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CHICAGO, Oct. 26, 2022 /PRNewswire/ -- Morningstar, Inc. (Nasdaq: MORN), a leading provider of independent investment research, posted solid third-quarter revenue growth, driven by continued momentum across the license-based areas of the business.
"Growth in our license-based products remains a bright spot as investments in these areas are bearing fruit," said Kunal Kapoor, Morningstar's chief executive officer. "The broad decline in global markets and rising interest rates proved more challenging for our asset- and transaction-based product areas. We are being prudent and moderating hiring activity as we navigate the current environment."
Third-Quarter 2022 Financial Highlights
Year-to-Date Financial Highlights
Overview of Financial Results
Third-Quarter 2022 Results
Revenue grew 9.2% to $468.2 million. Organic revenue, which excludes all M&A-related revenue, accounting changes, and foreign currency effects, grew 8.5% versus the prior year, led by strong growth in license-based product areas.
License-based revenue grew 19.4% versus the prior year, or 18.3% on an organic basis. PitchBook, Morningstar Sustainalytics, Morningstar Data, and Morningstar Direct all provided meaningful contributions to growth in the quarter, collectively growing 24.5% on an organic basis. Asset-based revenue declined 1.6% year over year, or 5.3% organically, primarily due to lower revenue from Investment Management and Workplace Solutions, which reflected the continued downturn in global markets. Transaction-based revenue declined 20.7% versus the prior year, or 17.8% on an organic basis, as a result of a marked slowdown in global credit ratings activity.
Operating expense increased 23.6% to $446.2 million, including costs of $30.1 million as the Company began to significantly reduce its China operations and to shift work related to its global business functions to other Morningstar locations. Excluding the impact of these costs, operating expenses increased 15.2%. The largest contributors to operating expense growth were severance-related costs, compensation costs, stock-based compensation, professional fees, sales commissions, and travel and related expenses.
Third-quarter operating income declined 67.6% to $22.0 million. Adjusted operating income declined 8.3% to $76.6 million. Third-quarter operating margin was 4.7%, compared with 15.8% in the prior year. Adjusted operating margin was 16.4% in the third quarter of 2022, versus 19.4% in the prior year. In addition to reflecting expense growth, margins were negatively impacted by declines in revenue in the asset- and transaction-based product areas.
Net income (loss) in the third quarter of 2022 was ($9.0) million, or ($0.21) per diluted share, compared with net income (loss) of $49.0 million, or $1.13 per diluted share, in the third quarter of 2021. The net loss includes the impact of non-operating losses, which represent realized and unrealized foreign exchange losses, realized losses on the sale of investments, and unrealized losses on mark-to-market equity securities. Adjusted diluted net income (loss) per share declined 44.2% to $0.77 in the third quarter of 2022, compared with $1.38 in the prior year, primarily due to lower operating income, higher interest expense, and foreign exchange losses.
The tax provision in the third quarter of 2022 reflected a tax against negative pre-tax book income. For the first nine months of 2022, the effective tax rate was 30.9%, an increase of 6.5 percentage points over the prior year. The increase in the effective tax rate for the nine months ended September 30, 2022 is primarily attributable to minimum taxes, additional reserves for uncertain tax positions that increased the Company's liability for unrecognized tax benefits, and non-deductible foreign exchange losses. The Company anticipates a lower impact from minimum taxes in the fourth quarter.
Product Area Highlights
On a consolidated basis, PitchBook, Morningstar Sustainalytics, Morningstar Data, and Morningstar Direct were the top four contributors to organic revenue growth in the third quarter of 2022. In aggregate, the Company's license-based product areas continued to benefit from strong demand and steady renewal rates. (For performance of the largest product areas and key metrics, refer to the Supplemental Data table contained in this release and the Supplemental Presentation included on our Investor Relations website at shareholders.morningstar.com under "Financials — Financial Summary".)
Highlights of these and other products are provided below. Organic revenue excludes all M&A-related revenue, accounting changes, and foreign currency effects. Foreign currency effects accounted for the entire difference between reported and organic growth in the quarter for Morningstar Data, Morningstar Direct, Morningstar Sustainalytics, and DBRS Morningstar.
License-based
Asset-based
Transaction-based
Reduction and Shift of China Operations
In July 2022, the Company began to significantly reduce its operations in Shenzhen, China and to shift the work related to its global business functions, including global product and software development, managed investment data collection and analysis, and equity data collection and analysis, to other Morningstar locations. These activities will result in a significant headcount reduction in Shenzhen, China and growth in other Morningstar locations including Mumbai, Toronto, Madrid, and Chicago. Going forward, the Company's work in China will be focused solely on commercial activities in the domestic market.
During the transition period, the Company expects to incur costs related to these efforts in three primary categories and recorded $30.1 million in the third quarter of 2022.
The Company expects that these activities will be substantially complete by the end of the third quarter of 2023 and will result in lower ongoing run-rate costs from the overall net reduction in the related headcount and certain overhead.
Update on LCD and Praemium Integrations
Following the close of the LCD transaction on June 1, 2022, PitchBook started to integrate LCD employees into the relevant teams and added resources to focus specifically on supporting the LCD business. Morningstar Indexes has integrated LCD's leveraged loan indexes into its global index product and service platform. Customer conversion is proceeding as planned.
Subsequent to the June 30, 2022 close of the Praemium acquisition, all Praemium entities have been renamed and rebranded as Morningstar Wealth Platform. In addition, the product technology separation from the previous parent company is complete. The Company is progressing with other integration efforts, has added Morningstar factsheets and data for funds and foreign exchange to the platform, and is evaluating opportunities to integrate Morningstar reporting, charting, and screening capabilities.
Balance Sheet and Capital Allocation
As of September 30, 2022, the Company had cash, cash equivalents, and investments totaling $407.1 million and $1.2 billion of debt, compared with cash, cash equivalents, and investments of $546.1 million and $359.4 million of debt as of December 31, 2021.
Cash provided by operating activities declined to $102.1 million for the third quarter of 2022, versus $122.6 million the prior year. The decline in operating cash flow was primarily due to lower cash earnings and the impact of softer performance in asset- and transaction-based areas.
In the third quarter of 2022, the Company repurchased $15.2 million of its shares, paid $15.3 million in dividends, and spent $1.9 million on acquisitions and other investments.
In September 2022, the Company executed amendments to its multicurrency credit agreement initially closed on May 6, 2022 to provide greater capacity and flexibility. The amended credit agreement totals $1.3 billion, an increase from the $1.1 billion available under the original credit agreement, and is comprised of a term facility of $650.0 million and a $650.0 million revolving credit facility. As of September 30, 2022, the Company had $649.2 million outstanding under its term facility and $160.0 million outstanding under its revolving credit facility.
Comparability of Year-Over-Year Results
Certain other items, as detailed below, affected the comparability of third quarter of 2022 results versus the prior year:
Use of Non-GAAP Financial Measures
The tables at the end of this press release include a reconciliation of the non-GAAP financial measures used by the Company to comparable GAAP measures and an explanation of why the Company uses them.
Investor Communication
Morningstar encourages all interested parties — including securities analysts, current shareholders, potential shareholders, and others — to submit questions in writing. Investors and others may send questions about Morningstar's business to investors@morningstar.com. Morningstar will make written responses to selected inquiries available to all investors at the same time in Form 8-Ks furnished to the Securities and Exchange Commission, generally every month.
About Morningstar, Inc.
Morningstar, Inc. is a leading provider of independent investment research in North America, Europe, Australia, and Asia. The Company offers an extensive line of products and services for individual investors, financial advisors, asset managers and owners, retirement plan providers and sponsors, and institutional investors in the debt and private capital markets. Morningstar provides data and research insights on a wide range of investment offerings, including managed investment products, publicly listed companies, private capital markets, debt securities, and real-time global market data. Morningstar also offers investment management services through its investment advisory subsidiaries, with approximately $239 billion in assets under advisement and management as of September 30, 2022. The Company has operations in 29 countries. For more information, visit www.morningstar.com/company. Follow Morningstar on Twitter @MorningstarInc.
Caution Concerning Forward-Looking Statements
This press release contains forward-looking statements as that term is used in the Private Securities Litigation Reform Act of 1995. These statements are based on our current expectations about future events or future financial performance. Forward-looking statements by their nature address matters that are, to different degrees, uncertain, and often contain words such as "may," "could," "expect," "intend," "plan," "seek," "anticipate," "believe," "estimate," "predict," "potential," or "continue." These statements involve known and unknown risks and uncertainties that may cause the events we discuss not to occur or to differ significantly from what we expect. For us, these risks and uncertainties include, among others, failing to maintain and protect our brand, independence, and reputation; liability related to cybersecurity and the protection of confidential information, including personal information about individuals; liability for any losses that result from an actual or claimed breach of our fiduciary duties or failure to comply with applicable securities laws; compliance failures, regulatory action, or changes in laws applicable to our credit ratings operations, or our investment advisory, ESG, and index businesses; failing to respond to technological change, keep pace with new technology developments, or adopt a successful technology strategy; the failure to recruit, develop, and retain qualified employees and compensation expense associated with these activities in a period of inflation and rising wage scales in the markets where we operate; inadequacy of our operational risk management and business continuity programs in the event of a material disruptive event, including an outage of our database, technology-based products and services or network facilities; failing to differentiate our products and services and continuously create innovative, proprietary, and insightful financial technology solutions; prolonged volatility or downturns affecting the financial sector, global financial markets, and global economy and its effect on our revenue from asset-based fees and credit ratings business; failing to maintain growth across our businesses in today's fragmented geopolitical, regulatory and cultural world; liability relating to the information and data we collect, store, use, create, and distribute or the reports that we publish or are produced by our software products; the failure of acquisitions and other investments to be efficiently integrated and produce the results we anticipate; the impact of the current COVID-19 pandemic and government actions in response thereto on our business, financial condition, and results of operations; challenges faced by our non-U.S. operations, including the concentration of data and development work at our offshore facilities in China and India; our indebtedness could adversely affect our cash flows and financial flexibility; 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 filings with the Securities and Exchange Commission, including our most recent Annual Report on Form 10-K. If any of these risks and uncertainties materialize, our actual future results and other future events 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.
Media Relations Contact:
Stephanie Lerdall, +1 312-244-7805, stephanie.lerdall@morningstar.com
Investor Relations Contact:
Sarah Bush, +1 312-384-3754, sarah.bush@morningstar.com
©2022 Morningstar, Inc. All Rights Reserved.
MORN-E
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) | 2022 | 2021 | Change | 2022 | 2021 | Change | ||||||
Revenue | $ 468.2 | $ 428.9 | 9.2 % | $ 1,395.6 | $ 1,237.1 | 12.8 % | ||||||
Operating expense: | ||||||||||||
Cost of revenue | 195.4 | 183.1 | 6.7 % | 584.3 | 508.8 | 14.8 % | ||||||
Sales and marketing | 89.7 | 72.9 | 23.0 % | 262.9 | 201.3 | 30.6 % | ||||||
General and administrative | 116.9 | 67.0 | 74.5 % | 294.3 | 232.5 | 26.6 % | ||||||
Depreciation and amortization | 44.2 | 38.1 | 16.0 % | 121.8 | 112.3 | 8.5 % | ||||||
Total operating expense | 446.2 | 361.1 | 23.6 % | 1,263.3 | 1,054.9 | 19.8 % | ||||||
Operating income | 22.0 | 67.8 | (67.6) % | 132.3 | 182.2 | (27.4) % | ||||||
Operating margin | 4.7 % | 15.8 % | 9.5 % | 14.7 % | ||||||||
Non-operating income (loss), net: | ||||||||||||
Interest expense, net | (10.5) | (2.3) | NMF | (17.3) | (7.3) | NMF | ||||||
Other income (loss), net | (13.8) | (2.3) | NMF | (15.0) | 1.4 | NMF | ||||||
Non-operating income (loss), net | (24.3) | (4.6) | NMF | (32.3) | (5.9) | NMF | ||||||
Income (loss) before income taxes and equity in net income (loss) of unconsolidated entities | (2.3) | 63.2 | NMF | 100.0 | 176.3 | (43.3) % | ||||||
Equity in net income (loss) of unconsolidated entities | (1.3) | 1.9 | NMF | (2.7) | 4.6 | NMF | ||||||
Income tax expense | 5.4 | 16.1 | (66.5) % | 30.1 | 44.1 | (31.7) % | ||||||
Consolidated net income (loss) | $ (9.0) | $ 49.0 | NMF | $ 67.2 | $ 136.8 | (50.9) % | ||||||
Net income (loss) per share: | ||||||||||||
Basic | $ (0.21) | $ 1.14 | NMF | $ 1.57 | $ 3.18 | (50.6) % | ||||||
Diluted | $ (0.21) | $ 1.13 | NMF | $ 1.56 | $ 3.16 | (50.6) % | ||||||
Weighted average shares outstanding: | ||||||||||||
Basic | 42.5 | 43.1 | (1.4) % | 42.7 | 43.0 | (0.7) % | ||||||
Diluted | 42.7 | 43.4 | (1.6) % | 43.0 | 43.3 | (0.7) % | ||||||
NMF - Not meaningful, pp - percentage points |
Morningstar, Inc. and Subsidiaries Unaudited Condensed Consolidated Statements of Cash Flows | ||||||||
Three months ended September 30, | Nine months ended September 30, | |||||||
(in millions) | 2022 | 2021 | 2022 | 2021 | ||||
Operating activities | ||||||||
Consolidated net income (loss) | $ (9.0) | $ 49.0 | $ 67.2 | $ 136.8 | ||||
Adjustments to reconcile consolidated net income (loss) to net | 79.2 | 43.3 | 183.1 | 153.9 | ||||
Changes in operating assets and liabilities, net | 31.9 | 30.3 | (56.0) | 23.3 | ||||
Cash provided by operating activities | 102.1 | 122.6 | 194.3 | 314.0 | ||||
Investing activities | ||||||||
Capital expenditures | (33.7) | (30.2) | (93.4) | (71.6) | ||||
Acquisitions, net of cash acquired | (0.2) | (24.6) | (646.8) | (24.6) | ||||
Purchases of investments in unconsolidated entities | (1.7) | (1.3) | (28.3) | (15.8) | ||||
Other, net | (0.4) | (0.1) | 7.5 | (13.4) | ||||
Cash used for investing activities | (36.0) | (56.2) | (761.0) | (125.4) | ||||
Financing activities | ||||||||
Common shares repurchased | (15.2) | (0.1) | (217.7) | (0.1) | ||||
Dividends paid | (15.3) | (13.6) | (46.2) | (40.6) | ||||
Repayments of debt | (90.0) | (10.0) | (310.9) | (85.0) | ||||
Proceeds from debt | 70.0 | 10.0 | 1,110.0 | 10.0 | ||||
Payment for acquisition-related earn-outs | — | — | (16.2) | (34.4) | ||||
Other, net | (6.6) | (6.5) | (27.2) | (25.4) | ||||
Cash provided by (used for) financing activities | (57.1) | (20.2) | 491.8 | (175.5) | ||||
Effect of exchange rate changes on cash and cash equivalents | (16.5) | (6.8) | (36.2) | (8.6) | ||||
Net increase (decrease) in cash and cash equivalents | (7.5) | 39.4 | (111.1) | 4.5 | ||||
Cash and cash equivalents-beginning of period | 380.2 | 387.6 | 483.8 | 422.5 | ||||
Cash and cash equivalents-end of period | $ 372.7 | $ 427.0 | $ 372.7 | $ 427.0 |
Morningstar, Inc. and Subsidiaries Unaudited Condensed Consolidated Balance Sheets | ||||
As of September 30, | As of December 31, | |||
(in millions) | 2022 | 2021 | ||
Assets | ||||
Current assets: | ||||
Cash and cash equivalents | $ 372.7 | $ 483.8 | ||
Investments | 34.4 | 62.3 | ||
Accounts receivable, net | 284.5 | 268.9 | ||
Income tax receivable, net | 9.5 | 8.9 | ||
Other current assets | 87.7 | 63.7 | ||
Total current assets | 788.8 | 887.6 | ||
Goodwill | 1,542.4 | 1,207.0 | ||
Intangible assets, net | 559.1 | 328.2 | ||
Property, equipment, and capitalized software, net | 187.8 | 171.8 | ||
Operating lease assets | 185.5 | 149.2 | ||
Investments in unconsolidated entities | 96.9 | 63.3 | ||
Deferred tax asset, net | 11.5 | 12.8 | ||
Other assets | 43.1 | 42.8 | ||
Total assets | $ 3,415.1 | $ 2,862.7 | ||
Liabilities and equity | ||||
Current liabilities: | ||||
Deferred revenue | $ 424.8 | $ 377.4 | ||
Accrued compensation | 194.9 | 273.7 | ||
Accounts payable and accrued liabilities | 67.1 | 76.5 | ||
Operating lease liabilities | 37.1 | 36.4 | ||
Current portion of long-term debt | 32.1 | — | ||
Contingent consideration liability | 46.4 | 17.3 | ||
Other current liabilities | 4.0 | 2.2 | ||
Total current liabilities | 806.4 | 783.5 | ||
Operating lease liabilities | 162.5 | 135.7 | ||
Accrued compensation | 19.1 | 16.3 | ||
Deferred tax liability, net | 72.5 | 101.7 | ||
Long-term debt | 1,125.5 | 359.4 | ||
Other long-term liabilities | 50.1 | 50.2 | ||
Total liabilities | 2,236.1 | 1,446.8 | ||
Total equity | 1,179.0 | 1,415.9 | ||
Total liabilities and equity | $ 3,415.1 | $ 2,862.7 |
Morningstar, Inc. and Subsidiaries Supplemental Data (Unaudited) | |||||||||||||||
Three months ended September 30, | Nine months ended September 30, | ||||||||||||||
(in millions) | 2022 | 2021 | Change | Organic (1) | 2022 | 2021 | Change | Organic (1) | |||||||
Revenue by type | |||||||||||||||
License-based (2) | $ 342.6 | $ 287.0 | 19.4 % | 18.3 % | $ 982.0 | $ 830.3 | 18.3 % | 19.1 % | |||||||
Asset-based (3) | 67.3 | 68.4 | (1.6) % | (5.3) % | 203.4 | 194.6 | 4.5 % | 5.3 % | |||||||
Transaction-based (4) | 58.3 | 73.5 | (20.7) % | (17.8) % | 210.2 | 212.2 | (0.9) % | 1.7 % | |||||||
Key product area revenue | |||||||||||||||
PitchBook | $ 104.7 | $ 75.5 | 38.7 % | 38.7 % | $ 296.9 | $ 205.4 | 44.5 % | 44.5 % | |||||||
Morningstar Data | 63.3 | 61.3 | 3.3 % | 9.6 % | 190.9 | 180.4 | 5.8 % | 10.3 % | |||||||
DBRS Morningstar (5) | 51.8 | 65.1 | (20.4) % | (17.5) % | 186.2 | 189.8 | (1.9) % | 0.7 % | |||||||
Morningstar Direct | 45.9 | 43.8 | 4.8 % | 10.0 % | 137.3 | 129.1 | 6.4 % | 10.2 % | |||||||
Investment Management | 29.1 | 32.4 | (10.2) % | (13.2) % | 89.9 | 92.8 | (3.1) % | 0.9 % | |||||||
Workplace Solutions | 24.9 | 26.5 | (6.0) % | (6.0) % | 77.7 | 77.2 | 0.6 % | 0.6 % | |||||||
Morningstar Sustainalytics | 26.2 | 19.8 | 32.3 % | 45.8 % | 76.8 | 56.3 | 36.4 % | 46.9 % | |||||||
Morningstar Advisor Workstation | 24.2 | 23.1 | 4.8 % | 4.8 % | 71.0 | 68.8 | 3.2 % | 3.3 % | |||||||
As of September 30, | |||||||||||||||
Assets under management and | 2022 | 2021 | Change | ||||||||||||
Workplace Solutions | |||||||||||||||
Managed Accounts | $ 109.0 | $ 110.7 | (1.5) % | ||||||||||||
Fiduciary Services | 47.9 | 57.9 | (17.3) % | ||||||||||||
Custom Models/CIT | 35.3 | 41.1 | (14.1) % | ||||||||||||
Workplace Solutions (total) | $ 192.2 | $ 209.7 | (8.3) % | ||||||||||||
Investment Management | |||||||||||||||
Morningstar Managed Portfolios | $ 30.7 | $ 31.4 | (2.2) % | ||||||||||||
Institutional Asset Management | 9.2 | 11.4 | (19.3) % | ||||||||||||
Asset Allocation Services | 7.3 | 7.7 | (5.2) % | ||||||||||||
Investment Management (total) | $ 47.2 | $ 50.5 | (6.5) % | ||||||||||||
Asset value linked to Morningstar | $ 133.3 | $ 136.3 | (2.2) % | ||||||||||||
Three months ended September 30, | Nine months ended September 30, | ||||||||||||||
2022 | 2021 | Change | 2022 | 2021 | Change | ||||||||||
Average assets under management and | $ 246.1 | $ 255.7 | (3.8) % | $ 255.6 | $ 245.5 | 4.1 % |
_____________________________________________________________________________
(1) Organic revenue excludes acquisitions, divestitures, the impacts of the adoption of new accounting standards or revisions to accounting practices, and the effect of foreign currency translations. |
(2) License-based revenue includes PitchBook, Morningstar Data, Morningstar Direct, Morningstar Sustainalytics, Morningstar Advisor Workstation, and other similar products. |
(3) Asset-based revenue includes Investment Management, Workplace Solutions, and Morningstar Indexes. |
(4) Transaction-based revenue includes DBRS Morningstar, Internet advertising, and Morningstar-sponsored conferences. |
(5) For the three and nine months ended September 30, 2022, DBRS Morningstar recurring revenue derived primarily from surveillance, research, and other transaction-related services was 48.6% and 40.3%, respectively. For the three and nine months ended September 30, 2021, recurring revenue was 35.4% and 36.1%, respectively. |
Morningstar, Inc. and Subsidiaries
Reconciliations of Non-GAAP Measures with the Nearest Comparable GAAP Measures (Unaudited)
To supplement Morningstar's condensed consolidated financial statements presented in accordance with U.S. Generally Accepted Accounting Principles (GAAP), Morningstar uses the following measures considered as non-GAAP by the Securities and Exchange Commission, including:
These non-GAAP measures may not be comparable to similarly titled measures reported by other companies.
Morningstar presents organic revenue because the Company believes this non-GAAP measure helps investors better compare period-over-period results. Morningstar excludes revenue from acquired businesses from its organic revenue growth calculation for a period of 12 months after it completes the acquisition. For divestitures, Morningstar excludes revenue in the prior-year period for which there is no comparable revenue in the current period.
Morningstar presents adjusted operating income, adjusted operating margin, and adjusted net income per share to show the effect of significant acquisition activity, better compare period-over-period results, and improve overall understanding of the underlying performance of the business absent the impact of acquisitions.
In addition, Morningstar presents free cash flow solely as supplemental disclosure to help investors better understand how much cash is available after making capital expenditures. Morningstar's management team uses free cash flow to evaluate the health of its business. Free cash flow should not be considered an alternative to any measure required to be reported under GAAP (such as cash provided by (used for) operating, investing, and financing activities).
Three months ended September 30, | Nine months ended September 30, | |||||||||||
(in millions) | 2022 | 2021 | Change | 2022 | 2021 | Change | ||||||
Reconciliation from consolidated revenue to organic revenue: | ||||||||||||
Consolidated revenue | $ 468.2 | $ 428.9 | 9.2 % | $ 1,395.6 | $ 1,237.1 | 12.8 % | ||||||
Less: acquisitions | (18.9) | — | NMF | (23.2) | — | NMF | ||||||
Less: accounting changes | — | (1.2) | NMF | — | (4.7) | NMF | ||||||
Effect of foreign currency translations | 14.6 | — | NMF | 32.0 | — | NMF | ||||||
Organic revenue | $ 463.9 | $ 427.7 | 8.5 % | $ 1,404.4 | $ 1,232.4 | 14.0 % | ||||||
Reconciliation from consolidated operating income to adjusted | ||||||||||||
Consolidated operating income | $ 22.0 | $ 67.8 | (67.6) % | $ 132.3 | $ 182.2 | (27.4) % | ||||||
Add: intangible amortization expense | 18.7 | 15.6 | 19.9 % | 48.4 | 46.9 | 3.2 % | ||||||
Add: M&A-related expenses | 4.9 | 4.2 | 16.7 % | 13.7 | 11.4 | 20.2 % | ||||||
Add: M&A-related earn-outs (1) | 0.9 | (4.1) | NMF | 8.0 | 31.7 | (74.8) % | ||||||
Add: Severance and personnel expenses (2) | 27.0 | — | NMF | 27.0 | — | NMF | ||||||
Add: Transformation costs (2) | 3.1 | — | NMF | 3.1 | — | NMF | ||||||
Add: Asset impairment costs (2) | — | — | — % | — | — | — % | ||||||
Adjusted operating income | $ 76.6 | $ 83.5 | (8.3) % | $ 232.5 | $ 272.2 | (14.6) % | ||||||
Reconciliation from consolidated operating margin to adjusted | ||||||||||||
Consolidated operating margin | 4.7 % | 15.8 % | (11.1) pp | 9.5 % | 14.7 % | (5.2) pp | ||||||
Add: intangible amortization expense | 4.0 % | 3.6 % | 0.4 pp | 3.5 % | 3.8 % | (0.3) pp | ||||||
Add: M&A-related expenses | 1.0 % | 1.0 % | — | 1.0 % | 0.9 % | 0.1 pp | ||||||
Add: M&A-related earn-outs (1) | 0.2 % | (1.0) % | NMF | 0.6 % | 2.6 % | (2.0) pp | ||||||
Add: Severance and personnel expenses (2) | 5.8 % | — % | 5.8 pp | 1.9 % | — % | 1.9 pp | ||||||
Add: Transformation costs (2) | 0.7 % | — % | 0.7 pp | 0.2 % | — % | 0.2 pp | ||||||
Add: Asset impairment costs (2) | — % | — % | — | — % | — % | — | ||||||
Adjusted operating margin | 16.4 % | 19.4 % | (3.0) pp | 16.7 % | 22.0 % | (5.3) pp | ||||||
Reconciliation from consolidated diluted net income (loss) per | ||||||||||||
Consolidated diluted net income (loss) per share | $ (0.21) | $ 1.13 | NMF | $ 1.56 | $ 3.16 | (50.6) % | ||||||
Add: intangible amortization expense | 0.32 | 0.27 | 18.5 % | 0.83 | 0.80 | 3.7 % | ||||||
Add: M&A-related expenses | 0.08 | 0.07 | 14.3 % | 0.24 | 0.19 | 26.3 % | ||||||
Add: M&A-related earn-outs (1) | 0.02 | (0.09) | NMF | 0.18 | 0.71 | (74.6) % | ||||||
Add: Severance and personnel expenses (2) | 0.47 | — | NMF | 0.46 | — | NMF | ||||||
Add: Transformation costs (2) | 0.05 | — | NMF | 0.05 | — | NMF | ||||||
Add: Asset impairment costs (2) | — | — | — % | — | — | — % | ||||||
Less: non-operating (gains) losses (3) | 0.04 | — | NMF | (0.02) | — | NMF | ||||||
Adjusted diluted net income per share | $ 0.77 | $ 1.38 | (44.2) % | $ 3.30 | $ 4.86 | (32.1) % | ||||||
Reconciliation from cash provided by operating activities to | ||||||||||||
Cash provided by operating activities | $ 102.1 | $ 122.6 | (16.7) % | $ 194.3 | $ 314.0 | (38.1) % | ||||||
Capital expenditures | (33.7) | (30.2) | 11.6 % | (93.4) | (71.6) | 30.4 % | ||||||
Free cash flow | $ 68.4 | $ 92.4 | (26.0) % | $ 100.9 | $ 242.4 | (58.4) % |
______________________________________________________________________
NMF - Not meaningful, pp - percentage points |
(1) Reflects the impact of M&A-related earn-outs included in current period operating expense (compensation expense), primarily due to the earn-out for Morningstar Sustainalytics. The three months and first nine months ended September 30, 2022 also includes M&A-related earn-outs included in current period operating expense related to our acquisition of LCD. |
(2) Reflects costs associated with the significant reduction of the Company's operations in Shenzhen, China, and the shifting of work related to its global business functions to other Morningstar locations. |
Severance and personnel expenses include severance charges, incentive payments related to early signing of severance agreements, transition bonuses, and stock-based compensation related to the acceleration of vesting of restricted stock unit (RSU) and market share unit (MSU) awards. In addition, the reversal of accrued sabbatical liabilities is included in this category. |
Transformation costs include professional fees and the temporary duplication of headcount. As the Company hires replacement roles in other markets and shifts capabilities, it expects to continue to employ certain Shenzhen-based staff through the transition period, which will result in elevated compensation costs on a temporary basis. |
Asset impairment costs include the write-off or accelerated depreciation of fixed assets in the Shenzhen, China office that are not redeployed, in addition to lease abandonment costs as the Company plans to downsize office space prior to the lease termination date. |
(3) Non-operating (gains) losses in the three and nine months ended September 30, 2022, related to unrealized gains and losses on investments. |
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SOURCE Morningstar, Inc.