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Table of Contents

 

UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington D.C. 20549
 

FORM 10-Q
 
x QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
FOR THE QUARTERLY PERIOD ENDED September 30, 2017
OR
o 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) 
mlogored2a01a09.jpg
Illinois
 
36-3297908
(State or Other Jurisdiction of
 
(I.R.S. Employer
Incorporation or Organization)
 
Identification Number)
 
 
 
22 West Washington Street
 
 
Chicago, Illinois
 
60602
(Address of Principal Executive Offices)
 
(Zip Code)
  (312) 696-6000
(Registrant’s Telephone Number, Including Area Code)
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 and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted 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 and post 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, 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   x
Accelerated filer  o
Non-accelerated filer   o
Smaller reporting company  o
Emerging growth company  o
 
 
(Do not check if a smaller reporting 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 o No x
As of October 20, 2017, there were 42,529,709 shares of the Company’s common stock, no par value, outstanding.
 


Table of Contents

MORNINGSTAR, INC. AND SUBSIDIARIES
INDEX
 
 
 
 
 
 
 
 
 
 
 
 
 
Unaudited Condensed Consolidated Statements of Income for the three and nine months ended September 30, 2017 and 2016
 
 
 
 
 
 
 
 
Unaudited Condensed Consolidated Statements of Comprehensive Income for the three and nine months ended September 30, 2017 and 2016
 
 
 
 
 
 
 
 
Unaudited Condensed Consolidated Balance Sheets as of September 30, 2017 and December 31, 2016
 
 
 
 
 
 
 
 
Unaudited Condensed Consolidated Statement of Equity for the nine months ended September 30, 2017
 
 
 
 
 
 
 
 
Unaudited Condensed Consolidated Statements of Cash Flows for the nine months ended September 30, 2017 and 2016
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 


2

Table of Contents

PART 1.
FINANCIAL INFORMATION
Item 1.
Financial Statements

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Morningstar, Inc. and Subsidiaries
Unaudited Condensed Consolidated Statements of Income
 
 
Three months ended September 30
 
Nine months ended September 30
(in millions except per share amounts)
 
2017

 
2016

 
2017

 
2016

 
 
 
 
 
 
 
 
 
Revenue
 
$
229.9

 
$
196.1

 
$
668.6

 
$
586.4

 
 
 
 
 
 
 
 
 
Operating expense:
 
 
 
 
 
 
 
 
Cost of revenue
 
90.9

 
84.9

 
283.2

 
256.3

Sales and marketing
 
31.1

 
23.1

 
100.2

 
71.1

General and administrative
 
33.3

 
25.8

 
93.2

 
76.1

Depreciation and amortization
 
21.8

 
18.1

 
64.8

 
52.0

Total operating expense
 
177.1

 
151.9

 
541.4

 
455.5

 
 
 
 
 
 
 
 
 
Operating income
 
52.8

 
44.2

 
127.2

 
130.9

 
 
 
 
 
 
 
 
 
Non-operating income (expense):
 
 

 
 

 
 
 
 
Interest income (expense), net
 
(0.9
)
 
—

 
(2.6
)
 
0.3

Gain on sale of investments, reclassified from other comprehensive income
 
0.3

 
0.3

 
1.1

 
0.5

Gain on sale of business
 
—

 
—

 
17.5

 
—

Other income (expense), net
 
(1.4
)
 
1.8

 
(4.0
)
 
4.8

Non-operating income (expense), net
 
(2.0
)
 
2.1

 
12.0

 
5.6

 
 
 
 
 
 
 
 
 
Income before income taxes and equity in net income (loss) of unconsolidated entities
 
50.8

 
46.3

 
139.2

 
136.5

 
 
 
 
 
 
 
 
 
Equity in net income (loss) of unconsolidated entities
 
—

 
0.4

 
(1.0
)
 
0.7

 
 
 
 
 
 
 
 
 
Income tax expense
 
16.9

 
16.5

 
40.2

 
46.5

 
 
 
 
 
 
 
 
 
Consolidated net income
 
$
33.9

 
$
30.2

 
$
98.0

 
$
90.7

 
 
 
 
 
 
 
 
 
Net income per share:
 
 

 
 

 
 
 
 
Basic
 
$
0.80

 
$
0.70

 
$
2.29

 
$
2.11

Diluted
 
$
0.79

 
$
0.70

 
$
2.28

 
$
2.09

 
 
 
 
 
 
 
 
 
Dividends per common share:
 
 
 
 
 
 
 
 
Dividends declared per common share
 
$
—

 
$
0.22

 
$
0.46

 
$
0.66

Dividends paid per common share
 
$
0.23

 
$
0.22

 
$
0.69

 
$
0.66

 
 
 
 
 
 
 
 
 
Weighted average shares outstanding:
 
 
 
 
 
 
 
 
Basic
 
42.5

 
43.1

 
42.8

 
43.0

Diluted
 
42.8

 
43.3

 
43.1

 
43.3


See notes to unaudited condensed consolidated financial statements.


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

 
 
Three months ended September 30
 
Nine months ended September 30
(in millions) 
 
2017

 
2016

 
2017

 
2016

 
 
 
 
 
 
 
 
 
Consolidated net income
 
$
33.9

 
$
30.2

 
$
98.0

 
$
90.7

 
 
 
 
 
 
 
 
 
Other comprehensive income (loss):
 
 
 
 
 
 
 
 
Foreign currency translation adjustment
 
10.0

 
(1.7
)
 
29.9

 
(9.8
)
Unrealized gains (losses) on securities, net of tax:
 
 
 
 
 
 
 
 
  Unrealized holding gains arising during period
 
0.9

 
0.6

 
3.5

 
1.1

  Reclassification gains (losses) included in net
  income
 
(0.3
)
 
0.2

 
(0.8
)
 
—

Other comprehensive income (loss)
 
10.6

 
(0.9
)
 
32.6

 
(8.7
)
 
 
 
 
 
 
 
 
 
Comprehensive income
 
$
44.5

 
$
29.3

 
$
130.6

 
$
82.0


See notes to unaudited condensed consolidated financial statements.



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Morningstar, Inc. and Subsidiaries
Unaudited Condensed Consolidated Balance Sheets
 
 
As of September 30
 
As of December 31
(in millions except share amounts)
 
2017

 
2016

Assets
 
 

 
 

Current assets:
 
 

 
 

Cash and cash equivalents
 
$
270.3

 
$
259.1

Investments
 
53.7

 
44.9

Accounts receivable, less allowance of $2.6 and $2.1, respectively
 
148.2

 
145.8

Other current assets
 
25.7

 
22.2

Total current assets
 
497.9

 
472.0

Property, equipment, and capitalized software, less accumulated depreciation and amortization of $263.4 and $214.8, respectively
 
151.2

 
152.1

Investments in unconsolidated entities
 
61.5

 
40.3

Goodwill
 
565.4

 
556.8

Intangible assets, net
 
100.9

 
120.9

Other assets
 
6.8

 
8.8

Total assets
 
$
1,383.7

 
$
1,350.9

 
 
 
 
 
Liabilities and equity
 
 

 
 

Current liabilities:
 
 

 
 

Accounts payable and accrued liabilities
 
$
32.6

 
$
44.6

Accrued compensation
 
72.4

 
71.7

Deferred revenue
 
174.1

 
165.4

Other current liabilities
 
15.5

 
13.2

Total current liabilities
 
294.6

 
294.9

Accrued compensation
 
11.0

 
10.3

Deferred tax liability, net
 
39.9

 
38.2

Long-term debt
 
205.0

 
250.0

Deferred rent
 
23.9

 
24.8

Other long-term liabilities
 
30.1

 
35.9

Total liabilities
 
604.5

 
654.1

 
 
 
 
 
Equity:
 
 

 
 

Morningstar, Inc. shareholders’ equity:
 
 

 
 

Common stock, no par value, 200,000,000 shares authorized, of which 42,529,709 and 42,932,994 shares were outstanding as of September 30, 2017 and December 31, 2016, respectively
 
—

 
—

Treasury stock at cost, 10,627,537 and 10,106,249 shares as of September 30, 2017 and December 31, 2016, respectively
 
(707.5
)
 
(667.9
)
Additional paid-in capital
 
595.4

 
584.0

Retained earnings
 
940.2

 
861.9

Accumulated other comprehensive loss:
 
 
 
 
    Currency translation adjustment
 
(51.4
)
 
(81.3
)
    Unrealized gain (loss) on available-for-sale investments
 
2.5

 
(0.2
)
Total accumulated other comprehensive loss
 
(48.9
)
 
(81.5
)
Total Morningstar, Inc. shareholders’ equity
 
779.2

 
696.5

Noncontrolling interest
 
—

 
0.3

Total equity
 
779.2

 
696.8

Total liabilities and equity
 
$
1,383.7

 
$
1,350.9


See notes to unaudited condensed consolidated financial statements.

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Morningstar, Inc. and Subsidiaries
Unaudited Condensed Consolidated Statement of Equity
For the nine months ended September 30, 2017
 
 
 
Morningstar, Inc. Shareholders’ Equity
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Accumulated
Other
Comprehensive
Loss

 
 
 
 
 
 
Common Stock
 
 

 
Additional
Paid-in
Capital

 
 
 
 
Non-
Controlling
Interest

 
 
(in millions, except share amounts)
 
Shares
Outstanding

 
Par
Value

 
Treasury
Stock

 
 
Retained
Earnings

 
 
 
Total
Equity

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Balance as of December 31, 2016
 
42,932,994

 
$
—

 
$
(667.9
)
 
$
584.0

 
$
861.9

 
$
(81.5
)
 
$
0.3

 
$
696.8

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Net income
 
 
 
—

 
—

 
—

 
98.0

 
—

 
—

 
98.0

Other comprehensive income (loss):
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Unrealized gain on available-for-sale investments, net of income tax of $1.1
 
 
 
—

 
—

 
—

 
—

 
3.5

 
—

 
3.5

Reclassification of adjustments for gain included in net income, net of income tax of $0.3
 
 
 
—

 
—

 
—

 
—

 
(0.8
)
 
—

 
(0.8
)
Foreign currency translation adjustment, net
 
 
 
—

 
—

 
—

 
—

 
29.9

 
—

 
29.9

Other comprehensive income, net
 
 
 
—

 
—

 
—

 
—

 
32.6

 
—

 
32.6

Issuance of common stock related to option exercises and vesting of restricted stock units, net of shares withheld for taxes on settlements of restricted stock units
 
130,086

 
—

 
1.0

 
(4.2
)
 
—

 
—

 
—

 
(3.2
)
Stock-based compensation
 
 
 
—

 
—

 
16.5

 
—

 
—

 
—

 
16.5

Common shares repurchased
 
(533,371
)
 
—

 
(40.6
)
 
—

 
—

 
—

 
—

 
(40.6
)
Dividends declared
 
 
 
—

 
—

 
—

 
(19.7
)
 
—

 
—

 
(19.7
)
Purchase of additional interest in majority-owned investment
 
 
 
—

 
—

 
(0.9
)
 
—

 
—

 
(0.3
)
 
(1.2
)
Balance as of September 30, 2017
 
42,529,709

 
$
—

 
$
(707.5
)
 
$
595.4

 
$
940.2

 
$
(48.9
)
 
$
—

 
$
779.2

 
See notes to unaudited condensed consolidated financial statements.



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Morningstar, Inc. and Subsidiaries
Unaudited Condensed Consolidated Statements of Cash Flows
 
 
Nine months ended September 30
(in millions)
 
2017

 
2016

 
 
 
 
 
Operating activities
 
 
 
 

Consolidated net income
 
$
98.0

 
$
90.7

Adjustments to reconcile consolidated net income to net cash flows from operating activities:
 
 
 
 
Depreciation and amortization
 
64.8

 
52.0

Deferred income taxes
 
1.0

 
(2.9
)
Stock-based compensation expense
 
16.5

 
10.6

Provision for bad debt
 
1.3

 
0.7

Equity in net income (loss) of unconsolidated entities
 
1.0

 
(0.7
)
Gain on sale of business
 
(17.5
)

—

Other, net
 
2.9

 
(5.2
)
Changes in operating assets and liabilities, net of effects of acquisitions:
 


 


Accounts receivable
 
(0.3
)
 
13.1

Other assets
 
(3.0
)
 
(1.4
)
Accounts payable and accrued liabilities
 
(4.3
)
 
(3.9
)
Accrued compensation
 
0.2

 
(20.8
)
Income taxes—current
 
1.6

 
6.3

Deferred revenue
 
6.2

 
4.1

Deferred rent
 
(1.1
)
 
(2.7
)
Other liabilities
 
(2.6
)
 
3.3

Cash provided by operating activities
 
164.7

 
143.2

 
 
 
 
 
Investing activities
 
 
 
 

Purchases of investments
 
(22.7
)
 
(24.4
)
Proceeds from maturities and sales of investments
 
20.6

 
21.6

Capital expenditures
 
(46.4
)
 
(47.5
)
Acquisitions, net of cash acquired
 
(1.0
)
 
(15.8
)
Proceeds from sale of a business
 
23.7

 
—

Purchases of equity- and cost-method investments
 
(24.3
)
 
(16.4
)
Other, net
 
0.6

 
—

Cash used for investing activities
 
(49.5
)
 
(82.5
)
 
 
 
 
 
Financing activities
 
 
 
 

Common shares repurchased
 
(41.3
)
 
(38.8
)
Dividends paid
 
(29.6
)
 
(28.5
)
Proceeds from short-term debt
 
—

 
40.0

Repayment of short-term debt
 
—

 
(15.0
)
Repayment of long-term debt
 
(45.0
)
 
—

Proceeds from stock-option exercises
 
0.2

 
0.4

Employee taxes paid from withholding of restricted stock units
 
(3.4
)
 
(4.4
)
Other, net
 
(0.4
)
 
—

Cash used for financing activities
 
(119.5
)
 
(46.3
)
 
 
 
 
 
Effect of exchange rate changes on cash and cash equivalents
 
15.5

 
(2.1
)
Net increase in cash and cash equivalents
 
11.2

 
12.3

Cash and cash equivalents—beginning of period
 
259.1

 
207.1

Cash and cash equivalents—end of period
 
$
270.3

 
$
219.4

 
 
 
 
 
Supplemental disclosure of cash flow information:
 
 
 
 

Cash paid for income taxes
 
$
37.5

 
$
43.3

Cash paid for interest
 
$
3.8

 
$
0.8

Supplemental information of non-cash investing and financing activities:
 
 
 
 
Unrealized gain on available-for-sale investments
 
$
3.5

 
$
1.5

Software and equipment obtained under long-term financing arrangement
 
$
3.1

 
$
9.0

 
See notes to unaudited condensed consolidated financial statements.

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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, revenue, and expenses. Actual results could differ from those estimates. In the opinion of management, the statements reflect all adjustments, which are of a normal recurring nature, necessary to present fairly our financial position, results of operations, equity, and cash flows. These financial statements and notes are unaudited and should be read in conjunction with our Audited Consolidated Financial Statements and Notes thereto included in our Annual Report on Form 10-K for the year ended December 31, 2016, filed with the SEC on February 28, 2017 (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

We discuss our significant accounting policies in Note 2 of our Audited Consolidated Financial Statements included in our Annual Report.

On May 28, 2014, the FASB issued ASU No. 2014-09, Revenue from Contracts with Customers, which requires an entity to recognize the amount of revenue to which it expects to be entitled for the transfer of promised goods or services to customers. The ASU will replace most existing revenue recognition guidance in U.S. GAAP when it becomes effective. The original effective date for ASU 2014-09 would have required us to adopt it beginning on January 1, 2017. In August 2015, the FASB issued ASU No. 2015-14, Revenue from Contracts with Customers—Deferral of the Effective Date, which defers the effective date of ASU 2014-09 for one year and permits early adoption as early as the original effective date of ASU 2014-09. We elected the deferral, and the new standard is effective for us on January 1, 2018.

The company has obtained an understanding of ASU No. 2014-09 and is in the process of analyzing the impact of the new standard on its financial results. We have completed a high-level assessment of the attributes within the company’s contracts for its major products and services, and we have started assessing potential impacts to our internal processes, control environment, and disclosures. While the company does not currently anticipate that the adoption of ASU No. 2014-09 will result in a material change to the timing of when revenue is recognized and believes that it will retain similar accounting treatment used to recognize revenue under current standards. We have identified that there will be certain changes in accounting treatment related to delivery of third-party content (principal vs. agent) and costs to obtain contracts (e.g., sales commissions). We are finalizing our assessment and quantifying the impacts related to these matters but do not expect them to be material. We are continuing to assess the impact of the new standard on our financial results and other possible impacts. The standard allows for both retrospective and modified retrospective methods of adoption. We plan to adopt using the modified retrospective transition method applied to those contracts which were not completed as of January 1, 2018. Upon adoption, we will recognize the cumulative effect of adopting this guidance as an adjustment to our opening balance of retained earnings. Prior periods will not be retrospectively adjusted. We are evaluating the effect that ASU 2014-09 will have on our consolidated financial statements and related disclosures. We will continue to provide enhanced disclosures as we continue our assessment.




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On March 17, 2016, the FASB issued ASU No. 2016-08, Revenue from Contracts with Customers: Principal versus Agent Considerations (Reporting Revenue Gross versus Net), which provides guidance on assessing whether an entity is a principal or an agent in a revenue transaction and whether an entity reports revenue on a gross or net basis. On April 14, 2016, the FASB issued ASU No. 2016-10, Revenue from Contracts with Customers: Identifying Performance Obligations and Licensing, which provides guidance on identifying performance obligations and accounting for licenses of intellectual property. On May 6, 2016, the FASB issued ASU No. 2016-11, Revenue Recognition and Derivatives and Hedging: Rescission of SEC guidance because of ASU No. 2014-09 and ASU No. 2014-16 pursuant to staff announcements at the March 3, 2016 EITF Meeting, which rescinds the following SEC Staff Observer comments from ASC 605, Revenue Recognition, upon an entity's early adoption of ASC 606, Revenue from Contracts with Customers: Revenue and expense recognition for freight services in process, accounting for shipping and handling fees and costs, and accounting for consideration given by a vendor to a customer (including a reseller of the vendor's products). On May 9, 2016, the FASB issued ASU No. 2016-12, Revenue from Contracts with Customers: Narrow-Scope Improvements and Practical Expedients, which makes narrow-scope amendments to ASU No. 2014-09 and provides practical expedients to simplify the transition to the new standard and clarify certain aspects of the standard. On December 21, 2016, the FASB issued ASU No. 2016-20, Technical Corrections and Improvements to Topic 606, Revenue from Contracts with Customers, which makes narrow-scope amendments to ASU No. 2014-09.

The effective date and transition requirements for ASU No. 2016-08, ASU No. 2016-10, ASU No. 2016-11, ASU No. 2016-12, and ASU No. 2016-20 are the same as the effective date and transition requirements of ASU No. 2014-09. We are evaluating the effect that ASU No. 2016-08, ASU No. 2016-10, ASU No. 2016-11, ASU No. 2016-12, and ASU No. 2016-20 will have on our consolidated financial statements and related disclosures.

On February 25, 2016, the FASB issued ASU No. 2016-02, Leases, which will require lessees to recognize almost all leases on their balance sheet as a right-of-use asset and a lease liability. The new standard is effective for us on January 1, 2019. The new standard must be adopted using a modified retrospective transition, and provides for certain practical expedients. Transition will require application of the new guidance at the beginning of the earliest comparative period presented. We are evaluating the effect that ASU No. 2016-02 will have on our consolidated financial statements and related disclosures.

On August 26, 2016, the FASB issued ASU No. 2016-15, Statement of Cash Flows: Classification of Certain Cash Receipts and Cash Payments, which reduces diversity in practice of how certain transactions are classified in the statement of cash flows. The new guidance clarifies the classification of cash activities related to debt prepayment or debt extinguishment costs, settlement of zero-coupon debt instruments, contingent consideration payments made after a business combination, proceeds from the settlement of insurance claims, proceeds from the settlement of corporate and bank-owned life insurance policies, distributions received from equity-method investments, and beneficial interests in securitization transactions. The guidance also describes a predominance principle in which cash flows with aspects of more than one class that cannot be separated should be classified based on the activity that is likely to be the predominant source or use of cash flow.

The new standard is effective for us on January 1, 2018. Early adoption is permitted, including adoption in an interim period, but requires all elements of the amendments to be adopted at once rather than individually. The new standard must be adopted using a retrospective transition method. We are evaluating the effect that ASU No. 2016-15 will have on our consolidated financial statements and related disclosures.

On January 5, 2017, the FASB issued ASU No. 2017-01, Business Combinations: Clarifying the Definition of a Business, which revises the definition of a business. When substantially all of the fair value of gross assets acquired is concentrated in a single asset (or a group of similar assets), the assets acquired would not represent a business. To be considered a business, an acquisition would have to include an input and a substantive process that together significantly contribute to the ability to create outputs. The new guidance provides a framework to evaluate when an input and substantive process are present (including for early-stage companies that have not generated outputs). To be a business without outputs, there will now need to be an organized workforce. The new guidance also narrows the definition of the term outputs to be consistent with how it is described in Topic 606, Revenue from Contracts with Customers. The new standard is effective for us on January 1, 2018. Early adoption is permitted. We are evaluating the effect that ASU No. 2017-01 will have on our consolidated financial statements and related disclosures.


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On January 26, 2017, the FASB issued ASU No. 2017-04, Intangibles—Goodwill and Other, which simplifies the accounting for goodwill impairment. The guidance removes Step 2 of the goodwill impairment test, which requires a hypothetical purchase price allocation. A goodwill impairment will now be the amount by which a reporting unit’s carrying value exceeds its fair value, not to exceed the carrying amount of goodwill. All other goodwill impairment guidance will remain largely unchanged. Entities will continue to have the option to perform a qualitative assessment to determine if a quantitative impairment test is necessary. The same one-step impairment test will be applied to goodwill at all reporting units, even those with zero or negative carrying amounts. Entities will be required to disclose the amount of goodwill at reporting units with zero or negative carrying amounts. The new standard is effective for us on January 1, 2020. The new standard should be applied prospectively. Early adoption is permitted for any impairment tests performed after January 1, 2017. We are evaluating the effect that ASU No. 2017-04 will have on our consolidated financial statements and related disclosures.

On May 10, 2017, the FASB issued ASU No. 2017-09, Compensation—Stock Compensation: Scope of Modification Accounting, which clarifies when to account for a change to the terms or conditions of a share-based payment award as a modification. Under the new guidance, modification accounting is required only if the fair value, the vesting conditions, or the classification of the award (as equity or liability) changes as a result of the change in terms or conditions. The new standard is effective for us on January 1, 2018. The new standard should be applied prospectively. Early adoption is permitted. We are evaluating the effect that ASU No. 2017-09 will have on our consolidated financial statements and related disclosures.

3. Credit Arrangements

In November 2016, we amended our credit agreement to provide us with a three-year credit facility with a borrowing capacity of up to $300.0 million. The credit agreement also provides for issuance of up to $25.0 million of letters of credit 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 1.75%, based on our consolidated leverage ratio or (ii) the lender's base rate plus the applicable margin for such loans, which ranges between 2.00% and 2.75%, based on our consolidated leverage ratio.

The credit agreement also contains financial covenants under which we: (i) may not exceed a maximum consolidated leverage ratio of 3.00 to 1.00 and (ii) are required to maintain a minimum consolidated interest coverage ratio of not less than 3.00 to 1.00. We were in compliance with the financial covenants as of September 30, 2017.

We had an outstanding principal balance of $205.0 million at a one-month LIBOR interest rate plus 100 basis points as of September 30, 2017, leaving borrowing availability of $95.0 million.

4. Acquisitions, Goodwill, and Other Intangible Assets

2017 Acquisitions

We did not complete any significant acquisitions in the first nine months of 2017.

2016 Acquisitions

In the third quarter of 2017, we did not make any significant changes to the preliminary purchase price allocation related to our acquisition of PitchBook Data, Inc. compared with the preliminary estimates at December 31, 2016. The values assigned to various assets and liabilities in the preliminary purchase price allocation are subject to change as a result of information that may become available in the future.

As of September 30, 2017, the primary areas of the preliminary purchase price allocation that are not yet finalized include the fair values of acquired intangible assets and related deferred tax liabilities, assumed deferred revenue, and assumed tax assets and liabilities.

Additional information concerning this acquisition can be found in the Audited Consolidated Financial Statements and Notes thereto included in our Annual Report.


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Goodwill
 
The following table shows the changes in our goodwill balances from December 31, 2016 to September 30, 2017:
 
 
 
(in millions)

Balance as of December 31, 2016
 
$
556.8

Divestiture of HelloWallet (See Note 5)
 
(2.4
)
Foreign currency translation and adjustments to purchase price allocation
 
11.0

Balance as of September 30, 2017
 
$
565.4


We did not record any impairment losses in the first nine months of 2017 and 2016. We perform our annual impairment reviews in the fourth quarter.

Intangible Assets

The following table summarizes our intangible assets: 
 
 
As of September 30, 2017
 
As of December 31, 2016
(in millions)
 
Gross

 
Accumulated
Amortization

 
Net

 
Weighted
Average
Useful  Life
(years)
 
Gross

 
Accumulated
Amortization

 
Net

 
Weighted
Average
Useful  Life
(years)
Intellectual property
 
$
31.5

 
$
(28.7
)
 
$
2.8

 
9
 
$
30.9

 
$
(27.4
)
 
$
3.5

 
9
Customer-related assets
 
156.5

 
(106.2
)
 
50.3

 
12
 
152.0

 
(97.7
)
 
54.3

 
12
Supplier relationships
 
0.2

 
(0.1
)
 
0.1

 
20
 
0.2

 
(0.1
)
 
0.1

 
20
Technology-based assets
 
127.8

 
(80.7
)
 
47.1

 
7
 
133.2

 
(72.1
)
 
61.1

 
7
Non-competition agreements
 
2.5

 
(1.9
)
 
0.6

 
5
 
5.0

 
(3.1
)
 
1.9

 
5
Total intangible assets
 
$
318.5

 
$
(217.6
)
 
$
100.9

 
10
 
$
321.3

 
$
(200.4
)
 
$
120.9

 
10
 
The following table summarizes our amortization expense related to intangible assets:
 
 
Three months ended September 30
 
Nine months ended September 30
(in millions)
 
2017

 
2016

 
2017

 
2016

Amortization expense
 
$
5.5

 
$
4.5

 
$
18.1

 
$
14.3

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

We expect intangible amortization expense for the remainder of 2017 and subsequent years as follows:
 
 
(in millions)

Remainder of 2017 (from October 1 through December 31)
 
$
5.6

2018
 
20.7

2019
 
19.2

2020
 
16.3

2021
 
13.0

Thereafter
 
26.1

 
Our estimates of future amortization expense for intangible assets may be affected by acquisitions, divestitures, changes in the estimated average useful life, and foreign currency translation.


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5. Divestiture

In June 2014, we acquired the remaining 81.3% interest in HelloWallet Holdings, Inc. (HelloWallet), increasing our ownership to 100%. This valued HelloWallet at $54.0 million, an amount that included $39.2 million of goodwill and $9.5 million of intangible assets.

On June 30, 2017, we sold HelloWallet to KeyBank National Association, a bank-based financial services company. We recorded a noncash gain on the sale of $17.5 million. This gain mainly represents the sale proceeds of $23.7 million less $2.4 million of goodwill and the write-off of the remaining net book value on the acquired intangible assets. As some aspects of HelloWallet had been integrated into Morningstar's single reporting unit, the goodwill attributable to this transaction was calculated using a relative fair value allocation method.

The sale of HelloWallet did not meet the criteria to be classified as a discontinued operation because the divestiture did not represent a strategic shift that has, or will have, a major effect on our operations and financial results.

The following table summarizes the amounts included in the gain on sale of business for the nine months ended September 30, 2017:
 
 
Nine months ended September 30
(in millions)
 
2017

Proceeds received
 
$
23.7

Intangibles and internally developed software
 
(4.6
)
Goodwill
 
(2.4
)
Other assets and liabilities
 
0.8

Total gain on sale of business
 
$
17.5


6. Income Per Share 

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

 
 
Three months ended September 30
 
Nine months ended September 30
(in millions, except per share amounts)
 
2017

 
2016

 
2017

 
2016

 
 
 
 
 
 
 
 
 
Basic net income per share:
 
 

 
 

 
 
 
 
Consolidated net income
 
$
33.9

 
$
30.2

 
$
98.0

 
$
90.7

 
 
 
 
 
 
 
 
 
Weighted average common shares outstanding
 
42.5

 
43.1

 
42.8

 
43.0

 
 
 
 
 
 
 
 
 
Basic net income per share
 
$
0.80

 
$
0.70

 
$
2.29

 
$
2.11

 
 
 
 
 
 
 
 
 
Diluted net income per share:
 
 
 
 
 
 
 
 
Consolidated net income
 
$
33.9

 
$
30.2

 
$
98.0

 
$
90.7

 
 
 
 
 
 
 
 
 
Weighted average common shares outstanding
 
42.5

 
43.1

 
42.8

 
43.0

Net effect of dilutive stock options, restricted stock units, and performance share awards
 
0.3

 
0.2

 
0.3

 
0.3

Weighted average common shares outstanding for computing diluted income per share
 
42.8

 
43.3

 
43.1

 
43.3

 
 
 
 
 
 
 
 
 
Diluted net income per share
 
$
0.79

 
$
0.70

 
$
2.28

 
$
2.09


The number of weighted average restricted stock units, performance share awards, and market stock units excluded from our calculation of diluted earnings per share because their inclusion would have been anti-dilutive was immaterial during the periods presented.

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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 one reportable segment, all required financial segment information can be found directly in the Unaudited Condensed Consolidated Financial Statements.

The accounting policies for our single reportable segment are the same as those described in “Note 2. Summary of Significant Accounting Policies” included in the Audited Consolidated Financial Statements and Notes thereto included in our Annual Report. We evaluate the performance of our reporting segment based on revenue and operating income.

Geographical Area Information

The tables below summarize our revenue and long-lived assets by geographical area:

External revenue by geographical area
 
 
 
 
 
 
 
 
 
 
Three months ended September 30
 
Nine months ended September 30
(in millions)
 
2017

 
2016

 
2017

 
2016

United States
 
$
171.8

 
$
143.5

 
$
503.4

 
$
430.6

 
 
 
 
 
 
 
 
 
United Kingdom
 
17.0

 
15.2

 
47.5

 
45.8

Continental Europe
 
18.2

 
16.0

 
51.0

 
47.3

Australia
 
8.8

 
8.3

 
25.5

 
24.1

Canada
 
7.5

 
7.1

 
22.0

 
20.6

Asia
 
5.3

 
5.0

 
15.7

 
15.1

Other
 
1.3

 
1.0

 
3.5

 
2.9

Total International
 
58.1

 
52.6

 
165.2

 
155.8

 
 
 
 
 
 
 
 
 
Consolidated revenue
 
$
229.9

 
$
196.1

 
$
668.6

 
$
586.4


Long-lived assets by geographical area
 
 
 
 
 
 
As of September 30
 
As of December 31
(in millions)
 
2017

 
2016

United States
 
$
136.7

 
$
139.1

 
 
 
 
 
United Kingdom
 
6.1

 
6.6

Continental Europe
 
1.8

 
1.9

Australia
 
1.1

 
0.6

Canada
 
0.2

 
0.4

Asia
 
5.2

 
3.4

Other
 
0.1

 
0.1

Total International
 
14.5

 
13.0

 
 
 
 
 
Consolidated property, equipment, and capitalized software, net
 
$
151.2

 
$
152.1



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8. Investments and Fair Value Measurements

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. We classify our investment portfolio as shown below:
 
 
 
As of September 30
 
As of December 31
(in millions)
 
2017

 
2016

Available-for-sale
 
$
32.4

 
$
27.7

Held-to-maturity
 
19.7

 
15.7

Trading securities
 
1.6

 
1.5

Total
 
$
53.7

 
$
44.9


The following table shows the cost, unrealized gains (losses), and fair value of investments classified as available-for-sale and held-to-maturity:
 
 
 
As of September 30, 2017
 
As of December 31, 2016
(in millions)
 
Cost

 
Unrealized
Gain

 
Unrealized
Loss

 
Fair
Value

 
Cost

 
Unrealized
Gain

 
Unrealized
Loss

 
Fair
Value

Available-for-sale:
 
 

 
 

 
 

 
 

 
 

 
 

 
 

 
 

Equity securities and exchange-traded funds
 
$
26.7

 
$
3.8

 
$
(0.5
)
 
$
30.0

 
$
25.6

 
$
1.3

 
$
(1.5
)
 
$
25.4

Mutual funds
 
2.1

 
0.3

 
—

 
2.4

 
2.2

 
0.1

 
—

 
2.3

Total
 
$
28.8

 
$
4.1

 
$
(0.5
)
 
$
32.4

 
$
27.8

 
$
1.4

 
$
(1.5
)
 
$
27.7

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Held-to-maturity:
 
 

 
 

 
 

 
 

 
 

 
 

 
 

 
 

Certificates of deposit
 
$
19.7

 
$
—

 
$
—

 
$
19.7

 
$
13.8

 
$
—

 
$
—

 
$
13.8

Convertible note
 
—

 
—

 
—

 
—

 
1.9

 
—

 
—

 
1.9

Total
 
$
19.7

 
$
—

 
$
—

 
$
19.7

 
$
15.7

 
$
—

 
$
—

 
$
15.7

 
As of September 30, 2017 and December 31, 2016, investments with unrealized losses for greater than a 12-month period were not material to the Unaudited Condensed Consolidated Balance Sheets and were not deemed to have other than temporary declines in value.

The table below shows the cost and fair value of investments classified as available-for-sale and held-to-maturity based on their contractual maturities as of September 30, 2017 and December 31, 2016.

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As of September 30, 2017
 
As of December 31, 2016
(in millions)
 
Cost

 
Fair Value

 
Cost

 
Fair Value

Available-for-sale:
 
 

 
 

 
 

 
 

Equity securities, exchange-traded funds, and mutual funds
 
$
28.8

 
$
32.4

 
$
27.8

 
$
27.7

    Total
 
$
28.8

 
$
32.4

 
$
27.8

 
$
27.7

 
 
 
 
 
 
 
 
 
Held-to-maturity:
 
 

 
 

 
 

 
 

Due in one year or less
 
$
19.5

 
$
19.5

 
$
13.8

 
$
13.8

Due in one to three years
 
0.2

 
0.2

 
1.9

 
1.9

Total
 
$
19.7

 
$
19.7

 
$
15.7

 
$
15.7

 
The following table shows the realized gains and losses arising from sales of our investments classified as available-for-sale recorded in our Unaudited Condensed Consolidated Statements of Income: 

 
 
Three months ended September 30
 
Nine months ended September 30
(in millions)
 
2017

 
2016

 
2017

 
2016

Realized gains
 
$
0.4

 
$
0.5

 
$
1.3

 
$
1.6

Realized losses
 
(0.1
)
 
(0.2
)
 
(0.2
)
 
(1.1
)
Realized gains, net
 
$
0.3

 
$
0.3

 
$
1.1

 
$
0.5

 
We determine realized gains and losses using the specific identification method.

The following table shows the net unrealized gains on trading securities as recorded in our Unaudited Condensed Consolidated Statements of Income:
 
 
 
Three months ended September 30
 
Nine months ended September 30
(in millions)
 
2017

 
2016

 
2017

 
2016

Unrealized gains, net
 
$
—

 
$
—

 
$
0.1

 
$
0.1


The table below shows the fair value of our assets subject to fair value measurements that are measured at fair value on a recurring basis using a fair value hierarchy:

Level 1:
Valuations based on quoted prices in active markets for identical assets or liabilities that we have the ability to access.
Level 2:
Valuations based on quoted prices in markets that are not active or for which all significant inputs are observable, either directly or indirectly.
Level 3:
Valuations based on inputs that are unobservable and significant to the overall fair value measurement.

 
 
Fair Value
 
Fair Value Measurements as of September 30, 2017
 
 
as of
 
Using Fair Value Hierarchy
(in millions)
 
September 30, 2017
 
Level 1

 
Level 2

 
Level 3

Available-for-sale investments:
 
 

 
 

 
 

 
 

Equity securities and exchange-traded funds
 
$
30.0

 
$
30.0

 
$
—

 
$
—

Mutual funds
 
2.4

 
2.4

 
—

 
—

Trading securities
 
1.6

 
1.6

 
—

 
—

Cash equivalents
 
0.3

 
0.3

 
—

 
—

Total
 
$
34.3

 
$
34.3

 
$
—

 
$
—


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Table of Contents

 
 
 
Fair Value
 
Fair Value Measurements as of December 31, 2016
 
 
as of
 
Using Fair Value Hierarchy
(in millions)
 
December 31, 2016
 
Level 1

 
Level 2

 
Level 3

Available-for-sale investments:
 
 

 
 

 
 

 
 

Equity securities and exchange-traded funds
 
$
25.4

 
$
25.4

 
$
—

 
$
—

Mutual funds
 
2.3

 
2.3

 
—

 
—

Trading securities
 
1.5

 
1.5

 
—

 
—

Cash equivalents
 
0.2

 
0.2

 
—

 
—

Total
 
$
29.4

 
$
29.4

 
$
—

 
$
—


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

We measure the fair value of money market funds, mutual funds, equity securities, and exchange-traded funds based on quoted prices in active markets for identical assets or liabilities. We did not hold any securities categorized as Level 2 or Level 3 as of September 30, 2017 and December 31, 2016.

9. Stock-Based Compensation
 
Stock-Based Compensation Plans
 
All of our employees and our non-employee directors are eligible for awards under the Morningstar 2011 Stock Incentive Plan, which provides for a variety of stock-based awards, including stock options, restricted stock units, performance share awards, market stock units, and restricted stock.

The following table summarizes the stock-based compensation expense included in each of our operating expense categories:
 
 
Three months ended September 30
 
Nine months ended September 30
(in millions)
 
2017

 
2016

 
2017

 
2016

Cost of revenue
 
$
2.2

 
$
1.5

 
$
6.6

 
$
5.5

Sales and marketing
 
0.7

 
0.3

 
2.1

 
1.3

General and administrative
 
2.6

 
1.0

 
7.8

 
3.8

Total stock-based compensation expense
 
$
5.5

 
$
2.8

 
$
16.5

 
$
10.6


As of September 30, 2017, the total unrecognized stock-based compensation cost related to outstanding restricted stock units, performance share awards, and market stock units expected to vest was $37.5 million, which we expect to recognize over a weighted average period of 33 months.


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Table of Contents

10. Income Taxes

Effective Tax Rate

The following table shows our effective tax rate for the three and nine months ended September 30, 2017 and September 30, 2016:
 
 
 
Three months ended September 30
 
Nine months ended September 30
(in millions)
 
2017

 
2016

 
2017

 
2016

Income before income taxes and equity in net income (loss) of unconsolidated entities
 
$
50.8

 
$
46.3

 
$
139.2

 
$
136.5

Equity in net income (loss) of unconsolidated entities
 
—

 
0.4

 
(1.0
)
 
0.7

Total
 
$
50.8

 
$
46.7

 
$
138.2

 
$
137.2

Income tax expense
 
$
16.9

 
$
16.5

 
$
40.2

 
$
46.5

Effective tax rate
 
33.3
%
 
35.3
%
 
29.1
%
 
33.9
%
 
Our effective tax rate in the third quarter and for the first nine months of 2017 was 33.3% and 29.1%, a respective decrease of 2.0 and 4.8 percentage points compared with the same periods a year ago. During the third quarter of 2017, our effective tax rate, compared to the third quarter of 2016, decreased primarily due to a reduction in our liability for unrecognized tax benefits. The decrease in our effective tax rate for the first nine months of 2017, compared to the first nine months of 2016, primarily reflects the fact that we recorded a book gain of $17.5 million on the sale of HelloWallet in the second quarter of 2017 that is not a gain for tax purposes. Further, we can no longer realize certain net deferred tax assets that were attributable to our investment in HelloWallet. The net effect of both of the HelloWallet tax impacts represents a decrease to our effective tax rate for the first nine months of 2017.

Unrecognized Tax Benefits

The table below provides information concerning our gross unrecognized tax benefits as of September 30, 2017 and December 31, 2016, as well as the effect these gross unrecognized tax benefits would have on our income tax expense, if they were recognized.
 
 
As of September 30
 
As of December 31
(in millions)
 
2017

 
2016

Gross unrecognized tax benefits
 
$
18.1

 
$
18.4

Gross unrecognized tax benefits that would affect income tax expense
 
$
14.5

 
$
14.4

Decrease in income tax expense upon recognition of gross unrecognized tax benefits
 
$
13.3

 
$
13.3


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.

 
 
As of September 30
 
As of December 31
Liabilities for Unrecognized Tax Benefits (in millions)
 
2017

 
2016

Current liability
 
$
8.8

 
$
8.9

Non-current liability
 
5.7

 
5.4

Total liability for unrecognized tax benefits
 
$
14.5

 
$
14.3


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 and various state and local tax authorities in the United States, as well as tax authorities in certain non-U.S. jurisdictions. It is possible that the examination phase of some of these audits will conclude in 2017. It is not possible to estimate the effect of current audits on previously recorded unrecognized tax benefits.

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Table of Contents


We have not provided federal and state income taxes on accumulated undistributed earnings of certain foreign subsidiaries because these earnings have been permanently reinvested. Approximately 73% of our cash, cash equivalents, and investments balance as of September 30, 2017 was held by our operations outside of the United States. 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. It is not practical to determine the amount of the unrecognized deferred tax liability related to the undistributed earnings.
 
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, thus increasing 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 the period.

11. Contingencies

Michael D. Green
In August 2017, Michael D. Green, individually and purportedly on behalf of all others similarly situated, filed a complaint in the United States District Court for the Northern District of Illinois. The complaint names as defendants Morningstar, Inc., Prudential Investment Management Services LLC, and Prudential Retirement Insurance and Annuity Co., and contains one count alleging violation of the Racketeering Influenced and Corrupt Practices Act (RICO). Plaintiff, a participant in a pension plan, alleges that the defendants engaged in concerted racketeering actions to steer plan participants into high-cost investments that pay unwarranted fees to the defendants. The complaint seeks unspecified compensatory damages for plaintiff and the members of the putative class, treble damages, injunctive relief, costs, and attorneys’ fees. Morningstar has filed a motion to dismiss the complaint, which is fully briefed and under advisement by the court. Although Morningstar is vigorously contesting the claim asserted, we cannot predict the outcome of the proceeding.

Other Matters
We are involved from time to time in legal proceedings and litigation that arise in the normal course of our business. While it is difficult to predict the outcome of any particular 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.

12. Share Repurchase Program
 
We have an ongoing authorization, originally approved by our board of directors in September 2010 and subsequently amended, to repurchase up to $1.0 billion in shares of our outstanding common stock. The authorization expires on December 31, 2017. 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.

As of September 30, 2017, we had repurchased a total of 10,561,496 shares for $713.5 million under this authorization, leaving approximately $286.5 million available for future repurchases.

13. Subsequent Event

In October 2017, our board of directors approved a regular quarterly dividend of 23.0 cents per share payable on October 31, 2017 to shareholders of record as of October 18, 2017. We will pay a quarterly dividend of approximately $9.8 million on October 31, 2017.


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Table of Contents

Item 2.
Management’s Discussion and Analysis of Financial Condition and Results of Operations
 
The discussion included in this section, as well as other sections of this Quarterly Report on Form 10-Q (this Quarterly Report), contains forward-looking statements as that term is used in the Private Securities Litigation Reform Act of 1995. These statements are based on our current expectations about future events or future financial performance. Forward-looking statements by their nature address matters that are, to different degrees, uncertain, and often contain words such as “may,” “could,” “expect,” “intend,” “plan,” “seek,” “anticipate,” “believe,” “estimate,” “predict,” “potential,” or “continue.” These statements involve known and unknown risks and uncertainties that may cause the events we discuss not to occur or to differ significantly from what we expect. For us, these risks and uncertainties include, among others:

•
liability for any losses that result from an actual or claimed breach of our fiduciary duties;
•
failing to maintain and protect our brand, independence, and reputation;
•
allegations about possible conflicts of interest;
•
failing to differentiate our products and continuously create innovative, proprietary research tools;
•
failing to respond to technological change, keep pace with new technology developments, or adopt a successful technology strategy;
•
trends in the asset management industry, including the increasing popularity of passively managed investment vehicles;
•
liability associated with the storage of personal information related to individuals as well as portfolio and account-level information;
•
liability relating to the acquisition or redistribution of data or information we acquire or errors included therein;
•
compliance failures, regulatory action, or changes in laws applicable to our investment advisory or credit rating operations;
•
the failure of acquisitions and other investments to produce the results we anticipate;
•
downturns in the financial sector, global financial markets, and global economy;
•
the effect of market volatility on revenue from asset-based fees;
•
an outage of our database, technology-based products and services, or network facilities; and
•
challenges faced by our non-U.S. operations, including the concentration of data and development work at our offshore facilities in China and India.

A more complete description of these risks and uncertainties can be found in our other filings with the Securities and Exchange Commission (SEC), including our Annual Report on Form 10-K for the year ended December 31, 2016 (our Annual Report). If any of these risks and uncertainties materialize, our actual future results may vary significantly from what we expect. We do not undertake to update our forward-looking statements as a result of new information or future events.

All dollar and percentage comparisons, which are often accompanied by words such as “increase,” “decrease,” “grew,” “declined,” “was up,” “was down,” “was flat,” or “was similar” refer to a comparison with the same period in the previous year unless otherwise stated. 



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Table of Contents

Understanding our Company
 
Our Business

Our mission is to create great products that help investors reach their financial goals. We offer an extensive line of products and services for individual investors, financial advisors, asset managers, retirement plan providers and sponsors, and institutional investors in the private capital markets. We generate revenue through three main business models:

•
Subscriptions and license agreements, which typically generate recurring revenue;
•
Asset-based fees for our investment management business; and
•
Transaction-based revenue for products that involve one-time, non-recurring revenue.

Industry Overview
 
Equity markets continued their positive trend in the third quarter of 2017. The Morningstar U.S. Market Index, a broad market benchmark, was up 4.0% for the third quarter of 2017 and 12.5% year-to-date, while the Global Ex-U.S. Index finished the quarter up 6.2% and 21.5% year-to-date.

U.S. mutual fund assets stood at $17.8 trillion in August 2017, based on data from the Investment Company Institute (ICI), compared with $16.4 trillion in August 2016. Based on Morningstar's estimated asset flow data, investors added about $43.2 billion to long-term open-end and exchange-traded funds during the third quarter of 2017, compared with an outflow of $9.5 billion in the third quarter of 2016. Continuing a long-term trend, investors continued to heavily favor lower-cost, passively managed vehicles for new inflows.

Assets in exchange-traded funds totaled $3.1 trillion in August 2017, up from $2.4 trillion in August 2016, based on data from the ICI.

Despite continued gains in the equity markets, we believe the business environment for the financial services industry remains challenging in some respects. Low interest rates and the industrywide shift to passive investment management have continued to put pressure on spending for many asset management firms.

Financial advisors have been adapting to the increasing demand for solutions that are in the best interest of investors, including new fiduciary standards, an increasing emphasis on keeping fees low, and improved client communication. Despite ongoing uncertainty about the scope of potential regulatory changes, we believe recent shifts, such as a greater emphasis on serving investors’ interests and lowering fees, are fundamental changes that will continue. Many industry participants have been moving toward a more client-centric business model and working to deliver solutions that put investors’ interests first. We believe Morningstar is well-positioned to help financial advisors meet these needs, and we have a broad range of solutions to help them determine, demonstrate, and document that their advice is in the best interest of the investor.






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Table of Contents

Supplemental Operating Metrics (Unaudited)

The tables below summarize our key product metrics and other supplemental data.
 
 
 
As of September 30
 
 
 
 
 
 
 
 
2017

 
2016

 
Change

 
 
 
 
 
 
Our business
 
 
 
 
 
 
 
 
 
 
 
 
Morningstar.com Premium Membership subscriptions (U.S.)
 
118,209

 
118,375

 
(0.1
)%
 
 
 
 
 
 
Morningstar.com average monthly unique users (U.S.)
 
1,923,483

 
1,867,057

 
3.0
 %
 
 
 
 
 
 
Advisor Workstation clients (U.S.)
 
182

 
178

 
2.2
 %
 
 
 
 
 
 
Morningstar Office licenses (U.S.)
 
4,303

 
4,606

 
(6.6
)%
 
 
 
 
 
 
Morningstar Direct licenses
 
13,476

 
12,243

 
10.1
 %
 
 
 
 
 
 
PitchBook Platform licenses
 
12,410

 
9,006

(1)
37.8
 %
 
 
 
 
 
 
Assets under advisement and management (approximate) ($bil) (2)
 
 
 
 
 
 
 
 
 
 
 
 
 
Workplace Solutions (Retirement)
 
 
 
 
 
 
 
 
 
 
 
 
 
    Managed Accounts (3)
 
$
56.1

 
$
47.5

 
18.1
 %
 
 
 
 
 
 
 
Plan Sponsor Advice
 
39.1

 
33.5

 
16.7
 %
 
 
 
 
 
 
 
Custom Models
 
26.5

 
22.4

 
18.3
 %
 
 
 
 
 
 
 
Workplace Solutions (total)
 
$