Acquisitions, Divestitures, Goodwill, and Other Intangible Assets

9 Months Ended

Sep. 30, 2019

Goodwill and Intangible Assets Disclosure [Abstract]

Acquisitions, Divestitures, Goodwill, and Other Intangible Assets

Acquisitions, Divestitures, Goodwill, and Other Intangible Assets

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 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 2019.

The transaction has been accounted for using the acquisition method of 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 assets acquired and liabilities assumed are based on preliminary estimates 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.

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 estimated remaining useful lives of long-lived assets, reduction in revenue as a result of the fair value adjustments to deferred revenue, and interest expense incurred on the long-term debt.

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, 2018 to September 30, 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

We did not record any impairment losses in the first nine months of 2019 and 2018. We perform our annual impairment reviews in the fourth quarter or when triggering events are identified.

Intangible Assets

The following table summarizes our intangible assets: 

	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)
Intellectual property	$	65.7	$	(31.0	)	$	34.7	8	$	30.8	$	(29.2	)	$	1.6	9
Customer-related assets	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
Technology-based assets	155.4		(106.3		)	49.1		7	126.9		(96.3		)	30.6		7
Non-competition agreements	2.4		(2.2		)	0.2		5	2.4		(2.1		)	0.3		5
Total intangible assets	$	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

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

We expect intangible amortization expense for the remainder of 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

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

Acquisitions, Divestitures, Goodwill, and Other Intangible Assets

Acquisitions, Divestitures, Goodwill, and Other Intangible Assets

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 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 2019.

The transaction has been accounted for using the acquisition method of 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 assets acquired and liabilities assumed are based on preliminary estimates 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.

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 estimated remaining useful lives of long-lived assets, reduction in revenue as a result of the fair value adjustments to deferred revenue, and interest expense incurred on the long-term debt.

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, 2018 to September 30, 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

We did not record any impairment losses in the first nine months of 2019 and 2018. We perform our annual impairment reviews in the fourth quarter or when triggering events are identified.

Intangible Assets

The following table summarizes our intangible assets: 

	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)
Intellectual property	$	65.7	$	(31.0	)	$	34.7	8	$	30.8	$	(29.2	)	$	1.6	9
Customer-related assets	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
Technology-based assets	155.4		(106.3		)	49.1		7	126.9		(96.3		)	30.6		7
Non-competition agreements	2.4		(2.2		)	0.2		5	2.4		(2.1		)	0.3		5
Total intangible assets	$	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

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

We expect intangible amortization expense for the remainder of 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

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