Morningstar, Inc. 2020 Form 10-K Summary
Reporting period: Fiscal year ended December 31, 2020. The filing is an annual Form 10-K rather than a quarterly filing; fourth-quarter data are included in the selected quarterly information.
Business Context
Morningstar provides investment data, research, ratings, software, indexes, ESG analytics, credit ratings, investment management, and retirement solutions globally. Its principal customer groups include advisors, asset managers, fixed-income issuers, private-market investors, retirement-plan participants and sponsors, and individual investors. The company reports one operating segment.
Revenue is generated primarily through recurring license-based subscriptions, asset-based fees, and transaction-based services. Major products include Morningstar Data, DBRS Morningstar, PitchBook, Morningstar Direct, Investment Management, Advisor Workstation, Workplace Solutions, Sustainalytics, and Morningstar.com.
Financial Performance and Key Metrics
| Metric | 2020 | 2019 | Change |
|---|---|---|---|
| Revenue | $1,389.5 million | $1,179.0 million | 17.9% |
| Operating income | $215.2 million | $189.6 million | 13.5% |
| Operating margin | 15.5% | 16.1% | Down 0.6 percentage points |
| Consolidated net income | $223.6 million | $152.0 million | 46.9% |
| Diluted earnings per share | $5.18 | $3.52 | 47.2% |
| Cash provided by operating activities | $384.3 million | $334.4 million | 14.9% |
| Capital expenditures | $76.7 million | $80.0 million | Down 4.1% |
| Free cash flow | $307.6 million | $254.4 million | 20.9% |
Revenue mix was 67.3% license-based, 16.1% asset-based, and 16.6% transaction-based in 2020, compared with 68.9%, 17.9%, and 13.1%, respectively, in 2019. License-based revenue increased 15.0%, asset-based revenue increased 5.8%, and transaction-based revenue increased 49.2%.
- Key product growth: PitchBook revenue increased 35.5% to $201.1 million, DBRS Morningstar increased 62.5% to $207.3 million, Morningstar Data increased 9.3% to $215.1 million, and Morningstar Direct increased 6.4% to $158.1 million.
- Renewals: The estimated annual renewal rate for license-based products was approximately 99%. PitchBook renewal was approximately 115%, Morningstar Data approximately 101%, Morningstar Direct approximately 96%, and Advisor Workstation approximately 91%.
- Profitability: Adjusted operating income, excluding intangible amortization and M&A-related expenses, was $316.7 million, with an adjusted operating margin of 22.8%, versus 19.8% in 2019.
- Taxes: Income tax expense was $59.7 million and the effective tax rate was 21.1%, compared with 23.1% in 2019.
- Liquidity: Cash, cash equivalents, and investments totaled $464.2 million at year-end, including $422.5 million of cash and cash equivalents and $41.7 million of investments.
- Debt: Total debt was $449.1 million, consisting primarily of $348.3 million of 2.32% senior notes due 2030 and $100.8 million under the term facility. The company had $300.0 million of revolving-credit availability and an undrawn $50.0 million 364-day facility.
- Shareholder returns: The company paid $51.4 million in dividends and repurchased $41.9 million of common stock during 2020. A new $400.0 million repurchase authorization became effective January 1, 2021. The expected 2021 quarterly dividend was increased to $0.315 per share.
Material Changes Versus 2019
- Revenue growth was driven by strong PitchBook performance, increased DBRS Morningstar contribution, demand for Morningstar Data and Direct, and the acquisition of Sustainalytics.
- Operating expenses increased 18.7%, faster than the underlying organic revenue growth, primarily because of the inclusion of DBRS Morningstar and Sustainalytics, acquisition-related earn-outs, additional personnel, amortization, and regulatory and technology costs.
- Organic revenue increased 8.2% to $1,254.5 million, excluding acquisitions and foreign-currency effects.
- Operating margin declined modestly because of acquisition-related amortization and expenses, despite higher revenue and operating income.
- Net income benefited materially from $50.9 million of noncash holding gain recognized upon acquiring the remaining interest in Sustainalytics and $30.0 million of gains from sales of equity-method investments.
- Morningstar acquired Hueler Analytics assets, PlanPlus Global, and the remaining 60% of Sustainalytics. Sustainalytics added approximately 750 employees and increased goodwill to $1,205.0 million.
- Debt declined from $513.1 million at year-end 2019 to $449.1 million at year-end 2020, primarily reflecting issuance of the 2030 notes and repayment of borrowings.
- International revenue increased 33.9% and represented approximately 30% of consolidated revenue, compared with 27% in 2019, largely because of DBRS Morningstar and Sustainalytics.
Fourth-Quarter Information, Outlook, and Commentary
Fourth-quarter 2020 revenue was $380.4 million, operating income was $65.1 million, net income was $75.3 million, and diluted earnings per share were $1.74. Fourth-quarter results included a $30.0 million gain from the sale of two equity-method investments.
Management does not provide public financial forecasts or earnings guidance. Management stated that recurring license-based revenue remained resilient during the pandemic and that remote operations caused minimal interruption to product delivery and support. The company expects continued investment in technology, cloud migration, product development, ESG capabilities, and employee resources.
Management expects available cash, investments, operating cash flow, and credit facilities to fund operating and cash needs for at least the next 12 months. Planned 2021 cash uses include approximately $86.7 million of annual bonus payments, capital expenditures, dividends, and potential share repurchases. The company expects approximately $61.1 million of intangible-amortization expense in 2021 based on acquisitions completed through year-end 2020.
Risks, Contingencies, and Unusual Items
- COVID-19 could reduce customer spending, delay implementations, lower asset-based revenue, reduce debt issuance and credit-rating activity, and increase operating or compliance costs.
- Market declines may reduce assets under management and advisement and related fees. Credit-rating revenue is sensitive to the volume and value of new debt issuance.
- DBRS Morningstar, investment advisory, ESG, index, and retirement businesses face extensive and changing regulation, including post-Brexit requirements and evolving ESG and privacy rules.
- Cybersecurity incidents, data breaches, system outages, cloud-provider failures, and weaknesses in customer or vendor systems could result in reputational damage, litigation, regulatory penalties, and lost revenue.
- Acquisition integration, contingent consideration, goodwill, and intangible-asset valuations involve significant judgment. Sustainalytics contingent consideration had a year-end fair value of $53.7 million.
- Goodwill was $1,205.0 million and intangible assets were $380.1 million at year-end. No goodwill or intangible-asset impairment was recorded in 2020.
- On February 16, 2021, the SEC filed a civil action against former subsidiary Morningstar Credit Ratings, LLC concerning its former commercial mortgage-backed securities methodology and alleged filing and internal-control violations. Management did not expect a material adverse effect, but the matter remains a contingency.
- The company had $11.8 million of gross unrecognized tax benefits, including $7.6 million classified as current, and was subject to tax audits in multiple jurisdictions.
- Approximately 60% of cash, cash equivalents, and investments were held outside the United States. The company does not hedge foreign-currency exposure.
- Joe Mansueto owned approximately 45.5% of outstanding common stock, giving him substantial voting influence.
Investor Verification Items
- Verify the sustainability of 2020 earnings after excluding the $50.9 million Sustainalytics holding gain and $30.0 million investment-sale gains.
- Assess organic growth and margin trends separately from the effects of DBRS Morningstar, Sustainalytics, acquisition accounting, amortization, and M&A-related earn-outs.
- Review the integration and performance of Sustainalytics, including the $53.7 million contingent consideration liability and remaining measurement-period adjustments.
- Monitor PitchBook renewals and growth, DBRS Morningstar issuance volumes, and the effect of the TD Ameritrade contract change and cancellation on 2021 Investment Management revenue.
- Evaluate leverage, variable-rate debt exposure, covenant compliance, the transition away from LIBOR, and the maturity profile of the 2030 notes and credit facilities.
- Follow the SEC litigation involving Morningstar Credit Ratings, regulatory developments affecting ESG data and credit ratings, and outstanding data-license audits.
- Reconcile GAAP results with non-GAAP adjusted operating income and free cash flow, noting that the company’s non-GAAP measures may not be comparable with those of other issuers.