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______________________________________________________________________________________________________
(1) Excludes finance lease amortization expense of $1.2 million in 2023 and $2.1 million in 2022.
(2) Reflects non-recurring expenses related to M&A activity including pre-deal due diligence, transaction costs, and post-close integration costs.
(3) Reflects the impact of M&A-related earn-outs included in operating expense.
(4) Reflects costs associated with the significant reduction of the company's operations in Shenzhen, China and the shift 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 accelerated vesting of restricted stock unit (RSU) and market stock 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 hired replacement roles in other markets and shifted capabilities, it employed certain Shenzhen-based staff through the transition period, which resulted 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 were not redeployed, in addition to lease abandonment costs as the company downsized its office space prior to the lease termination date.
(5) Corporate and All Other includes unallocated corporate expenses of $153.5 million in 2023 and $135.8 million in 2022, as well as adjusted operating income/loss from Morningstar Sustainalytics and Morningstar Indexes. Unallocated corporate expenses include finance, human resources, legal, and other management-related costs that are not considered when segment performance is evaluated.
Segment Results
Segment adjusted operating income reflects the impact of direct segment expenses as well as certain allocated centralized costs, such as information technology, sales and marketing, and research and data.
Morningstar Data and Analytics
The following table presents the results for Morningstar Data and Analytics:
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| (in millions) | | 2023 | | 2022 | | 2021 | | 2023 vs 2022 | | 2022 vs 2021 |
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| Revenue | | $ | 747.2 | | | $ | 696.6 | | | $ | 667.5 | | | 7.3 | % | | 4.4 | % |
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| Adjusted operating income | | $ | 339.8 | | | $ | 313.3 | | | $ | 293.5 | | | 8.5 | % | | 6.7 | % |
| Adjusted operating margin | | 45.5 | % | | 45.0 | % | | 44.0 | % | | 0.5 pp | | 1.0 pp |
Morningstar Data and Analytics depreciation expense was $ million, $ million, and $ million for 2023, 2022, and 2021, respectively.
2023 versus 2022
Morningstar Data and Analytics total revenue increased $50.6 million, or 7.3%, in 2023. Revenue grew 7.4% on an organic basis, driven primarily by increases in Morningstar Data and Morningstar Direct.
Morningstar Data contributed $26.2 million to Morningstar Data and Analytics revenue growth, with revenue increasing 10.3% on a reported and organic basis, supported by growth across all major geographies. At the product level, managed investment data, including fund data, continued to be a key driver of higher revenue, followed by growth in Morningstar Essentials and equity data. In 2023, Morningstar Data's coverage continued to evolve to meet client needs, with the addition of structured products and notes data and the continued expansion of coverage on other vehicle types.
Morningstar Direct contributed $17.1 million to Morningstar Data and Analytics revenue growth, with revenue increasing 9.3%, or 9.2%, on an organic basis, reflecting growth across all major geographies. Morningstar Direct licenses increased 0.8%. In 2023, Morningstar Direct introduced Direct Lens, which unifies the platform's portfolio capabilities in a clear and intuitive interface; self-service data feeds; and the Morningstar Data Python package, which gives data scientists, data strategists, and quantitative analysts seamless access to data in their favorite coding environments.
Morningstar Data and Analytics adjusted operating income increased $26.5 million, or 8.5%, and adjusted operating margin increased 0.5 percentage points in 2023, as revenue growth outpaced expense growth. Expense growth was primarily driven by higher compensation costs.
2022 versus 2021
Morningstar Data and Analytics total revenue increased $29.1 million, or 4.4%, in 2022. Revenue grew 8.0% on an organic basis, driven primarily by demand for Morningstar Data and Morningstar Direct.
Morningstar Data contributed $11.5 million to Morningstar Data and Analytics revenue growth, with revenue increasing 4.7% or 9.4%, on an organic basis, driven by growth across geographies and strong demand for fund data. In 2022, Morningstar Data expanded the reach of its data sets to better cover the client portfolio with enhancements to fixed-income data and analytics and expanded coverage of 529 plan portfolios, public equities, collective investment trusts, and model portfolios. We also introduced new regulatory data solutions in response to global investor protection, capital adequacy, and sustainability regulations.
Morningstar Direct contributed $11.6 million to Morningstar Data and Analytics revenue growth, with revenue increasing 6.7%, or 10.7%, on an organic basis, driven by growth across geographies. Morningstar Direct licenses increased 5.7%, reflecting gains from both new and existing clients. In 2022, Morningstar Direct enriched and expanded Analytics Lab, which combines access to Morningstar's data and research with Jupyter Notebook, an open-source data-science tool, to allow clients to explore and analyze Morningstar data more efficiently in a flexible environment. Performance was also positively impacted by the release of the Sustainability and Portfolio Hubs, which act as a central repository of research and tools for related workflows, and broadened data coverage in fixed-income, exchange-traded funds (ETFs), ESG, model portfolios, and alternatives to better cover investor portfolios.
Morningstar Data and Analytics adjusted operating income increased $19.8 million, or 6.7%, and adjusted operating margin increased 1.0 percentage points in 2022, as revenue growth outpaced expense growth. Expense growth was primarily driven by higher compensation costs, as well as increased professional fees.
PitchBook
The following table presents the results for PitchBook:
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| (in millions) | | 2023 | | 2022 | | 2021 | | 2023 vs 2022 | | 2022 vs 2021 |
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| Revenue | | $ | 551.9 | | | $ | 450.7 | | | $ | 301.6 | | | 22.5 | % | | 49.4 | % |
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| Adjusted operating income | | $ | 148.1 | | | $ | 71.5 | | | $ | 55.4 | | | 107.1 | % | | 29.1 | % |
| Adjusted operating margin | | 26.8 | % | | 15.9 | % | | 18.4 | % | | 10.9 pp | | (2.5) pp |
PitchBook depreciation expense was $ million, $ million, and $ million for 2023, 2022, and 2021, respectively.
2023 versus 2022
PitchBook total revenue increased $101.2 million, or 22.5%, in 2023, which included positive contributions from the acquisition of LCD which closed June 1, 2022. Revenue grew 17.6% on an organic basis.
The PitchBook product area, which includes the PitchBook Platform as well as direct data, contributed $85.7 million to PitchBook revenue growth, with revenue increasing 21.0% on a reported and organic basis, as licenses grew 14.0%. Growth was primarily driven by strength in its core investor and advisor clients, which offset some continued softness with its company (corporate) market segment. During 2023, PitchBook substantially completed the integration of LCD core data offering and news onto the PitchBook Platform. At the same time, PitchBook introduced new capabilities to inform investor strategies, including the VC Exit Predictor, a proprietary tool and scoring methodology to predict exit outcomes for VC-backed companies, and the Manager Scoring tool, a new methodology that helps limited partners discover and evaluate top-performing private fund managers. Results exclude stand-alone LCD revenues.
PitchBook adjusted operating income increased $76.6 million, or 107.1%, and adjusted operating margin increased 10.9 percentage points in 2023, as revenue growth outpaced expense growth. Expense growth was primarily driven by higher compensation costs partially offset by a decrease in stock-based compensation expense in 2023 compared to 2022 when higher stock-based compensation costs reflected the overachievement of targets under the PitchBook management bonus plan.
2022 versus 2021
PitchBook total revenue increased $149.1 million, or 49.4%, in 2022, which included positive contributions from the acquisition of LCD which closed June 1, 2022. Revenue grew 39.1% on an organic basis.
The PitchBook product area contributed $117.5 million to PitchBook revenue growth, with revenue increasing 40.5% on a reported and organic basis, as PitchBook continued to enhance core data sets and improve the user experience. Reported and organic results for the product area exclude contributions from the LCD acquisition. Licenses grew 28.0%. In 2022, PitchBook added new companies and funds to coverage in the Europe, Middle East, and Africa (EMEA) and Asia-Pacific regions, while enhancing alternative data sets including real assets and hedge funds. Notable product releases included Portfolio Forecasting, a tool that allows Limited Partners to efficiently manage cash flow, pace commitments, and hit allocation targets directly within the PitchBook Platform.
PitchBook adjusted operating income increased $16.1 million, or 29.1%, and adjusted operating margin decreased 2.5 percentage points in 2022, as expense growth outpaced revenue growth. Expense growth was primarily driven by higher compensation costs and increases in stock-based compensation expense due to the overachievement of targets under the PitchBook management bonus plan. Higher compensation costs reflected increased investment in the business, which also drove higher professional fees, and costs for the LCD business beginning on June 1, 2022.
Morningstar Wealth
The following table presents the results for Morningstar Wealth:
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| (in millions) | | 2023 | | 2022 | | 2021 | | 2023 vs 2022 | | 2022 vs 2021 | |
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| Revenue | | $ | 229.9 | | | $ | 228.9 | | | $ | 238.4 | | | 0.4 | % | | (4.0) | % | |
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| Adjusted operating income (loss) | | $ | (40.4) | | | $ | (14.3) | | | $ | 19.4 | | | 182.5 | % | | NMF | |
| Adjusted operating margin | | (17.6) | % | | (6.2) | % | | 8.1 | % | | (11.4) pp | | (14.3) pp | |
Morningstar Wealth asset-based revenue represented 53.3% of total segment revenue in 2023. Revenue is based on quarter-end, prior quarter-end, or average asset levels during each quarter, which are often reported on a one-quarter lag for certain Investment Management products including Morningstar Managed Portfolios. The timing of this client asset reporting and the structure of our contracts often results in a lag between market movements and the impact on revenue. The following table summarizes our approximate Morningstar Wealth AUMA:
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| (in billions) | | 2023 | | 2022 | | 2021 | | 2023 vs 2022 | | 2022 vs 2021 |
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| Morningstar Managed Portfolios | | $ | 38.7 | | | $ | 32.6 | | | $ | 32.4 | | | 18.7 | % | | 0.6 | % |
| Institutional Asset Management | | 7.7 | | | 9.8 | | | 11.8 | | | (21.4) | % | | (16.9) | % |
| Asset Allocation Services | | 9.1 | | | 8.5 | | | 8.0 | | | 7.1 | % | | 6.3 | % |
| Investment Management (total) | | $ | 55.5 | | | $ | 50.9 | | | $ | 52.2 | | | 9.0 | % | | (2.5) | % |
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Morningstar Wealth depreciation expense was $ million, $ million, and $ million for 2023, 2022, and 2021, respectively.
2023 versus 2022
Morningstar Wealth total revenue increased $1.0 million, or 0.4%, in 2023. Revenue decreased 1.6% on an organic basis, primarily reflecting lower ad sales revenue on Morningstar.com.
Investment Management contributed $5.0 million to Morningstar Wealth revenue growth, with revenue increasing 4.3%. Organic revenue, which excluded Praemium for the first six months of 2023, decreased 0.1%, reflecting market headwinds in the first half of the year. Reported AUMA, calculated using the most recently available average quarterly or monthly data, increased 9.0% to $55.5 billion compared with the prior year, supported by stronger market performance which drove higher asset values. Positive net flows to Managed Portfolios over the trailing 12 months, reflecting strong net inflows outside the U.S. and relatively flat net flows in the U.S., offset lower AUMA in Institutional Asset Management which experienced significant outflows from a large institutional client.
Morningstar Wealth adjusted operating loss increased $26.1 million, or 182.5%, and adjusted operating margin decreased 11.4 percentage points in 2023, as expense growth outpaced relatively flat revenue growth. Expense growth was primarily driven by higher compensation costs from headcount largely added during 2022 and reflects significant investments to build out the U.S. and international wealth platforms. Those investments supported the continued enhancement of the wealth platforms and products as well as the expansion of teams supporting go-to-market activities. Expenses also included $1.8 million in severance related to targeted reorganizations in Morningstar Wealth, which had a negative 0.8 percentage point impact on adjusted operating margin in 2023.
2022 versus 2021
Morningstar Wealth total revenue decreased $9.5 million, or 4.0%, in 2022. Revenue declined 1.9% on an organic basis, reflecting market-driven declines in Investment Management revenue.
Investment Management revenue was $7.9 million lower, and decreased 6.3%, or 4.3%, on an organic basis. Reported AUMA fell 2.5% to $50.9 billion compared with the prior year, reflecting the declines in global markets and softer net flows. Excluding $4.4 billion of assets related to the acquisition of Praemium's U.K. and international offerings in the second quarter of 2022, assets would have declined 10.9% compared with the prior year. In 2022, the company successfully closed the Praemium acquisition, which expanded its wealth management capabilities outside the U.S. During 2022, Investment Management also continued to enhance the advisor and client experience on its turnkey asset management platform and introduced direct indexing, which allows advisors to personalize index portfolios to address individual preferences and tax management needs, as part of an ongoing strategy to build a comprehensive wealth platform leveraging capabilities across Morningstar.
Morningstar Wealth adjusted operating loss increased $33.7 million, and adjusted operating margin decreased 14.3 percentage points in 2022, due to the decline in revenue described above, higher expenses, and the financial results of Praemium which the company began consolidating as of June 30, 2022. Expense growth was primarily driven by higher compensation costs due to higher headcount, as described above, as well as higher professional fees supporting the integration of third-party technology to support the investments in the U.S. wealth platform.
Morningstar Credit
The following table presents the results for Morningstar Credit:
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| (in millions) | | 2023 | | 2022 | | 2021 | | 2023 vs 2022 | | 2022 vs 2021 |
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| Revenue | | $ | 215.4 | | | $ | 236.9 | | | $ | 271.2 | | | (9.1) | % | | (12.6) | % |
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| Adjusted operating income | | $ | 21.7 | | | $ | 59.1 | | | $ | 74.5 | | | (63.3) | % | | (20.7) | % |
| Adjusted operating margin | | 10.1 | % | | 24.9 | % | | 27.5 | % | | (14.8) pp | | (2.6) pp |
Morningstar Credit depreciation expense was $ million, $ million, and $ million for 2023, 2022, and 2021, respectively.
2023 versus 2022
Morningstar Credit total revenue decreased $21.5 million, or 9.1%, in 2023. Revenue declined 8.5% on an organic basis, primarily due to sharp declines in CMBS ratings revenue driven by ongoing softness in U.S. CMBS ratings activity, and, to a lesser extent, declines in residential mortgage-backed securities (RMBS) related revenue. These declines were partially offset by an increase in asset-backed securities ratings revenues and modest gains in corporate ratings revenues. Revenue related to data products increased.
Morningstar Credit adjusted operating income decreased $37.4 million, or 63.3%, and adjusted operating margin decreased 14.8 percentage points in 2023, due to the decline in revenue described above and higher expenses. Expenses included $8.0 million related to the DBRS SEC settlements and $1.7 million in severance related to targeted reorganizations, which collectively had a negative 4.5 percentage point impact on adjusted operating margin in 2023. The remaining expense growth was primarily driven by higher compensation costs.
2022 versus 2021
Morningstar Credit total revenue decreased $34.3 million, or 12.6%, in 2022. Revenue declined 10.0% on an organic basis, reflecting a sharp decrease in credit issuance in the second half of the year, including significant declines in CMBS and RMBS issuance. In 2022, areas of investment included added capabilities to support U.S. and European corporates, asset-based securities, and data products. Despite the challenging ratings environment, revenue grew for data products and U.S. corporates. Specifically for U.S. corporates, growth was driven by the addition of coverage and ratings for new middle-market credits.
Morningstar Credit adjusted operating income decreased $15.4 million, or 20.7%, and adjusted operating margin decreased 2.6% percentage points in 2022, due to the decline in revenue described above. Morningstar Credit expenses decreased driven in part by lower compensation costs and professional fees.
Morningstar Retirement
The following table presents the results for Morningstar Retirement:
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| Revenue | | $ | 110.5 | | | $ | 104.0 | | | $ | 104.6 | | | 6.3 | % | | (0.6) | % |
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| Adjusted operating income | | $ | 54.1 | | | $ | 51.4 | | | $ | 55.4 | | | 5.3 | % | | (7.2) | % |
| Adjusted operating margin | | 49.0 | % | | 49.4 | % | | 53.0 | % | | (0.4) pp | | (3.6) pp |
Morningstar Retirement asset-based revenue represented 98.2% of total segment revenue in 2023 and is based on quarter-end, prior quarter-end, or average asset levels during each quarter, which are often reported on a one-quarter lag. The timing of this client asset reporting and the structure of our contracts often results in a lag between market movements and the impact on revenue. The following table summarizes our approximate Morningstar Retirement AUMA:
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We generated free cash flow of $197.3 million in 2023, an increase of $29.0 million compared with 2022. The change reflects a $18.6 million increase in cash provided by operating activities as well as a $10.4 million decrease in capital expenditures. The increase in cash flow from operations was primarily driven by higher cash earnings and a lower bonus payment in the first quarter of 2023 compared to the prior period and offset by the cash payments related to the Termination Agreement, higher interest payments, and severance and other costs related to the significant reduction and shift of the company's operations in China.
Excluding the $4.5 million LCD contingent payment within operating cash flow, payments related to the Termination Agreement of $59.9 million, and $26.4 million of severance and other related costs paid for the China transition, which together totaled $90.8 million, as well as comparable items in the prior year, cash flow from operations would have increased 19.7% to $407.2 million and free cash flow would have increased 36.7% to $288.1 million in 2023.
Acquisitions
We paid a total of $672.3 million, less cash acquired, related to acquisitions over the past three years. We describe these acquisitions in Note 8 of the Notes to our Consolidated Financial Statements.
We paid a total of $62.9 million related to additional investments in unconsolidated entities over the past three years. We describe these investments in Note 9 of the Notes to our Consolidated Financial Statements.
Divestitures
We had no divestitures in 2023, 2022, or 2021.
Application of Critical Accounting Policies and Estimates
Our discussion and analysis of our financial condition and results of operations are based on our Consolidated Financial Statements, which have been prepared in accordance with GAAP. We discuss our significant accounting policies in Note 2 of the Notes to our Consolidated Financial Statements. The preparation of financial statements in accordance with GAAP requires our management team to make estimates and assumptions that affect the reported amounts of assets, liabilities, revenue, expense, and related disclosures included in our Consolidated Financial Statements.
We continually evaluate our estimates. We base our estimates on historical experience and various other assumptions that we believe are reasonable. Based on these assumptions and estimates, we make judgments about the carrying values of assets and liabilities that are not readily apparent from other sources. Our actual results could vary from these estimates and assumptions. If actual amounts are different from previous estimates, we include revisions in our results of operations for the period in which the actual amounts become known.
We believe the following critical accounting policies reflect the significant judgments and estimates used in the preparation of our Consolidated Financial Statements:
Revenue Recognition
Most of our revenue comes from the sale of subscriptions for data, software, and Internet-based products and services. We recognize this revenue in equal amounts over the noncancellable term of the subscription or license, which generally ranges from one to three years. Our license-based revenue represents subscription services available to customers and not a license under the accounting guidance. We also provide research, investment management, retirement advice, and other services. We recognize this revenue when the service is provided or during the service obligation period defined in the contract.
We make judgments related to revenue recognition, including allocating the transaction price in a contract. For contracts that combine multiple products and services or other performance obligations, we make judgments regarding the value of each obligation in the arrangement based on selling prices of the items as if sold separately. We recognize revenue as we satisfy our performance obligations under the terms of the contracts with our customers. If arrangements include an acceptance provision, which exists infrequently, we begin recognizing revenue upon the receipt of customer acceptance.
We make judgments at the beginning of an arrangement regarding whether collection of the consideration to which we are entitled is probable and assess the likelihood of collection on a customer-by-customer basis. We typically sell to institutional customers with whom we have a history of successful collections.
Deferred revenue is the amount billed or collected in advance for subscriptions or services that has not yet been recognized as revenue. Deferred revenue totaled $544.0 million at the end of 2023 (of which $517.7 million was classified as a current liability with an additional $26.3 million, mainly credit rating surveillance, included in long-term liabilities). We expect to recognize this deferred revenue in future periods as we fulfill our performance obligations under our subscription and service agreements.
The amount of deferred revenue may increase or decrease based on the mix of contracted products and services and the volume of new and renewal subscriptions. The timing of future revenue recognition may change depending on the terms of the applicable agreements and the timing of fulfilling our service obligations.
Acquisitions, Goodwill, and Other Intangible Assets
We generally acquire businesses which are accounted for as business combinations. Our financial statements reflect the operations of an acquired business starting from the completion of the transaction. We record the estimated fair value of assets acquired and liabilities assumed as of the date of acquisition.
To account for each business combination, we utilize the acquisition method of accounting which requires the following steps (1) identifying the acquirer, (2) determining the acquisition date, (3) recognizing and measuring identifiable assets acquired and liabilities assumed, and (4) recognizing and measuring goodwill or a gain from a bargain purchase.
Regardless of whether an acquisition is considered to be a business combination or an asset acquisition, allocating the purchase price to the acquired assets and liabilities involves management judgment. We base the fair value estimates on available historical information and on future expectations and assumptions that we believe are reasonable, but these estimates are inherently uncertain.
Determining the fair value of intangible assets requires significant management judgment in the following areas:
•Identify the acquired intangible assets: For each acquisition, we identify the intangible assets acquired. These intangible assets generally consist of customer relationships, trademarks and trade names, technology-related intangibles (including internally developed software and databases), and in certain acquisitions, noncompete agreements.
•Estimate the fair value of these intangible assets: We may consider various approaches to value the intangible assets. These include the cost approach, which measures the value of an asset based on the cost to reproduce it or replace it with another asset of like utility by applying the reproduction cost method or replacement cost method; the market approach, which values the asset through an analysis of sales and offerings of comparable assets which can be adjusted to reflect differences between the investment or asset being valued and the comparable investments or assets, such as historical financial condition and performance, expected economic benefits, time and terms of sale, utility, and physical characteristics, and the income approach, which measures the value of an asset based on the present value of the economic benefits it is expected to produce utilizing inputs such as estimated future cash flows based on forecasted revenue growth rates and margins, estimated attrition rates, and discount rate assumptions.
•Estimate the remaining useful life of the assets: For each intangible asset, we use judgment and assumptions to establish the remaining useful life of the asset. For example, for customer relationships, we determine the estimated useful life with reference to observed customer attrition rates. For technology-related assets such as databases, we make judgments about the demand for current data and historical metrics in establishing the remaining useful life. For internally developed software, we estimate an obsolescence factor associated with the software.
We record any excess of the purchase price over the estimated fair values of the net assets acquired as goodwill, which is not amortized.
We recognize the fair value of any contingent payments at the date of acquisition as part of the consideration transferred to acquire a business. Contingent payments are recognized at fair value at the date of acquisition using either a Monte Carlo simulation, which requires the use of management assumptions and inputs, such as projected financial information related to revenue growth and expected margin percentage, among other valuation related items, or calculating the weighted average of the estimated contingent payment scenarios. The liability associated with contingent consideration is remeasured to fair value at each reporting period subsequent to the date of acquisition considering factors that may impact the timing and amount of contingent payments until the term of the agreement has expired or the contingency is resolved. Any changes in the fair value measurement will be recorded in our Consolidated Statements of Income. In evaluating the characterization of contingent and deferred payments, we analyze relevant factors, including the nature of the payment, continuing employment requirements, incremental payments to employees of the acquired business, and timing and rationale underlying the transaction, to determine whether the payments should be accounted for as additional purchase consideration or post-combination related services.
We believe the accounting estimates related to purchase price allocations, subsequent goodwill impairment testing, and contingent payments are critical accounting estimates because changes in these assumptions could materially affect the amounts and classifications of assets and liabilities presented in our Consolidated Balance Sheets, as well as the amount of amortization and depreciation expense, if any, recorded in our Consolidated Statements of Income. The significance of this policy varies from period to period depending upon the volume of applicable acquisition transactions occurring.
Recently Adopted and Issued Accounting Pronouncements
Refer to Note 17 of the Notes to our Consolidated Financial Statements for recently adopted and issued accounting pronouncements as of December 31, 2023.
Item 7A. Quantitative and Qualitative Disclosures about Market Risk
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 , our cash, cash equivalents, and investments balance was $389.0 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 a portion of our long-term debt. The interest rates are based upon the applicable Secured Overnight Financing Rate (SOFR) 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, we estimate a 100 basis-point change in the SOFR rate would have a $6.2 million impact on our interest expense based on our outstanding principal balance and SOFR rates around .
We are subject to risk from fluctuations in foreign currencies from our operations outside of the U.S. 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.
The table below shows our exposure to foreign currency denominated revenue and operating income for the year ended :
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| (in millions, except foreign currency rates) | | Australian Dollar | | British Pound | | Canadian Dollar | | Euro | | Other Foreign Currencies |
| Foreign currency rate in U.S. dollars as of December 31, 2023 | | 0.6818 | | 1.2732 | | 0.7549 | | 1.1038 | | n/a |
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| Foreign denominated percentage of revenue | | 2.8 | % | | 7.3 | % | | 5.7 | % | | 6.6 | % | | 5.5 | % |
| Foreign denominated percentage of operating income (loss) | | 6.4 | % | | (21.3) | % | | (10.4) | % | | 8.5 | % | | (41.0) | % |
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| Estimated effect of a 10% adverse currency fluctuation on revenue | | $ | (5.8) | | | $ | (15.1) | | | $ | (11.9) | | | $ | (13.8) | | | $ | (11.4) | |
| Estimated effect of a 10% adverse currency fluctuation on operating income (loss) | | $ | (1.5) | | | $ | 5.0 | | | $ | 2.4 | | | $ | (2.0) | | | $ | 9.3 | |
The table below shows our net investment exposure in foreign currencies as of :
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| (in millions) | | Australian Dollar | | British Pound | | Canadian Dollar | | Euro | | Other Foreign Currencies |
| Assets, net of unconsolidated entities | | $ | 61.9 | | | $ | 271.8 | | | $ | 238.4 | | | $ | 231.6 | | | $ | 178.2 | |
| Less: liabilities | | (32.9) | | | (79.4) | | | (135.1) | | | (155.7) | | | 24.8 | |
| Net currency position | | $ | 29.0 | | | $ | 192.4 | | | $ | 103.3 | | | $ | 75.9 | | | $ | 203.0 | |
| | | | | | | | | | |
| Estimated effect of a 10% adverse currency fluctuation on equity | | $ | (2.9) | | | $ | (19.2) | | | $ | (10.3) | | | $ | (7.6) | | | $ | (20.3) | |
Item 8. Financial Statements and Supplementary Data
Report of Independent Registered Public Accounting Firm
To the Shareholders and Board of Directors
Morningstar, Inc.:
Opinion on the Consolidated Financial Statements
We have audited the accompanying consolidated balance sheets of Morningstar, Inc. and subsidiaries (the Company) as of December 31, 2023 and 2022, the related consolidated statements of income, comprehensive income (loss), equity, and cash flows for each of the years in the three-year period ended December 31, 2023, and the related notes and financial statement schedule II (collectively, the consolidated financial statements). In our opinion, the consolidated financial statements present fairly, in all material respects, the financial position of the Company as of December 31, 2023 and 2022, and the results of its operations and its cash flows for each of the years in the three-year period ended December 31, 2023, in conformity with U.S. generally accepted accounting principles.
We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States) (PCAOB), the Company’s internal control over financial reporting as of December 31, 2023, based on criteria established in Internal Control – Integrated Framework (2013) issued by the Committee of Sponsoring Organizations of the Treadway Commission, and our report dated February 29, 2024 expressed an adverse opinion on the effectiveness of the Company’s internal control over financial reporting.
Basis for Opinion
These consolidated financial statements are the responsibility of the Company’s management. Our responsibility is to express an opinion on these consolidated financial statements based on our audits. We are a public accounting firm registered with the PCAOB and are required to be independent with respect to the Company in accordance with the U.S. federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB.
We conducted our audits in accordance with the standards of the PCAOB. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the consolidated financial statements are free of material misstatement, whether due to error or fraud. Our audits included performing procedures to assess the risks of material misstatement of the consolidated financial statements, whether due to error or fraud, and performing procedures that respond to those risks. Such procedures included examining, on a test basis, evidence regarding the amounts and disclosures in the consolidated financial statements. Our audits also included evaluating the accounting principles used and significant estimates made by management, as well as evaluating the overall presentation of the consolidated financial statements. We believe that our audits provide a reasonable basis for our opinion.
Critical Audit Matter
The critical audit matter communicated below is a matter arising from the current period audit of the consolidated financial statements that was communicated or required to be communicated to the audit committee and that: (1) relates to accounts or disclosures that are material to the consolidated financial statements and (2) involved our especially challenging, subjective, or complex judgments. The communication of a critical audit matter does not alter in any way our opinion on the consolidated financial statements, taken as a whole, and we are not, by communicating the critical audit matter below, providing a separate opinion on the critical audit matter or on the accounts or disclosures to which it relates.
Evaluation of sufficiency of audit evidence over revenue
As discussed in Notes 2 and 5 to the consolidated financial statements, the Company has recorded $2,038.6 million in revenues, for the year ended December 31, 2023. The company’s process to account for and recognize revenue differs between certain revenue streams.
We identified the evaluation of the sufficiency of audit evidence over revenue as a critical audit matter. Evaluating the sufficiency of audit evidence obtained required especially subjective auditor judgment due to the multiple product revenue streams and the use of multiple processes to account for and recognize revenue. This included determining the revenue streams where procedures were performed and the nature and extent of audit evidence obtained over each revenue stream.
The following are the primary procedures we performed to address this critical audit matter. We used auditor judgment to determine the nature and extent of procedures to be performed, including the determination of the revenue streams over which those procedures were performed. For product revenue streams where procedures were performed, we:
● evaluated the design and tested the operating effectiveness of certain internal controls over the Company’s revenue recognition processes
● evaluated the company’s revenue recognition accounting policies
● selected certain revenue transactions and assessed recorded amounts by comparing them for consistency with underlying documentation, including the customer contract
● evaluated certain revenue transactions for consistency with the Company’s accounting policies, as applicable, including timing of revenue recognition
In addition, we evaluated the sufficiency of audit evidence obtained by assessing the results of the procedures performed, including the appropriateness of the nature and the extent of audit effort over revenue.
/s/ KPMG LLP
We have served as the Company’s auditor since 2011.
Chicago, Illinois
February 29, 2024
Report of Independent Registered Public Accounting Firm
To the Shareholders and Board of Directors
Morningstar, Inc.:
Opinion on Internal Control Over Financial Reporting
We have audited Morningstar, Inc. and subsidiaries' (the Company) internal control over financial reporting as of December 31, 2023, based on criteria established in Internal Control – Integrated Framework (2013) issued by the Committee of Sponsoring Organizations of the Treadway Commission. In our opinion, because of the effect of the material weakness, described below, on the achievement of the objectives of the control criteria, the Company has not maintained effective internal control over financial reporting as of December 31, 2023, based on criteria established in Internal Control – Integrated Framework (2013) issued by the Committee of Sponsoring Organizations of the Treadway Commission.
We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States) (PCAOB), the consolidated balance sheets of the Company as of December 31, 2023 and 2022, the related consolidated statements of income, comprehensive income (loss), equity, and cash flows for each of the years in the three-year period ended December 31, 2023, and the related notes and financial statement schedule II (collectively, the consolidated financial statements), and our report dated February 29, 2024 expressed an unqualified opinion on those consolidated financial statements.
A material weakness is a deficiency, or a combination of deficiencies, in internal control over financial reporting, such that there is a reasonable possibility that a material misstatement of the company’s annual or interim financial statements will not be prevented or detected on a timely basis. A material weakness related to ineffective process-level controls over the disclosures required in accordance with FASB ASC 280, Segment Reporting, resulting from ineffective risk assessment of factors that are relevant to assessing whether operating segments can be aggregated, has been identified and included in management’s assessment. The material weakness was considered in determining the nature, timing, and extent of audit tests applied in our audit of the 2023 consolidated financial statements, and this report does not affect our report on those consolidated financial statements.
Basis for Opinion
The Company’s management is responsible for maintaining effective internal control over financial reporting and for its assessment of the effectiveness of internal control over financial reporting, included in the accompanying Management's Report on Internal Control Over Financial Reporting. Our responsibility is to express an opinion on the Company’s internal control over financial reporting based on our audit. We are a public accounting firm registered with the PCAOB and are required to be independent with respect to the Company in accordance with the U.S. federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB.
We conducted our audit in accordance with the standards of the PCAOB. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether effective internal control over financial reporting was maintained in all material respects. Our audit of internal control over financial reporting included obtaining an understanding of internal control over financial reporting, assessing the risk that a material weakness exists, and testing and evaluating the design and operating effectiveness of internal control based on the assessed risk. Our audit also included performing such other procedures as we considered necessary in the circumstances. We believe that our audit provides a reasonable basis for our opinion.
Definition and Limitations of Internal Control Over Financial Reporting
A company’s internal control over financial reporting is a process designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles. A company’s internal control over financial reporting includes those policies and procedures that (1) pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of the assets of the company; (2) provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with generally accepted accounting principles, and that receipts and expenditures of the company are being made only in accordance with authorizations of management and directors of the company; and (3) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use, or disposition of the company’s assets that could have a material effect on the financial statements.
Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate.
/s/ KPMG LLP
Chicago, Illinois
February 29, 2024
Morningstar, Inc. and Subsidiaries
Consolidated Statements of Income
| | | | | | | | | | | | | | | | | | | | |
| Year ended December 31 (in millions except per share amounts) | | 2023 | | 2022 | | 2021 |
| Revenue | | $ | | | | $ | | | | $ | | |
| | | | | | |
| Operating expense: | | | | | | |
| Cost of revenue | | | | | | | | | |
| Sales and marketing | | | | | | | | | |
| General and administrative | | | | | | | | | |
| Depreciation and amortization | | | | | | | | | |
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| Total operating expense | | | | | | | | | |
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| Operating income | | | | | | | | | |
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| Non-operating expense, net: | | | | | | |
| Interest expense, net | | () | | | () | | | () | |
| Realized gain (loss) on sale of investments, reclassified from other comprehensive income | | | | | () | | | | |
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| Realized gain on sale of equity method investments | | | | | | | | | |
| Expense from equity method transaction, net | | () | | | | | | | |
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| Other income (expense), net | | | | | () | | | () | |
| Non-operating expense, net | | () | | | () | | | () | |
| | | | | | |
| Income before income taxes and equity in investments of unconsolidated entities | | | | | | | | | |
| | | | | | |
| Equity in investments of unconsolidated entities | | () | | | () | | | | |
| | | | | | |
| Income tax expense | | | | | | | | | |
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| Consolidated net income | | $ | | | | $ | | | | $ | | |
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| Net income per share: | | | | | | |
| Basic | | $ | | | | $ | | | | $ | | |
| Diluted | | $ | | | | $ | | | | $ | | |
| | | | | | |
| Dividends per common share: | | | | | | |
| Dividends declared per common share | | $ | | | | $ | | | | $ | | |
| Dividends paid per common share | | $ | | | | $ | | | | $ | | |
| | | | | | |
| Weighted average shares outstanding: | | | | | | |
| Basic | | | | | | | | | |
| Diluted | | | | | | | | | |
See notes to consolidated financial statements.
Morningstar, Inc. and Subsidiaries
Consolidated Statements of Comprehensive Income (Loss)
| | | | | | | | | | | | | | | | | | | | |
| Year ended December 31 (in millions) | | 2023 | | 2022 | | 2021 |
| Consolidated net income | | $ | | | | $ | | | | $ | | |
| | | | | | |
| Other comprehensive income, net of tax: | | | | | | |
| Foreign currency translation adjustment | | | | | () | | | () | |
| Unrealized gains (losses) on securities: | | | | | | |
| Unrealized holding gains (losses) arising during period | | | | | () | | | | |
| Reclassification of realized (gains) losses on investments included in net income, net of tax | | () | | | | | | () | |
| Other comprehensive income (loss), net | | | | | () | | | () | |
| | | | | | |
| Comprehensive income | | $ | | | | $ | | | | $ | | |
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See notes to consolidated financial statements.
Morningstar, Inc. and Subsidiaries
Consolidated Statements of Cash Flows
| | | | | | | | | | | | | | | | | | | | |
| Year ended December 31 (in millions) | | 2023 | | 2022 | | 2021 |
| Operating activities | | | | | | |
| Consolidated net income | | $ | | | | $ | | | | $ | | |
| Adjustments to reconcile consolidated net income to net cash flows from operating activities: | | | | | | |
| Depreciation and amortization | | | | | | | | | |
| Deferred income taxes | | () | | | () | | | () | |
| Stock-based compensation expense | | | | | | | | | |
| Provision for bad debt | | | | | | | | | |
| Equity in investments of unconsolidated entities | | | | | | | | () | |
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| Gain on equity method transaction | | () | | | | | | | |
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| Acquisition earn-out accrual | | | | | | | | | |
| Other, net | | () | | | | | | () | |
| Changes in operating assets and liabilities: | | | | | | |
| Accounts receivable | | () | | | () | | | () | |
| Accounts payable and accrued liabilities | | () | | | () | | | | |
| Accrued compensation and deferred commissions | | | | | () | | | | |
| Income taxes, current | | () | | | | | | () | |
| Deferred revenue | | | | | | | | | |
| Other assets and liabilities | | | | | () | | | () | |
| Cash provided by operating activities | | | | | | | | | |
| | | | | | |
| Investing activities | | | | | | |
| Purchases of investment securities | | () | | | () | | | () | |
| Proceeds from maturities and sales of investment securities | | | | | | | | | |
| Capital expenditures | | () | | | () | | | () | |
| Acquisitions, net of cash acquired | | () | | | () | | | () | |
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| Proceeds from sale of equity method investments, net | | | | | | | | | |
| Purchases of investments in unconsolidated entities | | () | | | () | | | () | |
| Other, net | | | | | () | | | () | |
| Cash used for investing activities | | () | | | () | | | () | |
| | | | | | |
| Financing activities | | | | | | |
| Common shares repurchased | | () | | | () | | | () | |
| Dividends paid | | () | | | () | | | () | |
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| Proceeds from revolving credit facility | | | | | | | | | |
| Repayment of revolving credit facility | | () | | | () | | | () | |
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| Proceeds from term facility | | | | | | | | | |
| Repayment of term facility | | () | | | () | | | () | |
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| Employee taxes withheld for stock awards | | () | | | () | | | () | |
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| Payment of acquisition-related earn-outs | | () | | | () | | | () | |
| Other, net | | | | | () | | | () | |
| Cash provided by (used for) financing activities | | () | | | | | | () | |
| | | | | | |
| Effect of exchange rate changes on cash and cash equivalents | | | | | () | | | () | |
| Net increase (decrease) in cash and cash equivalents | | () | | | () | | | | |
| Cash and cash equivalents—beginning of period | | | | | | | | | |
| Cash and cash equivalents—end of period | | $ | | | | $ | | | | $ | | |
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| Supplemental disclosure of cash flow information: | | | | | | |
| Cash paid for income taxes | | $ | | | | $ | | | | $ | | |
| Cash paid for interest | | $ | | | | $ | | | | $ | | |
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| FASB | Financial Accounting Standards Board |
| SEC | Securities and Exchange Commission |
. We have no intangible assets with indefinite useful lives. In accordance with FASB ASC 360-10-35, Subsequent Measurement—Impairment or Disposal of Long-Lived Assets, we review intangible assets for impairment whenever events or changes in circumstances indicate that the carrying value may not be recoverable. If the value of future undiscounted cash flows is less than the carrying amount of an asset group, we record an impairment loss based on the excess of the carrying amount over the fair value of the asset group. We did not record any impairment losses in 2023, 2022, and 2021.
. We amortize leasehold improvements over the lease term or their useful lives, whichever is shorter. Long-lived assets that are held and used are reviewed for impairment whenever events or changes in circumstances indicate that the carrying value may not be recoverable. If the value of future undiscounted cash flows is less than the carrying amount of an asset group, we record an impairment loss based on the excess of the carrying amount over the fair value of the asset group.
. We include capitalized software development costs related to projects that have not been placed into service in our construction in progress balance.
| | $ | | | | $ | | |
| | $ | | | | $ | | |
to years.
When a customer’s license-based contract is signed, the customer’s service is activated immediately, except where customizations are required. License-based arrangements, our largest source of revenue from customers, generally are billed quarterly or annually. Customers are typically given payment terms of zero to days.
Asset-based revenue is generated through contracts with daily asset management, which is determined to be a daily performance obligation and thus satisfied over time as the customer receives continuous access to a service for the contract term. We recognize revenue daily over the contract term based on the value of assets under management and a tiered fee agreed to with the customer. Asset-based arrangements typically have a term of to years. The fees from such arrangements represent variable consideration, and the customer does not make separate purchasing decisions that result in additional performance obligations. Significant changes in the underlying fund assets, or significant disruptions in the market, are evaluated to determine if revisions to estimates of earned asset-based fees for the current quarter are needed. An estimate of the average daily portfolio balance is a key input in determining revenue for a given period. Estimates are based on the most recently reported quarter, and, as a result, it is unlikely a significant reversal of revenue would occur.
Transaction-based revenue is generated through contracts with performance obligations that are satisfied when the product or service is delivered. Some of our performance obligations include the issuance of the rating and may include surveillance services for a period of time as agreed with the customer. We allocate the transaction price to the deliverables based on their relative selling price, which is generally determined by the price we charge when the same deliverable is sold separately. Our performance obligation for the issuance of the rating is satisfied when the rating is issued, which is when we recognize the related revenue. Our performance obligations for surveillance services are satisfied over time, as the customer has access to the service during the surveillance period and the level of service is consistent during the contract period. Therefore, we recognize revenue for this performance obligation on a straight-line basis.
. Discretionary amounts which are added to sales commission payments are expensed as incurred, as they are not considered to be directly attributable to obtaining a customer contract.
operating segments to the following reportable segments: Morningstar Data and Analytics, PitchBook, Morningstar Wealth, Morningstar Credit, and Morningstar Retirement. The operating segments of Morningstar Sustainalytics and Morningstar Indexes do not individually meet the quantitative segment reporting thresholds and have been combined and presented as part of Corporate and All Other, which is not a reportable segment. Corporate and All Other provides a reconciliation between revenue from our reportable segments and consolidated revenue amounts. Refer to Note 6 for detailed segment information.
million of severance expense in 2022. These amounts were recorded within "General and administrative" on our Consolidated Statements of Income. The liability was recorded within "Accrued compensation - current" on our Consolidated Balance Sheet. The company has substantially paid all of the accrued severance amounts as of December 31, 2023.
In 2023, the company incurred $ million of severance expense of which $ million was related to targeted reorganizations and headcount reductions in certain parts of the business and $ million was related to the Company's China operations transition during 2023.
3.
| | $ | | | | Revolving Credit Facility | | | | | | |
% Senior Notes due October 26, 2030, net of unamortized debt issuance costs of $1.5 million and $1.5 million, respectively | | | | | | |
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___________________________________________________________________________________________
(1) Corporate and All Other provides a reconciliation between revenue from our Total Reportable Segments and consolidated revenue amounts. Corporate and All Other includes Morningstar Sustainalytics and Morningstar Indexes as sources of revenues.
(2) Corporate and All Other includes unallocated corporate expenses of $ million in 2023, $ million in 2022, $ million in 2021, as well as adjusted operating income/loss from Morningstar Sustainalytics and Morningstar Indexes. Unallocated corporate expenses include finance, human resources, legal, and other management-related costs that are not considered when segment performance is evaluated.
(3) Excludes finance lease amortization expense of $ million in 2023, $ million in 2022, $ million in 2021.
| | $ | | | | $ | | | | $ | | | | $ | | | | $ | | | | PitchBook | | | | | | | | | | | | | | | | | | |
| Morningstar Wealth | | | | | | | | | | | | | | | | | | |
| Morningstar Credit | | | | | | | | | | | | | | | | | | |
| Morningstar Retirement | | | | | | | | | | | | | | | | | | |
| Total Reportable Segments | | | | | | | | | | | | | | | | | | |
Corporate and All Other (7) | | | | | | | | | | | | | | | | | | |
| Total | | $ | | | | $ | | | | $ | | | | $ | | | | $ | | | | $ | | |
___________________________________________________________________________________________
(7) Corporate and All Other provides a reconciliation between depreciation expense and stock-based compensation expense from our Total Reportable Segments and consolidated depreciation expense and stock-based compensation expense. Corporate and All Other includes unallocated corporate expenses of depreciation expense and stock-based compensation expense related to finance, human resources, legal, and other management-related costs that are not considered when segment performance is evaluated as well as depreciation expense and stock-based compensation expense from Morningstar Sustainalytics and Morningstar Indexes.
| | $ | | | | $ | | | | $ | | | | $ | | | | $ | | | | $ | | | | $ | | | | Asset-based | | | | | | | | | | | | | | | | | | | | | | | | |
| Transaction-based | | | | | | | | | | | | | | | | | | | | | | | | |
| Total | | $ | | | | $ | | | | $ | | | | $ | | | | $ | | | | $ | | | | $ | | | | $ | | |
| | $ | | | | $ | | | | $ | | | | $ | | | | $ | | | | $ | | | | $ | | | | Asset-based | | | | | | | | | | | | | | | | | | | | | | | | |
| Transaction-based | | | | | | | | | | | | | | | | | | | | | | | | |
| Total | | $ | | | | $ | | | | $ | | | | $ | | | | $ | | | | $ | | | | $ | | | | $ | | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | Year ended December 31, 2021 |
|
| (in millions) | | Morningstar Data and Analytics | | PitchBook | | Morningstar Wealth | | Morningstar Credit | | Morningstar Retirement | | Total Reportable Segments | | Corporate and All Other (8) | | Total |
Revenue by Type: (9) | | | | | | | | | | | | | | | | |
| License-based | | $ | | | | $ | | | | $ | | | | $ | | | | $ | | | | $ | | | | $ | | | | $ | | |
| Asset-based | | | | | | | | | | | | | | | | | | | | | | | | |
| Transaction-based | | | | | | | | | | | | | | | | | | | | | | | | |
| Total | | $ | | | | $ | | | | $ | | | | $ | | | | $ | | | | $ | | | | $ | | | | $ | | |
___________________________________________________________________________________________
(8) Corporate and All Other provides a reconciliation between revenue from our Total Reportable Segments and consolidated revenue amounts. Corporate and All Other includes Morningstar Sustainalytics and Morningstar Indexes as sources of revenues.
(9) Starting with the quarter ended March 31, 2023, the company updated its revenue-type classifications to account for product areas with more than one revenue type. Prior periods have not been restated to reflect the updated classifications. Revenue from Morningstar Sustainalytics' second-party opinions product was reclassified from license-based to transaction-based. Revenue from Morningstar Indexes data and services products was reclassified from asset-based to license-based. Revenue from Morningstar DBRS and Morningstar Credit data products was reclassified from transaction-based to license-based.
Geographical Area Information
| | $ | | | | $ | | | | | | | | | |
| Asia | | | | | | | | | |
| Australia | | | | | | | | | |
| Canada | | | | | | | | | |
| Continental Europe | | | | | | | | | |
| United Kingdom | | | | | | | | | |
| Other | | | | | | | | | |
| Total International | | | | | | | | | |
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| Consolidated revenue | | $ | | | | $ | | | | $ | | |
| | $ | | | | | | | |
| Asia | | | | | | |
| Australia | | | | | | |
| Canada | | | | | | |
| Continental Europe | | | | | | |
| United Kingdom | | | | | | |
| Other | | | | | | |
| Total International | | | | | | |
| | | | |
| Consolidated property, equipment, and capitalized software, net | | $ | | | | $ | | |
| | | | | | | | | | | | | | |
| Operating lease assets by geographical area | | | | |
| | As of December 31 |
| (in millions) | | 2023 | | 2022 |
| United States | | $ | | | | $ | | |
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| Asia | | | | | | |
| Australia | | | | | | |
| Canada | | | | | | |
| Continental Europe | | | | | | |
| United Kingdom | | | | | | |
| Other | | | | | | |
| Total International | | | | | | |
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| Consolidated operating lease assets | | $ | | | | $ | | |
7.
| | $ | | | | Available-for-sale | | | | | | |
| Held-to-maturity | | | | | | |
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| Total | | $ | | | | $ | | |
| | $ | | | | $ | | | | $ | | | | $ | | | | $ | | | | $ | () | | | $ | | | | Available-for-sale: | | | | | | | | | | | | | | | | |
| Marketable debt securities | | | | | | | | () | | | | | | | | | | | | | | | | |
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| Held-to-maturity: | | | | | | | | | | | | | | | | |
Certificates of deposit | | | | | | | | | | | | | | | | | | | | | | | | |
| Total | | $ | | | | $ | | | | $ | () | | | $ | | | | $ | | | | $ | | | | $ | () | | | $ | | |
As of and 2022, debt securities with unrealized losses for greater than a 12-month period were not material to the Consolidated Balance Sheets and were not deemed to have other than temporary declines in value.
and 2022.
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| | | As of December 31, 2023 | | As of December 31, 2022 |
| (in millions) | | Cost | | Fair Value | | Cost | | Fair Value |
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| Held-to-maturity: | | | | | | | | |
| Due in one year or less | | $ | | | | $ | | | | $ | | | | $ | | |
| Due in one to three years | | | | | | | | | | | | |
| Total | | $ | | | | $ | | | | $ | | | | $ | | |
| | $ | | | | $ | | | | Realized losses | | | | | () | | | | |
| Realized gains (losses), net | | $ | | | | $ | () | | | $ | | |
We determine realized gains and losses using the specific identification method.
| | $ | | | | $ | | |
| Level 1 | | Level 2 | | Level 3 | | Financial assets: | | | | | | | | |
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| Marketable equity investments, exchange-traded funds, and mutual funds | | $ | | | | $ | | | | $ | | | | $ | | |
| | |
| Marketable debt securities | | | | | | | | | | | | |
| | |
| | |
| Cash equivalents | | | | | | | | | | | | |
| Financial liabilities: | | | | | | | | |
| Contingent consideration | | | | | | | | | | | | |
| Total | | $ | | | | $ | | | | $ | | | | $ | | |
| | | | | | | | | | | | | | | | | | | | | | | | | | |
| | | Fair Value | | |
| | | as of | | Level Within the Fair Value Hierarchy as of December 31, 2022 |
| (in millions) | | December 31, 2022 | | Level 1 | | Level 2 | | Level 3 |
| Financial assets: | | | | | | | | |
| | |
| | |
| | |
| | |
| | |
| Marketable equity investments, exchange-traded funds, and mutual funds | | $ | | | | $ | | | | $ | | | | $ | | |
| | |
| Marketable debt securities | | | | | | | | | | | | |
| | |
| | |
| Cash equivalents | | | | | | | | | | | | |
| Financial liabilities: | | | | | | | | |
| Contingent consideration | | | | | | | | | | | | |
| Total | | $ | | | | $ | | | | $ | | | | $ | | |
We measure the fair value of money market funds, mutual funds, marketable equity securities, marketable debt securities, and exchange-traded funds based on quoted prices in active markets for identical assets or liabilities. We did not hold any securities categorized as Level 2 as of and 2022. We did not hold any securities categorized as Level 3 as of .
As of December 31, 2022, financial liabilities that were classified as Level 3 within the fair value hierarchy included a contingent consideration liability of $ million related to the LCD acquisition, which represents the acquisition date fair value of $ million plus changes due to remeasurement of this liability in subsequent reporting periods.
The contingent consideration reflected potential future payments that were contingent upon the achievement of certain conditions related to the separation of LCD’s contractual relationships from S&P Global (S&P) contracts that included other S&P products and services. This additional purchase consideration, for which the amount was contingent, was recognized at fair value at the date of acquisition, which was calculated as the weighted average of the estimated contingent payment scenarios. The contingent consideration was remeasured each reporting period until the contingency was resolved with any changes in fair value recorded in the current period earnings.
In the first quarter of 2023, we made a cash payment of $ million, resolving our contingent consideration liability related to our acquisition of LCD.
8.
million plus a contingent payment of up to $ million. We began consolidating the financial results of LCD in our consolidated financial statements as of June 1, 2022.
The total consideration transferred was recorded as $ million, comprised of a $ million cash payment plus contingent consideration with an acquisition date fair value of $ million.
The transaction was accounted for as a business combination under the acquisition method of accounting pursuant to FASB ASC 805, which requires that assets acquired and liabilities assumed be recognized at fair value as of the acquisition date. We finalized the purchase price allocation related to our acquisition of LCD during the second quarter of 2023 and did not record any significant adjustments compared to the preliminary estimates at the date of acquisition.
The final contingent consideration was determined based upon the achievement of certain conditions related to the separation of LCD’s contractual relationships from S&P contracts that include other S&P products and services during the six-month period following closing. To estimate the fair value of the contingent consideration at the acquisition date, we calculated the weighted average of the estimated contingent payment scenarios. At subsequent balance sheet dates, the contingent consideration was measured at fair value and any changes in the estimate were recorded in earnings unless the change in fair value was the result of facts and circumstances that existed as of the acquisition date. During the third and fourth quarters of 2022, the contingent consideration was remeasured and increased by $ million and $ million, respectively, for total consideration of $ million as of December 31, 2022. The contingent consideration is classified as "Contingent consideration liabilities" on our Consolidated Balance Sheet as of December 31, 2022. On February 6, 2023, we made a cash payment of $ million, resolving our contingent consideration liability related to our acquisition of LCD.
| | | |
| Accounts receivable and other current assets | | $ | | |
| Intangible assets, net | | | |
| Deferred revenue | | () | |
| Total fair value of net assets acquired | | $ | | |
| | |
| Goodwill | | $ | | |
Acquired accounts receivable were recorded at gross contractual amounts receivable, which approximates fair value. We collected substantially all of the gross contractual amounts receivable within a reasonable period of time after the acquisition date.
million of acquired intangible assets, as follows: | | | | | | | | | | | | | | |
| | (in millions) | | Weighted average useful life (years) |
| Customer-related assets | | $ | | | | |
| Technology-based assets | | | | | |
| Intellectual property | | | | | |
| Total intangible assets | | $ | | | | |
Goodwill of $ million represents the excess over the fair value of the net tangible and intangible assets acquired. Since LCD was an asset acquisition, goodwill is deductible for income tax purposes for that transaction.
Praemium Portfolio Services Limited (Praemium)
On June 30, 2022, we completed our acquisition of Praemium, a U.K.-based global provider of digital-first financial services, with $ million in cash paid at closing, subject to post-closing adjustments. Praemium and its subsidiaries offer several investment platforms and customer relationship management services to their financial planning and wealth management clients across the U.K. and international markets. We began consolidating the financial results of Praemium in our consolidated financial statements as of June 30, 2022.
The transaction was accounted for as a business combination under the acquisition method of accounting pursuant to FASB ASC 805, which requires that assets acquired and liabilities assumed be recognized at fair value as of the acquisition date. We finalized the purchase price allocation related to our acquisition of Praemium during the second quarter of 2023 and did not record any significant adjustments compared to the preliminary estimates at the date of acquisition.
| | | |
| Cash and cash equivalents | | $ | | |
| Accounts receivable and other current and non-current assets | | | |
| Intangible assets, net | | | |
| Deferred revenue | | () | |
| Deferred tax liability, net | | () | |
| Other current and non-current liabilities | | () | |
| Total fair value of net assets acquired | | $ | | |
| | |
| Goodwill | | $ | | |
Acquired accounts receivable were recorded at gross contractual amounts receivable, which approximates fair value. We collected substantially all of the gross contractual amounts receivable within a reasonable period of time after the acquisition date.
million of acquired intangible assets, as follows: | | | | | | | | | | | | | | |
| | (in millions) | | Weighted average useful life (years) |
| Customer-related assets | | $ | | | | |
| Technology-based assets | | | | | |
| Total intangible assets | | $ | | | | |
Goodwill of $ million represents the excess over the fair value of the net tangible and intangible assets acquired. Goodwill is not deductible for income tax purposes for that transaction.
We recognized a net deferred tax liability of $ million primarily because the amortization expense related to certain intangible assets is not deductible for income tax purposes.
2021 Acquisitions
Moorgate Benchmarks
On September 3, 2021, we acquired Moorgate Benchmarks (Moorgate), a privately held European-based global provider of index design, calculation, and administration. We began consolidating the financial results of Moorgate in our consolidated financial statements on September 3, 2021.
The transaction has been accounted for as a business combination 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. We finalized the purchase price allocation related to our acquisition of Moorgate during the fourth quarter of 2021 and did not record any significant adjustments compared to the preliminary estimates at the date of acquisition.
million of goodwill and $ million of acquired intangible assets, as follows: | | | | | | | | | | | | | | |
| | (in millions) | | Weighted average useful life (years) |
| Technology-based assets | | $ | | | | |
| Customer-related assets | | | | | |
| Total intangible assets | | $ | | | | |
We recognized a net deferred tax liability of $ million primarily because the amortization expense related to certain intangible assets is not deductible for income tax purposes.
operating segments, which are presented as the following reportable segments: Morningstar Data and Analytics, PitchBook, Morningstar Wealth, Morningstar Credit, and Morningstar Retirement. The company's operating segments also represent the company's reporting units to which goodwill is assigned. The company allocated goodwill by reporting unit in accordance with FASB ASC 350. Under the new reporting unit structure, the consolidated goodwill balance is initially allocated based on each reporting unit's relative fair value. The company used a market approach and assigned goodwill to the reporting units. The following table shows the changes in our goodwill balances from January 1, 2022 to December 31, 2023:
| | $ | | | | $ | | | | $ | | | | $ | | | | $ | | | | $ | | | | $ | | | | Acquisition of LCD | | | | | | | | | | | | | | | | | | | | | | | | |
| Acquisition of Praemium | | | | | | | | | | | | | | | | | | | | | | | | |
| Other, primarily foreign currency translation | | () | | | | | | () | | | () | | | | | | () | | | () | | | () | |
| Balance as of December 31, 2022 | | | | | | | | | | | | | | | | | | | | | | | | |
| Foreign currency translation | | | | | | | | | | | | | | | | | | | | () | | | | |
| Balance as of December 31, 2023 | | $ | | | | $ | | | | $ | | | | $ | | | | $ | | | | $ | | | | $ | | | | $ | | |
We did not record any impairment losses in 2023, 2022, or 2021 as the estimated fair value of our reporting unit exceeded its carrying value and we did not note any indicators of impairment. We perform our annual impairment testing during the fourth quarter of each year.
Intangible Assets
| | $ | () | | | $ | | | | | | $ | | | | $ | () | | | $ | | | | | | Technology-based assets | | | | | () | | | | | | | | | | | () | | | | | | |
| | | | | | | | | | |
| Intellectual property & other | | | | | () | | | | | | | | | | | () | | | | | | |
| | | | | | | | | | |
|
| (in millions) | | As of December 31, 2023 |
| Shares available for future grants | | | |
Accounting for Stock-Based Compensation Awards
| | $ | | | | $ | | | |
| Performance share awards | | | | | | | | | |
| Market stock units | | | | | | | | | |
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13.
cents for every dollar of an employee's contribution, up to a maximum of % of the employee's compensation in the pay period.
| | $ | | | | $ | | |
14.
| | $ | | | | $ | | | | Equity in investments of unconsolidated entities | | () | | | () | | | | |
|
| Income before income taxes | | $ | | | | $ | | | | $ | | |
| Income tax expense | | $ | | | | $ | | | | $ | | |
| Effective tax rate | | | % | | | % | | | % |
Our effective tax rate for the year ended December 31, 2023 was %, a decrease of percentage points, compared with % in the prior year. This decrease is primarily attributable to the recognition of $ million of tax benefits related to a retroactive tax election with respect to our 2021 and 2022 tax periods. We received confirmation of the approval of the tax election in the second quarter of 2023, which allowed us to recognize the tax benefits in that period.
Our effective tax rate for the year ended December 31, 2022 was %, an increase of percentage points, compared with % in 2021. The increase was primarily attributable to minimum taxes, non-deductible expenses, and additional reserves for uncertain tax positions.
The amount of accumulated undistributed earnings of our foreign subsidiaries was $ million as of December 31, 2023. We generally consider our U.S. directly-owned foreign subsidiary earnings to be permanently reinvested. We have not recorded deferred income taxes on the $ million primarily because most of these earnings were previously subject to the one-time deemed mandatory repatriation tax under the Tax Cuts and Jobs Act of 2017 (Tax Reform Act). We maintain a deferred tax liability for foreign withholding taxes on certain foreign affiliate parent companies that are not indefinitely reinvested.
| | | % | | $ | | | | | % | | $ | | | | | % | | State income taxes, net of federal income tax benefit | | | | | | % | | | | | | % | | | | | | % |
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| Stock-based compensation activity | | | | | | % | | () | | | () | % | | () | | | () | % |
| Equity in net income (loss) of unconsolidated subsidiaries (including holding gains upon acquisition) | | | | | | % | | | | | | % | | | | | | % |
| | | | | | |
| Acquisition earn-out | | | | | | % | | | | | | % | | | | | | % |
| Net change in valuation allowance related to deferred tax assets, including net operating losses | | () | | | () | % | | | | | | % | | | | | | % |
| Difference between U.S. federal statutory and foreign tax rates and other impacts of foreign operations | | | | | | % | | () | | | () | % | | () | | | () | % |
| Change in unrecognized tax benefits | | () | | | () | % | | | | | | % | | () | | | () | % |
| Credits and incentives | | () | | | () | % | | () | | | () | % | | () | | | () | % |
Foreign tax provisions (GILTI, FDII, and BEAT)(1) | | () | | | () | % | | () | | | () | % | | () | | | () | % |
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| Non-deductible expenses and other, net | | | | | | % | | | | | | % | | | | | | % |
| Total income tax expense | | $ | | | | | % | | $ | | | | | % | | $ | | | | | % |
(1) The Tax Reform Act established the Global Intangible Low-Tax Income (GILTI) provision, which taxes U.S. allocated expenses and certain income from foreign operations; the Foreign-Derived Intangible Income (FDII) provision, which allows a deduction against certain types of U.S. taxable income resulting in a lower effective U.S. tax rate on such income; and the Base Erosion Anti-Abuse Tax (BEAT), which is a minimum tax based on cross-border service payments by U.S. entities.
| | $ | | | | $ | | | | State | | | | | | | | | |
| Non-U.S. | | | | | | | | | |
| Current tax expense | | | | | | | | | |
| Deferred tax expense (benefit): | | | | | | |
| U.S. | | | | | | |
| Federal | | () | | | () | | | () | |
| State | | () | | | () | | | () | |
| Non-U.S. | | () | | | () | | | () | |
| Deferred tax expense, net | | () | | | () | | | () | |
| Income tax expense | | $ | | | | $ | | | | $ | | |
| | $ | | | | $ | | | | Non-U.S. | | | | | | | | | |
| Income before income taxes and equity in investments of unconsolidated entities | | $ | | | | $ | | | | $ | | |
Deferred Tax Assets and Liabilities
We recognize deferred income taxes for the temporary differences between the carrying amount of assets and liabilities for financial statement purposes and their tax basis.
| | $ | | | | Accrued liabilities | | | | | | |
| Deferred revenue | | | | | | |
| Net operating loss carryforwards - U.S. | | | | | | |
| Net operating loss carryforwards - Non-U.S. | | | | | | |
|
| Capitalized expenses | | | | | | |
| Deferred royalty revenue | | | | | | |
| Allowance for doubtful accounts | | | | | | |
| Lease liabilities | | | | | | |
|
|
| Capital loss and other carryforwards | | | | | | |
| Other | | | | | | |
| Total deferred tax assets | | | | | | |
| | | | |
| Deferred tax liabilities: | | | | |
| Acquired intangible assets | | () | | | () | |
| Property, equipment, and capitalized software | | () | | | () | |
| Lease right-of-use assets | | () | | | () | |
| Unrealized exchange gains, net | | () | | | () | |
| Prepaid expenses | | () | | | () | |
| Investments in unconsolidated entities | | () | | | () | |
| Withholding tax - foreign dividends | | () | | | () | |
|
| Total deferred tax liabilities | | () | | | () | |
| Net deferred tax liability before valuation allowance | | | | | () | |
| Valuation allowance | | () | | | () | |
| Deferred tax liabilities, net | | $ | () | | | $ | () | |
The net increase in our valuation allowance, from $ million at December 31, 2022 to $ million at December 31, 2023, is primarily attributable to capital losses and foreign tax credit carryforwards for which full realization is uncertain. Included in this increase, is $ million of foreign tax credits that will expire in 2031 through 2033. In assessing the need for a valuation allowance, many factors are considered, including the specific taxing jurisdiction, the carryforward period, income tax strategies and forecasted earnings for the entities in each jurisdiction. A valuation allowance is recognized if, based on the weight of available evidence, it is more likely than not that some portion or all of the deferred tax asset will not be realized.
| | $ | | | | Deferred tax liability, net | | () | | | () | |
| Deferred tax liability, net | | $ | () | | | $ | () | |
We utilized our remaining U.S. federal net operating loss (NOL) carryforwards of $ million during 2023 and have no carryforwards remaining as of December 31, 2023.
| | $ | | | | Non-U.S. NOLs with no expiration date | | | | | | |
| Total | | $ | | | | $ | | |
| | | | |
| Non-U.S. NOLs not subject to valuation allowances | | $ | | | | $ | | |
The increase in non-U.S. NOL carryforwards as of December 31, 2023 compared with the same period in 2022 primarily reflects NOLs generated from compensation and related liabilities attributable to the shift of our China operations.
million
Unrecognized Tax Benefits
We conduct business globally and, as a result, we file income tax returns in U.S. federal, state, local, and foreign jurisdictions. In the normal course of business, we are subject to examination by tax authorities throughout the world. With the exception of 2019, the open tax years for our U.S. Federal tax returns and most state tax returns include the years 2016 to the present.
We are currently under audit by federal, state, and local tax authorities in the U.S. as well as tax authorities in certain non-U.S. jurisdictions. It is likely that the examination phase of some of these federal, state, local, and non-U.S. audits will conclude in 2024. It is not possible to estimate the effect of current audits on previously recorded unrecognized tax benefits.
As of December 31, 2023, our Consolidated Balance Sheet included a current liability of $ million and a non-current liability of $ million for unrecognized tax benefits. As of December 31, 2022, our Consolidated Balance Sheet included a current liability of $ million and a non-current liability of $ million for unrecognized tax benefits. These amounts include interest and penalties, less any associated tax benefits.
| | $ | | | | Increases as a result of tax positions taken during a prior-year period | | | | | | |
| Decreases as a result of tax positions taken during a prior-year period | | () | | | | |
| Increases as a result of tax positions taken during the current period | | | | | | |
| Decreases relating to settlements with tax authorities | | () | | | () | |
| Decreases as a result of lapse of the applicable statute of limitations | | () | | | () | |
| Gross unrecognized tax benefits - end of the year | | $ | | | | $ | | |
In 2023, we recorded a net decrease of $ million of gross unrecognized tax benefits before settlements and lapses of statutes of limitations, of which $ million decreased our income tax expense by $ million.
Of the $ million net decrease in our gross unrecognized tax benefits, $ million is related to tax benefits related to a retroactive tax election with respect to our 2021 and 2022 tax periods which required approval by a taxing authority before recognizing the tax benefit of our election in our Consolidated Statements of Income. In 2022, we recorded the $ million as a current liability in our reserves for uncertain tax positions. We received confirmation of the approval of the tax election in the second quarter of 2023, which allowed us to recognize the tax benefits in that period.
In addition, we reduced our unrecognized tax benefits by $ million for settlements and lapses of statutes of limitations, of which $ million decreased our income tax expense by $ million.
As of December 31, 2023, we had $ million of gross unrecognized tax benefits, which if recognized, would decrease our income tax expense by $ million and reduce our effective income tax rate.
We record interest and penalties related to uncertain tax positions as part of our income tax expense.
| | $ | | |
We recorded the increase in the liabilities for penalties and interest, net of any tax benefits, to income tax expense in our Consolidated Statements of Income in 2023.
15.
million civil monetary penalty to the SEC for this matter, and also paid a $ million civil monetary penalty to the SEC to resolve the investigation related to CMBS ratings methodologies, both in early October 2023.
Other Matters
We are involved from time to time in commercial disputes and legal proceedings that arise in the normal course of our business. While it is difficult to predict the outcome of any particular dispute or proceeding, we do not believe the result of any of these matters will have a material adverse effect on our business, operating results, or financial position.
16.
million in shares of the company's outstanding common stock, effective January 1, 2023. This authorization replaced the then-existing share repurchase program and expires on December 31, 2025. Under this authorization, 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.
For the year ended December 31, 2023, we repurchased a total of shares for $ million. As of , we have $ million available for future repurchases under the current share repurchase program.
17.
Item 9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure
Not applicable.
Item 9A. Controls and Procedures
(a) Evaluation of Disclosure Controls and Procedures
We maintain disclosure controls and procedures to reasonably assure that information required to be disclosed in the reports filed or submitted under the Securities and Exchange Act of 1934, as amended (the Exchange Act) is recorded, processed, summarized, and reported within the time periods specified in the SEC's rules and forms. Disclosure controls and procedures include, without limitation, controls and procedures designed to ensure that information required to be disclosed in the reports filed under the Exchange Act is accumulated and communicated to management, including the chief executive officer and chief financial officer, as appropriate, to allow timely decisions regarding required disclosure.
We completed an evaluation 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, as of December 31, 2023. Management, including our chief executive officer and chief financial officer, participated in and supervised this evaluation. Based on that evaluation, our chief executive officer and chief financial officer concluded that our disclosure controls and procedures are not effective as of December 31, 2023, due solely to the material weakness in internal control over financial reporting related to segment reporting described below.
Notwithstanding the material weakness described below, our chief executive officer and chief financial officer have concluded that the consolidated financial statements in this Annual Report on Form 10-K (Report) fairly present, in all material respects, the company’s financial position and results of operations and cash flows as of and for the periods presented, in conformity with U.S. generally accepted accounting principles.
(b) Management's Report on Internal Control Over Financial Reporting
Our management is responsible for establishing and maintaining adequate internal control over financial reporting (as defined under Rules 13a-15(f) and 15d-15(f) of the Exchange Act).
We carried out an evaluation, under the supervision and with the participation of our management, including our chief executive officer and chief financial officer, and under the oversight of our board of directors, of the effectiveness of our internal control over financial reporting based on the framework set forth in Internal Control—Integrated Framework (2013) issued by the Committee of Sponsoring Organizations of the Treadway Commission. Based on that evaluation, our management concluded that our internal control over financial reporting was not effective as of December 31, 2023, due to a material weakness in internal control over financial reporting related to segment reporting described below.
The company had ineffective process-level controls over the disclosures required in accordance with FASB ASC 280, Segment Reporting, resulting from ineffective risk assessment of factors that are relevant to assessing whether operating segments can be aggregated.
KPMG LLP, the company’s independent registered public accounting firm, who audited our consolidated financial statements included in this Report, has also issued an adverse opinion on the effectiveness of the company’s internal control over financial reporting. KPMG’s report is included in Part II, Item 8 of this report under the caption “Financial Statements and Supplementary Data”.
Remediation Plan
In response to the material weakness, we have begun implementing process and control improvements to address the above material weakness including:
a.Enhancing our risk assessment process, focusing on factors that could impact our financial reporting, including related disclosures.
b.Further enhancing our process-level controls related to the company’s segment reporting.
Management believes evidence of effectiveness of the remediation steps can be achieved within the next year and we intend to regularly report to the Audit Committee on progress and results of the remediation plan. The material weakness in our internal control over financial reporting will not be considered remediated until the remediated controls operate for a sufficient period of time and management has concluded, through testing, that these controls are operating effectively.
No system of controls, no matter how well designed and operated, can provide absolute assurance that the objectives of the system of controls will be met, and no evaluation of controls can provide absolute assurance that the objectives of the system of controls will be met, and no evaluation of controls can provide absolute assurance that all control deficiencies or material weaknesses have been or will be detected. There is no assurance that the remediation will be fully effective.
(c) Changes in Internal Control Over Financial Reporting
Except for the identification of the material weakness described above, there were no changes in our internal control over financial reporting during the fiscal quarter ended December 31, 2023, that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.
Item 9B. Other Information
Trading Arrangements
During the three months ended December 31, 2023, the company’s executive officers and directors adopted or terminated contracts, instructions, or written plans for the purchase or sale of the company’s securities as noted below: | | | | | | | | | | | | | | | | | | | | |
| | | | | | |
| Name and Title | | Date of Adoption of Trading Plan | | Scheduled Expiration Date of Trading Plan (1) | | Aggregate Number of Securities to Be Purchased or Sold |
Joe Mansueto
Executive Chairman | | 11/17/2023 (2) | | 4/30/2025 | | Sale of up to 500,000 shares of common stock |
________________________________________
(1) The trading plan may also expire on such earlier date as all transactions under the trading plan are completed.
(2) Intended to satisfy the affirmative defense of Rule 10b5-1(c).
Item 9C. Disclosure Regarding Foreign Jurisdictions that Prevent Inspections
Not applicable.
Part III
Item 10. Directors, Executive Officers, and Corporate Governance
The information contained under the headings Board of Directors and Corporate Governance—Director Independence, —Board Committees and Charters, and —Delinquent Section 16(a) Reports in the company's Definitive Proxy Statement for the 2024 Annual Meeting of Shareholders, which will be filed not later than 120 days after the end of the registrant's fiscal year ended December 31, 2023, (the Proxy Statement) and the information contained under the heading Executive Officers in Part I of this Report is incorporated herein by reference in response to this item.
We have adopted a code of ethics, which is posted in the Investor Relations area of our corporate website at https://shareholders.morningstar.com in the Governance section. We intend to include on our website any amendments to, or waivers from, a provision of the code of ethics that apply to our principal executive officer, principal financial officer, principal accounting officer, or controller that relates to any element of the code of ethics definition contained in Item 406(b) of SEC Regulation S-K. Shareholders may request a free copy of these documents by sending an e-mail to investors@morningstar.com.
Item 11. Executive Compensation
The information contained under the headings Board of Directors and Corporate Governance—Director Compensation, and Compensation Discussion and Analysis—Compensation Committee Report and —Executive Compensation Tables in the Proxy Statement is incorporated herein by reference in response to this item.
Item 12. Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters
The information contained under the headings Security Ownership of Certain Beneficial Owners and Compensation Discussion and Analysis—Equity Compensation Plan Information in the Proxy Statement is incorporated herein by reference in response to this item.
Item 13. Certain Relationships and Related Transactions, and Director Independence
The information contained under the headings Certain Relationships and Related Party Transactions and Board of Directors and Corporate Governance—Director Independence in the Proxy Statement is incorporated herein by reference in response to this item.
Item 14. Principal Accountant Fees and Services
The information contained under the headings Proposal 3: Ratification of the Appointment of Independent Registered Public Accounting Firm—Audit Committee Report and —Principal Accounting Firm Fees in the Proxy Statement is incorporated herein by reference in response to this item.
Part IV
Item 15. Exhibits and Financial Statement Schedules
(a)
1. Consolidated Financial Statements
The following documents are filed as part of this Report under Item 8—Financial Statements and Supplementary Data:
| | | | | | | | | | | | | | | | | |
| Report of KPMG LLP, Independent Registered Public Accounting Firm |
| | | Auditor Firm ID: | | |
| Financial Statements: |
| Consolidated Statements of Income—Years ended December 31, 2023, 2022, and 2021 |
| Consolidated Statements of Comprehensive Income—Years ended December 31, 2023, 2022, and 2021 |
| Consolidated Balance Sheets—December 31, 2023 and 2022 |
| Consolidated Statements of Equity—Years ended December 31, 2023, 2022, and 2021 |
| Consolidated Statements of Cash Flows—Years ended December 31, 2023, 2022, and 2021 |
| Notes to Consolidated Financial Statements |
2. Financial Statement Schedules
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
The report of KPMG LLP dated February 29, 2024 concerning the Financial Statement Schedule II, Morningstar, Inc., and subsidiaries Valuation and Qualifying Accounts, is included at the beginning of Part II, Item 8 of this Annual Report on Form 10-K for the years ended December 31, 2023, December 31, 2022, and December 31, 2021.
The following financial statement schedule is filed as part of this Annual Report on Form 10-K:
| | $ | | | | $ | () | | | $ | | | | 2022 | | | | | | | | () | | | | |
| 2021 | | $ | | | | $ | | | | $ | () | | | $ | | |
3. Exhibits
| | | | | | | | |
| Exhibit | | Description |
| | Agreement and Plan of Merger, dated May 28, 2019, by and among Morningstar, Alpine Merger Co., Ratings Acquisition Corp and Shareholder Representative Services LLC is incorporated by reference to Exhibit 2.1 to our Current Report on Form 8-K that we filed with the SEC on June 3, 2019. |
| | Asset Purchase Agreement, by and between S&P Global Inc. and Morningstar, Inc., dated as of April 3, 2022, is incorporated by reference to Exhibit 2.1 to our Quarterly Report on Form 10-Q for the quarter ended June 30, 2022. |
| | Amendment to the Asset Purchase Agreement, by and between S&P Global Inc. and Morningstar, Inc., dated as of June 1, 2022, is incorporated by reference to Exhibit 2.2 to our Quarterly Report on Form 10-Q for the quarter ended June 30, 2022. |
| | Amended and Restated Articles of Incorporation of Morningstar are incorporated by reference to Exhibit 3.1 to our Registration Statement on Form S-1, as amended, Registration No. 333-115209 (the Registration Statement). |
| | By-laws of Morningstar, as in effect on February 27, 2018, are incorporated by reference to Exhibit 3.1 to our Current Report on Form 8-K that we filed with the SEC on February 28, 2018. |
| | Specimen Common Stock Certificate is incorporated by reference to Exhibit 4.1 to the Registration Statement. |
| | Description of Morningstar's Securities is incorporated by reference to Exhibit 4.2 to our Annual Report on Form 10-K for the year ended December 31, 2019. |
| | Form of Indemnification Agreement is incorporated by reference to Exhibit 10.1 to the Registration Statement. |
| | Morningstar Incentive Plan, as amended and restated effective January 1, 2014, is incorporated by reference to Exhibit 10.2 to our Annual Report on Form 10-K for the year ended December 31, 2013. |
| | Morningstar 2011 Stock Incentive Plan is incorporated by reference to Exhibit 10.1 to our Current Report on Form 8-K that we filed with the SEC on May 18, 2011. |
| | Morningstar Amended and Restated 2011 Stock Incentive Plan is incorporated by reference to Exhibit 10.1 to our Current Report on Form 8-K that we filed with the SEC on May 20, 2021. |
| | Form of Morningstar 2011 Stock Incentive Plan Restricted Stock Unit Award Agreement, for awards made on and after May 15, 2019 and prior to May 15, 2020, is incorporated by reference to Exhibit 10.1 to our Quarterly Report on Form 10-Q for the quarter ended June 30, 2019. |
| | Form of Morningstar 2011 Stock Incentive Plan Market Stock Unit Award Agreement, for awards made on and after May 15, 2019 and prior to May 15, 2020, is incorporated by reference to Exhibit 10.2 to our Quarterly Report on Form 10-Q for the quarter ended June 30, 2019. |
| | Form of Morningstar 2011 Stock Incentive Plan Market Stock Unit with Revenue Kicker Award Agreement, for awards made on and after May 15, 2019 and prior to May 15, 2020, is incorporated by reference to Exhibit 10.3 to our Quarterly Report on Form 10-Q for the quarter ended June 30, 2019. |
| | Form of Morningstar 2011 Stock Incentive Plan Market Stock Unit Award Agreement, for awards made on and after May 15, 2020 and prior to May 15, 2021, is incorporated by reference to Exhibit 10.1 to our Quarterly Report on Form 10-Q for the quarter ended June 30, 2020. |
| | Form of Morningstar 2011 Stock Incentive Plan Market Stock Unit with Performance Kicker Award Agreement for awards made on and after May 15, 2020 and prior to May 15, 2021 is incorporated by reference to Exhibit 10.2 to our Quarterly Report on Form 10-Q for the quarter ended June 30, 2020. |
| | Form of Morningstar Amended and Restated 2011 Stock Incentive Plan Restricted Stock Unit Award Agreement, for awards made on and after May 15, 2021, is incorporated by reference to Exhibit 10.2 to our Quarterly Report on Form 10-Q for the quarter ended June 30, 2021. |
| | Form of Morningstar Amended and Restated 2011 Stock Incentive Plan Director Restricted Stock Unit Award Agreement, for awards made on and after May 15, 2021, is incorporated by reference to Exhibit 10.3 to our Quarterly Report on Form 10-Q for the quarter ended June 30, 2021. |
| | Form of Morningstar Amended and Restated 2011 Stock Incentive Plan Market Stock Unit Award Agreement, for awards made on and after May 15, 2021, is incorporated by reference to Exhibit 10.4 to our Quarterly Report on Form 10-Q for the quarter ended June 30, 2021. |
| | Form of Morningstar Amended and Restated 2011 Stock Incentive Plan Market Stock Unit with Performance Kicker Award Agreement, for awards made on and after May 15, 2021 and prior to May 15, 2022, is incorporated by reference to Exhibit 10.5 to our Quarterly Report on Form 10-Q for the quarter ended June 30, 2021. |
| | Form of Morningstar Amended and Restated 2011 Stock Incentive Plan CEO Restricted Stock Unit Award Agreement, for awards made on and after May 15, 2021, is incorporated by reference to Exhibit 10.6 to our Quarterly Report on Form 10-Q for the quarter ended June 30, 2021. |
| | | | | | | | |
| | Form of Morningstar Amended and Restated 2011 Stock Incentive Plan Bonus Restricted Stock Unit Award Agreement, for awards made on and after May 15, 2022, is incorporated by reference to Exhibit 10.2 to our Quarterly Report on Form 10-Q for the quarter ended June 30, 2022. |
| | Form of Morningstar Amended and Restated 2011 Stock Incentive Plan Market Stock Unit with Revenue Kicker Award Agreement, for awards made on and after May 15, 2022, is incorporated by reference to Exhibit 10.3 to our Quarterly Report on Form 10-Q for the quarter ended June 30, 2022. |
| | Form of Morningstar Amended and Restated 2011 Stock Incentive Plan Bonus Restricted Stock Unit Agreement, for awards made on or after March 1, 2023, is incorporated by reference to Exhibit 10.1 to our Quarterly Report on Form 10-Q for the quarter ended March 31, 2023. |
| | Contract Services Agreement dated as of February 1, 2023, between Morningstar, Inc. and Bevin Desmond, is incorporated by reference to Exhibit 10.1 to our Current Report on Form 8-K that we filed with the SEC on February 2, 2023. |
| | Separation Agreement and General Release dated as of February 1, 2023, between Morningstar, Inc. and Bevin Desmond, is incorporated by reference to Exhibit 10.2 to our Current Report on Form 8-K that we filed with the SEC on February 2, 2023. |
| | Credit Agreement dated as of May 6, 2022, among Morningstar, Inc., certain subsidiaries of Morningstar, Inc., and Bank of America, N.A., is incorporated by reference to Exhibit 10.1 to our Quarterly Report on Form 10-Q for the quarter ended June 30, 2022. |
| | Amendment No. 1 to the Credit Agreement dated as of September 13, 2022, among Morningstar, Inc., certain subsidiaries of Morningstar, Inc., Bank of America, N.A. and the other lenders party thereto, is incorporated by reference to Exhibit 10.1 to our Quarterly Report on Form 10-Q for the quarter ended September 30, 2022. |
| | Amendment No. 2 to the Credit Agreement dated as of September 30, 2022, among Morningstar, Inc., certain subsidiaries of Morningstar, Inc., Bank of America, N.A. and the other lenders party thereto, is incorporated by reference to Exhibit 10.2 to our Quarterly Report on Form 10-Q for the quarter ended September 30, 2022. |
| | Note Purchase Agreement, dated as of October 26, 2020, among Morningstar and each of the purchasers signatory thereto, is incorporated by reference to Exhibit 10.1 to our Current Report on Form 8-K filed with the SEC on October 26, 2020. |
| | Subsidiaries of Morningstar. |
| | Consent of KPMG LLP. |
| | Certification of Chief Executive Officer pursuant to Rule 13a-14(a) and 15d-14(a) of the Securities Exchange Act of 1934, as amended. |
| | Certification of Chief Financial Officer pursuant to Rule 13a-14(a) and 15d-14(a) of the Securities Exchange Act of 1934, as amended. |
| | 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. |
| | 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. |
| | Morningstar, Inc. Incentive Compensation Recoupment Policy |
| 101† | | The following financial information from Morningstar's Annual Report on Form 10-K for the year ended December 31, 2023, filed with the SEC on February 29, 2024, formatted in Inline XBRL: (i) Cover Page, (ii) Consolidated Statements of Income, (iii) Consolidated Statements of Comprehensive Income, (iv) Consolidated Balance Sheets, (v) Consolidated Statements of Equity, (vi) Consolidated Statements of Cash Flows and (vii) the Notes to Consolidated Financial Statements |
| 104† | | Cover Page Interactive Data File (the cover page XBRL tags are embedded in the Inline XBRL document). |
* Management contract with a director or executive officer or a compensatory plan or arrangement in which directors or executive officers are eligible to participate.
† Filed or furnished herewith.
Item 16. Form 10-K Summary
None.
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) 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 on February 29, 2024.
| | | | | | | | |
| | | MORNINGSTAR, INC. |
| | | |
| By: | /s/ Kunal Kapoor |
| | | Kunal Kapoor |
| | | Title: Chief Executive Officer |
Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the registrant and in the capacities and on the dates indicated.
| | | | | | | | | | | | | | |
| Signature | | Title | | Date |
| | | | |
| /s/ Kunal Kapoor | | Chief Executive Officer | | February 29, 2024 |
| Kunal Kapoor | | (principal executive officer) and Director | | |
| | | | |
| /s/ Jason Dubinsky | | Chief Financial Officer (principal | | February 29, 2024 |
| Jason Dubinsky | | financial and principal accounting officer) | | |
|
|
|
| | | | |
| /s/ Joe Mansueto | | Executive Chairman and Chairman | | February 29, 2024 |
| Joe Mansueto | | of the Board | | |
| | | | |
| /s/ Robin Diamonte | | Director | | February 29, 2024 |
| Robin Diamonte | | | | |
| | | | |
| /s/ Cheryl Francis | | Director | | February 29, 2024 |
| Cheryl Francis | | | | |
| | | | |
| /s/ Stephen Joynt | | Director | | February 29, 2024 |
| Stephen Joynt | | | | |
| | | | |
| /s/ Steven Kaplan | | Director | | February 29, 2024 |
| Steven Kaplan | | | | |
| | | | |
| /s/ Gail Landis | | Director | | February 29, 2024 |
| Gail Landis | | | | |
| | | | |
| /s/ Bill Lyons | | Director | | February 29, 2024 |
| Bill Lyons | | | | |
| | | | |
| /s/ Doniel Sutton | | Director | | February 29, 2024 |
| Doniel Sutton | | | | |
| | | | |
| /s/ Caroline Tsay | | Director | | February 29, 2024 |
| Caroline Tsay | | | | |
| | | | |
|
|
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