Our stock-based compensation expense reflects grants of restricted stock units, performance share awards, market stock units, and stock options. We measure the fair value of our restricted stock units, restricted stock, and performance share awards on the grant date based on the closing market price of Morningstar's common stock on the day prior to the grant. For market stock units, we estimate the fair value of the awards using a Monte Carlo valuation model. For stock options, we estimate the fair value of our stock options on the date of grant using a Black-Scholes option-pricing model. We amortize the fair values to stock-based compensation expense, net of estimated forfeitures, ratably over the vesting period.

We estimate expected forfeitures of all employee stock-based awards and recognize compensation cost only for those awards expected to vest. We determine forfeiture rates based on historical experience and adjust the estimated forfeitures to actual forfeiture experience, as needed.

Income Taxes. We record deferred income taxes for the temporary differences between the carrying amount of assets and liabilities for financial statement purposes and tax purposes in accordance with FASB ASC 740. FASB ASC 740 prescribes the minimum recognition threshold a tax position is required to meet before being recognized in the financial statements. It also provides guidance on derecognition, measurement, classification, interest and penalties, accounting in interim periods, and disclosure for uncertain tax positions.

We recognize interest and penalties related to unrecognized tax benefits as part of income tax expense in our Consolidated Statements of Income. We classify liabilities related to unrecognized tax benefits as either current or long-term liabilities in our Consolidated Balance Sheet, depending on when we expect to make payment.

Leases. We determine if a contract is or contains a lease at the inception of the contract. For identified operating leases, we recognize a lease liability and right-of-use asset on the consolidated balance sheet. The right-of-use asset represents our right to use an underlying asset for the lease term, and the operating lease liability represents the company's obligation to make lease payments.
 
Our lease agreements consist primarily of real estate leases for office space, and non-real estate leases in which office equipment is primarily the underlying asset. In cases where an agreement contains both a lease and non-lease component, we do not allocate consideration to both components, but account for each as a single lease component by class of underlying asset. There are few instances of short-term agreements in our lease portfolio, which are typically arranged as needed and paid on a month-to-month basis. These leases are not recognized on the Consolidated Balance Sheet, but monthly lease expense is recognized on the Consolidated Statements of Income.
 
Operating lease liabilities and right-of-use assets are measured using the present value of future lease payments of the lease term at the commencement date. Right-of-use assets also include initial direct costs incurred by the company, net of pre-payments and lease incentives. In the absence of an explicit rate in the lease agreement, the discount rate used to calculate present value is equal to the company's incremental borrowing rate. Operating lease expense is recognized on a straight-line basis over the life of the lease and is included in general and administrative expenses on the Consolidated Statements of Income.
v3.19.3.a.u2
Credit Arrangements
12 Months Ended
Dec. 31, 2019
Debt Disclosure [Abstract]  
Credit Arrangements Credit Arrangements

Debt

The following table summarizes our total debt and long-term debt as of December 31, 2019 and December 31, 2018.
(in millions)
 
As of December 31, 2019
 
As of December 31, 2018
Term Facility, net of unamortized debt issuance costs of $1.3 million
 
$
443.1

 
$

Revolving Credit Facility
 
70.0

 

Prior Revolving Credit Facility
 

 
70.0

Total debt
 
$
513.1

 
$
70.0

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

 

Long-term debt
 
$
502.1

 
$
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. As of December 31, 2019, our total outstanding debt under the Credit Agreement was $513.1 million with borrowing availability of $230.0 million under the Revolving Credit Facility.

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 or 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 related to the Revolving Credit Facility are amortized on a straight-line to interest expense over the term of the Credit Agreement. Amortization of debt issuance costs related to the Term Facility are amortized to interest expense using the effective interest method 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. This 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 December 31, 2019 and December 31, 2018.
v3.19.3.a.u2
Income Per Share
12 Months Ended
Dec. 31, 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 income per share:

(in millions, except per share amounts)
 
2019
 
2018
 
2017
Basic net income per share:
 
 
 
 
 
 
Consolidated net income
 
$
152.0

 
$
183.0

 
$
136.9

 
 
 
 
 
 
 
Weighted average common shares outstanding
 
42.7

 
42.6

 
42.7

 
 
 
 
 
 
 
Basic net income per share
 
$
3.56

 
$
4.30

 
$
3.21

 
 
 
 
 
 
 
Diluted net income per share:
 
 
 
 
 
 
Consolidated net income
 
$
152.0

 
$
183.0

 
$
136.9

 
 


 


 
 
Weighted average common shares outstanding
 
42.7

 
42.6

 
42.7

Net effect of dilutive stock options and restricted stock units
 
0.5

 
0.4

 
0.3

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

 
43.0

 
43.0

 
 


 


 
 
Diluted net income per share
 
$
3.52

 
$
4.25

 
$
3.18


During the periods presented, the number of anti-dilutive restricted stock units, performance share awards, or market stock units to exclude from our calculation of diluted earnings per share was immaterial.

v3.19.3.a.u2
Revenue
12 Months Ended
Dec. 31, 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.
 
 
Year ended December 31
(in millions)
 
2019
 
2018
 
2017
License-based
 
$
812.7

 
$
751.6

 
$
667.7

Asset-based
 
211.6

 
200.4

 
182.2

Transaction-based
 
154.7

 
67.9

 
61.8

Consolidated revenue
 
$
1,179.0

 
$
1,019.9

 
$
911.7



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 generated from the sale of 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. Asset-based arrangements typically have a term of 12 to 36 months. The 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.

Transaction-based performance obligations are satisfied when the product or service is completed or delivered. Transaction-based revenue includes DBRS Morningstar credit ratings, Internet advertising, and conferences. DBRS Morningstar credit ratings revenue may include revenue from surveillance services, which is 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 may be refundable. The contract liabilities balance as of December 31, 2019 had a net increase of $72.3 million, primarily driven by cash payments received or payable in advance of satisfying our performance obligations. We recognized $194.9 million of revenue in 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 2020 and subsequent years as follows:
(in millions)
 
As of December 31, 2019
2020
 
$
437.1

2021
 
107.1

2022
 
44.4

2023
 
14.2

2024
 
8.9

Thereafter
 
55.0

Total
 
$
666.7



The aggregate amount of revenue we expect to recognize for 2020 and subsequent years is higher than our contract liability balance of $282.3 million as of December 31, 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 licensed-based, asset-based, and transaction-based contracts as of December 31, 2019. We are applying the optional exemption available under ASC Topic 606, 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 licensed-based contracts, the consideration received for services performed is based on future user count, which is known at the time the services are performed. The variable consideration for this revenue can be affected by the number of user licenses, which cannot be reasonably estimated. 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 movements in the market. For transaction-based contracts, 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 and cannot be reasonably estimated.

As of December 31, 2019, the table above also does not include revenue for unsatisfied performance obligations related to certain of our license-based and transaction-based contracts with duration of one year or less since we are applying the optional exemption under ASC Topic 606. 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 twelve months.

Contract Assets

Our contract assets represent accounts receivable, less allowance for doubtful accounts and deferred commissions.

The following table summarizes our contract assets balance:

 
 
As of December 31
(in millions)
 
2019
 
2018
Accounts receivable, less allowance for doubtful accounts
 
$
188.5

 
$
172.2

Deferred commissions
 
30.4

 
25.1

Total contract assets
 
$
218.9

 
$
197.3


The following table shows the change in our deferred commissions balance from January 1, 2019 to December 31, 2019:

 
 
(in millions)
Balance as of January 1, 2019
 
$
25.1

Commissions earned and capitalized
 
24.9

Amortization of capitalized amounts
 
(19.6
)
Balance as of December 31, 2019
 
$
30.4


v3.19.3.a.u2
Segment and Geographical Area Information
12 Months Ended
Dec. 31, 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. 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. We evaluate the performance of our reporting segment based on revenue and operating income.

Geographical Area Information

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

Revenue by geographical area
 
 
 
 
 
 
 
 
Year ended December 31
(in millions)
 
2019
 
2018
 
2017
United States
 
$
866.4

 
$
764.2

 
$
687.0

 
 
 
 
 
 
 
Asia
 
27.9

 
24.5

 
21.2

Australia
 
39.5

 
40.9

 
34.6

Canada
 
56.9

 
30.7

 
29.4

Continental Europe
 
88.0

 
81.2

 
69.9

United Kingdom
 
93.9

 
72.4

 
64.7

Other
 
6.4

 
6.0

 
4.9

Total International
 
312.6

 
255.7

 
224.7

 
 
 
 
 
 
 
Consolidated revenue
 
$
1,179.0

 
$
1,019.9

 
$
911.7


Property, equipment, and capitalized software, net by geographical area
 
 
 
 
 
 
As of December 31
(in millions)
 
2019
 
2018
United States
 
$
131.2

 
$
126.4

 
 
 
 
 
Asia
 
6.6

 
6.5

Australia
 
4.2

 
5.0

Canada
 
2.9

 
0.3

Continental Europe
 
2.3

 
1.3

United Kingdom
 
6.9

 
3.8

Other
 
0.6

 
0.2

Total International
 
23.5

 
17.1

 
 
 
 
 
Consolidated property, equipment, and capitalized software, net
 
$
154.7

 
$
143.5




Operating lease assets by geographical area
 
 
 
 
 
 
As of December 31
(in millions)
 
2019
 
2018
United States
 
$
86.4

 
$

 
 
 
 
 
Asia
 
20.2

 

Australia
 
5.8

 

Canada
 
7.5

 

Continental Europe
 
6.3

 

United Kingdom
 
17.9

 

Other
 
0.7

 

Total International
 
58.4

 

 
 
 
 
 
Consolidated operating lease assets
 
$
144.8

 
$


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

The long-lived assets by geographical area table does not include deferred commissions, non-current as the balance is not significant.
v3.19.3.a.u2
Investments and Fair Value Measurements
12 Months Ended
Dec. 31, 2019
Fair Value Disclosures [Abstract]  
Investments and Fair Value Measurements Investments and Fair Value Measurements
 
We classify our investments into three categories: available-for-sale, held-to-maturity, and trading. 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. We classify our investment portfolio as shown below:
 
 
 
As of December 31
(in millions)
 
2019
 
2018
Available-for-sale
 
$
25.8

 
$
20.1

Held-to-maturity
 
2.3

 
2.5

Trading securities
 
5.3

 
4.0

Total
 
$
33.4

 
$
26.6



The following table shows the cost, unrealized gains (losses), and fair values related to investments classified as available-for-sale and held-to-maturity:
 
 
 
As of December 31, 2019
 
As of December 31, 2018
(in millions)
 
Cost
 
Unrealized
Gain
 
Unrealized
Loss
 
Fair
Value
 
Cost
 
Unrealized
Gain
 
Unrealized
Loss
 
Fair
Value
Available-for-sale:
 
 

 
 

 
 

 
 

 
 

 
 

 
 

 
 

   Equity securities and exchange-traded funds
 
$
19.0

 
$
2.9

 
$

 
$
21.9

 
$
17.9

 
$
1.2

 
$
(1.8
)
 
$
17.3

Mutual funds
 
3.7

 
0.2

 

 
3.9

 
3.0

 

 
(0.2
)
 
2.8

Total
 
$
22.7

 
$
3.1

 
$

 
$
25.8

 
$
20.9

 
$
1.2

 
$
(2.0
)
 
$
20.1

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Held-to-maturity:
 
 
 
 
 
 
 
 
 
 

 
 

 
 

 
 

Certificates of deposit
 
$
2.3

 
$

 
$

 
$
2.3

 
$
2.5

 
$

 
$

 
$
2.5

Total
 
$
2.3

 
$

 
$

 
$
2.3

 
$
2.5

 
$

 
$

 
$
2.5


 
As of December 31, 2019 and December 31, 2018, investments with unrealized losses for greater than a 12-month period were not material to the Consolidated Balance Sheets and were not deemed to have other than temporary declines in value.

The table below shows the cost and fair value of investments classified as available-for-sale and held-to-maturity based on their contractual maturities as of December 31, 2019 and December 31, 2018.

 
 
As of December 31, 2019
 
As of December 31, 2018
(in millions)
 
Cost
 
Fair Value
 
Cost
 
Fair Value
Available-for-sale:
 
 

 
 

 
 

 
 

Equity securities, exchange-traded funds, and mutual funds
 
$
22.7

 
$
25.8

 
$
20.9

 
$
20.1

Total
 
$
22.7

 
$
25.8

 
$
20.9

 
$
20.1

 
 
 
 
 
 
 
 
 
Held-to-maturity:
 
 

 
 

 
 

 
 

Due in one year or less
 
$
2.3

 
$
2.3

 
$
2.3

 
$
2.3

Due in one to three years
 

 

 
0.2

 
0.2

Total
 
$
2.3

 
$
2.3

 
$
2.5

 
$
2.5



The following table shows the realized gains and losses arising from sales of our investments classified as available-for-sale recorded in our Consolidated Statements of Income: 
(in millions)
 
2019
 
2018
 
2017
Realized gains
 
$
1.2

 
$
1.8

 
$
3.4

Realized losses
 

 
(0.8
)
 
(0.2
)
Realized gains, net
 
$
1.2

 
$
1.0

 
$
3.2


We determine realized gains and losses using the specific identification method.
The following table shows the net unrealized (losses) gains on trading securities as recorded in our Consolidated Statements of Income:
 
(in millions)
 
2019
 
2018
 
2017
Unrealized (losses) gains, net
 
$
0.6

 
$
(0.2
)
 
$
0.1



The table below shows the fair value of our assets subject to fair value measurements that are measured at fair value on a recurring basis using the fair value hierarchy:
 
Level 1:
Valuations based on quoted prices in active markets for identical assets or liabilities that we have the ability to access.
Level 2:
Valuations based on quoted prices in markets that are not active or for which all significant inputs are observable, either directly or indirectly.
Level 3:
Valuations based on inputs that are unobservable and significant to the overall fair value measurement.

 
 
Fair Value
 
Fair Value Measurements as of December 31, 2019
 
 
as of
 
Using Fair Value Hierarchy
(in millions)
 
December 31, 2019
 
Level 1

 
Level 2

 
Level 3

Available-for-sale investments
 
 

 
 

 
 

 
 

Equity securities and exchange-traded funds
 
$
21.9

 
$
21.9

 
$

 
$

Mutual funds
 
3.9

 
3.9

 

 

Trading securities
 
5.3

 
5.3

 

 

Cash equivalents
 
0.9

 
0.9

 

 

Total
 
$
32.0

 
$
32.0

 
$

 
$

 
 
 
Fair Value
 
Fair Value Measurements as of December 31, 2018
 
 
as of
 
Using Fair Value Hierarchy
(in millions)
 
December 31, 2018
 
Level 1

 
Level 2

 
Level 3

Available-for-sale investments
 
 

 
 

 
 

 
 

Equity securities and exchange-traded funds
 
$
17.3

 
$
17.3

 
$

 
$

Mutual funds
 
2.8

 
2.8

 

 

Trading securities
 
4.0

 
4.0

 

 

Cash equivalents
 
0.1

 
0.1

 

 

Total
 
$
24.2

 
$
24.2

 
$

 
$


 
Based on our analysis of the nature and risks of our investments in equity securities and mutual funds and exchange-traded funds, we have determined that presenting each of these investment categories in the aggregate is appropriate.

We measure the fair value of money market funds, mutual funds, equity securities, and exchange-traded funds based on quoted prices in active markets for identical assets or liabilities. We did not hold any securities categorized as Level 2 or Level 3 as of December 31, 2019 and December 31, 2018.
v3.19.3.a.u2
Acquisitions, Goodwill, and Other Intangible Assets
12 Months Ended
Dec. 31, 2019
Acquisitions, Goodwill, and Other Intangible Assets [Abstract]  
Acquisitions, Goodwill, and Other Intangible Assets Acquisitions, Goodwill, and Other Intangible Assets
 
2019 Acquisitions

AdviserLogic
On December 1, 2019, we acquired AdviserLogic, a cloud-based financial planning software platform for financial advisors in Australia. We began consolidating the financial results of AdviserLogic in our Consolidated Financial Statements on December 1, 2019.
DBRS
On July 2, 2019, we acquired 100% of the 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 Canada, the U.S., and Europe. The combination of DBRS with Morningstar Credit Ratings' business (collectively, DBRS Morningstar) expands global asset class coverage and provides 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 $127.6 million of revenue and $123.5 million of operating expense during the year ended December 31, 2019. We incurred transaction-related costs of $6.5 million during the year 2019.
We accounted for this transaction 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 December 31, 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 December 31, 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 acquired intangible assets and 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 these 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
 
28.8

Property, equipment, and capitalized software, net
 
12.8

Intangible assets, net
 
284.1

Goodwill
 
473.3

Operating lease assets
 
33.3

Other current and non-current assets
 
5.7

Deferred revenue
 
(43.2
)
Deferred tax liability, net
 
(66.6
)
Operating lease liabilities
 
(35.0
)
Other current and non-current liabilities
 
(19.6
)
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 $284.1 million of acquired intangible assets, as follows:
 
 
(in millions)
 
Weighted Average Useful Life (years)
Customer-related assets
 
$
219.1

 
10
Technology-based assets
 
29.4

 
5
Intellectual property (trademarks and trade names)
 
35.6

 
7
Total intangible assets
 
$
284.1

 
 


We recognized a preliminary net deferred tax liability of $66.6 million mainly because the amortization expense related to certain intangible assets is not deductible for income tax purposes.
Goodwill of $473.3 million represents the excess over the fair value of the net tangible and intangible assets acquired. Goodwill is not deductible for income tax purposes.
The following unaudited pro forma information presents a summary of our Condensed Consolidated Statements of Income for the year ended December 31, 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 (in millions)
 
2019
 
2018
Revenue
 
$
1,259.2

 
$
1,184.5

Operating income
 
190.3

 
223.6

Net income
 
148.2

 
179.7

 
 
 
 
 
Basic net income per share
 
$
3.47

 
$
4.22

Diluted net income per share
 
$
3.43

 
$
4.18


Other acquisition activity during 2019 was not significant.

Goodwill
 
The following table shows the changes in our goodwill balances from January 1, 2018 to December 31, 2019:
 
 
 
(in millions)
Balance as of January 1, 2018
 
$
564.9

Other, primarily foreign currency translation
 
(8.2
)
Balance as of December 31, 2018
 
$
556.7

Acquisition of DBRS
 
473.3

Other, primarily foreign currency translation
 
9.1

Balance as of December 31, 2019
 
$
1,039.1



We did not record any impairment losses in 2019, 2018, or 2017 as the estimated fair value of our reporting unit exceeded its carrying value and we did not note any indicators of impairment. We perform our annual impairment testing during the fourth quarter of each year.

Intangible Assets

The following table summarizes our intangible assets: 
 
 
As of December 31, 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
 
$
66.7

 
$
(32.9
)
 
$
33.8

 
8
 
$
30.8

 
$
(29.2
)
 
$
1.6

 
9
Customer-related assets
 
377.9

 
(130.3
)
 
247.6

 
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
 
163.7

 
(112.0
)
 
51.7

 
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
 
$
610.9

 
$
(277.5
)
 
$
333.4

 
10
 
$
313.3

 
$
(239.4
)
 
$
73.9

 
10

 
The following table summarizes our amortization expense related to intangible assets:
(in millions)
 
2019
 
2018
 
2017
Amortization expense
 
$
36.5

 
$
20.7

 
$
23.6


 
We did not record any impairment losses involving intangible assets in 2019, 2018, or 2017.

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

Based on acquisitions and divestitures completed through December 31, 2019, we expect intangible amortization expense for 2020 and subsequent years to be as follows:
 
 
(in millions)
2020
 
$
53.5

2021
 
50.2

2022
 
42.2

2023
 
40.0

2024
 
34.0

Thereafter
 
113.5

Total
 
$
333.4



Our estimates of future amortization expense for intangible assets may be affected by additional acquisitions, divestitures, changes in the estimated average useful lives, impairments, and foreign currency translation.
v3.19.3.a.u2
Divestitures
12 Months Ended
Dec. 31, 2019
Discontinued Operations and Disposal Groups [Abstract]