Morningstar, Inc. Form 10-K Summary
Reporting period: Fiscal year ended December 31, 2014; filed February 27, 2015. The filing also provides unaudited fourth-quarter results. Morningstar is a global provider of investment data, research, software, ratings, advisory, retirement, and asset-management solutions serving financial advisors, asset managers, retirement organizations, and individual investors in 27 countries.
Business Context and Reporting Period
- Morningstar reports one operating segment and derives revenue primarily from investment information products and investment management services.
- Investment information represented approximately 80% of 2014 revenue; investment management represented approximately 20%.
- Major 2014 acquisitions included ByAllAccounts and the remaining ownership interest in HelloWallet. Morningstar also continued migrating customers from Principia to Advisor Workstation and other products.
- Key strategic initiatives include developing a cloud-based next-generation Morningstar Direct platform, expanding retirement and holistic financial-wellness offerings, and growing strategic-beta indexes and research.
Financial Metrics
| Metric | 2014 | 2013 | Change |
|---|---|---|---|
| Revenue | $760.1 million | $698.3 million | 8.9% increase |
| Operating income | $105.6 million | $170.7 million | 38.1% decrease |
| Operating margin | 13.9% | 24.4% | Down 10.5 percentage points |
| Net income attributable to Morningstar | $78.3 million | $123.5 million | 36.6% decrease |
| Diluted earnings per share | $1.74 | $2.66 | 34.6% decrease |
| Cash provided by operating activities | $132.2 million | $186.7 million | 29.2% decrease |
| Capital expenditures | $58.3 million | $33.6 million | 73.7% increase |
| Free cash flow | $73.9 million | $153.1 million | 51.7% decrease |
Excluding the $61.0 million litigation settlement, adjusted operating income was $166.6 million and adjusted operating margin was 21.9%, compared with 24.4% in 2013. These are non-GAAP measures.
- Revenue drivers: Morningstar Direct revenue increased 15.7% to $91.8 million; Advisor Workstation increased 9.3% to $101.7 million; Retirement Solutions increased 25.7% to $57.3 million; and Morningstar Data increased 6.3% to $137.4 million.
- Investment management: Revenue increased 14.3% to $163.0 million. Asset-based fee revenue was $94.1 million, or approximately 12.4% of consolidated revenue.
- Profitability: Total operating expense increased 24.0% to $654.5 million, including the litigation settlement, higher compensation, sales commissions, depreciation, and technology investment.
- Liquidity: Cash, cash equivalents, and investments totaled $224.6 million at year-end, down from $298.6 million. Working capital was $106.0 million.
- Debt: Morningstar had $30.0 million outstanding under a $75.0 million revolving credit facility at LIBOR plus 100 basis points, leaving $45.0 million available.
- Balance sheet: Total assets were $1.019 billion, total liabilities were $364.9 million, and total equity was $654.4 million.
- Capital returns: The company repurchased approximately 1.1 million shares for $76.7 million in 2014 and paid $30.5 million in dividends. Approximately $173.5 million remained under the $700 million repurchase authorization at year-end.
Material Changes Versus the Prior Comparable Period
- Revenue growth accelerated to 8.9% from 6.1% in 2013; organic revenue increased 7.6%, excluding acquisitions and foreign-currency effects.
- Operating income and net income declined sharply because of the $61.0 million Business Logic litigation settlement recorded in the second quarter.
- Operating cash flow and free cash flow fell substantially because of the settlement payment and higher capital expenditures, including increased spending on internally developed software and technology.
- Investment management growth was led by Retirement Solutions and Morningstar Managed Portfolios. Retirement Solutions assets under management and advisement rose to $76.8 billion, while Managed Portfolios assets increased to $9.3 billion.
- Investment Advisory assets under advisement declined to $81.0 billion from $83.5 billion, primarily because certain variable-annuity clients brought fund-of-funds management in-house.
- Morningstar Direct licenses increased to approximately 10,100 from 8,500, while U.S. Morningstar.com Premium subscriptions declined slightly to approximately 123,000.
- The company drew $30.0 million on a new revolving credit facility and reduced its investment portfolio substantially during the year.
- Foreign currency translation reduced comprehensive income by $29.8 million, and international revenue represented approximately 28% of consolidated revenue.
Guidance, Outlook, Risks, Contingencies, and Unusual Items
- Morningstar does not provide public financial forecasts or earnings guidance.
- Management expects to introduce the next-generation web-based Morningstar Direct platform in 2015 and integrate HelloWallet capabilities with its retirement solutions.
- Management expects to continue capital expenditures in 2015 and make approximately $48.0 million of annual bonus payments related to 2014 performance.
- The company expects regular quarterly dividends of $0.19 per share in 2015, subject to board approval and applicable restrictions.
- Material risks include market declines affecting asset-based fees, financial-sector spending reductions, increased popularity of passive investments, regulatory and fiduciary liabilities, data privacy and cybersecurity incidents, technology outages, foreign currency volatility, and operational concentration in China and India.
- Morningstar estimates approximately $21.9 million of intangible-asset amortization expense in 2015 based on acquisitions completed through year-end 2014.
- Known contractual obligations totaled $171.9 million, including $136.7 million of operating lease commitments, $30.1 million of credit-facility payments and fees, and $5.1 million of unrecognized tax benefits expected to be resolved in 2015. An additional $6.6 million of unrecognized tax benefits had no reliably estimable payment period.
- The company is involved in ordinary-course legal proceedings and states that it does not expect them to have a material adverse effect. The $61.0 million Business Logic settlement was the principal unusual item in 2014.
- KPMG issued unqualified opinions on the financial statements and internal control over financial reporting. Management concluded that disclosure controls and internal controls were effective.
Important Facts for Investors to Verify
- Reconcile GAAP operating income and cash flow with management’s adjusted operating income and free-cash-flow measures, particularly the effect of the $61.0 million settlement.
- Review whether growth in Morningstar Direct, Retirement Solutions, Managed Portfolios, and other recurring products offsets the decline in Principia and Investment Advisory revenue.
- Monitor asset-based fee exposure, including approximately $166.3 billion of average assets under management and advisement and the effect of market movements and client outflows.
- Assess liquidity after acquisitions, share repurchases, dividends, capital expenditures, bonus payments, and the $30.0 million credit-facility draw.
- Evaluate integration results and purchase-accounting finalization for HelloWallet and ByAllAccounts, including goodwill and acquired intangible assets.
- Track the transition to the next-generation Morningstar Direct platform and the associated capitalized software and amortization costs.
- Review regulatory, fiduciary, data-security, cybersecurity, litigation, tax, foreign-currency, and offshore-operational exposures.
- Consider the effect of Joe Mansueto’s approximately 55% ownership on shareholder voting control and corporate governance.