October 4, 2019

DBRS contribution to group profits would’ve been negative in FY19 and the deal is dilutive on a pro-forma FY18 and 1H19 basis – is it fair to say synergies are important for making the deal accretive in FY20?

The dilution from the transaction is primarily due to the impact of the purchase accounting adjustments referenced above and the incremental interest expense from the debt used to finance the transaction. As presented, pro forma consolidated net income was $1.66 per diluted share for the six months ended June 30, 2019 and $4.18 per diluted share for the year ended December 31, 2018. These compare to Morningstar’s historical results of $1.75 per diluted share and $4.25 per diluted share for the same periods. Excluding the non-cash intangible amortization, pro forma consolidated net income per share would be $1.85 for the six months ended June 30, 2019 and $4.49 for the year ended December 31, 2018. We believe that this lens provides a cleaner view of earnings per share on more of a cash basis, which leads to accretion of $0.10 and $0.24 per share, respectively for those periods presented in the pro forma statements.

Furthermore, DBRS’s audited statement of cash flows underscores the company’s strong cash generation. DBRS reported CAD $34.9 million and CAD $42.6 million of cash from operating activities for the 12-month periods ended November 30, 2018 and 2017. After subtracting capital expenditures, free cash flow was CAD $27.2 million and CAD $39.2 million for the same periods.

When we announced the deal in May, we highlighted DBRS’s strong cash flow and stated that success for the transaction is not solely dependent on synergies. We believe the combination of Morningstar and DBRS will enhance scale and provide us with even better opportunity to take share in a growing, global market, so it’s fair to say that we are viewing this acquisition through a growth lens. That being said, we are focused on making sure we operate the business efficiently and plan to take advantage of certain cost saving opportunities as we combine operations and integrate.

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