MORNINGSTAR, INC., 10-Q filed on 10/30/2020
Quarterly Report
v3.20.2
Cover page - shares
9 Months Ended
Sep. 30, 2020
Oct. 23, 2020
Cover [Abstract]    
Document Quarterly Report true  
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 Period End Date Sep. 30, 2020  
Document Fiscal Year Focus 2020  
Document Fiscal Period Focus Q3  
Amendment Flag false  
Title of 12(b) Security Common stock, no par value  
Entity Incorporation, State or Country Code IL  
Document Transition Report false  
Entity File Number 000-51280  
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 Small Business false  
Entity Emerging Growth Company false  
Entity Interactive Data Current Yes  
Entity Shell Company false  
Entity Common Stock, Shares Outstanding   42,832,941
v3.20.2
Condensed Consolidated Balance Sheets - USD ($)
$ in Millions
Sep. 30, 2020
Jun. 30, 2020
Mar. 31, 2020
Dec. 31, 2019
Sep. 30, 2019
Jun. 30, 2019
Mar. 31, 2019
Dec. 31, 2018
Current assets:                
Cash and cash equivalents $ 351.1     $ 334.1 $ 321.8     $ 369.3
Investments 26.7     33.4        
Accounts receivable, less allowance for credit losses of $4.1 million and $4.1 million, respectively 186.9     188.5        
Income tax receivable 7.2     6.3        
Deferred commissions 18.6     16.9        
Other current assets 32.1     24.0        
Total current assets 622.6     603.2        
Goodwill 1,178.1     1,039.1        
Intangible assets, net 382.8     333.4        
Property, equipment, and capitalized software, less accumulated depreciation and amortization of $431.1 million and $377.3 million, respectively 150.9     154.7        
Operating lease assets 152.4     144.8        
Investments in unconsolidated entities 36.9     59.6        
Deferred tax assets, net 10.8     10.7        
Deferred commissions 15.2     13.5        
Other assets 13.3     11.9        
Total assets 2,563.0     2,370.9        
Current liabilities:                
Deferred revenue 293.2     250.1        
Accrued compensation 128.2     137.5        
Accounts payable and accrued liabilities 53.7     58.9        
Current portion of long-term debt 11.0     11.0        
Operating lease liabilities 38.6     35.8        
Business Combination, Contingent Consideration, Liability 33.5     0.0        
Other current liabilities 1.5     2.5        
Total current liabilities 559.7     495.8        
Operating lease liabilities 141.3     138.7        
Accrued compensation 33.5     12.1        
Deferred tax liabilities, net 109.3     95.0        
Long-term debt 473.9     502.1        
Deferred revenue 33.2     32.2        
Other long-term liabilities 35.0     11.4        
Total liabilities 1,385.9     1,287.3        
Morningstar, Inc. shareholders’ equity:                
Common stock, no par value, 200,000,000 shares authorized, of which 42,848,921 and 42,848,359 shares were outstanding as of September 30, 2020 and December 31, 2019, respectively 0.0     0.0        
Treasury stock at cost, 11,124,814 and 10,840,173 shares as of September 30, 2020 and December 31, 2019, respectively (765.9)     (728.7)        
Additional paid-in capital 667.8     655.0        
Retained earnings 1,340.5     1,217.9        
Accumulated other comprehensive loss:                
Currency translation adjustment (66.3)     (63.0)        
Unrealized gain on available-for-sale investments 1.0     2.4        
Total accumulated other comprehensive loss (65.3)     (60.6)        
Total equity 1,177.1 $ 1,086.9 $ 1,032.7 1,083.6 $ 1,041.9 $ 1,003.4 $ 968.2 $ 934.7
Total liabilities and equity $ 2,563.0     $ 2,370.9        
v3.20.2
Condensed Consolidated Statements of Income - USD ($)
$ in Thousands, shares in Millions
3 Months Ended 9 Months Ended
Sep. 30, 2020
Sep. 30, 2019
Sep. 30, 2020
Sep. 30, 2019
Income Statement [Abstract]        
Revenue $ 357,200 $ 313,800 $ 1,009,100 $ 846,600
Operating expense:        
Cost of revenue 138,700 128,400 406,800 341,000
Sales and marketing 52,600 44,000 150,700 129,700
General and administrative 85,800 57,200 197,800 142,000
Depreciation and amortization 35,800 34,600 103,700 84,000
Total operating expense 312,900 264,200 859,000 696,700
Operating income 44,300 49,600 150,100 149,900
Non-operating income, net:        
Interest expense, net (1,400) (4,800) (6,500) (4,800)
Realized gains on sale of investments, reclassified from other comprehensive income 700 300 1,200 700
Gain on sale of equity method investments 0 19,500 0 19,500
Other expense, net (2,000) (1,100) (6,100) (2,500)
Non-operating income, net 48,200 13,900 39,500 12,900
Income before income taxes and equity in net loss of unconsolidated entities 92,500 63,500 189,600 162,800
Equity in net income (loss) of unconsolidated entities 600 (1,100) (700) (1,900)
Income tax expense 16,900 13,300 40,600 36,500
Consolidated net income $ 76,200 $ 49,100 $ 148,300 $ 124,400
Net income per share:        
Basic (in dollars per share) $ 1.78 $ 1.15 $ 3.46 $ 2.91
Diluted (in dollars per share) 1.76 1.14 3.43 2.89
Dividends declared (in dollars per share) 0 0 0.60 0.56
Dividends paid per common share (in dollars per share) $ 0.30 $ 0.28 $ 0.90 $ 0.84
Weighted average shares outstanding:        
Basic (in shares) 42.9 42.8 42.9 42.7
Diluted (in shares) 43.2 43.2 43.2 43.1
Holding gain on previously-held equity interest $ 50,900 $ 0 $ 50,900 $ 0
v3.20.2
Condensed Consolidated Statements of Comprehensive Income - USD ($)
$ in Millions
3 Months Ended 9 Months Ended
Sep. 30, 2020
Sep. 30, 2019
Sep. 30, 2020
Sep. 30, 2019
Statement of Comprehensive Income [Abstract]        
Consolidated net income $ 76.2 $ 49.1 $ 148.3 $ 124.4
Other comprehensive income (loss):        
Foreign currency translation adjustment 24.3 (18.3) (3.3) (17.7)
Unrealized gains (losses) on securities, net of tax:        
Unrealized holding gains (losses) arising during period 0.8 0.2 (0.5) 2.4
Reclassification gains included in net income (0.5) (0.3) (0.9) (0.6)
Other comprehensive income (loss) 24.6 (18.4) (4.7) (15.9)
Comprehensive income $ 100.8 $ 30.7 $ 143.6 $ 108.5
v3.20.2
Condensed Consolidated Balance Sheets (Parenthetical) - USD ($)
$ in Millions
Sep. 30, 2020
Dec. 31, 2019
Statement of Financial Position [Abstract]    
Allowance for doubtful accounts receivable $ 4.1 $ 4.1
Accumulated depreciation and amortization $ 431.1 $ 377.3
Common Stock, No Par Value $ 0 $ 0
Common Stock, Shares Authorized 200,000,000 200,000,000
Common Stock, Shares, Outstanding 42,848,921 42,848,359
Treasury Stock, Shares 11,124,814 10,840,173
v3.20.2
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, 2018 $ 934.7 $ 0.0 $ (726.8) $ 621.7 $ 1,114.8 $ (75.0)
Balance (in shares) at Dec. 31, 2018   42,624,118        
Increase (Decrease) in Stockholders' Equity            
Net income 33.2       33.2  
Other comprehensive loss:            
Unrealized holding gains (losses) arising during period 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 loss, net 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        
Stock Issued During Period, Value, Stock Options Exercised and Vesting of Restricted Stock (4.6)     (4.6)    
Reclassification of awards previously liability-classified that were converted to equity 6.6     6.6    
Adjustments to Additional Paid in Capital, Share-based Compensation, Requisite Service Period Recognition            
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        
Increase (Decrease) in Stockholders' Equity            
Net income 124.4          
Other comprehensive loss:            
Unrealized holding gains (losses) arising during period 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 loss, net (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        
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 loss:            
Unrealized holding gains (losses) arising during period 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 loss, net (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        
Stock Issued During Period, Value, Stock Options Exercised and Vesting of Restricted Stock (5.3)   1.0 (6.3)    
Reclassification of awards previously liability-classified that were converted to equity 0.2     0.2    
Adjustments to Additional Paid in Capital, Share-based Compensation, Requisite Service Period Recognition            
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 loss:            
Unrealized holding gains (losses) arising during period 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 loss, net (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        
Stock Issued During Period, Value, Stock Options Exercised and Vesting of Restricted Stock (3.0)   1.0 (4.0)    
Adjustments to Additional Paid in Capital, Share-based Compensation, Requisite Service Period Recognition            
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        
Balance at Dec. 31, 2019 $ 1,083.6 $ 0.0 (728.7) 655.0 1,217.9 (60.6)
Balance (in shares) at Dec. 31, 2019 42,848,359 42,848,359        
Increase (Decrease) in Stockholders' Equity            
Net income $ 23.9       23.9  
Other comprehensive loss:            
Unrealized holding gains (losses) arising during period (4.1)         (4.1)
Reclassification of adjustments for gain included in net income, net of income tax 0.3         0.3
Foreign currency translation adjustment (40.4)         (40.4)
Other comprehensive loss, net (44.2)         (44.2)
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)   121,689        
Stock Issued During Period, Value, Stock Options Exercised and Vesting of Restricted Stock (10.6) $ 0.0 0.0 (10.6) 0.0 0.0
Reclassification of awards previously liability-classified that were converted to equity 5.5 $ 0.0 0.0 5.5 0.0 0.0
Adjustments to Additional Paid in Capital, Share-based Compensation, Requisite Service Period Recognition            
Stock-based compensation 7.3     7.3    
Common share repurchased (in shares)   (176,925)        
Common shares repurchased (20.0)   (20.0)      
Dividends declared (12.8)       (12.8)  
Balance at Mar. 31, 2020 1,032.7 $ 0.0 (748.7) 657.2 1,229.0 (104.8)
Balance (in shares) at Mar. 31, 2020   42,793,123        
Balance at Dec. 31, 2019 $ 1,083.6 $ 0.0 (728.7) 655.0 1,217.9 (60.6)
Balance (in shares) at Dec. 31, 2019 42,848,359 42,848,359        
Increase (Decrease) in Stockholders' Equity            
Net income $ 148.3          
Other comprehensive loss:            
Unrealized holding gains (losses) arising during period (0.5)          
Reclassification of adjustments for gain included in net income, net of income tax (0.9)          
Foreign currency translation adjustment (3.3)          
Other comprehensive loss, net (4.7)          
Balance at Sep. 30, 2020 $ 1,177.1 $ 0.0 (765.9) 667.8 1,340.5 (65.3)
Balance (in shares) at Sep. 30, 2020 42,848,921 42,848,921        
Balance at Mar. 31, 2020 $ 1,032.7 $ 0.0 (748.7) 657.2 1,229.0 (104.8)
Balance (in shares) at Mar. 31, 2020   42,793,123        
Increase (Decrease) in Stockholders' Equity            
Net income 48.2       48.2  
Other comprehensive loss:            
Unrealized holding gains (losses) arising during period 2.8         2.8
Reclassification of adjustments for gain included in net income, net of income tax (0.7)         (0.7)
Foreign currency translation adjustment 12.8         12.8
Other comprehensive loss, net 14.9         14.9
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)   128,060        
Stock Issued During Period, Value, Stock Options Exercised and Vesting of Restricted Stock (6.6) $ 0.0 1.3 (7.9) 0.0 0.0
Reclassification of awards previously liability-classified that were converted to equity 0.3 0.0 0.0 0.3 0.0 0.0
Adjustments to Additional Paid in Capital, Share-based Compensation, Requisite Service Period Recognition            
Stock-based compensation 10.3     10.3    
Dividends declared (12.9)       (12.9)  
Balance at Jun. 30, 2020 1,086.9 $ 0.0 (747.4) 659.9 1,264.3 (89.9)
Balance (in shares) at Jun. 30, 2020   42,921,183        
Increase (Decrease) in Stockholders' Equity            
Net income 76.2       76.2  
Other comprehensive loss:            
Unrealized holding gains (losses) arising during period 0.8         0.8
Reclassification of adjustments for gain included in net income, net of income tax (0.5)         (0.5)
Foreign currency translation adjustment 24.3         24.3
Other comprehensive loss, net 24.6         24.6
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)   49,758        
Stock Issued During Period, Value, Stock Options Exercised and Vesting of Restricted Stock (1.3)   0.8 (2.1) 0.0 0.0
Reclassification of awards previously liability-classified that were converted to equity 0.1   0.0 0.1 0.0 0.0
Adjustments to Additional Paid in Capital, Share-based Compensation, Requisite Service Period Recognition            
Stock-based compensation 9.9   9.9    
Common share repurchased (in shares)   (122,020)        
Common shares repurchased (19.3)   (19.3)      
Balance at Sep. 30, 2020 $ 1,177.1 $ 0.0 $ (765.9) $ 667.8 $ 1,340.5 $ (65.3)
Balance (in shares) at Sep. 30, 2020 42,848,921 42,848,921        
v3.20.2
Condensed Consolidated Statement of Equity (Parenthetical) - $ / shares
3 Months Ended 9 Months Ended
Sep. 30, 2020
Sep. 30, 2019
Sep. 30, 2020
Sep. 30, 2019
Statement of Stockholders' Equity [Abstract]        
Dividends declared (in dollars per share) $ 0 $ 0 $ 0.60 $ 0.56
v3.20.2
Condensed Consolidated Statements of Cash Flows - USD ($)
9 Months Ended
Sep. 30, 2020
Sep. 30, 2019
Operating activities    
Consolidated net income $ 148,300,000 $ 124,400,000
Adjustments to reconcile consolidated net income to net cash flows from operating activities:    
Depreciation and amortization 103,700,000 84,000,000.0
Deferred income taxes (2,100,000) (2,800,000)
Stock-based compensation expense 27,500,000 33,300,000
Provision for bad debt 2,200,000 600,000
Equity in net loss of unconsolidated entities 700,000 1,900,000
Holding gain on previously-held equity interest (50,900,000) 0
Gain on sale of equity method investments 0 (19,500,000)
Acquisition earn-out 27,800,000  
Other, net 4,300,000 1,400,000
Changes in operating assets and liabilities:    
Accounts receivable 5,500,000 30,600,000
Accounts payable and accrued liabilities (7,000,000.0) (5,000,000.0)
Accrued compensation and deferred commissions (16,100,000) (8,100,000)
Income taxes, current 2,700,000 (6,200,000)
Deferred revenue 21,500,000 21,000,000.0
Other assets and liabilities 1,600,000 (3,700,000)
Cash provided by operating activities 269,700,000 251,900,000
Investing activities    
Purchases of investment securities (40,400,000) (28,100,000)
Proceeds from maturities and sales of investment securities 41,000,000.0 27,800,000
Capital expenditures (54,700,000) (57,100,000)
Acquisitions, net of cash acquired (67,800,000) 673,900,000
Proceeds from sale of equity method investments   17,000,000.0
Purchases of equity- and cost-method investments (4,500,000) (1,400,000)
Other, net 1,700,000 (600,000)
Cash used for investing activities (124,700,000) (716,300,000)
Financing activities    
Common shares repurchased (37,600,000) (4,900,000)
Dividends paid (38,600,000) (35,900,000)
Proceeds from long-term debt 60,000,000.0 610,000,000.0
Repayment of long-term debt (88,400,000) (132,800,000)
Proceeds from stock-option exercises 1,300,000 100,000
Employee taxes paid from withholding of restricted stock units (19,800,000) (12,800,000)
Other, net (1,500,000) (400,000)
Cash used for financing activities (124,600,000) 423,300,000
Effect of exchange rate changes on cash and cash equivalents (3,400,000) (6,400,000)
Net increase (decrease) in cash and cash equivalents 17,000,000.0 (47,500,000)
Cash and cash equivalents—beginning of period 334,100,000 369,300,000
Cash and cash equivalents—end of period 351,100,000 321,800,000
Supplemental disclosure of cash flow information:    
Cash paid for income taxes 40,000,000.0 45,900,000
Cash paid for interest 7,700,000 6,500,000
Supplemental information of non-cash investing and financing activities:    
Unrealized gain (loss) on available-for-sale investments $ (1,900,000) $ 2,400,000
v3.20.2
Basis of Presentation of Interim Financial Information
9 Months Ended
Sep. 30, 2020
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, revenues, 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, 2019, filed with the SEC on March 2, 2020 (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

COVID-19 Update

We continue to closely monitor the impact of the COVID-19 pandemic on all aspects of our business and in the geographies in which we operate, including how it affects team members, customers, suppliers, and global markets. Since the situation surrounding the COVID-19 pandemic remains fluid, we are actively managing our response and have assessed potential impacts to our financial position and operating results related to our consolidated financial statements for the three and nine months ended September 30, 2020.
On March 27, 2020, the Coronavirus Aid, Relief, and Economic Security (CARES) Act was signed into law. The CARES Act provides a substantial stimulus and assistance package intended to address the impact of the COVID-19 pandemic, including tax relief and government loans, grants and investments. The CARES Act had no impact on our consolidated financial statements for the three and nine months ended September 30, 2020. We continue to monitor any effects that may result from the CARES Act and other similar legislation or governmental actions in geographies in which our business operates.
v3.20.2
Summary of Significant Accounting Policies
3 Months Ended
Sep. 30, 2020
Accounting Policies [Abstract]  
Summary of Significant Accounting Policies Summary of Significant Accounting Policies
Our significant accounting policies are included in Note 2 of the Notes to our Audited Consolidated Financial Statements included in our Annual Report. During the quarter, we made updates to our significant accounting policy on business combinations, which is included below.

Business Combinations
When we acquire a business, we account for the business combination in accordance with ASC 805, Business Combinations (ASC 805). We recognize and measure the fair value of the acquired business and allocate the purchase price to the identifiable tangible and intangible assets acquired and liabilities assumed based upon their estimated fair values at the date of acquisition. The difference between the purchase price and the estimated fair value of the net assets acquired or the excess of the aggregate estimated fair values of assets acquired and liabilities assumed is recorded as goodwill. In determining the estimated fair values of assets acquired and liabilities assumed in a business combination, we use various recognized valuation methods, including discounted cash flow, Monte Carlo simulations, and relief from royalty. For a business combination achieved in stages, we remeasure our previously-held equity interest immediately before the acquisition to the acquisition date fair value and recognize any gain in our Consolidated Statements of Income.
We recognize the fair value of any contingent payments at the date of acquisition as part of the consideration transferred to acquire a business. The liability associated with contingent consideration is remeasured to fair value at each reporting period subsequent to the date of acquisition considering factors that may impact the timing and amount of contingent payments until the term of the agreement has expired or the contingency is resolved. Any changes in the fair value measurement will be recorded in our Consolidated Statements of Income. In evaluating the characterization of contingent and deferred payments, we analyze relevant factors, including the nature of the payment, continuing employment requirements, incremental payments to employees of the acquired business, and timing and rationale underlying the transaction, to determine whether the payments should be accounted for as additional purchase consideration or post-combination related services.

We expense direct costs related to the business combination, such as 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 ASC 420, Exit or Disposal Cost Obligations, on the acquisition date.

As part of the purchase price allocation, we follow the requirements of ASC 740, Income Taxes (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. 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.

Recently adopted accounting pronouncements

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 requires the reversal of previously recognized credit losses if fair value increases. 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. The new standard became effective for us on January 1, 2020 and was applied prospectively. As a result of the adoption of these standards, we made changes to our processes for the assessment of the adequacy of our allowance for credit losses on certain types of financial instruments, including accounts receivable. The adoption of ASU No. 2016-13, ASU No. 2019-04, and ASU No. 2019-05 did not have a material impact on the consolidated financial statements, related disclosures, or results of operations.

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. The Company adopted this guidance prospectively beginning on January 1, 2020. Upon adoption, fees paid in a CCA will be evaluated for capitalization as a prepaid asset and expensed within the results of operations in the same financial statement line item as software license fees instead of depreciation and amortization expense. The adoption of ASU No. 2018-15 did not have a material impact on the consolidated financial statements, related disclosures, or results of operations.

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 became effective for us on January 1, 2020. As we only have Level 1 investments, the adoption of ASU No. 2018-13 had no impact on our consolidated financial statements and related disclosures.
Recently issued accounting pronouncements not yet adopted

Income Taxes: On December 18, 2019, the FASB issued ASU No. 2019-12, Simplifying the Accounting for Income Taxes (ASU No. 2019-12), which is intended to simplify the accounting for income taxes by removing certain exceptions to the general principles of ASC 740, Income Taxes, and providing for simplification in several other areas. The new standard is effective for us on January 1, 2021. Early adoption is permitted. We have not decided whether to adopt early and are evaluating the effect that ASU No. 2019-12 may have on our consolidated financial statements, related disclosures, and results of operations.

Reference Rate Reform: On March 12, 2020, the FASB issued ASU No. 2020-04: Facilitation of the Effects of Reference Rate Reform on Financial Reporting (Topic 848) (ASU No. 2020-04), which provides temporary optional expedients and exceptions for applying generally accepted accounting principles to contract modifications resulting from reference rate reform initiatives. The intention of the standard is to ease the potential accounting and financial reporting burden associated with transitioning away from the expiring London Interbank Offered Rate (LIBOR), and other interbank offered rates, to alternative benchmark rates. This guidance is temporary and only in effect during the reference rate transition period through December 31, 2022. We are evaluating the effect that ASU No. 2020-04 may have on our consolidated financial statements, related disclosures, and results of operations.
v3.20.2
Credit Arrangements
9 Months Ended
Sep. 30, 2020
Debt Disclosure [Abstract]  
Credit Arrangements Credit Arrangements
Debt

The following table summarizes our total and long-term debt as of September 30, 2020 and December 31, 2019.
(in millions)As of September 30, 2020As of December 31, 2019
Term Facility, net of unamortized debt issuance costs of $1.0 million and $1.3 million
$434.9 $443.1 
Revolving Credit Facility50.0 70.0 
Total debt$484.9 $513.1 
Less: Current portion of long-term debt, net of unamortized debt issuance costs of $0.3 million and $0.3 million11.0 11.0 
Long-term debt$473.9 $502.1 

Credit Agreement

In connection with the acquisition of Ratings Acquisition Corp (DBRS) on July 2, 2019, the Company entered into a 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 Credit Agreement will expire on July 2, 2024. As of September 30, 2020, our total outstanding debt under the Credit Agreement was $484.9 million with borrowing availability of $250.0 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.

364-Day Revolving Credit Facility

On June 30, 2020, we entered into a 364-day revolving credit facility (364-Day Revolving Credit Facility) providing for borrowings in an aggregate principal amount of up to $50.0 million. The proceeds of such borrowings may be used for working capital, capital expenditures, and any other lawful corporate purpose. As of September 30, 2020, no borrowings were outstanding.

Compliance with Covenants

The Credit Agreement and the 364-Day Revolving Credit Facility contain identical 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 364-Day Revolving Credit Facility) 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 these financial covenants as of September 30, 2020 and December 31, 2019.
v3.20.2
Acquisitions, Goodwill and Other Intangible Assets
9 Months Ended
Sep. 30, 2020
Goodwill and Intangible Assets Disclosure [Abstract]  
Acquisitions, Goodwill and Other Intangible Assets Acquisitions, Goodwill, and Other Intangible Assets
2020 Acquisitions
On January 31, 2020, we acquired Hueler Analytics' Stable Value Fund Comparative Universe Data and Stable Value Index (Hueler Analytics). We began consolidating the financial results of Hueler Analytics in our consolidated financial statements on January 31, 2020.
On April 3, 2020, we acquired PlanPlus Global, a financial-planning, risk-profiling, and portfolio tracking software firm. The acquisition expands our financial-planning capabilities for advisors. We began consolidating the financial results of PlanPlus Global in our consolidated financial statements on April 3, 2020.
Increased Ownership Interest in Sustainalytics Holding B.V. (Sustainalytics)
On July 2, 2020, we completed the acquisition of the remaining 60% interest in Sustainalytics, a globally recognized leader in environmental, social, and governance (ESG) ratings and research, for an initial cash payment of $61.2 million. The acquisition was accounted for as a business combination with July 2, 2020 as the date of acquisition, and the Company was determined to be the acquirer. Accordingly, we began consolidating the financial results of Sustainalytics in our consolidated financial statements on July 2, 2020. We previously held an approximately 40% ownership interest in Sustainalytics, which had an estimated fair value of $75.4 million at the date of the acquisition and a book value of $24.5 million immediately prior to the acquisition, and resulted in the recording of a holding gain of $50.9 million.

The transaction has been accounted for as a business combination 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. The values assigned to the assets acquired and liabilities assumed are based on preliminary estimates of fair value available as of July 2, 2020, and may be adjusted during the measurement period of up to 12 months from the acquisition date 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. Subsequent measurement changes for certain contingent liabilities will generally be recognized in the Company’s future earnings.
Consideration related to the acquisition consists of an initial cash payment of $61.2 million and contingent payments with an acquisition date fair value of $75.2 million, a portion of which is treated as additional purchase consideration and the remainder, which is sometimes referred to as an earn-out, but accounted for and described as compensation expense for purpose of the following discussion and disclosure. The acquisition date fair values of the additional purchase consideration and compensation are $47.4 million and $27.8 million, respectively. The contingent payments are due on the first and second anniversaries of the acquisition date, and each payment is determined based on a multiple of Sustainalytics' revenues for the years ended December 31, 2020 and 2021, respectively, which are also the measurement periods for determining the final payments. We used a Monte Carlo simulation to arrive at the estimated fair values of the contingent payments at the acquisition date. At subsequent balance sheet dates, the additional purchase consideration, including contingent payments, will continue to be measured at fair value and is classified as "Contingent consideration liabilities" and "Other long-term liabilities" on our condensed Consolidated Balance Sheet as of September 30, 2020. The compensation will be measured based on probability weighted future benefits expected to be paid, and is reflected in "Current liabilities - Accrued compensation" and "Accrued Compensation" on our Condensed Consolidated Balance Sheet as of September 30, 2020.

The book value of our 40% ownership interest immediately prior to the acquisition date was $24.5 million, and we recorded a $50.9 million non-cash holding gain for the difference between the fair value and the book value of our previously-held equity interest. The acquisition of the additional 60% interest was considered an acquisition achieved in stages and resulted in the remeasurement of the previously-held equity interest to fair value. The Company determined the fair value of the previously-held equity interest using a discounted cash flow analysis (an income approach) based on projected cash flows for Sustainalytics to derive total purchase consideration, which was divided by fully diluted outstanding shares to determine the fair value per share. The fair value per share was then applied to the shares of Sustainalytics held by the Company to derive the acquisition date fair value of the previously-held equity interest. The gain is classified as "Holding gain on previously-held equity interest" in our Condensed Consolidated Statement of Income for the three and nine months ended September 30, 2020.

As of September 30, 2020, we completed our initial determination of the fair values of the acquired, identifiable assets and liabilities based on the information available. There are various areas that are not yet finalized due to information that may become available subsequently, which may result in changes in the values assigned to various assets and liabilities, including, but not limited to, assumed current and deferred tax assets and liabilities. If additional information related to the acquisition date fair value determinations 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 acquisition date:
(in millions)
Fair value of consideration transferred$108.6 
Fair value of the previously-held equity interest75.4 
Cash and cash equivalents$9.8 
Accounts receivable6.2 
Intangible assets, net79.5 
Operating lease assets5.2 
Other current and non-current assets7.6 
Deferred revenue(21.2)
Operating lease liability(5.2)
Deferred tax liability, net(17.4)
Other current and non-current liabilities(15.6)
Total fair value of net assets acquired$48.9 
Goodwill$135.1 
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 $79.5 million of acquired intangible assets, as follows:

(in millions)Weighted average useful life (years)
Customer-related assets$22.9 20
Technology-based assets46.7 10
Intellectual property9.9 10
Total intangible assets$79.5 

Goodwill of $135.1 million represents the excess over the fair value of the net tangible and intangible assets acquired. Goodwill is not deductible for income tax purposes.

We recognized a preliminary net deferred tax liability of $17.4 million primarily because the amortization expense related to certain intangible assets is not deductible for income tax purposes.

2019 Acquisitions

During the second quarter of 2020, we finalized the purchase price allocation related to our acquisition of DBRS and did not record any significant adjustments compared with the preliminary estimates disclosed in the Notes to the Audited Consolidated Financial Statements included in our Annual Report.
Goodwill
The following table shows the changes in our goodwill balances from December 31, 2019 to September 30, 2020:

 (in millions)
Balance as of December 31, 2019$1,039.1 
Acquisition of Sustainalytics135.1 
Other3.9 
Balance as of September 30, 2020$1,178.1 

We did not record any goodwill impairment losses in the first nine months of 2020 and 2019. We perform our annual impairment reviews in the fourth quarter or when impairment indicators and triggering events are identified.

Intangible Assets
The following table summarizes our intangible assets: 

 As of September 30, 2020As of December 31, 2019
(in millions)GrossAccumulated
Amortization
NetWeighted
Average
Useful  Life
(years)
GrossAccumulated
Amortization
NetWeighted
Average
Useful  Life
(years)
Customer-related assets$402.9 $(152.2)$250.7 11$377.9 $(130.3)$247.6 11
Technology-based assets219.7 (127.9)91.8 7163.7 (112.0)51.7 7
Intellectual property & other81.1 (40.8)40.3 869.3 (35.2)34.1 8
Total intangible assets$703.7 $(320.9)$382.8 10$610.9 $(277.5)$333.4 10
 
The following table summarizes our amortization expense related to intangible assets:

 Three months ended September 30,Nine months ended September 30,
(in millions)2020201920202019
Amortization expense$15.6 $13.3 $43.3 $23.1 
 
We amortize intangible assets using the straight-line method over their expected economic useful lives.

We expect intangible amortization expense for the remainder of 2020 and subsequent years to be as follows:
 (in millions)
Remainder of 2020 (from October 1 through December 31)$15.7 
202159.4 
202251.4 
202347.7 
202441.7 
Thereafter166.9 
Total$382.8 
 
Our estimates of future amortization expense for intangible assets may be affected by additional acquisitions, divestitures, changes in the estimated useful lives, impairments, and foreign currency translation.
v3.20.2
Income Per Share
3 Months Ended
Sep. 30, 2020
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 share and per share amounts)2020201920202019
Basic net income per share:  
Consolidated net income $76.2 $49.1 $148.3 $124.4 
Weighted average common shares outstanding42.9 42.8 42.9 42.7 
Basic net income per share$1.78 $1.15 $3.46 $2.91 
Diluted net income per share:
Consolidated net income $76.2 $49.1 $148.3 $124.4 
Weighted average common shares outstanding42.9 42.8 42.9 42.7 
Net effect of dilutive stock options, restricted stock units, performance share awards, and market stock units0.3 0.4 0.3 0.4 
Weighted average common shares outstanding for computing diluted income per share43.2 43.2 43.2 43.1 
Diluted net income per share$1.76 $1.14 $3.43 $2.89 

During the periods presented, the number of anti-dilutive restricted stock units, performance share awards, or market stock units excluded from our calculation of diluted earnings per share was immaterial.
v3.20.2
Revenue
9 Months Ended
Sep. 30, 2020
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)2020201920202019
License-based $242.9 $204.6 $680.0 $601.0 
Asset-based55.4 54.5 164.4 155.9 
Transaction-based58.9 54.7 164.7 89.7 
Consolidated revenue$357.2 $313.8 $1,009.1 $846.6 

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 by Morningstar Data, Morningstar Direct, Morningstar Advisor Workstation, PitchBook, Sustainalytics, and other similar product lines.


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. 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 and significant disruptions in the market are evaluated to determine whether estimates of earned asset-based fees need to be revised for the current quarter. The timing of client asset reporting and the structure of certain contracts can result in a one-quarter lag between market movements and the impact on earned revenue. 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 is generated by 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 is generated by DBRS Morningstar, Internet advertising, and Morningstar-sponsored conferences. DBRS Morningstar revenue includes 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 are refundable. The contract liabilities balance as of September 30, 2020 had a net increase of $44.1 million, primarily driven by cash payments received or payable in advance of satisfying our performance obligations. We recognized $227.8 million of revenue in the nine month period ended September 30, 2020 that was included in the contract liabilities balance as of December 31, 2019.

We expect to recognize revenue related to our contract liabilities for the remainder of 2020 and subsequent years as follows:
(in millions)As of September 30, 2020
Remainder of 2020 (from October 1 through December 31) $193.8 
2021364.3 
2022114.1 
202334.4 
202416.3 
Thereafter 61.4 
Total$784.3 
The aggregate amount of revenue we expect to recognize for the remainder of 2020 and subsequent years is higher than our contract liability balance of $326.4 million as of September 30, 2020. The difference represents the value of future obligations for signed contracts for which we have not yet begun to satisfy the performance obligations or have not yet billed the customer.

The table above does not include variable consideration for unsatisfied performance obligations related to certain of our license-based, asset-based, and transaction-based contracts as of September 30, 2020. 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 license-based contracts, the consideration received for services performed is based on the number of future users, which is not known until 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 are not known until 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 for Internet advertising, the consideration received for services performed is based on the number of impressions, which is not known until the 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 September 30, 2020, the table above also does not include revenue for unsatisfied performance obligations related to certain of our license-based and transaction-based contracts with durations 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 Morningstar-sponsored 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 for credit losses, and deferred commissions. We did not record any impairment losses on receivables or deferred commissions in the first nine months of 2020.

The following table summarizes our contract assets balance:
(in millions)As of September 30, 2020As of December 31, 2019
Accounts receivable, less allowance for credit losses$186.9 $188.5 
Deferred commissions33.8 30.4 
Total contract assets$220.7 $218.9 
v3.20.2
Segment and Geographical Area Information
3 Months Ended
Sep. 30, 2020
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 considering our core data which is managed centrally on a company-wide basis, and evaluates our financial results. Because we have a single reportable segment, all required financial segment information can be found directly in the Condensed Consolidated Financial Statements. The accounting policies for our reportable segment are the same as those described in Note 2 of the Notes to the Audited Consolidated Financial Statements 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)2020201920202019
United States$247.8 $225.3 $710.7 $628.4 
Asia8.6 7.3 24.5 20.4 
Australia11.9 9.7 32.9 29.2 
Canada25.0 20.7 74.0 36.4 
Continental Europe32.3 22.3 79.2 63.6 
United Kingdom30.0 27.0 83.0 63.9 
Other1.6 1.5 4.8 4.7 
Total International109.4 88.5 298.4 218.2 
Consolidated revenue$357.2 $313.8 $1,009.1 $846.6 

Property, equipment, and capitalized software, net by geographical area
(in millions)As of September 30, 2020As of December 31, 2019
United States$125.9 $131.2 
Asia8.2 6.6 
Australia3.6 4.2 
Canada2.5 2.9 
Continental Europe3.1 2.3 
United Kingdom7.1 6.9 
Other0.5 0.6 
Total International25.0 23.5 
Consolidated property, equipment, and capitalized software, net$150.9 $154.7 
Operating lease assets by geographical area
(in millions)As of September 30, 2020As of December 31, 2019
United States$92.9 $86.4 
Asia13.7 20.2 
Australia5.3 5.8 
Canada7.9 7.5 
Continental Europe17.9 6.3 
United Kingdom14.1 17.9 
Other0.6 0.7 
Total International59.5 58.4 
Consolidated operating lease assets$152.4 $144.8 

The long-lived assets by geographical area do not include deferred commissions, non-current as the balance is not material.
v3.20.2
Fair Value Measurement of Investments
9 Months Ended
Sep. 30, 2020
Fair Value Disclosures [Abstract]  
Investments and Fair Value Measurements Fair Value MeasurementsAs of September 30, 2020 and December 31, 2019, our investment balances totaled $26.7 million and $33.4 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.
v3.20.2
Leases
9 Months Ended
Sep. 30, 2020
Leases [Abstract]  
Leases Leases
We lease office space and certain equipment under various operating and finance leases, with most 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 the 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 the below criteria:

there is an identified asset;
we obtain substantially all 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 if available. However, as most of our leases do not provide an implicit rate, 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 13 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 lease assets and lease liabilities:

Leases (in millions)Classification on the Balance SheetAs of September 30, 2020As of December 31, 2019
Assets
OperatingOperating Lease Assets$152.4 $144.8 
Liabilities
OperatingOperating lease liabilities, current$38.6 $35.8 
OperatingOperating lease liabilities, non-current141.3 138.7 
Total lease liabilities$179.9 $174.5 

Our operating lease expense for the three months ended September 30, 2020 was $11.1 million, compared with $9.1 million for the three months ended September 30, 2019. Charges related to our operating leases that are variable and, therefore, not included in the measurement of the lease liabilities, were $4.0 million for the three months ended September 30, 2020, compared with $3.7 million for the three months ended September 30, 2019. We made lease payments of $11.0 million during the three months ended September 30, 2020, compared with $7.0 million during the three months ended September 30, 2019.

Our operating lease expense for the nine months ended September 30, 2020 was $30.9 million, compared with $24.9 million for the nine months ended September 30, 2019. Charges related to our operating leases that are variable and, therefore, not included in the measurement of the lease liabilities, were $10.9 million for the nine months ended September 30, 2020, compared with $9.4 million for the nine months ended September 30, 2019. We made lease payments of $30.5 million during the nine months ended September 30, 2020, compared with $21.4 million during the nine months ended September 30, 2019.

The following table shows 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 2020 (October 1 through December 31)$11.5 
202143.6 
202230.0 
202327.2 
202421.5 
Thereafter75.3 
Total minimum lease commitments209.1 
Adjustment for discount to present value29.2 
Total$179.9 
The following table summarizes the weighted-average lease terms and weighted-average discount rates for our operating leases:
As of September 30, 2020
Weighted-average remaining lease term (in years)6.79
Weighted-average discount rate4.25 %
v3.20.2
Stock-Based Compensation
9 Months Ended
Sep. 30, 2020
Share-based Payment Arrangement [Abstract]  
Stock-Based Compensation Stock-Based Compensation
 
Stock-Based Compensation Plans
 
All 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)2020201920202019
Cost of revenue$4.1 $3.2 $10.2 $10.0 
Sales and marketing1.3 1.4 3.5 4.2 
General and administrative4.5 6.2 13.8 19.1 
Total stock-based compensation expense$9.9 $10.8 $27.5 $33.3 

As of September 30, 2020, the total unrecognized stock-based compensation cost related to outstanding restricted stock units, performance share awards, and market stock units expected to vest was $54.0 million, which we expect to recognize over a weighted average period of 15 months.
v3.20.2
Income Taxes
9 Months Ended
Sep. 30, 2020
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, 2020 and September 30, 2019:

 Three months ended September 30,Nine months ended September 30,
(in millions)2020201920202019
Income before income taxes and equity in net income (loss) of unconsolidated entities$92.5 $63.5 $189.6 $162.8 
Equity in net income (loss) of unconsolidated entities0.6 (1.1)(0.7)(1.9)
Total$93.1 $62.4 $188.9 $160.9 
Income tax expense$16.9 $13.3 $40.6 $36.5 
Effective tax rate18.2 %21.3 %21.5 %22.7 %
 
Our effective tax rate in the third quarter and first nine months of 2020 was 18.2% and 21.5%, respectively, reflecting respective decreases of 3.1 and 1.2 percentage points, compared with the same periods in the prior year. The decreases are primarily attributable to the holding gain recorded in connection with our purchase of the remaining ownership interest in Sustainalytics on July 2, 2020, which is not taxable.
Unrecognized Tax Benefits

The table below provides information concerning our gross unrecognized tax benefits as of September 30, 2020 and December 31, 2019, as well as the effect these gross unrecognized tax benefits would have on our income tax expense, if they were recognized.

(in millions)As of September 30, 2020As of December 31, 2019
Gross unrecognized tax benefits$11.7 $12.6 
Gross unrecognized tax benefits that would affect income tax expense$11.7 $12.6 
Decrease in income tax expense upon recognition of gross unrecognized tax benefits$11.5 $12.4 

Our Unaudited Condensed Consolidated Balance Sheets include the following liabilities for unrecognized tax benefits. These amounts include interest and penalties, less any associated tax benefits.

Liabilities for Unrecognized Tax Benefits (in millions)As of September 30, 2020As of December 31, 2019
Current liability$8.0 $10.8 
Non-current liability4.6 3.0 
Total liability for unrecognized tax benefits$12.6 $13.8 

Because we conduct business globally, we file income tax returns in U.S. federal, state, local, and foreign jurisdictions. We are currently under audit by federal, state, and local tax authorities in the U.S. as well as tax authorities in certain non-U.S. jurisdictions. It is likely that the examination phase of some of these federal, state, local, and non-U.S. audits will conclude in 2020. It is not possible to estimate the effect of current audits on previously recorded unrecognized tax benefits.

Approximately 66% of our cash, cash equivalents, and investments balance as of September 30, 2020 was held by our operations outside of the United States. We generally consider our U.S. directly-owned foreign subsidiary earnings to be permanently reinvested. We believe that our cash balances and investments in the United States, along with cash generated from our U.S. operations, will be sufficient to meet our U.S. operating and cash needs for the foreseeable future, without requiring us to repatriate earnings from these foreign subsidiaries.

Certain of our non-U.S. operations have incurred net operating losses (NOLs), which may become deductible to the extent these operations become profitable. For each of our operations, we evaluate whether it is more likely than not that the tax benefits related to NOLs will be realized. As part of this evaluation, we consider evidence such as tax planning strategies, historical operating results, forecasted taxable income, and recent financial performance. In the year that certain non-U.S. operations record a loss, we do not recognize a corresponding tax benefit, which increases our effective tax rate. Upon determining that it is more likely than not that the NOLs will be realized, we reduce the tax valuation allowances related to these NOLs, which results in a reduction to our income tax expense and our effective tax rate in that period.
v3.20.2
Contingencies
9 Months Ended
Sep. 30, 2020
Commitments and Contingencies Disclosure [Abstract]  
Contingencies Contingencies We record accrued liabilities for litigation, regulatory, and other business matters when those matters represent loss contingencies that are both probable and estimable. In these cases, there may be an exposure to loss in excess of any amounts accrued. When a loss contingency is not both probable and estimable, we do not establish an accrued liability. As litigation, regulatory, or other business matters develop, we evaluate on an ongoing basis whether such matters present a loss contingency that is probable and estimable.
Data Audits and Reviews
In our global data business, we include in our products, or directly redistribute to our customers, data, and information licensed from third-party vendors. Our compliance with the terms of these licenses is reviewed internally and is also subject to audit by the third-party vendors. At a given time, we may be undergoing several such internal reviews and third-party vendor audits and the results and findings of which may indicate that we may be required to make a payment for prior data usage. Due to a lack of available information and data, as well as potential variations of any audit or internal review findings, we generally are not able to reasonably estimate a possible loss, or range of losses for these matters. While we cannot predict the outcome of these processes, we do not anticipate they will have a material adverse effect on our business, operating results, or financial position.

Credit Ratings Matter
In April 2020, the staff of the SEC provided an oral Wells Notice to Morningstar Credit Ratings, LLC (MCR) recommending that the Commission authorize an enforcement action related to MCR’s former commercial mortgage-backed securities ratings methodology. MCR submitted a written response regarding this notice to the staff in May 2020. In July 2020, the staff provided a written confirmation of the Wells Notice. In August 2020, MCR met with the staff of the SEC to discuss MCR’s response and in October 2020, MCR submitted a supplemental written response to the staff. At this time, we do not believe any outcome in this matter will have a material adverse effect on our business, operating results, or financial position.

Other Matters
We are involved from time to time in regulatory investigations and legal proceedings that arise in the normal course of our business. While it is difficult to predict the outcome of any particular investigation or proceeding, we do not believe the result of any of these matters will have a material adverse effect on our business, operating results, or financial position.
v3.20.2
Share Repurchase Program
9 Months Ended
Sep. 30, 2020
Equity [Abstract]  
Treasury Stock
13. Share Repurchase Program
 
In December 2017, the board of directors approved a share repurchase program that authorizes the Company to repurchase up to $500.0 million in shares of the Company's outstanding common stock effective January 1, 2018. The authorization expires on December 31, 2020. We may repurchase shares from time to time at prevailing market prices on the open market or in private transactions in amounts that we deem appropriate.
In the third quarter of 2020, we repurchased a total of 122,020 shares for $19.3 million, of which $1.7 million settled in October 2020. As of September 30, 2020, we repurchased a total of 543,125 shares for $64.9 million under this program, leaving approximately $435.1 million available for future repurchases.
v3.20.2
Subsequent Events (Notes)
9 Months Ended
Sep. 30, 2020
Subsequent Events [Abstract]  
Subsequent Events Subsequent Events
Private Placement Debt Offering

On October 26, 2020, Morningstar completed the issuance and sale of $350.0 million aggregate principal amount of 2.32% senior notes due October 26, 2030 (the 2.32% Notes), in a private placement exempt from the registration requirements of the Securities Act of 1933, as amended, pursuant to a Note Purchase Agreement entered into on the same date. The Company expects to use the net proceeds from the offering to reduce a portion of the outstanding indebtedness under the Company’s Credit Agreement and for other corporate purposes. Financial covenants under the 2.32% Notes are generally consistent with the Company's credit facilities. Interest on the Notes will be paid semi-annually on each October 30 and April 30 during the term of the 2.32% Notes and at maturity, with the first interest payment date occurring on April 30, 2021.

MJKK Sale
On October 7, 2020, the Company entered into an underwriting agreement for a secondary distribution through underwriters of 3,850,000 shares of Morningstar Japan K.K. (MJKK) owned by the Company at a price per share of ¥437.9. The share sale closed on October 19, 2020 resulting in net proceeds to the Company, after underwriting discounts and commissions, of $16.0 million, which resulted in a pre-tax gain of $12.2 million. In connection with this distribution, the Company also entered into a share loan agreement with an underwriter providing for the borrowing by the underwriter in connection with its overallotment option of 1,289,000 MJKK shares for the period from October 19, 2020 to November 10, 2020, which shares will either be returned to the Company or purchased in whole or part by the underwriter prior to November 6, 2020.
v3.20.2
Summary of Significant Accounting Policies (Policies)
9 Months Ended
Sep. 30, 2020
Accounting Policies [Abstract]  
Recent Accounting Pronouncements Policy
Recently adopted accounting pronouncements

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 requires the reversal of previously recognized credit losses if fair value increases. 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. The new standard became effective for us on January 1, 2020 and was applied prospectively. As a result of the adoption of these standards, we made changes to our processes for the assessment of the adequacy of our allowance for credit losses on certain types of financial instruments, including accounts receivable. The adoption of ASU No. 2016-13, ASU No. 2019-04, and ASU No. 2019-05 did not have a material impact on the consolidated financial statements, related disclosures, or results of operations.

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. The Company adopted this guidance prospectively beginning on January 1, 2020. Upon adoption, fees paid in a CCA will be evaluated for capitalization as a prepaid asset and expensed within the results of operations in the same financial statement line item as software license fees instead of depreciation and amortization expense. The adoption of ASU No. 2018-15 did not have a material impact on the consolidated financial statements, related disclosures, or results of operations.

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 became effective for us on January 1, 2020. As we only have Level 1 investments, the adoption of ASU No. 2018-13 had no impact on our consolidated financial statements and related disclosures.
Recently issued accounting pronouncements not yet adopted

Income Taxes: On December 18, 2019, the FASB issued ASU No. 2019-12, Simplifying the Accounting for Income Taxes (ASU No. 2019-12), which is intended to simplify the accounting for income taxes by removing certain exceptions to the general principles of ASC 740, Income Taxes, and providing for simplification in several other areas. The new standard is effective for us on January 1, 2021. Early adoption is permitted. We have not decided whether to adopt early and are evaluating the effect that ASU No. 2019-12 may have on our consolidated financial statements, related disclosures, and results of operations.

Reference Rate Reform: On March 12, 2020, the FASB issued ASU No. 2020-04: Facilitation of the Effects of Reference Rate Reform on Financial Reporting (Topic 848) (ASU No. 2020-04), which provides temporary optional expedients and exceptions for applying generally accepted accounting principles to contract modifications resulting from reference rate reform initiatives. The intention of the standard is to ease the potential accounting and financial reporting burden associated with transitioning away from the expiring London Interbank Offered Rate (LIBOR), and other interbank offered rates, to alternative benchmark rates. This guidance is temporary and only in effect during the reference rate transition period through December 31, 2022. We are evaluating the effect that ASU No. 2020-04 may have on our consolidated financial statements, related disclosures, and results of operations.
Segment Reporting Policy We report our results in a single reportable segment, which reflects how our chief operating decision maker allocates resources considering our core data which is managed centrally on a company-wide basis, and evaluates our financial results. Because we have a single reportable segment, all required financial segment information can be found directly in the Condensed Consolidated Financial Statements. The accounting policies for our reportable segment are the same as those described in Note 2 of the Notes to the Audited Consolidated Financial Statements included in our Annual Report. We evaluate the performance of our reporting segment based on revenue and operating income.
Investments- Debt and Equity Securities Policy 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.
v3.20.2
(Tables)
9 Months Ended
Sep. 30, 2020
Debt Disclosure [Abstract]  
Summary of Total Debt and Long-term Debt
The following table summarizes our total and long-term debt as of September 30, 2020 and December 31, 2019.
(in millions)As of September 30, 2020As of December 31, 2019
Term Facility, net of unamortized debt issuance costs of $1.0 million and $1.3 million
$434.9 $443.1 
Revolving Credit Facility50.0 70.0 
Total debt$484.9 $513.1 
Less: Current portion of long-term debt, net of unamortized debt issuance costs of $0.3 million and $0.3 million11.0 11.0 
Long-term debt$473.9 $502.1 
v3.20.2
Acquisitions, Goodwill and Other Intangible Assets (Tables)
3 Months Ended 9 Months Ended
Sep. 30, 2020
Sep. 30, 2020
Goodwill and Intangible Assets Disclosure [Abstract]    
Business Acquisition, Pro Forma Information  
The following table summarizes our allocation of the estimated fair values of the assets acquired and liabilities assumed at the acquisition date:
(in millions)
Fair value of consideration transferred$108.6 
Fair value of the previously-held equity interest75.4 
Cash and cash equivalents$9.8 
Accounts receivable6.2 
Intangible assets, net79.5 
Operating lease assets5.2 
Other current and non-current assets7.6 
Deferred revenue(21.2)
Operating lease liability(5.2)
Deferred tax liability, net(17.4)
Other current and non-current liabilities(15.6)
Total fair value of net assets acquired$48.9 
Goodwill$135.1 
The preliminary allocation of the estimated fair values of the assets acquired and liabilities assumed includes $79.5 million of acquired intangible assets, as follows:

(in millions)Weighted average useful life (years)
Customer-related assets$22.9 20
Technology-based assets46.7 10
Intellectual property9.9 10
Total intangible assets$79.5 
Schedule of Goodwill
The following table shows the changes in our goodwill balances from December 31, 2019 to September 30, 2020:

 (in millions)
Balance as of December 31, 2019$1,039.1 
Acquisition of Sustainalytics135.1 
Other3.9 
Balance as of September 30, 2020$1,178.1 
 
Schedule of Intangible Assets
The following table summarizes our intangible assets: 

 As of September 30, 2020As of December 31, 2019
(in millions)GrossAccumulated
Amortization
NetWeighted
Average
Useful  Life
(years)
GrossAccumulated
Amortization
NetWeighted
Average
Useful  Life
(years)
Customer-related assets$402.9 $(152.2)$250.7 11$377.9 $(130.3)$247.6 11
Technology-based assets219.7 (127.9)91.8 7163.7 (112.0)51.7 7
Intellectual property & other81.1 (40.8)40.3 869.3 (35.2)34.1 8
Total intangible assets$703.7 $(320.9)$382.8 10$610.9 $(277.5)$333.4 10
 
Schedule of Intangible Asset, Amortization Expense
The following table summarizes our amortization expense related to intangible assets:

 Three months ended September 30,Nine months ended September 30,
(in millions)2020201920202019
Amortization expense$15.6 $13.3 $43.3 $23.1 
 
Schedule of Expected Amortization Expense  
We expect intangible amortization expense for the remainder of 2020 and subsequent years to be as follows:
 (in millions)
Remainder of 2020 (from October 1 through December 31)$15.7 
202159.4 
202251.4 
202347.7 
202441.7 
Thereafter166.9 
Total$382.8 
 
Our estimates of future amortization expense for intangible assets may be affected by additional acquisitions, divestitures, changes in the estimated useful lives, impairments, and foreign currency translation.
v3.20.2
Income Per Share (Tables)
9 Months Ended
Sep. 30, 2020
Earnings Per Share [Abstract]  
Schedule of Earnings Per Share, Basic and Diluted
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 share and per share amounts)2020201920202019
Basic net income per share:  
Consolidated net income $76.2 $49.1 $148.3 $124.4 
Weighted average common shares outstanding42.9 42.8 42.9 42.7 
Basic net income per share$1.78 $1.15 $3.46 $2.91 
Diluted net income per share:
Consolidated net income $76.2 $49.1 $148.3 $124.4 
Weighted average common shares outstanding42.9 42.8 42.9 42.7 
Net effect of dilutive stock options, restricted stock units, performance share awards, and market stock units0.3 0.4 0.3 0.4 
Weighted average common shares outstanding for computing diluted income per share