October 4, 2019

DBRS 1H19 operating margin is 5.9%, much lower than Morningstar’s. Are there any one-offs in 1H19 that need adjusting for?

The pro forma financial statements that were filed on September 17, 2019 included several adjustments to DBRS’s historical operating expenses. One of the most material adjustments derives from our preliminary valuation of the net identifiable assets of DBRS, which valued intangible assets (customer relationships, developed technology and trademarks) at $288.2 million. Based on the useful life assumptions outlined in the pro forma statement footnotes, annual amortization expense works out to $33.8 million, or $16.9 million in the 1H19 period.

We believe it is helpful to look at results excluding amortization expense so as not to burden the business with the impacts of purchase accounting and to get a better view of DBRS’s underlying operating income. When we stated that DBRS operating margins were similar to overall Morningstar’s margins upon the announcement of the transaction, we were not assuming any impact of purchase accounting adjustments. This exclusion results in a 19.7% adjusted operating margin for DBRS in the six months ended June 30, 2019 versus the 5.9% you referenced above. The same exclusion in the full year ended November 30, 2018, results in an adjusted operating margin of 25.3% for DBRS.

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