10-Q 1 morn-20220331.htm 10-Q morn-20220331
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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington D.C. 20549
FORM 10-Q
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

FOR THE QUARTERLY PERIOD ENDED March 31, 2022
OR
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the transition period from         to
Commission File Number: 000-51280
MORNINGSTAR, INC.
(Exact Name of Registrant as Specified in its Charter) 
morn-20220331_g1.jpg
Illinois 36-3297908
(State or Other Jurisdiction of (I.R.S. Employer
Incorporation or Organization) Identification Number)
22 West Washington Street 
ChicagoIllinois60602
(Address of Principal Executive Offices)(Zip Code)
  (312) 696-6000
(Registrant’s Telephone Number, Including Area Code)

Securities registered pursuant to Section 12(b) of the Act:
Title of Each ClassTrading SymbolName of Each Exchange on Which Registered
Common stock, no par valueMORNNASDAQ
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes x No o
Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit such files). Yes x No o
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company, or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company,” and "emerging growth company" in Rule 12b-2 of the Exchange Act.
Large accelerated filer
Accelerated filer  
o

Non-accelerated filer   o
Smaller reporting company  Emerging growth company  
If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. o
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes No x
As of April 22, 2022, there were 42,730,601 shares of the Company’s common stock, no par value, outstanding.


MORNINGSTAR, INC. AND SUBSIDIARIES
INDEX
 
   
 
   
   Unaudited Condensed Consolidated Statements of Income for the three months ended March 31, 2022 and 2021
Unaudited Condensed Consolidated Statements of Comprehensive Income for the three months ended March 31, 2022 and 2021
    
   Unaudited Condensed Consolidated Balance Sheets as of March 31, 2022 and December 31, 2021
    
   Unaudited Condensed Consolidated Statements of Equity for the three months ended March 31, 2022 and 2021
    
   Unaudited Condensed Consolidated Statements of Cash Flows for the three months ended March 31, 2022 and 2021
    
   
   
 
   
 
   
 
   
   
   
 
   
 
   
 
   
 
   
 
3

PART 1.FINANCIAL INFORMATION
Item 1.Financial Statements
Morningstar, Inc. and Subsidiaries
Unaudited Condensed Consolidated Statements of Income
 Three months ended March 31,
(in millions, except share and per share amounts)20222021
Revenue$457.0 $392.8 
Operating expense:
Cost of revenue191.3 157.3 
Sales and marketing81.4 61.9 
General and administrative90.3 69.8 
Depreciation and amortization37.6 36.6 
Total operating expense400.6 325.6 
Operating income56.4 67.2 
Non-operating income, net:  
Interest expense, net(2.4)(2.8)
Realized gains on sale of investments, reclassified from other comprehensive income1.0 1.3 
Other income, net8.0 1.6 
Non-operating income, net6.6 0.1 
Income before income taxes and equity in net income of unconsolidated entities63.0 67.3 
Equity in net income of unconsolidated entities0.4 1.7 
Income tax expense 17.3 14.1 
Consolidated net income$46.1 $54.9 
Net income per share:  
Basic$1.07 $1.28 
Diluted$1.06 $1.27 
Dividends per common share:
Dividends declared per common share$0.36 $0.32 
Dividends paid per common share$0.36 $0.32 
Weighted average shares outstanding:
Basic43.0 42.9 
Diluted43.3 43.3 

See notes to unaudited condensed consolidated financial statements.
4

Morningstar, Inc. and Subsidiaries
Unaudited Condensed Consolidated Statements of Comprehensive Income

 Three months ended March 31,
(in millions) 20222021
Consolidated net income $46.1 $54.9 
Other comprehensive loss, net of tax:
Foreign currency translation adjustment(5.0)(3.0)
Unrealized gains (losses) on securities:
  Unrealized holding gains (losses) arising during period(4.8)2.1 
  Reclassification of gains on investments included in net income(0.7)(1.0)
Other comprehensive loss(10.5)(1.9)
Comprehensive income$35.6 $53.0 

See notes to unaudited condensed consolidated financial statements.


5

Morningstar, Inc. and Subsidiaries
Unaudited Condensed Consolidated Balance Sheets
(in millions, except share amounts)As of March 31, 2022
(unaudited)
As of December 31, 2021
Assets  
Current assets:  
Cash and cash equivalents$483.5 $483.8 
Investments61.4 62.3 
Accounts receivable, less allowance for credit losses of $4.4 million and $4.5 million, respectively276.4 268.9 
Income tax receivable 8.9 
Deferred commissions34.2 31.2 
Prepaid expenses44.4 30.6 
Other current assets2.9 1.9 
Total current assets902.8 887.6 
Goodwill1,202.6 1,207.0 
Intangible assets, net321.6 328.2 
Property, equipment, and capitalized software, less accumulated depreciation and amortization of $550.0 million and $529.2 million, respectively176.5 171.8 
Operating lease assets145.4 149.2 
Investments in unconsolidated entities64.1 63.3 
Deferred tax asset, net13.2 12.8 
Deferred commissions32.3 31.1 
Other assets10.9 11.7 
Total assets$2,869.4 $2,862.7 
Liabilities and equity  
Current liabilities:  
Deferred revenue$428.6 $377.4 
Accrued compensation153.3 273.7 
Accounts payable and accrued liabilities72.7 76.5 
Operating lease liabilities37.4 36.4 
Contingent consideration liability17.0 17.3 
Other current liabilities11.5 2.2 
Total current liabilities720.5 783.5 
Operating lease liabilities129.1 135.7 
Accrued compensation18.0 16.3 
Deferred tax liabilities, net93.7 101.7 
Long-term debt504.4 359.4 
Deferred revenue37.4 36.4 
Other long-term liabilities14.6 13.8 
Total liabilities1,517.7 1,446.8 
Equity:  
Morningstar, Inc. shareholders’ equity:  
Common stock, no par value, 200,000,000 shares authorized, of which 42,767,652 and 43,136,273 shares were outstanding as of March 31, 2022 and December 31, 2021, respectively  
Treasury stock at cost, 11,526,992 and 11,124,021 shares as of March 31, 2022 and December 31, 2021, respectively(874.9)(764.3)
6

Additional paid-in capital715.2 689.0 
Retained earnings1,557.2 1,526.5 
Accumulated other comprehensive loss:
    Currency translation adjustment(45.8)(40.8)
    Unrealized gain on available-for-sale investments 5.5 
Total accumulated other comprehensive loss(45.8)(35.3)
Total equity1,351.7 1,415.9 
Total liabilities and equity$2,869.4 $2,862.7 

See notes to unaudited condensed consolidated financial statements.
7

Morningstar, Inc. and Subsidiaries
Unaudited Condensed Consolidated Statements of Equity
For the three months ended March 31, 2022 and 2021
 Morningstar, Inc. Shareholders’ Equity 
Accumulated
Other
Comprehensive
Loss
 Common Stock Additional
Paid-in
Capital
 
(in millions, except share and per share amounts)Shares
Outstanding
Par
Value
Treasury
Stock
Retained
Earnings
Total
Equity
Balance as of December 31, 202143,136,273 $ $(764.3)$689.0 $1,526.5 $(35.3)$1,415.9 
Net income— — — 46.1 — 46.1 
Other comprehensive loss:
Unrealized loss on available-for-sale investments, net of tax— — — — (4.8)(4.8)
Reclassification of adjustments for gain on investments included in net income, net of tax— — — — (0.7)(0.7)
Foreign currency translation adjustment, net— — — — (5.0)(5.0)
Other comprehensive loss, net— — — — (10.5)(10.5)
Issuance of common stock related to vesting of restricted stock units, net of shares withheld for taxes on settlements of restricted stock units34,350   (7.1)  (7.1)
Reclassification of awards previously liability-classified that were converted to equity  19.4   19.4 
Stock-based compensation— — 13.9 — — 13.9 
Common shares repurchased(402,971)— (110.6)— — — (110.6)
Dividends declared ($0.36 per share)— — — (15.4)— (15.4)
Balance as of March 31, 202242,767,652 $ $(874.9)$715.2 $1,557.2 $(45.8)$1,351.7 

8


 Morningstar, Inc. Shareholders’ Equity 
Accumulated
Other
Comprehensive
Loss
 Common Stock Additional
Paid-in
Capital
 
(in millions, except share and per share amounts)Shares
Outstanding
Par
Value
Treasury
Stock
Retained
Earnings
Total
Equity
Balance as of December 31, 202042,898,158 $ $(767.3)$671.3 $1,389.4 $(22.0)$1,271.4 
Net income— — — 54.9 — 54.9 
Other comprehensive loss:
Unrealized gain on available-for-sale investments, net of tax— — — — 2.1 2.1 
Reclassification of adjustments for gain on investments included in net income, net of tax— — — — (1.0)(1.0)
Foreign currency translation adjustment, net— — — — (3.0)(3.0)
Other comprehensive loss— — — — (1.9)(1.9)
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 units47,826 — — (6.3)— — (6.3)
Reclassification of awards previously liability-classified that were converted to equity— — 8.7 — — 8.7 
Stock-based compensation— — 8.1 — — 8.1 
Common shares repurchased— — — — — —  
Dividends declared ($0.32 per share)— — — (13.5)— (13.5)
Balance as of March 31, 202142,945,984 $ $(767.3)$681.8 $1,430.8 $(23.9)$1,321.4 

See notes to unaudited condensed consolidated financial statements.

9

Morningstar, Inc. and Subsidiaries
Unaudited Condensed Consolidated Statements of Cash Flows
 Three months ended March 31,
(in millions)20222021
Operating activities
Consolidated net income $46.1 $54.9 
Adjustments to reconcile consolidated net income to net cash flows from operating activities:
Depreciation and amortization37.6 36.6 
Deferred income taxes(6.7)(2.5)
Stock-based compensation expense13.9 8.1 
Provision for bad debt 1.1 
Equity in net income of unconsolidated entities(0.4)(1.7)
Acquisition earn-out accrual7.1 5.7 
Other, net(9.0)(2.7)
Changes in operating assets and liabilities:
Accounts receivable(8.6)(26.3)
Accounts payable and accrued liabilities(2.7)(6.7)
Accrued compensation and deferred commissions(108.7)(61.7)
Income taxes, current17.1 4.1 
Deferred revenue53.8 60.9 
Other assets and liabilities(16.0)(5.6)
Cash provided by operating activities23.5 64.2 
Investing activities 
Purchases of investment securities(15.9)(20.9)
Proceeds from maturities and sales of investment securities18.2 15.3 
Capital expenditures(28.0)(22.7)
Acquisitions, net of cash acquired(6.8) 
Purchases of equity-method investments(1.0)(5.2)
Other, net(0.2)0.1 
Cash used for investing activities(33.7)(33.4)
Financing activities 
Common shares repurchased(110.6) 
Dividends paid(15.5)(13.5)
Proceeds from revolving credit facility175.0  
Repayment of revolving credit facility(30.0) 
Repayment of term facility (45.0)
Employee taxes withheld for restricted stock units(7.1)(6.3)
Other, net (1.2)
Cash provided by (used for) financing activities11.8 (66.0)
Effect of exchange rate changes on cash and cash equivalents(1.9)(3.7)
Net decrease in cash and cash equivalents(0.3)(38.9)
Cash and cash equivalents—beginning of period483.8 422.5 
Cash and cash equivalents—end of period$483.5 $383.6 
Supplemental disclosure of cash flow information: 
Cash paid for income taxes$7.0 $12.5 
Cash paid for interest$2.6 $3.1 
Supplemental information of non-cash investing activities:
Unrealized gain on available-for-sale investments$0.1 $1.5 

See notes to unaudited condensed consolidated financial statements.
10

MORNINGSTAR, INC. AND SUBSIDIARIES
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
 
1. 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, 2021, filed with the SEC on February 25, 2022 (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

2. 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.

Recently issued accounting pronouncements not yet adopted

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. The amendments in this update are applicable to contract modifications that replace a reference LIBOR rate beginning on March 12, 2020 through December 31, 2022. The optional expedients apply to our Credit Agreement and allow the Company to account for modifications due to reference rate reform by prospectively adjusting the effective interest rate on the Credit Agreement. As of March 31, 2022, we have not modified the Credit Agreement related to reference rate reform. In connection with the announcement of the acquisition of Leveraged Commentary and Data (LCD), the Company entered into a new financing commitment to support the transaction. The financing is comprised of a five-year term facility and a revolving credit facility, which will replace the Company's existing Credit Agreement, and will be used to finance a portion of the purchase price and for other general corporate purposes. The new financing commitment will not be based on LIBOR and therefore, reference rate reform is not applicable. See Note 14 for additional information on our planned acquisition of LCD and our financial commitment.

Business Combinations: On October 28, 2021, the FASB issued ASU No. 2021-08, Business Combinations: Accounting for Contract Assets and Contract Liabilities from Contracts with Customers (Topic 805) (ASU No. 2021-08), which requires contract assets and contract liabilities (i.e., deferred revenue) acquired in a business combination to be recognized and measured by the acquirer on the acquisition date in accordance with ASC 606, Revenue from Contracts with Customers. Generally, the new standard will result in the acquirer recognizing contract assets and contract liabilities at the same amounts recorded by the acquiree. Under current U.S. GAAP, contract assets and contract liabilities acquired in a business combination are recorded by the acquirer at fair value. ASU No. 2021-08 creates an exception to the general recognition and measurement principles of ASC 805, Business Combinations. The new standard is effective for us on January 1, 2023. Early adoption is permitted, including in an interim period, for any period for which financial statements have not yet been issued. Entities should apply the new guidance on a prospective basis to all business combinations with an acquisition date on or after the effective date. We have not made a decision on early adoption and are evaluating the effect that ASU No. 2021-08 will have on our consolidated financial statements, related disclosures, and results of operations.
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3. Credit Arrangements

Long-term Debt

The following table summarizes our long-term debt as of March 31, 2022 and December 31, 2021.
(in millions)As of March 31, 2022As of December 31, 2021
Term Facility, net of unamortized debt issuance costs of $0.1 million and $0.1 million, respectively
$11.0 $11.0 
Revolving Credit Facility145.0  
2.32% Senior Notes due October 26, 2030, net of unamortized debt issuance costs of $1.6 million and $1.6 million, respectively348.4 348.4 
Long-term debt$504.4 $359.4 

Credit Agreement

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 March 31, 2022, our total outstanding debt under the Credit Agreement was $156.0 million with borrowing availability of $155.0 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 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. Debt issuance costs related to the Revolving Credit Facility are amortized on a straight-line basis to interest expense over the term of the Credit Agreement. 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.

Private Placement Debt Offering

On October 26, 2020, we completed the issuance and sale of $350.0 million aggregate principal amount of 2.32% senior notes due October 26, 2030 (the 2030 Notes), in a private placement exempt from the registration requirements of the Securities Act of 1933, as amended. Proceeds were primarily used to pay off a portion of the Company's outstanding debt under the Credit Agreement. Starting on April 30, 2021, interest on the 2030 Notes will be paid semi-annually on each October 30 and April 30 during the term of the 2030 Notes and at maturity. As of March 31, 2022, our total outstanding debt, net of issuance costs, under the 2030 Notes was $348.4 million.

Compliance with Covenants

Each of the Credit Agreement and the 2030 Notes include customary representations, warranties, and covenants, including financial covenants, that require us to maintain specified ratios of consolidated earnings before interest, taxes, depreciation, and amortization (EBITDA) to consolidated interest charges and consolidated funded indebtedness to consolidated EBITDA, which are evaluated on a quarterly basis. We were in compliance with these financial covenants as of March 31, 2022.
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4. Acquisitions, Goodwill, and Other Intangible Assets

2022 Acquisitions
We did not make any significant acquisitions during the first quarter of 2022.

Goodwill
The following table shows the changes in our goodwill balances from December 31, 2021 to March 31, 2022:

 (in millions)
Balance as of December 31, 2021$1,207.0 
Foreign currency translation(4.4)
Balance as of March 31, 2022$1,202.6 
We did not record any goodwill impairment losses in the first three months of 2022 and 2021. 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 March 31, 2022As of December 31, 2021
(in millions)GrossAccumulated
Amortization
NetWeighted
Average
Useful  Life
(years)
GrossAccumulated
Amortization
NetWeighted
Average
Useful  Life
(years)
Customer-related assets$414.3 $(200.3)$214.0 11$413.7 $(192.8)$220.9 11
Technology-based assets238.4 (162.0)76.4 7232.3 (157.7)74.6 7
Intellectual property & other83.7 (52.5)31.2 883.0 (50.3)32.7 8
Total intangible assets$736.4 $(414.8)$321.6 10$729.0 $(400.8)$328.2 10
 
The following table summarizes our amortization expense related to intangible assets:

 Three months ended March 31,
(in millions)20222021
Amortization expense$14.1 $15.6 
 
We amortize intangible assets using the straight-line method over their expected economic useful lives.

Based on acquisitions completed through March 31, 2022, we expect intangible amortization expense for the remainder of 2022 and subsequent years to be as follows:
 (in millions)
Remainder of 2022 (April 1 through December 31)$42.7 
202353.2 
202447.0 
202538.4 
202634.5 
Thereafter105.8 
Total$321.6 
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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.

5. 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 March 31,
(in millions, except share and per share amounts)20222021
Basic net income per share:  
Consolidated net income $46.1 $54.9 
Weighted average common shares outstanding43.0 42.9 
Basic net income per share$1.07 $1.28 
Diluted net income per share:
Consolidated net income $46.1 $54.9 
Weighted average common shares outstanding43.0 42.9 
Net effect of dilutive stock options and restricted stock units0.3 0.4 
Weighted average common shares outstanding for computing diluted income per share43.3 43.3 
Diluted net income per share$1.06 $1.27 

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.

6. 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 March 31,
(in millions)20222021
License-based $311.9 $266.1 
Asset-based68.5 61.4 
Transaction-based76.6 65.3 
Consolidated revenue$457.0 $392.8 

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 1 to 3 years, and are accounted for as subscription services available to customers and not as a license under the accounting guidance. License-based revenue is generated from the sale of PitchBook, Morningstar Data, Morningstar Direct, Morningstar Sustainalytics, Morningstar Advisor Workstation, and other similar product licenses.
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Asset-based performance obligations are satisfied over time as the customer receives continuous access to a service for the term of the agreement. Asset-based arrangements typically have a term of 1 to 3 years. 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 may be refundable. The contract liabilities balance as of March 31, 2022 had a net increase of $52.2 million, primarily driven by cash payments received or payable in advance of satisfying our performance obligations. We recognized $155.8 million of revenue in the three months ended March 31, 2022 that was included in the contract liabilities balance as of December 31, 2021.

We expect to recognize revenue related to our contract liabilities for the remainder of 2022 and subsequent years as follows:
(in millions)As of March 31, 2022
Remainder of 2022 (from April 1 through December 31)$648.3 
2023232.0 
202471.6 
202521.6 
202611.2 
Thereafter32.0 
Total$1,016.7 

The aggregate amount of revenue we expect to recognize for the remainder of 2022 and subsequent years is higher than our contract liability balance of $466.0 million as of March 31, 2022. The difference represents the value of future obligations for signed contracts that have yet to be billed.

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 March 31, 2022. 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 1 to 3 years 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.

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As of March 31, 2022, 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 or the existence of cancellation terms that may be exercised causing the contract term to be less than one year from March 31, 2022. 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.

The following table summarizes our contract assets balance:
(in millions)As of March 31, 2022As of December 31, 2021
Accounts receivable, less allowance for credit losses$276.4 $268.9 
Deferred commissions66.5 62.3 
Total contract assets$342.9 $331.2 

7. 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 of 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 March 31,
(in millions)20222021
United States$328.2 $269.5 
Asia10.8 10.0 
Australia14.0 13.5 
Canada27.1 27.4 
Continental Europe41.3 36.2 
United Kingdom33.1 34.1 
Other2.5 2.1 
Total International128.8 123.3 
Consolidated revenue$457.0 $392.8 

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Property, equipment, and capitalized software, net by geographical area
(in millions)As of March 31, 2022As of December 31, 2021
United States$143.6 $139.3 
Asia10.7 8.8 
Australia3.0 3.1 
Canada3.3 3.8 
Continental Europe9.6 10.1 
United Kingdom6.0 6.4 
Other0.3 0.3 
Total International32.9 32.5 
Consolidated property, equipment, and capitalized software, net$176.5 $171.8 
Operating lease assets by geographical area
(in millions)As of March 31, 2022As of December 31, 2021
United States$79.0 $82.7 
Asia25.4 24.1 
Australia4.4 4.6 
Canada6.7 7.1 
Continental Europe15.7 15.8 
United Kingdom13.6 14.4 
Other0.6 0.5 
Total International66.4 66.5 
Consolidated operating lease assets$145.4 $149.2 

The long-lived assets by geographical area do not include deferred commissions, non-current as the balance is not material.

8. Fair Value Measurements

As of March 31, 2022 and December 31, 2021, our investment balances totaled $61.4 million and $62.3 million, respectively. We classify our investments into two categories: equity investments and debt securities. We further classify our debt securities into 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. Except for the convertible note described below, 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.




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As of March 31, 2022, financial assets and liabilities that are classified as Level 3 within the fair value hierarchy include a contingent consideration liability of $17.0 million and a convertible note recorded as an available-for-sale investment of $9.8 million.

As of March 31, 2022, the contingent consideration reflects potential future payments that are contingent upon the achievement of certain revenue metrics related to our acquisition of Morningstar Sustainalytics that will be paid by June 30, 2022. This additional purchase consideration, for which the amount is contingent, is recognized at fair value at the date of acquisition using a Monte Carlo simulation, which requires the use of management assumptions and inputs, such as projected financial information related to revenue growth and expected margin percentage, among other valuation related items, and is remeasured each reporting period until the contingency is resolved with any changes in fair value recorded in current period earnings. At March 31, 2022, the fair value of the contingent consideration liability was impacted by foreign currency translations and not by adjustments to key assumptions used in our fair value estimates compared to the assumptions used in the acquisition date fair value estimates.

The convertible note will be remeasured at fair value each reporting period until it is converted, with any gains or losses recorded in our Consolidated Statements of Income.

9. 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 of 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 12 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.

Our operating lease expense for the three months ended March 31, 2022 was $10.2 million, compared with $10.9 million for the three months ended March 31, 2021. Charges related to our operating leases that are variable and, therefore, not included in the measurement of the lease liabilities, were $3.9 million for the three months ended March 31, 2022, compared with $4.4 million for the three months ended March 31, 2021. We made lease payments of $10.8 million during the three months ended March 31, 2022, compared with $12.3 million during the three months ended March 31, 2021.


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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 2022 (April 1 through December 31)$31.3 
202340.4 
202429.4 
202523.0 
202619.5 
Thereafter40.4 
Total minimum lease commitments184.0 
Adjustment for discount to present value17.5 
Present value of lease liabilities
$166.5 

The following table summarizes the weighted-average remaining lease terms and weighted-average discount rates for our operating leases:
As of March 31, 2022
Weighted-average remaining lease term (in years)5.9
Weighted-average discount rate3.3 %

10. Stock-Based Compensation
 
Stock-Based Compensation Plans
 
All our employees and our non-employee directors are eligible for awards under the Morningstar Amended and Restated 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 March 31,
(in millions)20222021
Cost of revenue$2.5 $2.4 
Sales and marketing1.4 0.9 
General and administrative10.0 4.8 
Total stock-based compensation expense$13.9 $8.1 

As of March 31, 2022, the total unrecognized stock-based compensation cost related to outstanding restricted stock units, performance share awards, and market stock units expected to vest was $87.8 million, which we expect to recognize over a weighted average period of 22 months.



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11. Income Taxes

Effective Tax Rate

The following table shows our effective tax rate for the three months ended March 31, 2022 and March 31, 2021:

 Three months ended March 31,
(in millions)20222021
Income before income taxes and equity in net income (loss) of unconsolidated entities$63.0 $67.3 
Equity in net income of unconsolidated entities0.4 1.7 
Total$63.4 $69.0 
Income tax expense$17.3 $14.1 
Effective tax rate27.3 %20.4 %
 
Our effective tax rate in the first quarter of 2022 was 27.3% reflecting an increase of 6.9 percentage points, compared with the same period in the prior year. The change is primarily attributable to additional reserves that we recorded for uncertain tax positions in the first quarter of 2022 that increased our liability for unrecognized tax benefits.

Unrecognized Tax Benefits

The table below provides information concerning our gross unrecognized tax benefits as of March 31, 2022 and December 31, 2021, 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 March 31, 2022As of December 31, 2021
Gross unrecognized tax benefits$14.2 $11.4 
Gross unrecognized tax benefits that would affect income tax expense$14.2 $11.4 
Decrease in income tax expense upon recognition of gross unrecognized tax benefits$14.1 $11.2 

Our gross unrecognized tax benefits of $14.2 million at March 31, 2022 increased by $2.8 million compared with $11.4 million at December 31, 2021. The increase, which was recorded in the first quarter of 2022, was primarily attributable to a change in facts and circumstances regarding our assessment as to the realizability of certain unrecognized tax benefits for prior tax periods.

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 March 31, 2022As of December 31, 2021
Current liability$10.2 $7.2 
Non-current liability5.4 5.2 
Total liability for unrecognized tax benefits$15.6 $12.4 

Our total liability for unrecognized tax benefits of $15.6 million at March 31, 2022 increased by $3.2 million compared with $12.4 million at December 31, 2021. This increase reflects the change in our assessment as to the realizability of certain unrecognized tax benefits for prior tax periods.

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 2022. It is not possible to estimate the effect of current audits on previously recorded unrecognized tax benefits.

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Approximately 61% of our cash, cash equivalents, and investments balance as of March 31, 2022 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.

12. 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 any given time, we may be undergoing several such internal reviews and third-party vendor audits and the results and findings 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. In situations where more information or specific areas subject to audit are available, we may be able to estimate a potential range of losses. 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. Our financial results as of March 31, 2022 include an immaterial accrual related to certain in-progress audits and reviews.

Credit Ratings Matters
On April 12, 2022, Morningstar Credit Ratings, LLC (MCR) reached an agreement in principle with the staff of the SEC to settle the civil action filed by the SEC in the United States District Court for the Southern District of New York on February 16, 2021. The SEC’s complaint related to MCR’s former commercial mortgage-backed securities ratings methodology during the period from 2015 to March 2017. MCR was formerly registered with the SEC as a Nationally Recognized Statistical Ratings Organization (NRSRO), but effective in December 2019, it withdrew its NRSRO registration. On April 19, 2021, MCR filed a motion to dismiss the SEC’s complaint. On January 5, 2022, the Court issued a written decision dismissing one of the three counts of the SEC’s complaint as well the SEC’s request for a permanent injunction against MCR. The proposed settlement would fully resolve this matter on a neither-admit-nor-deny basis and would involve a civil money penalty of $1.15 million. The settlement remains subject to approval by the SEC and the Court. Our financial results as of March 31, 2022 include an immaterial accrual related to this matter. We do not believe this proposed settlement will have a material adverse effect on our business, operating results, or financial position.

Given the nature of its credit ratings activities, DBRS, Inc. and its credit rating affiliates (collectively, DBRS) are subject to legal and tax proceedings, governmental, regulatory, and legislative investigations, subpoenas and other inquiries, and claims and litigation by governmental and private parties that are based on ratings assigned by these entities or that are otherwise incidental to their business. DBRS is subject to periodic reviews, inspections, examinations, and investigations by regulators in the U.S. and other jurisdictions, any of which may result in claims, legal proceedings, assessments, fines, penalties, disgorgement, or restrictions on business activities. While it is difficult to predict the outcome of any 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.


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Other Matters
We are involved from time to time in regulatory investigations, examinations, 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.

13. Share Repurchase Program
 
In December 2020, the board of directors approved a new share repurchase program that authorizes the Company to repurchase up to $400.0 million in shares of the Company's outstanding common stock, effective January 1, 2021. The new authorization expires on December 31, 2023. Under this authorization, 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.

For the three months ended March 31, 2022, we repurchased a total of 402,971 shares for $110.6 million. As of March 31, 2022, we have repurchased a total of 407,871 shares for $111.9 million, leaving $288.1 million available for future repurchases.

14. Subsequent Events

Planned acquisition of Leveraged Commentary & Data

On April 4, 2022, Morningstar announced it had reached an agreement to acquire Leveraged Commentary & Data (LCD), a market leader in news, research, data, insights, and indexes for the leveraged finance market from S&P Global. The purchase price is up to $650.0 million in cash, comprised of $600.0 million at closing, subject to certain adjustments, and a contingent payment of up to $50.0 million six months after closing, upon the achievement of certain conditions related to the transition of LCD customer relationships. The closing of the transaction is subject to customary closing conditions and is expected to occur early in the third quarter of 2022.

In conjunction with the announcement of the pending acquisition of LCD, the Company entered into a financing commitment for up to $1.1 billion to support the transaction. The financing is comprised of a five-year term facility and a revolving credit facility, which will replace the Company's existing Credit Agreement, and will be used to finance a portion of the purchase price and for other general corporate purposes.

Credit Ratings Matter

On April 12, 2022, Morningstar Credit Ratings, LLC (MCR) reached an agreement in principle with the staff of the SEC to settle the civil action filed by the SEC in the United States District Court for the Southern District of New York on February 16, 2021. The proposed settlement would fully resolve this matter on a neither-admit-nor-deny basis and would involve a civil money penalty of $