

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)~~ (312) 696-6000



Title of Each Class	Trading Symbol	Name of Each Exchange on Which Registered
Common stock, no par value	MORN	The Nasdaq Stock Market LLC

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. Yesx☒Noo

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). YesxNoo☐

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 filerx	☒	Accelerated filer o	☐	Non-accelerated filero	☐	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). Yeso☐Nox

As of October ~~20, 2017,~~18, 2019, there were ~~42,529,709~~42,809,867 shares of the Company’s common stock, no par value, outstanding.



PART 1		FINANCIAL INFORMATION		3

	Item 1.	Financial Statements		3

			Unaudited Condensed Consolidated Statements of Income for the three and nine months ended September 30, ~~2017~~2019 and ~~2016~~2018	43

			Unaudited Condensed Consolidated Statements of Comprehensive Income for the three and nine months ended September 30, ~~2017~~2019 and ~~2016~~2018	53

			Unaudited Condensed Consolidated Balance Sheets as of September 30, ~~2017~~2019 and December 31, ~~2016~~2018	64

			Unaudited Condensed Consolidated ~~Statement~~Statements of Equity for the nine months ended September 30, ~~2017~~2019 and 2018	75

			Unaudited Condensed Consolidated Statements of Cash Flows for the nine months ended September 30, ~~2017~~2019 and ~~2016~~2018	8

			Notes to Unaudited Condensed Consolidated Financial Statements	9

	Item 2.	Management’s Discussion and Analysis of Financial Condition and Results of Operations		2023

	Item 3.	Quantitative and Qualitative Disclosures about Market Risk		3339

	Item 4.	Controls and Procedures		3440


PART 2		OTHER INFORMATION		3541

	Item 1.	Legal Proceedings		3541

	Item 1A.	Risk Factors		3541

	Item 2.	Unregistered Sales of Equity Securities and Use of Proceeds		3541

	Item 6.	Exhibits		3642

SIGNATURE				3743

Table of Contents


PART 1.	FINANCIAL INFORMATION


Item 1.	Financial Statements

~~Table of Contents~~

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)	2019			2018			2019			2018

Revenue	$	313.8		$	261.3		$	846.6		$	757.2

Operating expense:
Cost of revenue	128.4			100.0			341.0			302.2
Sales and marketing	44.0			35.8			129.7			113.7
General and administrative	57.2			35.4			142.0			103.6
Depreciation and amortization	34.6			24.7			84.0			71.2
Total operating expense	264.2			195.9			696.7			590.7

Operating income	49.6			65.4			149.9			166.5

Non-operating income, net:
Interest expense, net	(4.8		)	(0.2		)	(4.8		)	(1.2		)
Gain on sale of investments, reclassified from other comprehensive income	0.3			0.3			0.7			0.9
Gain on sale of product line	—			—			—			10.5
Gain on sale of equity investments	19.5			5.6			19.5			5.6
Other income (expense), net	(1.1		)	1.6			(2.5		)	2.2
Non-operating income, net	13.9			7.3			12.9			18.0

Income before income taxes and equity in net income (loss) of unconsolidated entities	63.5			72.7			162.8			184.5

Equity in net income (loss) of unconsolidated entities	(1.1		)	0.3			(1.9		)	(1.6		)

Income tax expense	13.3			16.1			36.5			42.3

Consolidated net income	$	49.1		$	56.9		$	124.4		$	140.6

Net income per share:
Basic	$	1.15		$	1.33		$	2.91		$	3.30
Diluted	$	1.14		$	1.32		$	2.89		$	3.27

Dividends per common share:
Dividends declared per common share	$	—		$	—		$	0.56		$	0.50
Dividends paid per common share	$	0.28		$	0.25		$	0.84		$	0.75

Weighted average shares outstanding:
Basic	42.8			42.6			42.7			42.6
Diluted	43.2			43.1			43.1			43.0

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.

~~Table of Contents~~

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



	Three months ended September 30,						Nine months ended September 30,
(in millions)	2019			2018			2019			2018

Consolidated net income	$	49.1		$	56.9		$	124.4		$	140.6

Other comprehensive loss:
Foreign currency translation adjustment	(18.3		)	(6.1		)	(17.7		)	(20.2		)
Unrealized gains on securities, net of tax:
Unrealized holding gains arising during the period	0.2			0.5			2.4			0.8
Reclassification gains included in net income	(0.3		)	(0.2		)	(0.6		)	(0.7		)
Other comprehensive loss	(18.4		)	(5.8		)	(15.9		)	(20.1		)

Comprehensive income	$	30.7		$	51.1		$	108.5		$	120.5

See notes to unaudited condensed consolidated financial statements.

Table of Contents

Morningstar, Inc. and Subsidiaries

Unaudited Condensed Consolidated Balance Sheets


	As of September 30			As of December 31
(in millions except share amounts)	2017			2016
(in millions, except share amounts)							As of September 30, 2019 (unaudited)			As of December 31, 2018
Assets
Current assets:
Cash and cash equivalents	$	270.3		$	259.1		$	321.8		$	369.3
Investments	53.7			44.9			31.0			26.6
Accounts receivable, less allowance of $2.6 and $2.1, respectively	148.2			145.8
Accounts receivable, less allowance of $2.8 and $4.0, respectively							168.0			172.2
Income tax receivable							0.4			1.8
Deferred commissions							15.8			14.8
Other current assets	25.7			22.2			23.7			16.9
Total current assets	497.9			472.0			560.7			601.6
Property, equipment, and capitalized software, less accumulated depreciation and amortization of $263.4 and $214.8, respectively	151.2			152.1
Goodwill							1,015.8			556.7
Property, equipment, and capitalized software, less accumulated depreciation and amortization of $400.7 and $351.7, respectively							151.5			143.5
Operating lease assets							138.2			—
Intangible assets, net							335.7			73.9
Investments in unconsolidated entities	61.5			40.3			59.9			63.1
Goodwill	565.4			556.8
Intangible assets, net	100.9			120.9
Deferred commissions							11.7			10.3
Other assets	6.8			8.8			9.0			4.7
Total assets	$	1,383.7		$	1,350.9		$	2,282.5		$	1,453.8

Liabilities and equity
Current liabilities:
Deferred revenue							$	240.0		$	195.8
Accrued compensation							107.7			109.5
Accounts payable and accrued liabilities	$	32.6		$	44.6		36.9			54.4
Accrued compensation	72.4			71.7
Deferred revenue	174.1			165.4
Long-term debt							11.0			—
Operating lease liabilities							33.3			—
Other current liabilities	15.5			13.2			2.8			3.1
Total current liabilities	294.6			294.9			431.7			362.8
Operating lease liabilities							132.3			—
Accrued compensation	11.0			10.3			12.5			11.8
Deferred tax liability, net	39.9			38.2			85.1			22.2
Long-term debt	205.0			250.0			534.8			70.0
Deferred rent	23.9			24.8
Deferred revenue							32.0			14.2
Other long-term liabilities	30.1			35.9			12.2			38.1
Total liabilities	604.5			654.1			1,240.6			519.1

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		)
Common stock, no par value, 200,000,000 shares authorized, of which 42,809,867 and 42,624,118 shares were outstanding as of September 30, 2019 and December 31, 2018, respectively							—			—
Treasury stock at cost, 10,844,603 and 10,816,672 shares as of September 30, 2019 and December 31, 2018, respectively							(729.4		)	(726.8		)
Additional paid-in capital	595.4			584.0			646.9			621.7
Retained earnings	940.2			861.9			1,215.3			1,114.8
Accumulated other comprehensive loss:
Currency translation adjustment	(51.4		)	(81.3		)	(92.2		)	(74.5		)
Unrealized gain (loss) on available-for-sale investments	2.5			(0.2		)	1.3			(0.5		)
Total accumulated other comprehensive loss	(48.9		)	(81.5		)	(90.9		)	(75.0		)
Total Morningstar, Inc. shareholders’ equity	779.2			696.5
Noncontrolling interest	—			0.3
Total equity	779.2			696.8			1,041.9			934.7
Total liabilities and equity	$	1,383.7		$	1,350.9		$	2,282.5		$	1,453.8

~~See notes to unaudited condensed consolidated financial statements.~~

~~Table of Contents~~

~~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.

Table of Contents

Morningstar, Inc. and Subsidiaries

Unaudited Condensed Consolidated Statements of Equity

For the nine months ended September 30, 2019 and 2018



	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, 2018	42,624,118		$	—	$	(726.8	)	$	621.7		$	1,114.8		$	(75.0	)	$	934.7

Net income			—		—			—			33.2			—			33.2
Other comprehensive income:
Unrealized gain on available-for-sale investments, net of income tax of $0.7			—		—			—			—			1.9			1.9
Reclassification of adjustments for gain included in net income, net of income tax of $0.2			—		—			—			—			(0.5		)	(0.5		)
Foreign currency translation adjustment, net			—		—			—			—			3.4			3.4
Other comprehensive income			—		—			—			—			4.8			4.8
Vesting of restricted stock units, net of shares withheld for taxes on settlements of restricted stock units	73,530		—		—			(4.6		)	—			—			(4.6		)
Reclassification of awards previously liability-classified that were converted to equity			—		—			6.6			—			—			6.6
Stock-based compensation			—		—			10.0			—			—			10.0
Common shares repurchased	(41,935	)	—		(4.6		)	—			—			—			(4.6		)
Dividends declared ($0.28 per share)			—		—			—			(11.9		)	—			(11.9		)
Balance as of March 31, 2019	42,655,713		—		(731.4		)	633.7			1,136.1			(70.2		)	968.2

Net income			—		—			—			42.1			—			42.1
Other comprehensive loss:
Unrealized gain on available-for-sale investments, net of income tax of $0.1			—		—			—			—			0.3			0.3
Reclassification of adjustments for loss included in net income, net of income tax of $0.1			—		—			—			—			0.2			0.2
Foreign currency translation adjustment, net			—		—			—			—			(2.8		)	(2.8		)
Other comprehensive loss			—		—			—			—			(2.3		)	(2.3		)
Vesting of restricted stock units, net of shares withheld for taxes on settlements of restricted stock units	107,309		—		1.0			(6.3		)	—			—			(5.3		)
Reclassification of awards previously liability-classified that were converted to equity			—		—			0.2			—			—			0.2
Stock-based compensation			—		—			12.5			—			—			12.5
Dividends declared ($0.28 per share)			—		—			—			(12.0		)	—			(12.0		)
Balance as of June 30, 2019	42,763,022		$	—	$	(730.4	)	$	640.1		$	1,166.2		$	(72.5	)	$	1,003.4

Net income			—		—			—			49.1			—			49.1
Other comprehensive loss:
Unrealized gain on available-for-sale investments			—		—			—			—			0.2			0.2

Table of Contents



Reclassification of adjustments for gain included in net income, net of income tax of $0.1		—		—			—			—		(0.3		)	(0.3		)
Foreign currency translation adjustment, net		—		—			—			—		(18.3		)	(18.3		)
Other comprehensive loss		—		—			—			—		(18.4		)	(18.4		)
Vesting of restricted stock units, net of shares withheld for taxes on settlements of restricted stock units	46,845	—		1.0			(4.0		)	—		—			(3.0		)
Stock-based compensation		—		—			10.8			—		—			10.8
Balance as of September 30, 2019	42,809,867	$	—	$	(729.4	)	$	646.9		$	1,215.3	$	(90.9	)	$	1,041.9



	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, 2017	42,547,707		$	—	$	(708.2	)	$	601.0		$	958.7		$	(46.6	)	$	804.9

Cumulative effect of accounting change related to the adoption of ASU No. 2014-09											17.0						17.0
Net income			—		—			—			41.9			—			41.9
Other comprehensive income:
Reclassification of adjustments for gain included in net income, net of income tax of $0.1			—		—			—			—			(0.4		)	(0.4		)
Foreign currency translation adjustment, net			—		—			—			—			7.5			7.5
Other comprehensive income, net			—		—			—			—			7.1			7.1
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	79,050		—		—			(4.1		)	—			—			(4.1		)
Reclassification of awards previously liability-classified that were converted to equity			—		—			4.4			—			—			4.4
Stock-based compensation			—		—			6.6			—			—			6.6
Common shares repurchased	(92,529	)	—		(8.9		)	—			—			—			(8.9		)
Dividends declared ($0.25 per share)			—		—			—			(10.6		)	—			(10.6		)
Balance as of March 31, 2018	42,534,228		$	—	$	(717.1	)	$	607.9		$	1,007.0		$	(39.5	)	$	858.3

Net income			—		—			—			41.8			—			41.8
Other comprehensive loss:
Unrealized gain on available-for-sale investments, net of income tax of $0.3			—		—			—			—			0.3			0.3
Reclassification of adjustments for gain included in net income, net of income tax of $0.1			—		—			—			—			(0.1		)	(0.1		)
Foreign currency translation adjustment, net			—		—			—			—			(21.6		)	(21.6		)
Other comprehensive loss			—		—			—			—			(21.4		)	(21.4		)
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	118,598		—		1.2			(6.4		)	—			—			(5.2		)
Reclassification of awards previously liability-classified that were converted to equity			—		—			0.2			—			—			0.2

Table of Contents



Stock-based compensation			—		—			10.0			—			—			10.0
Common shares repurchased	(16,760	)	—		(1.6		)	—			—			—			(1.6		)
Dividends declared ($0.25 per share)			—		—			—			(10.7		)	—			(10.7		)
Balance as of June 30, 2018	42,636,066		$	—	$	(717.5	)	$	611.7		$	1,038.1		$	(60.9	)	$	871.4

Net income			—		—			—			56.9			—			56.9
Other comprehensive loss:
Unrealized gain on available-for-sale investments, net of income tax of $0.2			—		—			—			—			0.5			0.5
Reclassification of adjustments for gain included in net income			—		—			—			—			(0.2		)	(0.2		)
Foreign currency translation adjustment, net			—		—			—			—			(6.1		)	(6.1		)
Other comprehensive loss			—		—			—			—			(5.8		)	(5.8		)
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	34,662		—		0.5			(2.6		)	—			—			(2.1		)
Reclassification of awards previously liability-classified that were converted to equity			—		—			(0.1		)	—			—			(0.1		)
Stock-based compensation			—		—			7.3			—			—			7.3
Balance as of September 30, 2018	42,670,728		$	—	$	(717.0	)	$	616.3		$	1,095.0		$	(66.7	)	$	927.6

See notes to unaudited condensed consolidated financial statements.

Table of Contents

Morningstar, Inc. and Subsidiaries

Unaudited Condensed Consolidated Statements of Cash Flows


	Nine months ended September 30						Nine months ended September 30,
(in millions)	2017			2016			2019			2018

Operating activities
Consolidated net income	$	98.0		$	90.7		$	124.4		$	140.6
Adjustments to reconcile consolidated net income to net cash flows from operating activities:
Depreciation and amortization	64.8			52.0			84.0			71.2
Deferred income taxes	1.0			(2.9		)	(2.8		)	6.5
Stock-based compensation expense	16.5			10.6			33.3			23.9
Provision for bad debt	1.3			0.7			0.6			2.6
Equity in net income (loss) of unconsolidated entities	1.0			(0.7		)
Gain on sale of business	(17.5		)	—
Equity in net loss of unconsolidated entities							1.9			1.6
Gain on sale of product line							—			(10.5		)
Gain on sale of equity investments							(19.5		)	(5.6		)
Other, net	2.9			(5.2		)	1.4			(3.3		)
Changes in operating assets and liabilities, net of effects of acquisitions:
Changes in operating assets and liabilities:
Accounts receivable	(0.3		)	13.1			30.6			(29.1		)
Other assets	(3.0		)	(1.4		)
Accounts payable and accrued liabilities	(4.3		)	(3.9		)	(5.0		)	5.9
Accrued compensation	0.2			(20.8		)
Income taxes—current	1.6			6.3
Accrued compensation and deferred commissions							(8.1		)	(7.6		)
Income taxes, current							(6.2		)	(13.7		)
Deferred revenue	6.2			4.1			21.0			21.0
Deferred rent	(1.1		)	(2.7		)
Other liabilities	(2.6		)	3.3
Other assets and liabilities							(3.7		)	6.0
Cash provided by operating activities	164.7			143.2			251.9			209.5

Investing activities
Purchases of investments	(22.7		)	(24.4		)	(28.1		)	(23.7		)
Proceeds from maturities and sales of investments	20.6			21.6			27.8			22.3
Capital expenditures	(46.4		)	(47.5		)	(57.1		)	(55.2		)
Acquisitions, net of cash acquired	(1.0		)	(15.8		)	(673.9		)	—
Proceeds from sale of a business	23.7			—
Purchases of equity- and cost-method investments	(24.3		)	(16.4		)
Proceeds from sale of a product line							—			10.5
Proceeds from sale of equity investments							17.0			7.9
Purchases of equity investments							(1.4		)	(0.5		)
Other, net	0.6			—			(0.6		)	(0.3		)
Cash used for investing activities	(49.5		)	(82.5		)	(716.3		)	(39.0		)

Financing activities
Common shares repurchased	(41.3		)	(38.8		)	(4.9		)	(10.8		)
Dividends paid	(29.6		)	(28.5		)	(35.9		)	(31.9		)
Proceeds from short-term debt	—			40.0
Repayment of short-term debt	—			(15.0		)
Proceeds from long-term debt							610.0			—
Repayment of long-term debt	(45.0		)	—			(132.8		)	(90.0		)
Proceeds from stock-option exercises	0.2			0.4			0.1			0.1
Employee taxes paid from withholding of restricted stock units	(3.4		)	(4.4		)	(12.8		)	(11.5		)
Other, net	(0.4		)	—			(0.4		)	(1.1		)
Cash used for financing activities	(119.5		)	(46.3		)
Cash provided by (used for) financing activities							423.3			(145.2		)

Effect of exchange rate changes on cash and cash equivalents	15.5			(2.1		)	(6.4		)	(10.5		)
Net increase in cash and cash equivalents	11.2			12.3
Net increase (decrease) in cash and cash equivalents							(47.5		)	14.8
Cash and cash equivalents—beginning of period	259.1			207.1			369.3			308.2
Cash and cash equivalents—end of period	$	270.3		$	219.4		$	321.8		$	323.0

Supplemental disclosure of cash flow information:
Cash paid for income taxes	$	37.5		$	43.3		$	45.9		$	55.3
Cash paid for interest	$	3.8		$	0.8		$	6.5		$	2.7
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
Unrealized gain (loss) on available-for-sale investments							$	2.4		$	(0.2	)

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)~~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~~2018, filed with the SEC on ~~February 28, 2017~~March 1, 2019 (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

Significant changes to our accounting policies as a result of adopting ASU No. 2016-02, Leases, are discussed below. We discuss our other 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.Recently adopted accounting pronouncements

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.

~~Table of Contents~~

~~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.

Leases:On February 25, 2016, the FASB issued ASU No. 2016-02, Leases(Topic 842), which ~~will require~~requires lessees to recognize almost all leases on their balance sheet as a right-of-use asset and a lease liability. Expenses are recognized in the consolidated statement of income in a manner similar to previous accounting guidance. Topic 842 originally required the use of a modified retrospective approach upon adoption. In July 2018, the FASB issued ASU No. 2018-11, Leases (Topic 842) - Targeted Improvements, which allows an additional transition method to adopt the new lease standard at the adoption date instead of the beginning of the earliest period presented. We elected this transition method at the adoption date of January 1, 2019.

We also chose to elect the following practical expedients upon adoption: not to reassess whether any expired or existing contracts are or contain leases, not to reassess the lease classification for any expired or existing leases, not to reassess initial direct costs for any existing leases, and not to separately identify lease and nonlease components (i.e. maintenance costs) except for real estate leases. Additionally, we elected the short-term lease exemption, and are only applying the requirements of Topic 842 to long-term leases (leases greater than 1 year).

The adoption of Topic 842 resulted in the presentation of $118.8 million of operating lease assets and $145.8 million of operating lease liabilities on the consolidated balance sheet as of March 31, 2019. At implementation, we also reclassified $27.9 million in deferred rent liabilities related to these leases, which decreased recognized operating lease assets. The new standard did not have a material impact on the statement of income. See Note 9 for additional information.

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Income Statement-Reporting Comprehensive Income: On February 14, 2018, the FASB issued ASU No. 2018-02, Income Statement-Reporting Comprehensive Income (Topic 220): Reclassification of Certain Tax Effects from Accumulated Other Comprehensive Income, to address a specific consequence of the Tax Cuts and Jobs Act of 2017 (the Tax Reform Act) by allowing a reclassification from accumulated other comprehensive income (loss) to retained earnings for stranded tax effects resulting from the Tax Reform Act’s reduction of the U.S. federal corporate income tax rate. The new standard became effective for us on January 1, 2019 and is to be applied either in the period of adoption or retrospectively to each period in which the effect of the change in the U.S. federal corporate income tax rate in the Tax Reform Act is recognized. We did not elect to reclassify any stranded tax effects from accumulated other comprehensive income (loss) to retained earnings; therefore, the adoption did not have an impact on our consolidated financial statements and related disclosures.

Compensation—Stock Compensation: On June 20, 2018, the FASB issued ASU No. 2018-07, Compensation—Stock Compensation (Topic 718) - Improvements to Nonemployee Share-Based Payment Accounting, which aligns the accounting for share-based payment awards issued to employees and nonemployees. Under the new standard, the existing employee guidance will apply to nonemployee share-based transactions (as long as the transaction is not effectively a form of financing), with the exception of specific guidance related to the attribution of compensation cost. The cost of nonemployee awards will continue to be recorded as if the grantor had paid cash for the goods or services. In addition, the contractual term can be used in lieu of an expected term in the option-pricing model for nonemployee awards. The new standard became effective for us on January 1, 2019 and will be applied to all new awards granted after the date of adoption. The adoption did not have an impact on our consolidated financial statements and related disclosures.

Codification Improvements to Investments - Debt and Equity Securities: On July 17, 2018, the FASB issued ASU No. 2018-09, Codification Improvements (ASU No. 2018-09), which modifies the disclosure requirements on debt and equity securities related to ASC 320, Investments - Debt and Equity Securities. ASU No. 2018-09 removes the requirement for these disclosures when an entity provides summarized interim financial information. The new standard became 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 willadoption did not have an impact on our consolidated financial ~~statements and related disclosures.~~statements.

Recently issued accounting pronouncements not yet adopted

Current Expected Credit Losses: On ~~August 26,~~June 16, 2016, the FASB issued ASU No. ~~2016-15,~~ ~~Statement~~2016-13, Financial Instruments-Credit Losses (Topic 326): Measurement of ~~Cash Flows: Classification~~Credit Losses on Financial Instruments (ASU No. 2016-13), which requires that expected credit losses relating to financial assets measured on an amortized cost basis and available-for-sale debt securities be recorded through an allowance for credit losses. ASU No. 2016-13 limits the amount of ~~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 likelycredit losses to be ~~the predominant source or use of cash flow.~~

~~The new standard is effective~~recognized for ~~us on January 1, 2018. Early adoption is permitted, including adoption in an interim period, but requires all elements of the amendments~~available-for-sale debt securities 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.

~~Table of Contents~~

~~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~~and also requires the ~~carrying amount~~reversal 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~~previously recognized credit losses 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.fair value increases. The new standard is effective for us on January 1, 2020. ~~The new standard should be applied prospectively.~~ Early adoption is ~~permitted~~permitted. On April 25, 2019, the FASB issued ASU No. 2019-04, Codification Improvements (ASU No. 2019-04), which clarifies certain aspects of accounting for ~~any impairment tests performed after January 1, 2017.~~credit losses. On May 15, 2019, the FASB issued ASU No. 2019-05, Financial Instruments-Credit Losses (Topic 326): Targeted Transition Relief (ASU No. 2019-05), which allows entities to elect the fair value option on certain financial instruments. We believe that the most notable impact of these standards may relate to our processes around the assessment of the adequacy of our allowance for doubtful accounts on accounts receivable and the recognition of credit losses. We are ~~evaluating~~finalizing our evaluation of the ~~effect that~~impact of adopting ASU No. ~~2017-04 will have~~2016-13, ASU No. 2019-04 and ASU No. 2019-05 on our consolidated financial statements and related disclosures.

Disclosure Framework - Changes to the Disclosure Requirements for Fair Value Measurement:On ~~May 10, 2017,~~August 28, 2018, the FASB issued ASU No. ~~2017-09,~~ ~~Compensation—Stock Compensation: Scope of Modification Accounting~~2018-13,~~which clarifies when to account for a change~~ Fair Value Measurement (Topic 820): Disclosure Framework - Changes to the ~~terms or conditions~~Disclosure Requirements for Fair Value Measurement (ASU No. 2018-13), which eliminates, adds and modifies certain disclosure requirements around items such as transfers between Level 1 and 2, policy of ~~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~~timing of ~~the award (as equity or liability) changes as a result of the change in terms or conditions.~~transfers, and valuation process for Level 3. The new standard is effective for us on January 1, ~~2018. The new standard should be applied prospectively. Early adoption is permitted.~~2020. We are ~~evaluating~~finalizing our evaluation of the ~~effect that~~impact of adopting ASU No. ~~2017-09 will have~~2018-13 on our consolidated financial statements and related disclosures.

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Cloud Computing: On August 29, 2018, the FASB issued ASU No. 2018-15, Customer's Accounting for Fees Paid in a Cloud Computing Arrangement (ASU No. 2018-15), which helps entities evaluate the accounting for fees paid by a customer in a cloud computing arrangement (CCA) by providing guidance for determining when an arrangement includes a software license and when an arrangement is solely a hosted CCA service. Under ASU No. 2018-15, customers will apply the same criteria for capitalizing implementation costs as they would for an arrangement that has a software license. The new guidance also prescribes the balance sheet, income statement, and cash flow classification of the capitalized implementation costs and related amortization expense and requires additional quantitative and qualitative disclosures. The new standard is effective for us on January 1, 2020. Early adoption is permitted, including adoption in any interim period for which financial statements have not been issued. Entities can choose to adopt the new guidance prospectively to eligible costs incurred on or after the date this guidance is first applied or retrospectively. We are finalizing our evaluation of the impact of adopting ASU No. 2018-15 on our consolidated financial statements and related disclosures.

3. Credit Arrangements

Long-term debt

The following table summarizes our long-term debt as of September 30, 2019 and December 31, 2018.



(in millions)	As of September 30, 2019		As of December 31, 2018
July 2019 Term Facility, net of unamortized debt issuance costs of $1.4 million	$	445.8	$	—
July 2019 Revolving Credit Facility	100.0		—
Prior Revolving Credit Facility	—		70.0
Total debt	$	545.8	$	70.0
Less: Current portion of long-term debt, net of unamortized debt issuance costs of $0.3 million	11.0		—
Long-term debt	$	534.8	$	70.0

Credit Agreement

In ~~November 2016, we amended our~~connection with the acquisition of Ratings Acquisition Corp (DBRS) on July 2, 2019, the Company entered into a new senior credit agreement ~~to provide us~~(the Credit Agreement). The Credit Agreement provides the Company with a ~~three-year~~five-year multi-currency credit facility with aan initial borrowing capacity of up to $750.0 million, including a $300.0 ~~million.~~million revolving credit facility (the Revolving Credit Facility) and a term loan facility of $450.0 million (the Term Facility). The ~~credit agreement~~Credit Agreement also provides for the issuance of up to ~~$25.0~~$50.0 million of letters of credit and a $100.0 million sub-limit for a swingline facility under the ~~revolving credit facility.~~

Revolving Credit Facility. The new Credit Agreement will expire on July 2, 2024.

The interest rate applicable to any loan under the ~~credit agreement~~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%~~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 and any other lawful corporate purpose.

The portions of deferred debt issuance costs related to the Revolving Credit Facility are included in other current and other non-current assets, and the portion of deferred debt issuance costs related to the Term Facility is reported as a reduction to the carrying amount of the Term Facility. Amortization of debt issuance costs is recorded as interest expense over the term of the Credit Agreement.

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Prior Revolving Credit Facility

The new Credit Agreement replaced the prior $300.0 million five-year credit facility (the Prior Revolving Credit Facility), which was scheduled to expire on December 21, 2020. The Prior Revolving Credit Facility was repaid and terminated by the Company upon execution of the Credit Agreement.

In December 2018, we amended the Prior Revolving Credit Facility to extend the maturity date to December 21, 2020 with no other changes in terms. The credit agreement provided us with a borrowing capacity of up to $300.0 million and provided for issuance of up to $25.0 million of letters of credit. The interest rate applicable to any loan under the credit agreement was, at our option, either: (i) the applicable LIBOR plus an applicable margin for such loans, which ranged 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 ranged between 2.00% and 2.75%, based on our consolidated leverage ratio.

Compliance with Covenants

The ~~credit agreement also~~Credit Agreement contains financial covenants under which we: (i) may not exceed a maximum consolidated leverage ratio of ~~3.00~~3.50 to 1.00 (or 3.75 to 1.00 for the four fiscal quarters following any material acquisition (as defined in the Credit Agreement)) and (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.~~2019.

~~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, Divestitures, Goodwill, and Other Intangible Assets

~~2017~~ Acquisitions

On July 2, 2019, we acquired 100% of voting equity interests of DBRS for total cash consideration of $682.1 million. DBRS delivers comprehensive credit rating services and ongoing surveillance to customers in various market sectors across Europe, the U.S., and Canada. The combination of DBRS with Morningstar Credit Ratings' business (collectively, DBRS Morningstar) will expand global asset class coverage and provide investors with fixed-income analysis and research through the combined platform.

We ~~did not complete any significant acquisitions~~began consolidating the financial results of this acquisition in our Consolidated Financial Statements on July 2, 2019. DBRS Morningstar contributed $49.6 million of revenue and $51.6 million of operating expense during the three-month period ended September 30, 2019. We incurred transaction-related costs of $1.1 million and $2.9 million during the third quarter and first nine months of ~~2017.~~2019.

~~2016 Acquisitions~~

InThe transaction has been accounted for using the ~~third quarter~~acquisition method of ~~2017, we did not make any significant changes~~accounting, which requires that assets acquired and liabilities assumed be recognized at their fair values as of the acquisition date. Morningstar was the accounting acquirer for purposes of accounting for the business combination. The values assigned to the ~~preliminary purchase price allocation related to our acquisition of PitchBook Data, Inc. compared with the~~assets acquired and liabilities assumed are based on preliminary estimates ~~at December 31, 2016.~~of fair value available as of September 30, 2019, and may be adjusted during the measurement period of up to 12 months from the date of acquisition as further information becomes available. Any changes in the fair values of the assets acquired and liabilities assumed during the measurement period may result in adjustments to goodwill.

As of September 30, 2019, we completed our initial determination of the fair values of the acquired, identifiable assets and liabilities based on the information available. The primary areas that are not yet finalized due to information that may become available subsequently and may result in changes in the values assigned to various assets and liabilities include assumed current and deferred tax assets and liabilities. If additional information that existed as the time of the acquisition date becomes available within 12 months of the acquisition date, there may be adjustments to the initial fair value measurements.

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The following table summarizes our allocation of the estimated fair values of the assets acquired and liabilities assumed at the date of acquisition:



	(in millions)
Cash consideration transferred	$	682.1

Cash and cash equivalents	$	8.5
Accounts receivable	30.0
Property, equipment, and capitalized software, net	12.9
Intangible assets, net	288.2
Goodwill	468.3
Operating lease asset	33.5
Other current and non-current assets	4.4
Deferred revenue	(43.3		)
Deferred tax liability, net	(65.6		)
Operating lease liability	(33.5		)
Other current and non-current liabilities	(21.3		)
Total fair value of DBRS	$	682.1

Accounts receivable acquired were recorded at gross contractual amounts receivable, which approximates fair value. We expect to collect substantially all of the gross contractual amounts receivable within a reasonable period of time after the acquisition date.

The preliminary allocation of the estimated fair values of the assets acquired and liabilities assumed includes $288.2 million of acquired intangible assets, as follows:



	(in millions)		Weighted average useful life (years)
Customer-related assets	$	223.2	10
Technology-based assets	29.4		6
Intellectual property (trademarks)	35.6		6
Total intangible assets	$	288.2

We recognized a preliminary net deferred tax liability of $65.6 million mainly because the amortization expense related to certain intangible assets is not deductible for income tax purposes.

Goodwill of $468.3 million represents the excess over the fair value of the net tangible and intangible assets acquired. Goodwill is not deductible for income tax purposes.

Unaudited Pro Forma Information for DBRS Acquisition

The following unaudited pro forma information presents a summary of our Condensed Consolidated Statements of Income for the nine months ended September 30, 2019 and 2018, as if we had completed the acquisition as of January 1, 2018.

This unaudited pro forma information is presented for illustrative purposes and is not intended to represent or be indicative of the actual results of operations or expected synergies of DBRS Morningstar that would have been achieved had the acquisition occurred at the beginning of the earliest period presented, nor is it intended to represent or be indicative of future results of operations.

In calculating the pro forma information below, we included an estimate of amortization expense related to the intangible assets acquired, depreciation expense due to changes in ~~the preliminary purchase price allocation are subject to change~~estimated remaining useful lives of long-lived assets, reduction in revenue 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~~value adjustments to deferred revenue, and ~~assumed tax assets and liabilities.~~

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

long-term debt.

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~~Goodwill~~



Unaudited Pro Forma Financial Information	Nine months ended September 30,
(in millions, except for per share amount)	2019		2018
Revenue	$	926.8	$	880.6
Operating income	150.6		172.4
Net income	120.6		138.1

Basic net income per share	$	2.82	$	3.24
Diluted net income per share	$	2.80	$	3.21

Divestitures

During the third quarter of 2019, we divested our equity interest in one of our unconsolidated entities and recorded a gain of $19.5 million related to the sale and received $16.7 million of proceeds.

Goodwill

The following table shows the changes in our goodwill balances from December 31, ~~2016~~2018 to September 30, ~~2017~~2019:



	(in millions)
Balance as of December 31, 2018	$	556.7
Acquisition of DBRS	468.3
Foreign currency translation	(9.2		)
Balance as of September 30, 2019	$	1,015.8

(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~~2019 and ~~2016.~~2018. We perform our annual impairment reviews in the fourth ~~quarter.~~quarter or when triggering events are identified.

Intangible Assets

The following table summarizes our intangible assets:


	As of September 30, 2017								As of December 31, 2016								As of September 30, 2019								As of December 31, 2018
(in millions)	Gross		Accumulated Amortization			Net		Weighted Average Useful Life (years)	Gross		Accumulated Amortization			Net		Weighted Average Useful Life (years)	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	$	65.7	$	(31.0	)	$	34.7	8	$	30.8	$	(29.2	)	$	1.6	9
Customer-related assets	156.5		(106.2		)	50.3		12	152.0		(97.7		)	54.3		12	372.9		(121.3		)	251.6		11	153.0		(111.7		)	41.3		12
Supplier relationships	0.2		(0.1		)	0.1		20	0.2		(0.1		)	0.1		20	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	155.4		(106.3		)	49.1		7	126.9		(96.3		)	30.6		7
Non-competition agreements	2.5		(1.9		)	0.6		5	5.0		(3.1		)	1.9		5	2.4		(2.2		)	0.2		5	2.4		(2.1		)	0.3		5
Total intangible assets	$	318.5	$	(217.6	)	$	100.9	10	$	321.3	$	(200.4	)	$	120.9	10	$	596.6	$	(260.9	)	$	335.7	10	$	313.3	$	(239.4	)	$	73.9	10

The following table summarizes our amortization expense related to intangible assets:



	Three months ended September 30,				Nine months ended September 30,
(in millions)	2019		2018		2019		2018
Amortization expense	$	13.3	$	5.2	$	23.1	$	15.7

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 expect intangible amortization expense for the remainder of ~~2017~~2019 and subsequent years as follows:



	(in millions)
Remainder of 2019 (from October 1 through December 31)	$	10.4
2020	50.6
2021	47.3
2022	39.4
2023	39.4
Thereafter	148.6

(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

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



	Three months ended September 30,				Nine months ended September 30,
(in millions, except per share amounts)	2019		2018		2019		2018
Basic net income per share:
Consolidated net income	$	49.1	$	56.9	$	124.4	$	140.6

Weighted average common shares outstanding	42.8		42.6		42.7		42.6

Basic net income per share	$	1.15	$	1.33	$	2.91	$	3.30

Diluted net income per share:
Consolidated net income	$	49.1	$	56.9	$	124.4	$	140.6

Weighted average common shares outstanding	42.8		42.6		42.7		42.6
Net effect of dilutive stock options, restricted stock units, performance share awards, and market stock units	0.4		0.5		0.4		0.4
Weighted average common shares outstanding for computing diluted income per share	43.2		43.1		43.1		43.0

Diluted net income per share	$	1.14	$	1.32	$	2.89	$	3.27

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

Disaggregation of Revenue

The following table presents our revenue disaggregated by revenue type. Sales and usage-based taxes are excluded from revenue.



	Three months ended September 30,				Nine months ended September 30,
(in millions)	2019		2018		2019		2018
License-based	$	204.6	$	196.7	$	601.0	$	559.5
Asset-based	54.5		50.5		155.9		149.9
Transaction-based	54.7		14.1		89.7		47.8
Consolidated revenue	$	313.8	$	261.3	$	846.6	$	757.2

License-based performance obligations are generally satisfied over time as the customer has access to the product or service during the term of the subscription license and the level of service is consistent during the contract period. License-based agreements typically have a term of 12 to 36 months. License-based revenue is sourced from Morningstar Data, Morningstar Direct, Morningstar Advisor Workstation, PitchBook, and other similar products.

Contract liabilities

Our contract liabilities represent deferred revenue. We record contract liabilities when cash payments are received or due in advance of our performance, including amounts which are refundable. The contract liabilities balance as of September 30, 2019 had a net increase of $62.0 million, primarily driven by cash payments received or due in advance of satisfying our performance obligations. We recognized $187.4 million of revenue in the nine-month period ended September 30, 2019 that was included in the contract liabilities balance as of December 31, 2018.

We expect to recognize revenue related to our contract liabilities for the remainder of 2019 and subsequent years as follows:



(in millions)	As of September 30, 2019
Remainder of 2019 (from October 1 through December 31)	$	157.6
2020	276.7
2021	79.9
2022	32.3
2023	13.5
Thereafter	58.5
	$	618.5

The aggregate amount of revenue we expect to recognize for the remainder of 2019 and subsequent years is higher than our contract liability balance of $272.0 million as of September 30, 2019. The difference represents the value of future obligations for signed contracts where we have not yet begun to satisfy the performance obligations or have partially satisfied performance obligations.

The table above does not include variable consideration for unsatisfied performance obligations related to certain of our asset-based and transaction-based contracts as of September 30, 2019. We are applying the optional exemption as the variable consideration relates to these unsatisfied performance obligations being fulfilled as a series. The performance obligations related to these contracts are expected to be satisfied over the next 12 to 36 months as services are provided to the client. For license-based contracts, the consideration received for services performed is based on future user count, which will be known at the time the services are performed. The variable consideration for this revenue can be affected by the number of user licenses. For asset-based contracts, the consideration received for services performed is based on future asset values, which will be known at the time 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 significant movements in the market. For transaction-based contracts, such as internet advertising, the consideration received for services performed is based on the number of impressions, which will be known once impressions are created. The variable consideration for this revenue can be affected by the timing and quantity of impressions in any given period.

The table above does not include revenue for unsatisfied performance obligations related to certain of our license-based and transaction-based contracts as of September 30, 2019. We are applying the optional exemption as the performance obligations for such contracts have an expected duration of one year or less. For certain license-based contracts, the remaining performance obligation is expected to be less than one year based on the corresponding subscription terms. For transaction-based contracts, such as new credit rating issuances and conferences, the related performance obligations are expected to be satisfied within the next 12 months.

Our contract assets represent accounts receivable, less allowance and deferred commissions. We did not record any impairment losses on receivables or deferred commissions in the first nine months of 2019.



(in millions)	As of September 30, 2019		As of December 31, 2018
Accounts receivable, less allowance	$	168.0	$	172.2
Deferred commissions	15.8		14.8
Deferred commissions, non-current	11.7		10.3
Total contract assets	$	195.5	$	197.3



	(in millions)
Balance as of December 31, 2018	$	25.1
Commissions earned and capitalized	16.9
Amortization of capitalized amounts	(14.5		)
Balance as of September 30, 2019	$	27.5

7. Segment and Geographical Area Information

Geographical Area Information



Revenue by geographical area
	Three months ended September 30,				Nine months ended September 30,
(in millions)	2019		2018		2019		2018
United States	$	225.3	$	198.7	$	628.4	$	566.0

United Kingdom	27.0		17.9		63.9		54.6
Continental Europe	22.3		20.1		63.6		60.3
Australia	9.7		9.9		29.2		31.2
Canada	20.7		7.4		36.4		22.6
Asia	7.3		5.9		20.4		18.1
Other	1.5		1.4		4.7		4.4
Total International	88.5		62.6		218.2		191.2

Consolidated revenue	$	313.8	$	261.3	$	846.6	$	757.2



Operating lease assets by geographical area

(in millions)	As of September 30, 2019		As of December 31, 2018
United States	$	81.8	$	—

United Kingdom	12.4		—
Continental Europe	7.5		—
Australia	5.9		—
Canada	7.7		—
Asia	22.2		—
Other	0.7		—
Total International	56.4		—

Consolidated operating lease assets	$	138.2	$	—

8. ~~Investments and~~ Fair Value Measurements

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

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~~.

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

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

Three months ended September 30 Nine months ended September 30
(in millions) 2017
2016
2017
2016
Unrealized gains, net $ —
$ —
$ 0.1
$ 0.1

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
$ —
$ —

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
$ —
$ —

~~We measure the fair value of money market funds, mutual funds, equity securities, and exchange-traded funds~~valuations based on quoted prices in active markets for identical assets or ~~liabilities. We did not hold any securities categorized~~liabilities that we have the ability to access, and, therefore, are classified as Level ~~2 or Level 3 as of~~ ~~September 30, 2017~~ ~~and~~ ~~December 31, 2016~~.1 within the fair value hierarchy.

We determine whether an arrangement is or includes an embedded lease at contract inception. Operating lease assets and lease liabilities are recognized at 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.

The following table summarizes our operating assets and lease liabilities:



Leases (in millions)	Balance Sheet Classification	As of September 30, 2019
Assets
Operating	Operating lease assets	$	138.2

Liabilities
Current
Operating	Operating lease liabilities	$	33.3
Non-current
Operating	Operating lease liabilities, non-current	132.3
Total lease liabilities		$	165.6

Our operating lease expense for the three and nine months ended September 30, 2019 was $9.1 million and $24.9 million, respectively. Charges related to our operating leases that are variable and, therefore, not included in the measurement of the lease liabilities, were $3.7 million and $9.4 million for the three and nine months ended September 30, 2019, respectively. We made lease payments of $7.0 million and $21.4 million during the three and nine months ended September 30, 2019, respectively.

The following table summarizes 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 2019 (October 1 through December 31)	$	9.6
2020	39.7
2021	35.9
2022	23.2
2023	19.7
Thereafter	63.2
Total lease payments	191.3
Adjustment for discount to present value	25.7
Total	$	165.6

As of September 30, 2019, we had $22.8 million of executed operating leases included in the table above, primarily for office space, that have not yet commenced. These leases will commence over the remainder of 2019 and 2020 with lease terms of 9 years to 10 years.



	As of September 30, 2019
Weighted-average remaining lease term (in years)	6.60

Weighted-average discount rate	4.1	%

10. 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)	2019		2018		2019		2018
Cost of revenue	$	3.2	$	3.1	$	10.0	$	9.0
Sales and marketing	1.4		0.8		4.2		2.5
General and administrative	6.2		3.4		19.1		12.4
Total stock-based compensation expense	$	10.8	$	7.3	$	33.3	$	23.9

Table of Contents

1011. Income Taxes

Effective Tax Rate

The following table shows our effective tax rate for the three and nine months ended September 30, ~~2017~~2019 and September 30, ~~2016~~2018:



	Three months ended September 30,						Nine months ended September 30,
(in millions)	2019			2018			2019			2018
Income before income taxes and equity in net income (loss) of unconsolidated entities	$	63.5		$	72.7		$	162.8		$	184.5
Equity in net income (loss) of unconsolidated entities	(1.1		)	0.3			(1.9		)	(1.6		)
Total	$	62.4		$	73.0		$	160.9		$	182.9
Income tax expense	$	13.3		$	16.1		$	36.5		$	42.3
Effective tax rate	21.3		%	22.1		%	22.7		%	23.1		%

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~~2019 was ~~33.3%~~21.3% and ~~29.1%~~22.7%, ~~a respective decrease of 2.0 and 4.8 percentage points~~reflecting nominal decreases 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.prior year.

Unrecognized Tax Benefits

The table below provides information ~~concerning~~regarding our gross unrecognized tax benefits as of September 30, ~~2017~~2019 and December 31, ~~2016~~2018, as well as the effect these gross unrecognized tax benefits would have on our income tax expense, if they were recognized.



(in millions)	As of September 30, 2019		As of December 31, 2018
Gross unrecognized tax benefits	$	12.6	$	13.1
Gross unrecognized tax benefits that would affect income tax expense	12.6		13.1
Decrease in income tax expense upon recognition of gross unrecognized tax benefits	12.4		12.6

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~~The table below summarizes our liabilities for unrecognized tax ~~benefits.~~benefits as of September 30, 2019 and December 31, 2018. These amounts include interest and penalties, less any associated tax benefits.



Liabilities for Unrecognized Tax Benefits (in millions)	As of September 30, 2019		As of December 31, 2018
Current liability	$	9.5	$	6.6
Non-current liability	4.2		7.1
Total liability for unrecognized tax benefits	$	13.7	$	13.7

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.~~United States (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,~~U.S., as well as tax authorities in certain non-U.S. jurisdictions. It is possible that the examination phase of some of ~~these~~our current audits will conclude in ~~2017~~2019. It is not possible to reasonably estimate the effect of current audits on previously recorded unrecognized tax benefits.

~~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%~~72% of our cash, cash equivalents, and investments balance as of September 30, ~~2017~~2019 was held by our operations outside of the ~~United States.~~U.S. In February 2019, we repatriated approximately $45.8 million of our foreign earnings back to the U.S. Otherwise, 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,~~U.S., 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~~additional repatriation of earnings from these foreign subsidiaries. ~~It is not practical to determine the amount~~

Table of ~~the unrecognized deferred tax liability related to the undistributed earnings.~~Contents

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~~which would result in an increase to 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.

12. Contingencies

~~Michael D. Green~~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 whether any such matter presents a loss contingency that is probable and estimable on an ongoing basis.

Data Audits and Reviews

In ~~August 2017, Michael D. Green, individually~~our global data business, we include in our products, or directly redistribute to our customers, data and ~~purportedly on behalf~~information licensed from third-party vendors. Our compliance with the terms of ~~all others similarly situated, filed a complaint in~~these licenses is subject to audit by the ~~United States District Court for~~third-party vendors, and we also regularly review our compliance with 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 violationterms of the ~~Racketeering Influenced~~licenses. We are undergoing several such third-party vendor audits 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 plaintiffinternal reviews, and the ~~members~~results and findings may indicate that we may be required to make a payment for prior data usage. Due to a variety of factors, including lack of available information and data, the unique nature of each audit and internal review, as well as potential variations of the ~~putative class, treble damages, injunctive relief, costs, and attorneys’ fees. Morningstar has filed~~audit or internal review findings, we are not able to reasonably estimate a ~~motion to dismiss the complaint, which is fully briefed and under advisement by the court. Although Morningstar is vigorously contesting the claim asserted,~~possible loss, or range of losses, for some matters. While we cannot predict the ~~outcome~~outcomes, we do not believe the results of ~~the proceeding.~~any audits will have a material adverse effect on our business, operating results, or financial position.

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 it to be reasonably possible for the result of any of these matters ~~will~~to have a material adverse effect on our business, operating results, or financial position.

1213. Share Repurchase Program

~~We have an ongoing authorization, originally approved by our~~In December 2017, the board of directors ~~in September 2010 and subsequently amended,~~approved a share repurchase program that authorizes the Company to repurchase up to ~~$1.0 billion~~$500.0 million in shares of ~~our~~the Company's outstanding common ~~stock.~~stock effective January 1, 2018. The authorization expires on December 31, ~~2017.~~2020. We may repurchase shares from time to time at prevailing market prices on the open market or in private transactions in amounts that we deem appropriate.

As of September 30, ~~2017~~,2019, we ~~had~~ repurchased a total of ~~10,561,496~~244,180 shares for ~~$713.5~~$25.6 million under this authorization, leaving approximately ~~$286.5~~$474.4 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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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, including the integration of DBRS Morningstar, 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;

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liability related to the storage of personal information related to individuals as well as portfolio and account-level information;

inadequacy of our business continuity program in the event of a material emergency or adverse political or regulatory developments;

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~~decreasing popularity of ~~passively~~actively managed investment ~~vehicles;~~vehicles and increased industry consolidation;

~~liability associated with~~an outage of our database, technology-based products and services, or network facilities or the ~~storage~~movement of ~~personal information related to individuals as well as portfolio and account-level information;~~

~~liability relating~~parts of our technology infrastructure to the ~~acquisition or redistribution of data or information we acquire or errors included therein;~~public cloud;

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~~volatility in the financial sector, global financial markets, and global ~~economy;~~

~~the~~economy and its effect ~~of market volatility~~ on our revenue from asset-based ~~fees;~~fees and credit ratings business;

~~an outage~~the failure of ~~our database, technology-based products~~acquisitions and ~~services, or network facilities;~~other investments to be efficiently integrated and produce the results we anticipate;

the failure to recruit, develop, and retain qualified employees;

challenges faced by our non-U.S. operations, including the concentration of data and development work at our offshore facilities in China and ~~India.~~India;

liability relating to the acquisition or redistribution of data or information we acquire or errors included therein; and

the failure to protect our intellectual property rights or claims of intellectual property infringement against us.

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~~ 2018 (our Annual ~~Report)~~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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Understanding our Company

Our Business

Our mission is to ~~create great products~~empower investor success. The investing ecosystem is complex and navigating it with confidence requires a trusted, independent voice. Our perspective is delivered to institutions, advisors, and individuals with a single-minded purpose: to empower every investor with the conviction that ~~help~~he or she can make better-informed decisions and realize success on his or her own terms.

We deliver insights and experiences to clients that are essential to investing. Proprietary data sets, meaningful analytics, independent research and effective investment strategies are at the core of the powerful digital solutions that 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.rely on. We generate revenue through products and services in three ~~main business models:~~major categories:

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 primarily one-time, non-recurring revenue.

Industry ~~Overview~~Trends

~~Equity~~Global equity markets ~~continued their positive trend~~experienced heightened volatility in the third quarter of ~~2017.~~2019 on falling interest rates and increased concern over global trade wars; however, the Morningstar Global Markets Index, which contains stocks from 47 developed and emerging markets, represented little change from where the third quarter began. The Morningstar U.S. Market Index rose 1.3% in the third quarter as compared with a ~~broad market benchmark, was up 4.0% for~~1.5% decline in the Global Ex-U.S. Index. Morningstar’s Developed Markets Ex-U.S. Index decreased approximately 0.7% in the third quarter of ~~2017 and 12.5% year-to-date,~~2019, while the ~~Global Ex-U.S.~~Emerging Markets Index finished the ~~quarter up 6.2% and 21.5% year-to-date.~~same period down 3.9%.

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 tocomprised of both long-term open-end and exchange-traded funds ~~during~~(ETFs), totaled $19.5 trillion as of September 30, 2019, compared with $19.0 trillion as of September 30, 2018. The U.S. ETF industry benefited from strong investor inflows, ending the third quarter of ~~2017, compared~~2019 with ~~an outflow~~about $4.1 trillion in assets under management, up from $3.7 trillion at the end of ~~$9.5 billion~~September 2018. Assets in U.S. long-term open-end funds also increased to $15.4 trillion as of September 30, 2019 from $15.3 trillion as of September 30, 2018. In the third quarter of ~~2016. Continuing a long-term trend,~~2019, investors continued to ~~heavily~~ favor lower-cost, passively managed vehicles, as passively managed funds, including open-end funds and ETFs, attracted $78.6 billion of inflows over the three-month period compared with about $23.9 billion of outflows for ~~new~~actively managed funds. Morningstar estimates that investors added $59.2 billion to passively managed ETFs during the second quarter of 2019, while passively managed long-term open-end funds collected about $19.4 billion of 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~~The fixed-income market generated relatively strong returns in the ~~equity markets, we believe~~third quarter driven mainly by the ~~business environment~~continued decrease in interest rates, which pushed bond prices higher across the board. The Morningstar U.S. Core Bond Index, the broadest measure of the fixed-income universe, rose by 2.3%. The Morningstar U.S. Corporate Bond Index, which is a proxy for the ~~financial services industry remains challenging~~investment-grade market, rose 3.0%. Despite robust returns year-to-date, Morningstar’s Emerging Market Composite Index rose only 1.4%, as economic weakness in ~~some respects. Low interest rates~~Asia and the ~~industrywide shift~~strong dollar combined to ~~passive~~form a strong headwind for emerging market bonds throughout the third quarter.

Total U.S. venture capital (VC) investment ~~management have continued~~reached $96.7 billion through the first three quarters, which puts 2019 on pace to ~~put pressure on spending~~be the second-highest year for ~~many asset management firms.~~

~~Financial advisors~~VC investment behind record totals in 2018. Despite some high-profile setbacks in the IPO market, total exit value for 2019 is already at an all-time high of more than $200 billion. Fewer VC funds are being closed and 15 mega-funds have been ~~adapting to~~raised YTD, with more on the ~~increasing demand~~horizon, laying the foundation for ~~solutions that are~~strong VC activity in the ~~best interest~~coming quarters.

The U.S. private equity (PE) industry is also experiencing another robust year in 2019 with activity approximately matching the figures posted through the first three quarters of ~~investors, including new fiduciary standards, an increasing emphasis on keeping fees low,~~2018. On the year, PE activity reached nearly 4,000 deals and ~~improved client communication. Despite ongoing~~eclipsed half a trillion dollars in value. PE-backed exits, meanwhile, are experiencing a downturn as corporates are less willing to spend amidst economic uncertainty ~~about~~and the ~~scope of potential regulatory changes, we believe recent shifts, such as~~IPO market has been mixed. 2019 year-to-date fundraising nearly matches 2018’s full-year figures with 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.quarter remaining.

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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) $ 121.7
$ 103.4
17.7 %
Morningstar Investment Management
Morningstar Managed Portfolios $ 37.4
$ 29.4
(4) 27.2 %
Institutional Asset Management 54.1
59.9
(9.7 )%
Asset Allocation Services 8.8
7.6
15.8 %
Manager Selection Services 1.4
1.3
7.7 %
Morningstar Investment Management (total) $ 101.7
$ 98.2
3.6 %

Our employees (approximate)
Worldwide headcount 4,820
(5) 4,170
(6) 15.6 %

Three months ended September 30 Nine months ended September 30
(in millions) 2017
2016
Change
2017
2016
Change
Key product revenue (7)

Morningstar Data $ 40.8
$ 38.0
7.5 % $ 119.7
$ 112.8
6.1 %
Morningstar Direct 32.2
27.9
15.5 % 92.0
82.2
11.9 %
Morningstar Investment Management 26.3
24.7
6.6 % 78.0
73.7
5.8 %
Morningstar Advisor Workstation 22.2
20.7
6.9 % 64.8
62.0
4.6 %
Workplace Solutions 18.4
17.6
4.5 % 55.3
50.5
9.4 %

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Revenue by Type (7)

License-based (8)
$ 168.3
$ 142.2
18.4 % $ 489.3
$ 423.7
15.5 %
Asset-based (9)
47.4
43.1
10.0 % 137.9
125.3
10.1 %
Transaction-based (10)
14.2
10.8
31.1 % 41.4
37.4
10.5 %

Other Metrics
Average assets under management and advisement ($bil) $ 217.9
$ 196.5
10.9 % $ 210.8
$ 188.4
11.9 %
Number of new-issue ratings completed (11)
30
9
233.3 % 57
35
62.9 %
Asset value of new-issue ratings ($bil) (11)
$ 8.6
$ 5.1
68.6 % $ 23.1
$ 15.4
50.0 %



		Three months ended September 30,						Nine months ended September 30,
(in millions)		2019		2018		Change		2019		2018		Change
Revenue by type ⁽¹⁾
License-based ⁽²⁾		$	204.6	$	196.7	4.0	%	$	601.0	$	559.5	7.4	%
Asset-based ⁽³⁾		54.5		50.5		7.9	%	155.9		149.9		4.0	%
Transaction-based ⁽⁴⁾		54.7		14.1		287.9	%	89.7		47.8		87.7	%

Key product area revenue ⁽¹⁾
Morningstar Data		$	48.9	$	46.5	5.2	%	$	146.3	$	137.6	6.3	%
Morningstar Direct		37.4		34.4		8.7	%	110.5		102.5		7.8	%
PitchBook		38.7		25.3		53.0	%	106.1		70.0		51.6	%
Morningstar Investment Management		29.8		27.9		6.8	%	85.3		83.9		1.7	%
DBRS Morningstar ⁽⁵⁾		49.6		8.6		476.7	%	69.7		24.6		183.3	%
Morningstar Advisor Workstation		22.2		23.6		(5.9	)%	66.8		68.2		(2.1	)%
Workplace Solutions		20.0		19.1		4.7	%	58.2		56.0		3.9	%

		As of September 30,
		2019		2018		Change
Select business metrics
Morningstar Direct licenses		15,660		14,751		6.2	%
PitchBook Platform licenses		32,587		20,195		61.4	%
Advisor Workstation clients (U.S.)		167		180		(7.2	)%
Morningstar.com Premium Membership subscriptions (U.S.)		111,424		117,340		(5.0	)%

Assets under management and advisement (approximate) ($bil)
	Workplace Solutions
	Managed Accounts	$	65.5	$	63.1	3.8	%
	Fiduciary Services	47.5		43.1		10.2	%
	Custom Models	34.3		29.5		16.3	%
	Workplace Solutions (total)	$	147.3	$	135.7	8.5	%
	Investment Management
	Morningstar Managed Portfolios	$	45.9	$	45.6	0.7	%
	Institutional Asset Management	16.0		16.0		—	%
	Asset Allocation Services	7.7		10.6		(27.4	)%
	Investment Management (total)	$	69.6	$	72.2	(3.6	)%

Asset value linked to Morningstar Indexes ($bil)		64.0		45.4		41.0	%

		Three months ended September 30,						Nine months ended September 30,
		2019		2018		Change		2019		2018		Change
Average assets under management and advisement ($bil)		$	216.9	$	205.5	5.5	%	$	209.3	$	201.9	3.7	%

(1) ~~Included for informational purposes only; Morningstar did not acquire full ownership of PitchBook until December 2016.~~

(2) The asset totals shown above (including assets we either manage directly or on which we provide consulting or subadvisory work) only include assets for which we receive basis-point fees. Some of our client contracts include services for which we receive a flat fee, but we do not include those assets in the total reported above.

Excluding changes related to new contracts and cancellations, changes in the value of assets under advisement can come from two primary sources: gains or losses related to overall trends in market performance, and net inflows or outflows caused when investors add to or redeem shares from these portfolios.

Excluding for Morningstar Managed Portfolios, it's difficult for our Investment Management business to quantify these cash inflows and outflows. The information we receive from most of our clients does not separately identify the effect of cash inflows and outflows on asset balances for each period. We also cannot specify the effect of market appreciation or depreciation because the majority of our clients have discretionary authority to implement their own portfolio allocations.

(3) Many factors can cause changes in assets under management and advisement for our managed retirement accounts, including employer and employee contributions, plan administrative fees, market movements, and participant loans and hardship withdrawals. The information we receive from the plan providers does not separately identify these transactions or the changes in balances caused by market movement.

~~(4) Revised to include the assets from South Africa.~~

~~(5) Includes approximately 385 PitchBook employees, who are not reflected in the September 30, 2016 headcount total.~~

~~(6) Revised to exclude temporary employees and part-time employees who work less than 30 hours a week.~~

~~(7)~~ Key product area revenue and revenue by type includes the effect of foreign currency ~~translations.~~translation.

~~(8)~~Table of Contents

(2) License-based revenue includes Morningstar Data, Morningstar Direct, Morningstar Advisor Workstation, ~~Morningstar Enterprise Components, Morningstar Research,~~ PitchBook, ~~Data,~~ and other similar products. Excluding the non-recurring revenue benefit from a $10.5 million license fee related to an amended license agreement included in the prior period results, license-based revenue grew 9.9% and 9.5% during the third quarter and first nine months of 2019, respectively.

~~(9)~~(3) Asset-based revenue includes Morningstar Investment Management, Workplace Solutions, and Morningstar Indexes.

~~(10)~~(4) Transaction-based revenue includes DBRS Morningstar, internet advertising sales, and conferences.

(5) Revenue for the three and nine months ended September 30, 2018 reflects Morningstar Credit Ratings. Revenue for the first six months of 2019 includes revenue from Morningstar Credit Ratings ~~Internet advertising sales, and Conferences.~~only, while revenue for the three months ended September 30, 2019 reflects DBRS Morningstar.

~~(11) Includes commercial mortgage-backed securities, residential mortgage-backed securities, other asset-backed securities, and corporate and financial institutions.~~

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Three ~~and Nine~~ Months Ended September 30, ~~2017~~2019 vs. Three ~~and~~ ~~Nine~~ Months Ended September 30, ~~2016~~2018

Consolidated Results


	Three months ended September 30									Nine months ended September 30									Three months ended September 30,									Nine months ended September 30,
Key Metrics (in millions)	2017			2016			Change			2017			2016			Change			2019			2018			Change			2019			2018			Change
Revenue	$	229.9		$	196.1		17.3	%		$	668.6		$	586.4		14.0	%
Consolidated revenue																			$	313.8		$	261.3		20.1	%		$	846.6		$	757.2		11.8	%
Operating income	$	52.8		$	44.2		19.7	%		$	127.2		$	130.9		(2.8	)%		49.6			65.4			(24.2	)%		149.9			166.5			(10.0	)%
Operating margin	23.0		%	22.5		%	0.5		pp	19.0		%	22.3		%	(3.3	)	pp	15.8		%	25.0		%	(9.2	)	pp	17.7		%	22.0		%	(4.3	)	pp

Cash provided by operating activities	$	62.5		$	60.4		3.5	%		$	164.7		$	143.2		15.0	%		$	105.7		$	79.8		32.5	%		$	251.9		$	209.5		20.2	%
Capital expenditures	(13.1		)	(18.1		)	(27.6	)%		(46.4		)	(47.5		)	(2.3	)%		(20.1		)	(19.6		)	2.6	%		(57.1		)	(55.2		)	3.4	%
Free cash flow	$	49.4		$	42.3		16.8	%		$	118.3		$	95.7		23.6	%		$	85.6		$	60.2		42.2	%		$	194.8		$	154.3		26.2	%

~~NMF - not meaningful,~~ pp — percentage points

To supplement our consolidated financial statements presented in accordance with U.S. Generally Accepted Accounting Principles (GAAP), we use the following non-GAAP measures:

organic revenue - consolidated revenue excluding acquisitions, divestitures, adoption of accounting changes, and the effect of foreign currency ~~translations (organic revenue);~~translations;

international organic revenue - consolidated international revenue excluding acquisitions, divestitures, adoption of accounting changes, and the effect of foreign currency translations;

adjusted operating income - consolidated operating income excluding ~~PitchBook (adjusted~~acquisition-related amortization and integration expenses;

adjusted operating ~~income);~~

margin - consolidated operating margin excluding ~~PitchBook (adjusted operating margin);~~acquisition-related amortization and integration expenses; and

free cash ~~flow.~~flow - cash provided by or used for operating activities less capital expenditures.

These non-GAAP measures may not be comparable to similarly titled measures reported by other companies and should not be considered an alternative to any measure of performance as promulgated under GAAP.

We ~~define free cash flow as cash provided by or used for~~present organic revenue and international organic revenue because we believe these non-GAAP measures help investors better compare period-over-period results.

We present adjusted operating ~~activities less capital expenditures.~~ income and adjusted operating margin to show the effect of the DBRS acquisition, better reflect period-over-period comparisons, and improve overall understanding of the underlying performance of the business absent the impact of the DBRS acquisition.

We present free cash flow solely as supplemental disclosure to help investors better understand ~~how much~~the level of cash is available after ~~making~~ capital expenditures. Our management team uses free cash flow to evaluate our business. ~~Free cash flow is not equivalent to any measure required to be reported under GAAP.~~

Consolidated Revenue


	Three months ended September 30						Nine months ended September 30						Three months ended September 30,						Nine months ended September 30,
(in millions)	2017		2016		Change		2017		2016		Change		2019		2018		Change		2019		2018		Change
Consolidated revenue	$	229.9	$	196.1	17.3	%	$	668.6	$	586.4	14.0	%	$	313.8	$	261.3	20.1	%	$	846.6	$	757.2	11.8	%

In the third quarter of ~~2017~~2019, consolidated revenue increased ~~17.3%~~20.1% to $~~229.9~~313.8 million. ~~Our acquisition of PitchBook Data, Inc. (PitchBook) in December 2016 contributed $16.6 million of revenue during the~~ ~~third quarter~~ ~~of 2017.~~ Foreign currency movements had a ~~positive effect~~negative impact in the quarter, ~~increasing~~reducing revenue by approximately ~~$1.4~~$2.6 million.

~~During~~

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License-based revenue grew 4.0% during the third quarter~~, we experienced continued growth~~ of 2019, driven by demand for ~~license-based products such as~~PitchBook, Morningstar Direct, and Morningstar Data. ~~Revenue~~PitchBook exhibited strong levels of both new account sales as well as existing client renewals and upgrades, which resulted in an increase in revenue of $13.4 million during the quarter. Strong contributions from international markets helped to drive revenue growth of $3.0 million and $2.4 million for both Morningstar Direct ~~rose $4.3 million, reflecting growth in licenses for both new~~ and ~~existing clients.~~ Morningstar Data, respectively. During the third quarter of 2018, licensed-based revenue ~~also~~included a $10.5 million license fee related to an amended license agreement that did not recur in the third quarter of 2019.

Asset-based revenue increased ~~$2.9 million, mainly reflecting new contracts~~7.9% during the third quarter of 2019 supported by positive equity market performance. Average assets under management and ~~renewals for managed products data and our market data business.~~advisement (calculated based on available average quarterly or monthly data) were approximately $216.9 billion in the third quarter of 2019 compared with $205.5 billion in the third quarter of 2018.

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~~Products and services that mainly generate~~Morningstar Investment Management revenue ~~from asset-based fees~~ increased ~~$4.3~~$1.9 million during the third quarter, ~~mainly~~primarily driven by ~~strong~~the gross revenue contribution from the Morningstar Funds Trust of $2.9 million, which offset ongoing fee compression resulting from a shift in the asset mix toward lower-fee strategies. Revenue from Workplace Solutions increased $0.9 million during the quarter due to asset growth in ~~Workplace Solutions~~custom models and fiduciary services. Total assets linked to Morningstar ~~Managed Portfolios.~~Indexes grew 41.0% over the prior year period, which contributed to revenue growth.

~~Revenue from Morningstar Credit Ratings also increased $3.1 million~~Transaction-based revenue nearly tripled during the third quarter of ~~2017, primarily~~2019, driven by the $41.0 million revenue contribution of the newly combined credit ratings operation, DBRS Morningstar. Excluding the impact of the combined credit ratings contribution, transaction-based revenue declined 8.1% due to ~~new-issue growth~~decreases in ~~asset-backed securities.~~advertising revenue on Morningstar.com, which declined 10.5% in the third quarter of 2019.

For the first nine months of ~~2017,~~2019, consolidated revenue was up ~~14.0%~~11.8% to ~~$668.6~~$846.6 million, compared with ~~$586.4~~$757.2 million in the same period of ~~2016. PitchBook contributed $44.8 million~~2018. Foreign currency movements had a negative effect in the first nine months of 2019, reducing revenue by approximately $11.1 million.

License-based revenue grew 7.4% during the first nine months of ~~2017.~~2019 driven by PitchBook, Morningstar Data, and Morningstar Direct. Revenue from PitchBook, Morningstar Data, and Morningstar Direct ~~Morningstar Managed Portfolios, Morningstar Data, Morningstar Credit Ratings,~~increased $36.1 million, $8.7 million, and ~~Workplace Solutions were~~$8.0 million, respectively, due to the same factors listed above. Licensed-based revenue for the first nine months of 2018 also ~~primary contributors~~included a $10.5 million license fee related to ~~growth~~an amended license agreement that did not recur in the first nine months of 2019.

Asset-based revenue increased 4.0% during the first nine months of ~~2017.~~

2019, primarily driven by Morningstar Managed Portfolios, Morningstar Indexes, and Workplace Solutions. Morningstar Managed Portfolios revenue increased $4.1 million, primarily driven by the gross revenue contribution of Morningstar Funds Trust of $6.3 million, which was offset by a shift in the asset mix toward lower fee strategies. Revenue from ~~asset-based fees made up~~Morningstar Indexes increased $2.5 million, driven by the same factors described above. Workplace Solutions revenue increased $2.2 million due primarily to growth in custom models and fiduciary services. Average assets under management and advisement were approximately ~~16% of consolidated revenue~~$209.3 billion in the ~~third quarter and~~ first nine months of ~~2017,~~2019 compared with ~~approximately 17% for~~$201.9 billion in the ~~same periods~~first nine months of 2018.

Transaction-based revenue grew 87.7% during the first nine months of 2019 from the $45.1 million revenue contribution of DBRS Morningstar. Excluding the impact of the combined credit ratings operations, transaction-based revenue declined 13.7% due to decreases in ~~2016.~~advertising revenue on Morningstar.com, which declined 16.9% in the first nine months of 2019.

Organic revenue

To allow for more meaningful comparisons of our results in different periods, we provide information about organic revenue, which reflects our underlying business excluding acquisitions, divestitures, adoption of accounting changes, and the effect of foreign currency translations. ~~In the third quarter of 2017,~~We exclude revenue from acquired businesses from our organic revenue ~~increased 8.7%~~growth calculation for a period of 12 months after ~~excluding a favorable effect of $1.4 million from foreign currency translations and $16.6 million of incremental~~we complete the acquisition. For divestitures, we exclude revenue ~~from acquisitions, primarily from PitchBook. Our third quarter of 2016 results included revenue of $1.1 million from HelloWallet, which we divested~~ in the ~~second quarter of 2017, and that did not recur~~prior period for which there is no comparable revenue in the ~~third quarter~~current period.

Table of ~~2017.~~Contents

For the first nine months of 2017, organic revenue increased 7.0% after excluding an unfavorable effect of $3.0 million from foreign currency translations and $45.1 million of incremental revenue from acquisitions, almost entirely from PitchBook. Revenue in the first nine months of 2016 included $1.1 million of revenue from HelloWallet, which we divested in the second quarter of 2017, and that did not recur in the first nine months 2017.

The table below reconciles consolidated revenue ~~with~~to organic revenue:



	Three months ended September 30,								Nine months ended September 30,
(in millions)	2019			2018			Change		2019			2018			Change
Consolidated revenue	$	313.8		$	261.3		20.1	%	$	846.6		$	757.2		11.8	%
Less: acquisitions	(49.6		)	(8.6		)	476.7	%	(49.6		)	(8.6		)	476.7	%
Less: divestitures	—			—			—		—			—			—
Less: adoption of accounting changes ⁽¹⁾	—			—			—		—			—			—
Effect of foreign currency translations	2.6			—			NMF		11.1			—			NMF
Organic revenue	$	266.8		$	252.7		5.6	%	$	808.1		$	748.6		7.9	%

NMF - not meaningful

(1) On January 1, 2019, we adopted ASU No. 2016-02, Leases (Topic 842), which had no impact on timing and recognition of revenue. See Note 2 and Note 9 of the Notes to our Unaudited Condensed Consolidated Financial Statements for additional information.

Excluding revenue from DBRS Morningstar and the unfavorable impact of foreign currency translations, organic revenue ~~(revenue~~increased 5.6% and 7.9% during the third quarter of 2019 and the first nine months of 2019, respectively.

The combination of DBRS and Morningstar’s U.S.-based credit ratings operations makes it difficult to ascribe the origin of revenue growth to either entity. As such, revenue from the entire credit ratings operation will be excluded from the reporting of organic revenue growth through the second quarter of 2020. Prior periods results have been adjusted to conform to this presentation. PitchBook, Morningstar Data, and Morningstar Direct were the main drivers of the increase in organic revenue during both periods.

Revenue by region



	Three months ended September 30,						Nine months ended September 30,
(in millions)	2019		2018		Change		2019		2018		Change
United States	$	225.3	$	198.7	13.4	%	$	628.4	$	566.0	11.0	%

United Kingdom	27.0		17.9		50.8	%	63.9		54.6		17.0	%
Continental Europe	22.3		20.1		10.9	%	63.6		60.3		5.5	%
Australia	9.7		9.9		(2.0	)%	29.2		31.2		(6.4	)%
Canada	20.7		7.4		179.7	%	36.4		22.6		61.1	%
Asia	7.3		5.9		23.7	%	20.4		18.1		12.7	%
Other	1.5		1.4		7.1	%	4.7		4.4		6.8	%
Total International	88.5		62.6		41.4	%	218.2		191.2		14.1	%

Consolidated revenue	$	313.8	$	261.3	20.1	%	$	846.6	$	757.2	11.8	%

International revenue comprised approximately 25% of our consolidated revenue in both the third quarter and first nine months of 2019 and 2018. Approximately 60% is generated by continental Europe and the U.K., with most of the remainder from Canada, Australia, and Asia.

Table of Contents

The table below presents a reconciliation from international revenue to international organic revenue (international revenue excluding acquisitions, divestitures, adoption of accounting changes and the effect of foreign currency translations):


	Three months ended September 30								Nine months ended September 30								Three months ended September 30,							Nine months ended September 30,
(in millions)	2017			2016			Change		2017			2016			Change		2019			2018		Change		2019			2018		Change
Consolidated revenue	$	229.9		$	196.1		17.3	%	$	668.6		$	586.4		14.0	%
International revenue																	$	88.5		$	62.6	41.4	%	$	218.2		$	191.2	14.1	%
Less: acquisitions	(16.6		)	—			NMF		(45.1		)	—			NMF		(23.2		)	—		NMF		(23.2		)	—		NMF
Less: divestitures	—			(1.1		)	NMF		—			(1.1		)	NMF		—			—		—	%	—			—		—	%
Favorable (unfavorable) effect of foreign currency translations	(1.4		)	—			NMF		3.0			—			NMF
Organic revenue	$	211.9		$	195.0		8.7	%	$	626.5		$	585.3		7.0	%
Less: adoption of accounting changes																	—			—		—	%	—			—		—	%
Effect of foreign currency translations																	2.6			—		NMF		11.1			—		NMF
International organic revenue																	$	67.9		$	62.6	8.5	%	$	206.1		$	191.2	7.8	%

Revenue from international operations was up 41.4% and 14.1% in the third quarter of 2019 and first nine months of 2019, respectively, primarily as a result of our acquisition of DBRS, which has a significant revenue base in Canada, the U.K., and Continental Europe. International organic revenue increased 8.5% and 7.8% during the third quarter and first nine months of 2019, respectively, primarily due to Morningstar Data and Morningstar Direct.

Consolidated Operating Expense

~~Revenue by region~~

Three months ended September 30 Nine months ended September 30
(in millions) 2017
2016
Change
2017
2016
Change
United States $ 171.8
$ 143.5
19.7 % $ 503.4
$ 430.6
16.9 %

United Kingdom 17.0
15.2
11.8 % 47.5
45.8
3.7 %
Continental Europe 18.2
16.0
13.8 % 51.0
47.3
7.8 %
Australia 8.8
8.3
6.0 % 25.5
24.1
5.8 %
Canada 7.5
7.1
5.6 % 22.0
20.6
6.8 %
Asia 5.3
5.0
6.0 % 15.7
15.1
4.0 %
Other 1.3
1.0
30.0 % 3.5
2.9
20.7 %
Total International 58.1
52.6
10.5 % 165.2
155.8
6.0 %

Consolidated revenue $ 229.9
$ 196.1
17.3 % $ 668.6
$ 586.4
14.0 %



	Three months ended September 30,									Nine months ended September 30,
(in millions)	2019			2018			Change			2019			2018			Change
Cost of revenue	$	128.4		$	100.0		28.4	%		$	341.0		$	302.2		12.8	%
% of consolidated revenue	40.9		%	38.3		%	2.6		pp	40.3		%	39.9		%	0.4		pp
Sales and marketing	44.0			35.8			22.9	%		129.7			113.7			14.1	%
% of consolidated revenue	14.0		%	13.7		%	0.3		pp	15.3		%	15.0		%	0.3		pp
General and administrative	57.2			35.4			61.6	%		142.0			103.6			37.1	%
% of consolidated revenue	18.2		%	13.4		%	4.8		pp	16.8		%	13.7		%	3.1		pp
Depreciation and amortization	34.6			24.7			40.1	%		84.0			71.2			18.0	%
% of consolidated revenue	11.0		%	9.5		%	1.5		pp	9.9		%	9.4		%	0.5		pp
Total operating expense	$	264.2		$	195.9		34.9	%		$	696.7		$	590.7		17.9	%
% of consolidated revenue	84.2		%	75.0		%	9.2		pp	82.3		%	78.0		%	4.3		pp

~~International revenue made up about 25%~~Consolidated operating expense increased $68.3 million, or 34.9%, in the third quarter of ~~our consolidated revenue~~2019 and $106.0 million, or 17.9%, in the first nine months of ~~2017~~2019. DBRS Morningstar contributed 19.9% to operating expense growth, including acquisition-related amortization and ~~2016. About 60% of this amount is from Continental Europe and the United Kingdom, with most of~~integration expenses. Operating expenses for the remainder ~~from Australia, Canada, and Asia.~~

~~Consolidated Operating Expense~~

Three months ended September 30 Nine months ended September 30
(in millions) 2017
2016
Change
2017
2016
Change

Cost of revenue $ 90.9
$ 84.9
7.1 % $ 283.2
$ 256.3
10.5 %
  % of consolidated revenue 39.5 % 43.3 % (3.8 ) pp 42.4 % 43.7 % (1.3 ) pp
Sales and marketing 31.1
23.1
35.0 % 100.2
71.1
41.1 %
  % of consolidated revenue 13.6 % 11.8 % 1.8
pp 15.0 % 12.1 % 2.9
pp
General and administrative 33.3
25.8
29.0 % 93.2
76.1
22.5 %
  % of consolidated revenue 14.5 % 13.2 % 1.3
pp 13.9 % 13.0 % 0.9
pp
Depreciation and amortization 21.8
18.1
19.7 % 64.8
52.0
24.5 %
  % of consolidated revenue 9.5 % 9.2 % 0.3
pp 9.7 % 8.9 % 0.8
pp
Total operating expense $ 177.1
$ 151.9
16.6 % $ 541.4
$ 455.5
18.9 %
  % of consolidated revenue 77.0 % 77.5 % (0.5 ) pp 81.0 % 77.7 % 3.3
pp

~~PitchBook contributed $18.5 million~~Compensation expense (which primarily consists of ~~operating expense, primarily for salaries, amortization expense, professional fees, and commission expense, during the third quarter of 2017.~~

~~The remaining~~

Table of Contents

We had 6,557 employees worldwide as of September 30, 2019 compared with 5,230 as of September 30, 2018. This increase ~~was primarily~~reflects continued investment in resources to support our key growth initiatives, including operations in India and the United States. This increase also includes approximately 502 employees who joined Morningstar as a result of ~~higher compensation expense (including salaries, bonus, and other company-sponsored benefits), depreciation expense, and professional fees, offset by an increase~~the DBRS acquisition in ~~capitalized software development.~~July 2019.

Cost of revenue increased ~~$6.0~~$28.4 million in the third quarter of ~~2017.~~2019. Higher ~~professional fees~~compensation expense of ~~$3.9~~$20.6 million was the largest contributor to the increase with salary expense increasing $14.2 million. DBRS Morningstar contributed $16.5 million of the increase in compensation expense with salary expense increasing $10.2 million. Higher production expense of $5.1 million also contributed to the unfavorable variance in this category, mainly due to $2.9 million in the fees paid to sub-advisors and other costs related to the Morningstar Funds Trust.

Sales and marketing expense increased $8.2 million in the third quarter of ~~2016.~~2019, primarily due to higher compensation and sales commission expense. Compensation expense increased $5.0 million, driven by a $4.0 million increase in salary expense which was partially offset by a decrease in bonus expense. DBRS Morningstar contributed $2.1 million of increased compensation expense, driven by $1.1 million in salary expense. Sales commission expense increased $1.3 million due to strong PitchBook sales performance.

An increase in internally developed capitalized software partially offset these increases. We capitalized $34.6 million associated with software development activities related to the same products mentioned above in the first nine months of 2017 compared to $19.2 million in the first nine months of 2016.

~~Sales and marketing~~

For the first nine months of 2017, sales and marketing expense increased about $29.1 million, reflecting a $17.9 million increase in compensation expense (including salaries, bonus, and other company-sponsored benefits) and a $8.1 million increase in sales commission expense.

General and administrative

Depreciation and amortization

Consolidated Operating Income and Operating Margin

Non-Operating Income, ~~(Expense),~~Net, Equity in Net Income (Loss) of Unconsolidated Entities, and Effective Tax Rate and Income Tax Expense

Non-operating income, ~~(expense)~~net

During the third quarter of 2019 and first nine months of 2019, the gain on sale of equity investments relates to ~~our~~the sale of ~~HelloWallet~~our equity ownership in ~~June 2017.~~one of our unconsolidated entities. During the third quarter of 2018 and first nine months of 2018, the gain on sale of equity investments relates to the sale of a portion of our equity ownership interest in Morningstar Japan K.K. (MJKK).

Equity in net income (loss) of unconsolidated entities

Equity in net income (loss) of unconsolidated entities primarily reflects income from ~~Morningstar Japan K.K. (MJKK)~~MJKK offset by losses in our other equity method investments.

Effective tax rate and income tax expense

Liquidity and Capital Resources

As of September 30, ~~2017,~~2019, we had cash, cash equivalents, and investments of ~~$324.0~~$352.8 million, ~~an increase~~a decrease of ~~$20.0~~$43.1 million compared with ~~$304.0~~$395.9 million as of December 31, ~~2016.~~2018. The ~~increase~~decrease reflectscash provided by operating activities and proceeds from long-term debt of ~~$23.7~~$610.0 million ~~related to the sale of HelloWallet,~~ partially offset by ~~$46.4~~$673.9 million paid for the acquisition of ~~capital expenditures, $45.0~~DBRS, $132.8 million of repayments of long-term debt, $57.1 million of capital expenditures, dividends paid of $35.9 million, and ~~$41.3~~$12.8 million for employee taxes paid from withholding of restricted stock units. We also used $4.9 million to repurchase common stock through our share repurchase program, of which ~~$0.7~~$0.3 million was repurchased in the fourth quarter of ~~2016~~2018, but settled and paid ~~early~~ in ~~the first half of 2017. Dividends paid of $29.6 million and purchases of equity-method investments of $24.3 million also offset the cash inflows.~~January 2019.

Cash provided by operating activities is our main source of cash. In the first nine months of ~~2017~~,2019, cash provided by operating activities was $~~164.7~~251.9 million, reflecting $~~168.0~~223.3 million of net income, adjusted for non-cash items, and ~~offset by~~ an additional $~~3.3~~28.6 million ~~in negative~~ of positive changes from our net operating assets and ~~liabilities, which included bonus payments of $38.4 million.~~liabilities.

~~In November 2016,~~On July 2, 2019, we ~~amended our~~entered into a new senior credit agreement (the Credit Agreement), the initial borrowings under which were made to ~~provide us~~finance the DBRS acquisition, and repaid all outstanding obligations under the prior credit facility. The Credit Agreement provides the Company with a ~~three-year~~five year multi-currency credit facility with aan initial borrowing capacity of up to $750.0 million, including a $300.0 million revolving credit facility and a term loan facility of $450.0 million. We had an outstanding principal balance of ~~$205.0~~$534.8 million as of September 30, ~~2017, leaving~~2019 and a revolving credit facility borrowing availability of ~~$95.0~~$200.0 million. The ~~credit agreement~~Credit Agreement also contains financial covenants under which we: (i) may not exceed a maximum consolidated leverage ratio of ~~3.00~~3.50 to 1.00 (or 3.75 to 1.00 for the four fiscal quarters following any material acquisition (as defined in the Credit Agreement)) and (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 atas of September 30, ~~2017.~~2019. See Note 3 of the Notes to our Unaudited Condensed Consolidated Financial Statements for additional information on our new Credit Agreement.

In December ~~2015, our~~2017, the board of directors approved a ~~$300.0 million increase to our~~ share repurchase program ~~bringing~~that authorizes the ~~total amount authorized under~~Company to repurchase up to $500.0 million in shares of the ~~program to $1.0 billion. We may repurchase shares from time to time at prevailing market prices~~Company's outstanding common stock, effective January 1, 2018. The authorization expires on ~~the open market or in private transactions in amounts that we deem appropriate.~~December 31, 2020. In the first nine months of ~~2017,~~2019, we repurchased a total of ~~533,371~~41,935 shares for ~~$40.6 million. As of September 30, 2017, we have repurchased a total of~~ ~~10.6~~$4.6 million ~~shares for~~ ~~$713.5 million~~ and had approximately ~~$286.5~~$474.4 million available for future repurchases as of September 30, ~~2017.~~2019.

We expect to continue making capital expenditures in ~~2017~~2019, primarily for computer hardware and software provided by third parties, internally developed software, and leasehold improvements for new and existing office locations. We continue to adopt more public cloud and software as a service applications for new initiatives and are in the process of migrating relevant parts of our data centers to the public cloud over the next several years. During this migration, we expect to run certain applications and infrastructure in parallel. These actions will have some transitional effects on our level of capital expenditures and operating expenses.

Consolidated Free Cash Flow

We generated free cash flow of ~~$49.4~~$85.6 million in the third quarter of ~~2017~~2019, an increase of ~~$7.1~~$25.4 million compared with the third quarter of ~~2016.~~2018. The change primarily reflects a ~~$2.1~~$25.9 million increase in cash provided by operating activities.

~~In the first nine months of 2017, we generated free cash flow of $118.3 million, an~~ increase of $22.6 million compared with free cash flow of $95.7 million in the same period of 2016. The increase reflects a $21.5 million increase in cash provided by operating activities as well as a $1.1 million decrease in capital expenditures.

Application of Critical Accounting Policies and Estimates

Rule 10b5-1 Sales Plans

Name and Position
Date of
Plan
Plan Termination Date
Number of
Shares
to be
Sold under
the Plan

Timing of Sales under the Plan Number of Shares Sold under the Plan through October 15, 2017

Projected
Beneficial
Ownership (1)

Steven Kaplan Director 4/25/2017 12/21/2017 7,500
Shares to be sold under the plan on specified dates —
43,003
Gail Landis Director 11/15/2016 2/28/2018 1,500
Shares to be sold under the plan if the stock reaches specified prices 1,000
4,703
Jack Noonan Director 7/28/2017 1/25/2018 20,000
Shares to be sold under the plan if the stock reaches a specified price —
28,717

Name and Position

Date of

Plan

Plan Termination Date

Number of

to be

Sold under

the Plan

Timing of Sales under the Plan

Number of Shares Sold under the Plan through October 15, 2019

Projected

Beneficial

Ownership (1)

Bevin Desmond

Head of Talent and Culture

8/6/2019

12/31/2019

1,515

Shares to be sold under the plan if the stock reaches specified prices

—

52,201

Steven Kaplan

Director

7/31/2019

8/27/2020

2,316

Shares to be sold under the plan if the stock reaches specified prices

—

41,892

Gail Landis

Director

8/12/2019

10/28/2020

1,500

Shares to be sold under the plan if the stock reaches specified prices

—

2,891

Joe Mansueto

Executive Chairman

11/26/2018

4/30/2020

1,600,000

Shares to be sold under the plan if the stock reaches specified prices

800,000

20,415,674

Caroline Tsay

Director

8/6/2019

11/15/2020

964

Shares to be sold under the plan if the stock reaches specified prices

—

1,696

~~During the third quarter of 2017, the previously disclosed Rule 10b5-1 sales plans for Bevin Desmond and Tricia Rothschild completed in accordance with their respective terms.~~

______________________

Our investment portfolio is actively managed and may suffer losses from fluctuating interest rates, market prices, or adverse security selection. These accounts may consist 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. As of September 30, ~~2017~~2019, our cash, cash equivalents, and investments balance was $~~324.0~~352.8 million. Based on our estimates, a 100 basis-point change in interest rates would not have a material effect on the fair value of our investment portfolio.

We are subject to risk from fluctuations in the interest rates related to our long-term debt. The interest rates are based upon the applicable LIBOR rate plus an applicable margin for such loans or the lender's base rate plus an applicable margin for such loans. On an annualized basis, ~~based on LIBOR rates around September 30, 2017,~~ we estimate a 100 basis-point change in the LIBOR rate would have a ~~$2.1~~$5.5 million impact on our interest ~~expense.~~expense based on our outstanding principal balance and LIBOR rates around September 30, 2019.

We are subject to risk from fluctuations in foreign currencies from our operations outside of the United States. To date, we have not engaged in currency hedging, and we do not currently have any positions in derivative instruments to hedge our currency risk.

We carried out an evaluation, under the supervision and with the participation of management, including our chief executive officer and chief financial officer, of the effectiveness of the design and operation of our disclosure controls and procedures, as defined in Rules 13a-15(e) and 15d-15(e) of the Exchange Act of 1934, as of September 30, ~~2017~~2019. Based on that evaluation, our chief executive officer and chief financial officer concluded that our disclosure controls and procedures are effective to provide reasonable assurance that information required to be disclosed in the reports we file or submit under the Exchange Act is recorded, processed, summarized, and reported as and when required and is accumulated and communicated to management, including the chief executive officer and chief financial officer, as appropriate, to allow timely decisions regarding required disclosure.

Table of Contents


PART 2.	OTHER INFORMATION


Item 1.	Legal Proceedings

We incorporate by reference the information regarding legal proceedings set forth in Note 11~~, Contingencies,~~12 of the Notes to our Unaudited Condensed Consolidated Financial Statements contained in Part 1, Item 1 of this Quarterly Report on Form 10-Q.


Item 1A.	Risk Factors

There have been no material changes to the risk factors disclosed in Item 1A. Risk Factors in our Annual Report.


Item 2.	Unregistered Sales of Equity Securities and Use of Proceeds

Issuer Purchases of Equity Securities

Subject to applicable law, we may repurchase shares at prevailing market prices directly on the open market or in privately negotiated transactions in amounts that we deem appropriate.

~~We have an ongoing authorization, originally approved by our~~In December 2017, the board of directors ~~in September 2010, and subsequently amended,~~approved a share repurchase program that authorizes the Company to repurchase up to ~~$1.0 billion~~$500.0 million in shares of ~~our~~the Company's outstanding common ~~stock.~~stock, effective January 1, 2018. The authorization expires on December 31, ~~2017.~~2020.

The following table presents information related to repurchases of common stock we made during the three months ended September 30, ~~2017~~2019:

Period:
Total number
of shares
purchased

Average
price paid
per share

Total number
of shares
purchased as
part of publicly
announced
programs

Approximate
dollar value of
shares that
may yet be
purchased
under the
programs

July 1, 2017 - July 31, 2017 126,458
$ 78.46
126,458
$ 286,469,896
August 1, 2017 - August 31, 2017 —
—
—
$ 286,469,896
September 1, 2017 - September 30, 2017 —
—
—
$ 286,469,896
Total 126,458
$ 78.46
126,458



Period:	Total number of shares purchased	Average price paid per share		Total number of shares purchased as part of publicly announced programs	Approximate dollar value of shares that may yet be purchased under the programs
July 1, 2019 - July 31, 2019	—	$	—	—	$	474,439,476
August 1, 2019 - August 31, 2019	—	—		—	474,439,476
September 1, 2019 - September 30, 2019	—	—		—	474,439,476
Total	—	$	—	—

Table of Contents


Item 6.	Exhibits



Exhibit No		Description of Exhibit

10.1		Amendment No. 1 to Credit Agreement dated as of August 13, 2019 among Morningstar, Inc., certain subsidiaries of Morningstar, Inc., and Bank of America, N.A.

31.1		Certification of Chief Executive Officer pursuant to Rule 13a-14(a) and 15d-14(a) of the Securities Exchange Act of 1934, as amended

31.2		Certification of Chief Financial Officer pursuant to Rule 13a-14(a) and 15d-14(a) of the Securities Exchange Act of 1934, as amended

32.1		Certification of Chief Executive Officer pursuant to 18 U.S.C. 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002

32.2		Certification of Chief Financial Officer Pursuant to 18 U.S.C. 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002

101		The following ~~financial~~ information from Morningstar, Inc.’s Quarterly Report on Form 10-Q for the quarter ended September 30, ~~2017,~~2019, filed with the SEC on October ~~27, 2017~~30, 2019 formatted in Inline XBRL: (i) Cover Page, (ii) Unaudited Condensed Consolidated Statements of Income, ~~(ii)~~(iii) Unaudited Condensed Consolidated Statements of Comprehensive Income ~~(iii)~~(iv) Unaudited Condensed Consolidated Balance Sheets, ~~(iv)~~(v) Unaudited Condensed Consolidated Statement of Equity, ~~(v)~~(vi) Unaudited Condensed Consolidated Statements of Cash Flows and ~~(vi)~~(vii) the Notes to Unaudited Condensed Consolidated Financial Statements

104		Cover Page Interactive Data File (the cover page XBRL tags are embedded in the Inline XBRL document).

Table of Contents

SIGNATURE

Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.



		MORNINGSTAR, INC.

Date: October ~~27, 2017~~30, 2019	By:	/s/ Jason Dubinsky
		Jason Dubinsky
		Chief Financial Officer

3743



	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



	(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



	(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


External revenue by geographical area
Property, equipment, and capitalized software, net by geographical area
	Three months ended September 30				Nine months ended September 30
(in millions)	2017		2016		2017		2016		As of September 30, 2019		As of December 31, 2018
United States	$	171.8	$	143.5	$	503.4	$	430.6	$	129.4	$	126.4

United Kingdom	17.0		15.2		47.5		45.8		5.5		3.8
Continental Europe	18.2		16.0		51.0		47.3		2.1		1.3
Australia	8.8		8.3		25.5		24.1		4.2		5.0
Canada	7.5		7.1		22.0		20.6		2.8		0.3
Asia	5.3		5.0		15.7		15.1		6.9		6.5
Other	1.3		1.0		3.5		2.9		0.6		0.2
Total International	58.1		52.6		165.2		155.8		22.1		17.1

Consolidated revenue	$	229.9	$	196.1	$	668.6	$	586.4
Consolidated property, equipment, and capitalized software, net									$	151.5	$	143.5



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


~~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	$	—	$	—



	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	$	—	$	—




Revenue by Type (7)
License-based (8)	$	168.3	$	142.2	18.4	%	$	489.3	$	423.7	15.5	%
Asset-based (9)	47.4		43.1		10.0	%	137.9		125.3		10.1	%
Transaction-based (10)	14.2		10.8		31.1	%	41.4		37.4		10.5	%

Other Metrics
Average assets under management and advisement ($bil)	$	217.9	$	196.5	10.9	%	$	210.8	$	188.4	11.9	%
Number of new-issue ratings completed (11)	30		9		233.3	%	57		35		62.9	%
Asset value of new-issue ratings ($bil) (11)	$	8.6	$	5.1	68.6	%	$	23.1	$	15.4	50.0	%


	Nine months ended September 30, 2017												Nine months ended September 30, 2019
(in millions, except foreign currency rates)	Euro			British Pound			Australian Dollar			Other Foreign Currencies			Euro			British Pound			Canadian Dollar			Australian Dollar			Other Foreign Currencies
Currency rate in U.S. dollars as of September 30, 2017	1.1816			1.3403			0.7834			—
Currency rate in U.S. dollars as of September 30, 2019													1.0918			1.2300			0.7553			0.6754			-

Percentage of revenue	4.9		%	7.1		%	3.7		%	8.9		%	4.8		%	7.5		%	4.3		%	3.4		%	5.7		%
Percentage of operating income (loss)	10.2		%	0.3		%	4.1		%	(8.0		)%	13.5		%	1.2		%	8.1		%	2.9		%	(20.6		)%

Estimated effect of a 10% adverse currency fluctuation on revenue	$	(1.5	)	$	(2.6	)	$	(2.0	)	$	(4.5	)	$	(5.1	)	$	(8.1	)	$	(3.6	)	$	(3.7	)	$	(5.7	)
Estimated effect of a 10% adverse currency fluctuation on operating income (loss)	$	(0.6	)	$	—		$	(0.4	)	$	1.2		$	(2.6	)	$	(0.2	)	$	(1.2	)	$	(0.6	)	$	3.9