10-Q 1 morn-20240331.htm 10-Q morn-20240331
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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

FOR THE QUARTERLY PERIOD ENDED March 31, 2024
OR
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the transition period from         to
Commission File Number: 000-51280
MORNINGSTAR, INC.
(Exact Name of Registrant as Specified in its Charter) 
mlogored2a01a13.jpg
Illinois 36-3297908
(State or Other Jurisdiction of (I.R.S. Employer
Incorporation or Organization) Identification Number)
22 West Washington Street 
Chicago,Illinois60602
(Address of Principal Executive Offices)(Zip Code)
  (312) 696-6000
(Registrant’s Telephone Number, Including Area Code)

Securities registered pursuant to Section 12(b) of the Act:
Title of Each ClassTrading SymbolName of Each Exchange on Which Registered
Common stock, no par valueMORNNASDAQ
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes x No o
Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit such files). Yes x No o
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company, or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company,” and "emerging growth company" in Rule 12b-2 of the Exchange Act.
Large accelerated filer
Accelerated filer  
o

Non-accelerated filer   o
Smaller reporting company  Emerging growth company  
If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. o
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes No x
As of April 19, 2024, there were 42,745,583 shares of the company’s common stock, no par value, outstanding.


MORNINGSTAR, INC. AND SUBSIDIARIES
INDEX
 
   
 
   
   Unaudited Condensed Consolidated Statements of Income for the three months ended March 31, 2024 and 2023
Unaudited Condensed Consolidated Statements of Comprehensive Income (Loss) for the three months ended March 31, 2024 and 2023
    
   Condensed Consolidated Balance Sheets as of March 31, 2024 (unaudited) and December 31, 2023
    
   Unaudited Condensed Consolidated Statements of Equity for the three months ended March 31, 2024 and 2023
   
   Unaudited Condensed Consolidated Statements of Cash Flows for the three months ended March 31, 2024 and 2023
   
   
   
 
   
 
   
 
   
   
   
 
   
 
   
 
   
 
   
 
3

PART 1.FINANCIAL INFORMATION
Item 1.Financial Statements
Morningstar, Inc. and Subsidiaries
Unaudited Condensed Consolidated Statements of Income (Loss)
 Three months ended March 31,
(in millions, except per share amounts)20242023
Revenue$542.8 $479.7 
Operating expense:
Cost of revenue218.1 218.8 
Sales and marketing104.6 107.6 
General and administrative80.3 84.0 
Depreciation and amortization47.2 44.8 
Total operating expense450.2 455.2 
Operating income92.6 24.5 
Non-operating expense, net:
Interest expense, net(11.5)(13.3)
Realized gain on sale of investments, reclassified from other comprehensive income2.6 0.2 
Expense from equity method transaction, net (11.8)
Other income, net3.3 2.5 
Non-operating expense, net(5.6)(22.4)
Income before income taxes and equity in investments of unconsolidated entities87.0 2.1 
Equity in investments of unconsolidated entities(1.5)(1.3)
Income tax expense21.3 8.4 
Consolidated net income (loss)$64.2 $(7.6)
Net income (loss) per share:
Basic$1.50 $(0.18)
Diluted$1.49 $(0.18)
Dividends per common share:
Dividends declared per common share$0.41 $0.38 
Dividends paid per common share$0.41 $0.38 
Weighted average shares outstanding:
Basic42.7 42.5 
Diluted43.0 42.5 

See notes to unaudited condensed consolidated financial statements.    
4

Morningstar, Inc. and Subsidiaries
Unaudited Condensed Consolidated Statements of Comprehensive Income (Loss)

 Three months ended March 31,
(in millions) 20242023
Consolidated net income (loss)$64.2 $(7.6)
Other comprehensive income (loss), net of tax:
Foreign currency translation adjustment(10.6)7.1 
Unrealized gains on securities:
Unrealized holding gains arising during period1.9 0.1 
Reclassification of realized gains on investments included in net income(1.9)(0.2)
Other comprehensive income (loss), net(10.6)7.0 
Comprehensive income (loss)$53.6 $(0.6)

See notes to unaudited condensed consolidated financial statements.


5

Morningstar, Inc. and Subsidiaries
Condensed Consolidated Balance Sheets
(in millions, except share amounts)As of March 31, 2024
(unaudited)
As of December 31, 2023
Assets  
Current assets:  
Cash and cash equivalents$353.7 $337.9 
Investments55.4 51.1 
Accounts receivable, less allowance for credit losses of $6.1 million and $5.6 million, respectively326.2 343.9 
Income tax receivable, net 0.6 
Deferred commissions41.6 41.9 
Prepaid expenses48.6 34.9 
Other current assets5.1 5.4 
Total current assets830.6 815.7 
Goodwill1,574.1 1,578.8 
Intangible assets, net463.4 484.4 
Property, equipment, and capitalized software, less accumulated depreciation and amortization of $741.2 million and $714.0 million, respectively210.8 207.7 
Operating lease assets156.5 163.9 
Investments in unconsolidated entities96.1 100.2 
Deferred tax assets, net19.7 14.6 
Deferred commissions30.0 29.3 
Other assets8.2 8.8 
Total assets$3,389.4 $3,403.4 
Liabilities and equity  
Current liabilities:  
Deferred revenue$565.2 $517.7 
Accrued compensation122.9 214.4 
Accounts payable and accrued liabilities72.0 78.4 
Current portion of long-term debt32.1 32.1 
Operating lease liabilities34.7 36.4 
Other current liabilities19.9 1.8 
Total current liabilities846.8 880.8 
Operating lease liabilities143.8 151.4 
Accrued compensation23.3 23.7 
Deferred tax liabilities, net32.8 35.6 
Long-term debt917.3 940.3 
Deferred revenue24.7 26.3 
Other long-term liabilities17.6 17.5 
Total liabilities$2,006.3 $2,075.6 
Equity:  
Morningstar, Inc. shareholders’ equity:  
Common stock, no par value, 200,000,000 shares authorized, of which 42,745,570 and 42,728,182 shares were outstanding as of March 31, 2024 and December 31, 2023, respectively  
6

Treasury stock at cost, 11,987,495 and 11,987,495 shares as of March 31, 2024 and December 31, 2023, respectively(985.5)(985.5)
Additional paid-in capital808.0 789.0 
Retained earnings1,657.7 1,610.8 
Accumulated other comprehensive loss:
    Currency translation adjustment(97.0)(86.4)
    Unrealized loss on available-for-sale investments(0.1)(0.1)
Total accumulated other comprehensive loss(97.1)(86.5)
Total equity1,383.1 1,327.8 
Total liabilities and equity$3,389.4 $3,403.4 

See notes to unaudited condensed consolidated financial statements.
7

Morningstar, Inc. and Subsidiaries
Unaudited Condensed Consolidated Statements of Equity
For the three months ended March 31, 2024 and 2023
 Morningstar, Inc. Shareholders’ Equity 
Accumulated
Other
Comprehensive
Loss
 Common Stock Additional
Paid-in
Capital
 
(in millions, except share and per share amounts)Shares
Outstanding
Par
Value
Treasury
Stock
Retained
Earnings
Total
Equity
Balance as of December 31, 202342,728,182 $ $(985.5)$789.0 $1,610.8 $(86.5)$1,327.8 
Net income— — — 64.2 — 64.2 
Other comprehensive income (loss):
Unrealized gain on available-for-sale investments, net of tax— — — — 1.9 1.9 
Reclassification of realized gain on investments included in net income, net of tax— — — — (1.9)(1.9)
Foreign currency translation adjustment, net— — — — (10.6)(10.6)
Other comprehensive loss, net— — — — (10.6)(10.6)
Issuance of common stock related to vesting of stock awards, net of shares withheld for taxes on settlements of stock awards17,388 — — (3.2)— — (3.2)
Reclassification of awards previously liability-classified that were converted to equity— — 10.8 — — 10.8 
Stock-based compensation— — 11.4 — — 11.4 
Dividends declared ($0.41 per share)
— — — (17.3)— (17.3)
Balance as of March 31, 202442,745,570 $ $(985.5)$808.0 $1,657.7 $(97.1)$1,383.1 

8


 Morningstar, Inc. Shareholders’ Equity 
Accumulated
Other
Comprehensive
Loss
 Common Stock Additional
Paid-in
Capital
 
(in millions, except share and per share amounts)Shares
Outstanding
Par
Value
Treasury
Stock
Retained
Earnings
Total
Equity
Balance as of December 31, 202242,480,051 $ $(986.7)$757.8 $1,535.0 $(99.0)$1,207.1 
Net loss— — — (7.6)— (7.6)
Other comprehensive income (loss):
Unrealized gain on available-for-sale investments, net of tax— — — — 0.1 0.1 
Reclassification of realized gain on investments included in net income, net of tax— — — — (0.2)(0.2)
Foreign currency translation adjustment, net— — — — 7.1 7.1 
Other comprehensive income, net— — — — 7.0 7.0 
Issuance of common stock related to vesting of stock awards, net of shares withheld for taxes on settlements of stock awards70,892 — — (9.4)— — (9.4)
Reclassification of awards previously liability-classified that were converted to equity— — 11.4 — — 11.4 
Stock-based compensation— — 12.2 — — 12.2 
Dividends declared ($0.38 per share)
— — — (16.0)— (16.0)
Balance as of March 31, 202342,550,943 $ $(986.7)$772.0 $1,511.4 $(92.0)$1,204.7 

See notes to unaudited condensed consolidated financial statements.

9


Morningstar, Inc. and Subsidiaries
Unaudited Condensed Consolidated Statements of Cash Flows
 Three months ended March 31,
(in millions)20242023
Operating activities
Consolidated net income (loss)$64.2 $(7.6)
Adjustments to reconcile consolidated net income to net cash flows from operating activities:
Depreciation and amortization47.2 44.8 
Deferred income taxes(7.5)2.0 
Stock-based compensation expense11.4 12.2 
Provision for bad debt1.4 1.0 
Equity in investments of unconsolidated entities1.5 1.3 
Gain on equity method transaction (49.6)
Other, net(11.0)(2.7)
Changes in operating assets and liabilities:
Accounts receivable13.7 9.8 
Accounts payable and accrued liabilities(4.3)(5.8)
Accrued compensation and deferred commissions(79.2)(75.2)
Income taxes, current16.3 (2.6)
Deferred revenue50.0 43.4 
Other assets and liabilities(10.1)52.4 
Cash provided by operating activities93.6 23.4 
Investing activities 
Purchases of investment securities(7.2)(2.8)
Proceeds from maturities and sales of investment securities17.4 5.5 
Capital expenditures(34.1)(29.5)
Proceeds from sale of equity method investments, net 26.2 
Purchases of investments in unconsolidated entities(2.8)(0.1)
Cash used for investing activities(26.7)(0.7)
Financing activities 
Dividends paid(17.3)(15.9)
Proceeds from revolving credit facility90.0 95.0 
Repayment of revolving credit facility(105.0)(65.0)
Repayment of term facility(8.1)(8.1)
Employee taxes withheld for stock awards(3.2)(9.3)
Payment of acquisition-related earn-outs (45.5)
Other, net0.1  
Cash used for financing activities(43.5)(48.8)
Effect of exchange rate changes on cash and cash equivalents(7.6)1.7 
Net increase (decrease) in cash and cash equivalents15.8 (24.4)
Cash and cash equivalents—beginning of period337.9 376.6 
Cash and cash equivalents—end of period$353.7 $352.2 
Supplemental disclosure of cash flow information: 
Cash paid for income taxes$12.5 $9.1 
Cash paid for interest$11.5 $11.9 

See notes to unaudited condensed consolidated financial statements.
10

MORNINGSTAR, INC. AND SUBSIDIARIES
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
 
1. Basis of Presentation of Interim Financial Information
 
The accompanying unaudited condensed consolidated financial statements of Morningstar, Inc. and subsidiaries (Morningstar, we, our, the company) have been prepared to conform to the rules and regulations of the Securities and Exchange Commission (SEC). The preparation of financial statements in conformity with accounting principles generally accepted in the United States (GAAP) requires management to make estimates and assumptions that affect the reported amount of assets, liabilities, revenues, and expenses. Actual results could differ from those estimates. In the opinion of management, the statements reflect all adjustments, which are of a normal recurring nature, necessary to present fairly our financial position, results of operations, equity, and cash flows. These financial statements and notes are unaudited and should be read in conjunction with our Audited Consolidated Financial Statements and Notes thereto included in our Annual Report on Form 10-K for the year ended December 31, 2023, filed with the SEC on February 29, 2024 (our Annual Report).

The acronyms that appear in the Notes to our Unaudited Condensed Consolidated Financial Statements refer to the following:

ASC: Accounting Standards Codification
ASU: Accounting Standards Update
FASB: Financial Accounting Standards Board

2. Summary of Significant Accounting Policies

Our significant accounting policies are included in Note 2 of the Notes to our Audited Consolidated Financial Statements included in our Annual Report.

Recently issued accounting pronouncements not yet adopted

Segment reporting: On November 27, 2023, the FASB issued ASU No. 2023-07: Improvements to Reportable Segment Disclosures (Topic 280) (ASU No. 2023-07), which requires improved reportable segment disclosures, primarily through enhanced disclosures about significant segment expenses. The new standard is effective for our fiscal year beginning on January 1, 2024 and interim periods beginning on January 1, 2025. Entities should apply the new guidance retrospectively to all prior periods presented in the financial statements. We are evaluating the effect that ASU No. 2023-07 will have on our consolidated financial statements and related disclosures.

Income Taxes: On December 14, 2023, the FASB issued ASU No 2023-09: Improvements to Income Tax Disclosures (Topic 740) (ASU No. 2023-09), which requires additional disclosures primarily related to the income tax rate reconciliation and income taxes paid. This new standard is effective for our fiscal year beginning on January 1, 2025. Early adoption is permitted. Entities should apply the guidance prospectively although retrospective application is permitted. We have not made a decision on early adoption and are evaluating the effect that ASU No. 2023-09 will have on our consolidated financial statements and related disclosures.

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3. Credit Arrangements

Debt

The following table summarizes our debt as of March 31, 2024 and December 31, 2023:

(in millions)As of March 31, 2024As of December 31, 2023
Amended 2022 Term Facility, net of unamortized debt issuance costs of $0.5 million and $0.5 million, respectively$600.8 $608.9 
Amended 2022 Revolving Credit Facility 15.0 
2.32% Senior Notes due October 26, 2030, net of unamortized debt issuance costs of $1.4 million and $1.5 million, respectively
348.6 348.5 
Total debt$949.4 $972.4 

Credit Agreement

On May 6, 2022, the company entered into a senior credit agreement (the 2022 Credit Agreement), providing the Company with a five-year multi-currency credit facility with an initial borrowing capacity of up to $1.1 billion, including a $650.0 million term loan and a $450.0 million revolving credit facility. The agreement also provided for the issuance of letters of credit and a swingline facility. The 2022 Credit Agreement was amended twice in September 2022 (Amended 2022 Credit Agreement) to, among other items, eliminate the options for a second term loan draw and increase both the term loan and revolving credit facility to $650.0 million each, raising the total borrowing capacity to $1.3 billion. Aside from the increased borrowing capacity, the Amended 2022 Credit Agreement left the 2022 Credit Agreement terms largely unchanged. As of March 31, 2024, our total outstanding debt under the Amended 2022 Credit Agreement was $600.8 million, net of debt issuance costs, with borrowing availability of $650.0 million under the Amended 2022 Revolving Credit Facility.

The interest rate applicable to any loan under the Amended 2022 Credit Agreement is, at the company's option, either: (i) the applicable Secured Overnight Financing Rate plus an applicable margin for such loans, which ranges between 1.00% and 1.48%, based on the company's consolidated leverage ratio or (ii) the lender's base rate plus the applicable margin for such loans, which ranges between 0.00% and 0.38%, based on the company's consolidated leverage ratio.

The portions of deferred debt issuance costs related to the Amended 2022 Revolving Credit Facility are included in other current and non-current assets, and the portion of deferred debt issuance costs related to the Amended 2022 Term Facility is reported as a reduction to the carrying amount of the Amended 2022 Term Facility. Debt issuance costs related to the Amended 2022 Revolving Credit Facility are amortized on a straight-line basis to interest expense over the term of the Amended 2022 Credit Agreement. Debt issuance costs related to the Amended 2022 Term Facility are amortized to interest expense using the effective interest method over the term of the Amended 2022 Credit Agreement.

Private Placement Debt Offering

On October 26, 2020, we completed the issuance and sale of $350.0 million aggregate principal amount of 2.32% senior notes due October 26, 2030 (the 2030 Notes), in a private placement exempt from the registration requirements of the Securities Act of 1933, as amended. Proceeds were primarily used to repay a portion of the company's outstanding debt under the company's prior credit facility. Interest on the 2030 Notes is paid semi-annually on each October 30 and April 30 during the term of the 2030 Notes and at maturity, with the first interest payment date having occurred on April 30, 2021. As of March 31, 2024, our total outstanding debt, net of issuance costs, under the 2030 Notes was $348.6 million.

Compliance with Covenants

Each of the Amended 2022 Credit Agreement and the 2030 Notes include customary representations, warranties, and covenants, including financial covenants, that require us to maintain specified ratios of consolidated earnings before interest, taxes, depreciation, and amortization (EBITDA) to consolidated interest charges and consolidated funded indebtedness to consolidated EBITDA, which are evaluated on a quarterly basis. We were in compliance with these financial covenants as of March 31, 2024.
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4. Acquisitions, Goodwill, and Other Intangible Assets

2024 Acquisitions

We did not make any acquisitions during in the first three months of 2024.

Goodwill

The company has seven operating segments, which are presented as the following five 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 Intangibles—Goodwill and Other (FASB ASC 350). Under this reporting unit structure, the consolidated goodwill balance was allocated based on each reporting unit's relative fair value at January 1, 2021. The company used a market approach and assigned goodwill to the reporting units. The following table shows the changes in our goodwill balances from December 31, 2023 to March 31, 2024:

 (in millions)Morningstar Data and AnalyticsPitchBookMorningstar WealthMorningstar CreditMorningstar RetirementTotal Reportable SegmentsCorporate and All OtherTotal
Balance as of December 31, 2023$605.5 $607.4 $94.2 $108.6 $93.5 $1,509.2 $69.6 $1,578.8 
Foreign currency translation(2.8) (0.7)(1.1) (4.6)(0.1)(4.7)
Balance as of March 31, 2024$602.7 $607.4 $93.5 $107.5 $93.5 $1,504.6 $69.5 $1,574.1 

Changes in the carrying amount of the company’s recorded goodwill are mainly the result of business acquisitions, divestitures, and the effect of foreign currency translations. In accordance with FASB ASC 350, the company does not amortize goodwill; instead, goodwill is subject to an impairment test annually, or whenever indicators of impairment exist. When reviewing goodwill for impairment, we assess a number of qualitative factors to determine whether it is more likely than not that the fair value of our reporting units is less than their respective carrying values. Examples of qualitative factors that we assess include macroeconomic conditions affecting our reporting units, financial performance of our reporting units, market and competitive factors related to our reporting units, and other events specific to our reporting units. If we conclude that it is more likely than not that the fair value of a reporting unit is less than its carrying value, we perform a quantitative impairment test. The quantitative impairment test compares the estimated fair value of the reporting unit to its carrying value, and recognizes an impairment loss for the amount by which a reporting unit’s carrying amount exceeds its fair value, without exceeding the total amount of goodwill allocated to that reporting unit. We determine the fair value of a reporting unit using a market approach. Determining the fair value of a reporting unit involves judgment and the use of significant estimates and assumptions, which include assumptions regarding the revenue growth rates and operating margins used to calculate estimated future cash flows, as well as revenue and earnings multiples of publicly traded companies whose services and markets are comparable.

We perform our annual impairment reviews in the fourth quarter or when impairment indicators and triggering events are identified. The company did not observe any events or changes in circumstances that would require an additional impairment review in the first quarter of 2024. Refer to Note 7 for detailed segment information.


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Intangible Assets

The following table summarizes our intangible assets: 

 As of March 31, 2024As of December 31, 2023
(in millions)GrossAccumulated AmortizationNetWeighted Average Useful
 Life (years)
GrossAccumulated AmortizationNetWeighted Average Useful Life (years)
Customer-related assets$596.7 $(271.0)$325.7 14$601.7 $(263.8)$337.9 14
Technology-based assets314.0 (202.2)111.8 8315.3 (197.0)118.3 8
Intellectual property & other92.1 (66.2)25.9 893.2 (65.0)28.2 8
Total intangible assets$1,002.8 $(539.4)$463.4 12$1,010.2 $(525.8)$484.4 12
 
The following table summarizes our amortization expense related to intangible assets:

 Three months ended March 31,
(in millions)20242023
Amortization expense$17.7 $17.5 
 
We amortize intangible assets using the straight-line method over their estimated useful lives.

As of March 31, 2024, we expect intangible amortization expense for the remainder of 2024 and subsequent years to be as follows:

 (in millions)
Remainder of 2024 (April 1 through December 31)$47.3 
202556.7 
202652.9 
202745.6 
202841.7 
Thereafter219.2 
Total$463.4 

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


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5. Income (Loss) Per Share

The following table shows how we reconcile our net income (loss) and the number of shares used in computing basic and diluted net income (loss) per share:

 Three months ended March 31,
(in millions, except per share amounts)20242023
Basic net income (loss) per share:
Consolidated net income (loss)$64.2 $(7.6)
Weighted average common shares outstanding42.7 42.5 
Basic net income (loss) per share$1.50 $(0.18)
Diluted net income (loss) per share:
Consolidated net income (loss)$64.2 $(7.6)
Weighted average common shares outstanding42.7 42.5 
Net effect of dilutive stock awards (1)
0.3  
Weighted average common shares outstanding for computing diluted income per share43.0 42.5 
Diluted net income (loss) per share$1.49 $(0.18)
____________________________________________________________________________________________
(1) Potential common shares are not included in the computation of diluted earnings per share when a net loss exists as the effect would be an antidilutive per share amount.

During the periods presented, we have restricted stock units (RSUs), performance share awards, and market stock units (MSUs) that are excluded from our calculation of diluted earnings per share as their effect is antidilutive. The amount of these potential antidilutive shares was immaterial.

6. Revenue

Disaggregation of Revenue

The following table presents our revenue disaggregated by revenue type. Sales and usage-based taxes are excluded from revenue.
Three months ended March 31,
(in millions)20242023
Revenue by Type: (1)
License-based $400.2 $364.0 
Asset-based77.0 65.3 
Transaction-based65.6 50.4 
Consolidated revenue$542.8 $479.7 
____________________________________________________________________________________________
(1) Starting with the quarter ended March 31, 2024, revenue from PitchBook media sales product was reclassified from license-based to transaction-based. Prior periods have not been restated to reflect the updated classifications.

License-based performance obligations are generally satisfied over time as the customer has access to the product or service during the term of the subscription license and the level of service is consistent during the contract period. License-based agreements typically have a term of 1 to 3 years and are accounted for as subscription services available to customers and not as a license under the accounting guidance.


15

Asset-based performance obligations are satisfied over time as the customer receives continuous access to a service for the term of the agreement. Asset-based arrangements typically have a term of 1 to 3 years. Asset-based fees 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 and significant disruptions in the market are evaluated to determine whether estimates of earned asset-based fees need to be revised for the current quarter. The timing of client asset reporting and the structure of certain contracts can result in a lag between market movements and the impact on earned revenue. An estimate of variable consideration is included in the initial transaction price only to the extent it is probable that a significant reversal in the amount of the revenue recognized will not occur. Estimates of asset-based fees are based on the most recently completed quarter and, as a result, it is unlikely a significant reversal of revenue would occur.

Transaction-based performance obligations are satisfied when the product or service is completed or delivered. Some transaction-based revenue includes revenue from surveillance services, which is recognized over time, as the customer has access to the service during the surveillance period.

Contract Liabilities

Our contract liabilities represent deferred revenue. We record contract liabilities when cash payments are received or due in advance of our performance, including amounts which may be refundable. The contract liabilities balance as of March 31, 2024 had a net increase of $45.9 million, primarily driven by cash payments received or payable in advance of satisfying our performance obligations. We recognized $233.1 million of revenue in the three months ended March 31, 2024 that was included in the contract liabilities balance as of December 31, 2023.

We expect to recognize revenue related to our contract liabilities, including future billings, for the remainder of 2024 and subsequent years as follows:

(in millions)As of March 31, 2024
Remainder of 2024 (April 1 through December 31)$869.1 
2025380.5 
2026121.2 
202718.0 
20286.5 
Thereafter22.7 
Total$1,418.0 

The aggregate amount of revenue we expect to recognize for the remainder of 2024 and subsequent years is higher than our contract liability balance of $589.9 million as of March 31, 2024. The difference represents the value of future obligations for signed contracts that have yet to be billed.

The table above does not include variable consideration for unsatisfied performance obligations related to certain of our license-based, asset-based, and transaction-based contracts as of March 31, 2024. We are applying the optional exemption available under ASC Topic 606, as the variable consideration relates to these unsatisfied performance obligations being fulfilled as a series. The performance obligations related to these contracts are expected to be satisfied over the next 1 to 3 years as services are provided to the client. For license-based contracts, the consideration received for services performed is based on the number of future users, which is not known until the services are performed. The variable consideration for this revenue can be affected by the number of user licenses, which cannot be reasonably estimated. For asset-based contracts, the consideration received for services performed is based on future asset values, which are not known until the services are performed. The variable consideration for this revenue can be affected by changes in the underlying value of fund assets due to client redemptions, additional investments, or movements in the market. For transaction-based contracts, the consideration received for most Internet advertising services performed is based on the number of impressions, which is not known until the impressions are created. The variable consideration for this revenue can be affected by the timing and quantity of impressions in any given period and cannot be reasonably estimated.


16

As of March 31, 2024, the table above also does not include revenue for unsatisfied performance obligations related to certain of our license-based and transaction-based contracts with durations of one year or less since we are applying the optional exemption under ASC Topic 606. For certain license-based contracts, the remaining performance obligation is expected to be less than one year based on the corresponding subscription terms or the existence of cancellation terms that may be exercised causing the contract term to be less than one year from March 31, 2024. For transaction-based contracts, such as new credit rating issuances and Morningstar-sponsored conferences, the related performance obligations are expected to be satisfied within the next 12 months.

Contract Assets

Our contract assets represent accounts receivable, less allowance for credit losses, and deferred commissions.

The following table summarizes our contract assets balance:

(in millions)As of March 31, 2024As of December 31, 2023
Accounts receivable, less allowance for credit losses$326.2 $343.9 
Deferred commissions71.6 71.2 
Total contract assets$397.8 $415.1 

7. Segment and Geographical Area Information
 
Segment Information

Our segments are generally organized around the company's products offerings. The company concluded that it has seven operating segments which are presented as the following five reportable segments:

Morningstar Data and Analytics
PitchBook
Morningstar Wealth
Morningstar Credit
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 total reportable segments and consolidated revenue amounts.

Morningstar Data and Analytics provides investors comprehensive data, research and insights, and investment analysis to empower investment decision-making. Morningstar Data and Analytics includes product areas such as Morningstar Data, Morningstar Direct, and Morningstar Advisor Workstation.

PitchBook provides investors with access to a broad collection of data and research covering the private capital markets, including venture capital, private equity, private credit and bank loans, and merger and acquisition (M&A) activities. Investors can also access Morningstar's data and research on public equities.

Morningstar Wealth brings together our model portfolios and wealth platform; practice and portfolio management software for registered investment advisers; data aggregation and enrichment capabilities; and our individual investor platform. Morningstar Wealth includes the Investment Management product area.

Morningstar Credit provides investors with credit ratings, research, data, and credit analytics solutions that contribute to the transparency of international and domestic credit markets. Morningstar Credit includes the Morningstar DBRS product area and the Morningstar Credit data and credit analytics product areas.

Morningstar Retirement offers products designed to help individuals reach their retirement goals. Its offerings include managed retirement accounts, fiduciary services, Morningstar Lifetime Allocation funds, and custom models.

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FASB ASC 280 establishes standards for reporting information about operating segments. Operating segments are defined as components of an enterprise about which separate financial information is available that is evaluated regularly by the chief operating decision maker (CODM), in deciding how to allocate resources and assess performance. The company's chief executive officer, who is considered to be its CODM, reviews financial information presented on an operating segment basis for purposes of making operating decisions and assessing financial performance.

The CODM allocates resources and assesses performance of segments based on segment revenue as well as Adjusted Operating Income. Segment Adjusted Operating Income excludes intangible amortization, M&A-related expenses (including M&A-related earn-outs), and items related to the significant reduction and shift of the company's operations in China, such as severance and personnel expenses, transformation costs, and asset impairment costs. The CODM does not consider these items for the purposes of making decisions to allocate resources among segments or to assess segment performance. Although the amounts are excluded from segment Adjusted Operating Income, they are included in reported consolidated operating income and are included in the reconciliation to consolidated results. Expenses presented as part of the company's segments include both direct costs and allocations of shared costs. Shared costs include technology, investment research, sales, facilities, and marketing. These allocations are based on estimated utilization of shared resources and other factors. Adjusted Operating Income is the reported measure that the company believes is most consistent with those used in measuring the corresponding amount in the consolidated financial statements.

The CODM does not review any information regarding total assets on a segment basis. Operating segments do not record intersegment revenues; therefore, there is none to be reported.


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The following tables present information about the company’s reportable segments for the three months ended March 31, 2024 and 2023, along with the items necessary to reconcile the segment information to the totals reported in the accompanying consolidated financial statements. Prior period segment information is presented on a comparable basis to the basis on which current period segment information is presented and reviewed by the CODM.

Three months ended March 31,
(in millions)20242023
Revenue:
Morningstar Data and Analytics$196.7 $179.8 
PitchBook147.6 131.1 
Morningstar Wealth59.0 54.9 
Morningstar Credit60.3 46.8 
Morningstar Retirement28.4 25.2 
Total Reportable Segments$492.0 $437.8 
Corporate and All Other (1)
50.8 41.9 
Total Revenue$542.8 $479.7 
Adjusted Operating Income (Loss):
Morningstar Data and Analytics$91.2 $80.9 
PitchBook40.0 30.4 
Morningstar Wealth(5.6)(14.6)
Morningstar Credit12.3 (4.0)
Morningstar Retirement14.2 11.2 
Total Reportable Segments$152.1 $103.9 
Less reconciling items to Operating Income:
Corporate and All Other (2)
$(41.3)$(52.1)
Intangible amortization expense (3)
(17.7)(17.5)
M&A-related expenses (4)
(0.5)(4.2)
M&A-related earn-outs (5)
  
Severance and personnel expenses (6)
 (1.1)
Transformation costs (6)
 (4.2)
Asset impairment costs (6)
 (0.3)
Operating Income92.6 24.5 
Non-operating expense, net(5.6)(22.4)
Equity in investments of unconsolidated entities(1.5)(1.3)
Income before income taxes$85.5 $0.8 
____________________________________________________________________________________________
(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. Revenue from Morningstar Sustainalytics was $30.8 million and $27.3 million for the three months ended March 31, 2024 and 2023, respectively. Revenue from Morningstar Indexes was $20.0 million and $14.6 million for the three months ended March 31, 2024 and 2023, respectively.

(2) Corporate and All Other includes unallocated corporate expenses of $40.9 million and $36.1 million for the three months ended March 31, 2024 and 2023, respectively, as well as adjusted operating income (loss) from Morningstar Sustainalytics and Morningstar Indexes. Unallocated corporate expenses include certain finance, human resources, legal, marketing, and other management-related costs that are not considered when segment performance is evaluated.

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(3) Excludes finance lease amortization expense of $0.3 million and $0.1 million for the three months ended March 31, 2024 and 2023, respectively.

(4) Reflects non-recurring expenses related to M&A activity including pre-deal due diligence, transaction costs, and post-close integration costs.

(5) Reflects the impact of M&A-related earn-outs included in operating expense.

(6) 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 RSU and 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.

The following tables present segment revenue disaggregated by revenue type:

Three months ended March 31, 2024
(in millions)Morningstar Data and AnalyticsPitchBookMorningstar WealthMorningstar CreditMorningstar RetirementTotal Reportable Segments
Corporate and All Other (7)
Total
Revenue by Type: (8)
License-based$196.7 $145.6 $20.5 $4.2 $0.5 $367.5 $32.7 $400.2 
Asset-based  33.6  27.9 61.5 15.5 $77.0 
Transaction-based 2.0 4.9 56.1  63.0 2.6 $65.6 
Total$196.7 $147.6 $59.0 $60.3 $28.4 $492.0 $50.8 $542.8 
Three months ended March 31, 2023
(in millions)Morningstar Data and AnalyticsPitchBookMorningstar WealthMorningstar CreditMorningstar RetirementTotal Reportable Segments
Corporate and All Other (7)
Total
Revenue by Type: (8)
License-based$179.8 $131.1 $20.4 $2.8 $0.4 $334.5 $29.5 $364.0 
Asset-based  29.6  24.8 54.4 10.9 $65.3 
Transaction-based  4.9 44.0  48.9 1.5 $50.4 
Total$179.8 $131.1 $54.9 $46.8 $25.2 $437.8 $41.9 $479.7 
____________________________________________________________________________________________
(7) 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.

(8) Starting with the quarter ended March 31, 2024, revenue from PitchBook media sales product was reclassified from license-based to transaction-based. Prior periods have not been restated to reflect the updated classifications.




20

Geographical Area Information

The tables below summarize our revenue, long-lived assets, which includes property, equipment, and capitalized software, net, and operating lease assets by geographical area:
Revenue by geographical areaThree months ended March 31,
(in millions)20242023
United States$390.9 $347.3 
Asia12.7 12.1 
Australia15.0 14.4 
Canada32.6 27.3 
Continental Europe49.7 43.1 
United Kingdom38.9 33.1 
Other3.0 2.4 
Total International151.9 132.4 
Consolidated revenue$542.8 $479.7 
Property, equipment, and capitalized software, net by geographical area
(in millions)As of March 31, 2024As of December 31, 2023
United States$184.3 $178.5 
Asia8.7 9.9 
Australia1.6 1.9 
Canada3.1 3.6 
Continental Europe6.0 6.5 
United Kingdom7.0 7.2 
Other0.1 0.1 
Total International26.5 29.2 
Consolidated property, equipment, and capitalized software, net$210.8 $207.7 

Operating lease assets by geographical area
(in millions)As of March 31, 2024As of December 31, 2023
United States$96.6 $100.7 
Asia14.8 16.5 
Australia3.0 3.2 
Canada8.2 8.2 
Continental Europe17.6 18.1 
United Kingdom16.1 16.9 
Other0.2 0.3 
Total International59.9 63.2 
Consolidated operating lease assets$156.5 $163.9 


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8. Fair Value Measurements

As of March 31, 2024 and December 31, 2023, our investment balances totaled $55.4 million and $51.1 million, respectively. We classify our investments into two categories: equity investments and debt securities. We further classify our debt securities into available-for-sale, held-to-maturity, and trading securities. Our investment portfolio consists 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 March 31, 2024, all investments in our investment portfolio have valuations based on quoted prices in active markets for identical assets or liabilities that we have the ability to access, and, therefore, are classified as Level 1 within the fair value hierarchy. We recognize unrealized holding gains or losses within "Other income, net" on our Condensed Consolidated Statements of Income.

9. Investments in Unconsolidated Entities

As of March 31, 2024 and December 31, 2023, our investment in unconsolidated entities balance totaled $96.1 million and $100.2 million, respectively. We have investments in both equity method investments and investments in equity securities with and without a readily determinable fair value.

The carrying amount of other investments in unconsolidated entities without a readily determinable fair value was $50.7 million and $49.9 million as of March 31, 2024 and December 31, 2023, respectively. We did not record any material adjustments or impairment losses in the first three months of 2024 or 2023.

On January 27, 2023, we entered into a Termination Agreement (the Termination Agreement) with Morningstar Japan K.K. (now known as SBI Global Asset Management Co., Ltd. (Wealth Advisors)), and a Tender Offer Agreement (the Tender Offer Agreement) with SBI Global Asset Management Co., Ltd. (now known as SBI Asset Management Group Co., Ltd. (SBI)).

Pursuant to the Termination Agreement, Wealth Advisors agreed to cease use of the Morningstar brand and Morningstar and Wealth Advisors agreed to terminate the License Agreement originally entered into in 1998. As consideration for the transaction, Morningstar agreed to pay Wealth Advisors 8 billion Japanese yen upon the termination of the license agreement and the achievement of certain conditions related primarily to the termination of the use of the Morningstar brand by Wealth Advisors’ customers.

On April 6, 2023, we made the first cash payment of 6 billion Japanese yen ($45.1 million) and on April 19, 2023, we made the second and final cash payment of 2 billion Japanese yen ($14.8 million), pursuant to the Termination Agreement. The expense related to the Termination Agreement is recorded within "Expense from equity method transaction, net" in our Condensed Consolidated Statements of Income (Loss) for the three months ended March 31, 2023.

As part of this transaction, pursuant to the Tender Offer Agreement, Morningstar agreed to tender up to 10 million shares in Wealth Advisors to SBI. The tender offer closed on February 28, 2023, and SBI purchased 8,040,600 shares of Wealth Advisors from Morningstar, resulting in net proceeds of $26.2 million and a pre-tax gain of $18.4 million. The pre-tax gain is recorded within "Expense from equity method transaction, net" in our Condensed Consolidated Statements of Income (Loss) for the three months ended March 31, 2023.

Subsequent to the tender offer, the company's ownership percentage in Wealth Advisors decreased to 13.2% from 22.1%, and as a result, we no longer account for our investment in Wealth Advisors as an equity method investment. Each reporting period, we remeasure our remaining investment in Wealth Advisors, an equity security with a readily determinable value, at fair value and recognize unrealized holding gains or losses within "Other income, net" on our Condensed Consolidated Statements of Income. During the first quarter of 2023, we recognized an unrealized holding gain of $31.2 million, which is recorded within "Expense from equity method transaction, net" in our Condensed Consolidated Statement of Income (Loss) for the three months ended March 31, 2023.


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10. Leases

We lease office space and certain equipment under various operating and finance leases, with most of our lease portfolio consisting of operating leases for office space.

We determine whether an arrangement is, or includes, an embedded lease at contract inception. Operating lease assets and lease liabilities are recognized at the commencement date and initially measured using the present value of lease payments over the defined lease term. Lease expense is recognized on a straight-line basis over the lease term. For finance leases, we also recognize a finance lease asset and finance lease liability at inception, with lease expense recognized as interest expense and amortization.

A contract is or contains an embedded lease if the contract meets all the below criteria:

there is an identified asset;
we obtain substantially all the economic benefits of the asset; and
we have the right to direct the use of the asset.

For initial measurement of the present value of lease payments and for subsequent measurement of lease modifications, we are required to use the rate implicit in the lease, if available. However, as most of our leases do not provide an implicit rate, we use our incremental borrowing rate, which is a collateralized rate. To apply the incremental borrowing rate, we used a portfolio approach and grouped leases based on similar lease terms in a manner whereby we reasonably expect that the application does not differ materially from a lease-by-lease approach.

Our leases have remaining lease terms of approximately 1 year to 11 years, which may include the option to extend the lease when it is reasonably certain we will exercise that option. We do not have lease agreements with residual value guarantees, sale leaseback terms, or material restrictive covenants.

Leases with an initial term of 12 months or less are not recognized on the balance sheet. We recognize lease expense for these leases on a straight-line basis over the lease term.

Our operating lease expense for the three months ended March 31, 2024 was $10.4 million, compared with $11.7 million for the three months ended March 31, 2023. Charges related to our operating leases that are variable and, therefore, not included in the measurement of the lease liabilities, were $3.2 million for the three months ended March 31, 2024, compared with $4.1 million for the three months ended March 31, 2023. We made lease payments of $10.7 million during the three months ended March 31, 2024, compared with $11.3 million during the three months ended March 31, 2023.

The following table shows our minimum future lease commitments due in each of the next five years and thereafter for operating leases:

Minimum Future Lease Commitments (in millions)Operating Leases
Remainder of 2024 (April 1 through December 31)$32.7 
202536.4 
202638.9 
202731.3 
202824.6 
Thereafter36.4 
Total minimum lease commitments200.3 
Adjustment for discount to present value21.8 
Present value of lease liabilities
$178.5 


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The following table summarizes the weighted-average remaining lease terms and weighted-average discount rates for our operating leases:
As of March 31, 2024
Weighted-average remaining lease term (in years)5.6
Weighted-average discount rate3.9 %

11. Stock-Based Compensation
 
Stock-Based Compensation Plans
 
Our employees and our non-employee directors are eligible for awards under the Morningstar Amended and Restated 2011 Stock Incentive Plan, which provides for a variety of stock-based awards, including stock options, RSUs, performance share awards, MSUs, and restricted stock.

The following table summarizes the stock-based compensation expense included in each of our operating expense categories:
Three months ended March 31,
(in millions)20242023
Cost of revenue$4.6 $5.0 
Sales and marketing1.9 1.6 
General and administrative4.9 5.6 
Total stock-based compensation expense$11.4 $12.2 

As of March 31, 2024, the total unrecognized stock-based compensation cost related to outstanding RSUs, performance share awards, and MSUs expected to vest was $78.8 million, which we expect to recognize over a weighted average period of 24 months.

12. Income Taxes

Effective Tax Rate

The following table shows our effective tax rate for the three months ended March 31, 2024 and March 31, 2023:

 Three months ended March 31,
(in millions)20242023
Income before income taxes and equity in investments of unconsolidated entities$87.0 $2.1 
Equity in investments of unconsolidated entities(1.5)(1.3)
Income before income taxes$85.5 $0.8 
Income tax expense$21.3 $8.4 
Effective tax rate24.9 %NMF
___________________________________________________________________________________________
NMF — not meaningful

Our effective tax rate in the first quarter of 2024 was 24.9%. Our prior-year period effective tax rate was not meaningful due to the low level of pretax income in the prior-year period.


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In October 2021, the Organization for Economic Co-operation and Development (OECD) agreed to a two-pillar approach to global taxation focusing on global profit allocation (Pillar One) and a global minimum tax rate (Pillar Two). In December 2022, the European Union member states agreed to implement the OECD’s global corporate minimum tax rate of 15% under Pillar Two which became effective in January 2024. Other countries are also considering changes to their tax laws to adopt certain parts of the OECD’s proposals. This legislation represents a significant change in the international tax regime and could result in increases to our effective tax rate as a result of the imposition of minimum taxes. Pillar Two did not have a material impact to our consolidated financial statements as of March 31, 2024. We are continuing to monitor developments and administrative guidance in addition to evaluating the potential impact of Pillar Two on our consolidated financial statements for future periods.

Unrecognized Tax Benefits

The table below provides information concerning our gross unrecognized tax benefits as of March 31, 2024 and December 31, 2023, as well as the effect these gross unrecognized tax benefits would have on our income tax expense, if they were recognized.

(in millions)As of March 31, 2024As of December 31, 2023
Gross unrecognized tax benefits$13.4 $13.0 
Gross unrecognized tax benefits that would affect income tax expense$13.4 $13.0 
Decrease in income tax expense upon recognition of gross unrecognized tax benefits$13.1 $12.8 

Our Unaudited Condensed Consolidated Balance Sheets include the following liabilities for unrecognized tax benefits. These amounts include interest and penalties, less any associated tax benefits.

Liabilities for Unrecognized Tax Benefits (in millions)As of March 31, 2024As of December 31, 2023
Current liability$7.5 $6.2 
Non-current liability7.6 8.3 
Total liability for unrecognized tax benefits$15.1 $14.5 

Because we conduct business globally, we file income tax returns in U.S. federal, state, local, and foreign jurisdictions. 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.

Approximately 76% of our cash, cash equivalents, and investments balance as of March 31, 2024 was held by our operations outside of the United States. We generally consider our U.S. directly-owned foreign subsidiary earnings to be permanently reinvested. We believe that our cash balances and investments in the United States, along with cash generated from our U.S. operations, will be sufficient to meet our U.S. operating and cash needs for the foreseeable future, without requiring us to repatriate earnings from these foreign subsidiaries.

Certain of our non-U.S. operations have incurred net operating losses (NOLs), which may become deductible to the extent these operations become profitable. For each of our operations, we evaluate whether it is more likely than not that the tax benefits related to NOLs will be realized. As part of this evaluation, we consider evidence such as tax planning strategies, historical operating results, forecasted taxable income, and recent financial performance. In the year that certain non-U.S. operations record a loss, we do not recognize a corresponding tax benefit, which increases our effective tax rate. Upon determining that it is more likely than not that the NOLs will be realized, we reduce the tax valuation allowances related to these NOLs, which results in a reduction to our income tax expense and our effective tax rate in that period.



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13. Contingencies

We record accrued liabilities for litigation, regulatory, and other business matters when those matters represent loss contingencies that are both probable and estimable. In these cases, there may be an exposure to loss in excess of any amounts accrued. Unless a loss contingency is both probable and estimable, we do not establish an accrued liability. As litigation, regulatory, or other business matters develop, we evaluate on an ongoing basis whether such matters present a loss contingency that is probable and estimable.

Data Audits and Reviews

In our global data business, we include in our products, or directly redistribute to our customers, data and information licensed from third-party vendors. Our compliance with the terms of these licenses is reviewed internally and is also subject to audit by the third-party vendors. At any given time, we may be undergoing several such internal reviews and third-party vendor audits, and the results and findings may indicate that we may be required to make a payment for prior data usage. Due to a lack of available information and data, as well as potential variations of any audit or internal review findings, we generally are not able to reasonably estimate a possible loss, or range of losses, for these matters. In situations where more information or specific areas subject to audit are available, we may be able to estimate a potential range of losses. While we cannot predict the outcome of these processes, we do not anticipate they will have a material adverse effect on our business, operating results, or financial position.

Ratings and Regulatory Matters

Our ratings and related research activities, including credit ratings, environmental, social, and governance (ESG) ratings, managed investment, and equity ratings, are or may in the future become subject to regulation or increased scrutiny from executive, legislative, regulatory, and private parties. As a result, those activities may be subject to governmental, regulatory, and legislative investigations, regulatory examinations in the ordinary course of business, subpoenas, and other forms of legal process, which may lead to claims and litigation that are based on these ratings and related research activities. Our regulated businesses are generally subject to periodic reviews, inspections, examinations, and investigations by regulators in the jurisdictions in which they operate, any of which may result in claims, legal proceedings, assessments, fines, penalties, disgorgement, or restrictions on business activities. While it is difficult to predict the outcome of any particular investigation 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.

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.

14. Share Repurchase Program
 
On December 6, 2022, the board of directors approved a share repurchase program that authorizes the company to repurchase up to $500.0 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 three months ended March 31, 2024, we did not repurchase any shares under the share repurchase program. As of March 31, 2024, we have $498.6 million available for future repurchases under the current share repurchase program.

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Item 2.Management’s Discussion and Analysis of Financial Condition and Results of Operations

The discussion included in this section, as well as other under sections of this Quarterly Report on Form 10-Q (this Quarterly Report), contains forward-looking statements as that term is used in the Private Securities Litigation Reform Act of 1995. These statements are based on our current expectations about future events or future financial performance. Forward-looking statements by their nature address matters that are, to different degrees, uncertain, and often contain words such as “consider,” “estimate,” “forecast,” “future,” “goal,” “designed to,” “maintain,” “may,” “objective,” “ongoing,” “could,” “expect,” “intend,” “plan,” “possible,” “potential,” “anticipate,” “believe,” “predict,” “continue,” “strategy,” “strive,” “will,” “would,” "determine," "evaluate," or the negative thereof, and similar expressions. These statements involve known and unknown risks and uncertainties that may cause the events we discuss not to occur or to differ significantly from what we expect. For us, these risks and uncertainties include, among others:

failing to maintain and protect our brand, independence, and reputation;
failure to prevent and/or mitigate cybersecurity events and the failure to protect confidential information, including personal information about individuals;
compliance failures, regulatory action, or changes in laws applicable to our credit ratings operations, investment advisory, ESG, and index businesses;
failing to innovate our product and service offerings or anticipate our clients’ changing needs;
the impact of artificial intelligence and related new technologies on our business, legal, and regulatory exposure profile and reputation;
failure to detect errors in our products or failure of our products to perform properly due to defects, malfunctions or similar problems;
failing to recruit, develop, and retain qualified employees;
prolonged volatility or downturns affecting the financial sector, global financial markets, and the global economy and its effect on our revenue from asset-based fees and credit ratings business;
failing to scale our operations and increase productivity in order to implement our business plans and strategies;
liability for any losses that result from errors in our automated advisory tools or errors in the use of the information and data we collect;
inadequacy of our operational risk management, business continuity programs and insurance coverage in the event of a material disruptive event;
failing to efficiently integrate and leverage acquisitions and other investments, which may not realize the expected business or financial benefits, to produce the results we anticipate;
failing to maintain growth across our businesses in today's fragmented geopolitical, regulatory and cultural world;
liability relating to the information and data we collect, store, use, create, and distribute or the reports that we publish or are produced by our software products;
the potential adverse effect of our indebtedness on our cash flows and financial and operational flexibility;
challenges in accounting for tax complexities in the global jurisdictions we operate in could materially affect our tax obligations and tax rates; and
failing to protect our intellectual property rights or claims of intellectual property infringement against us.


27

A more complete description of these risks and uncertainties can be found in our other filings with the Securities and Exchange Commission (SEC), including our Annual Report on Form 10-K for the year ended December 31, 2023 (our Annual Report) as supplemented by our recent Quarterly Reports on Form 10-Q. If any of these risks and uncertainties materialize, our actual future results and other future events may vary significantly from what we expect. We do not undertake to update our forward-looking statements as a result of new information, future events, or otherwise, except as may be required by law. You are, however, advised to review any further disclosures we make on related subjects, and about new or additional risks, uncertainties, and assumptions in our future filings with the SEC on Forms 10-K, 10-Q, and 8-K.

All dollar and percentage comparisons, which are often accompanied by words such as “increase,” “decrease,” “grew,” “declined,” “was up,” “was down,” “was flat,” or “was similar” refer to a comparison with the same period in the previous year unless otherwise stated.


28

Understanding our Company
 
Our Business

Our mission is to empower investor success. The investing ecosystem is complex, and navigating it with confidence requires a trusted, independent voice. We deliver our perspective to institutions, advisors, and individuals with a single-minded purpose: to empower every investor with the conviction that they can make better-informed decisions and realize success on their own terms.

Our strategy is to deliver insights and experiences that are essential to the investor workflow. Proprietary data sets, meaningful analytics, independent research, and effective investment strategies are at the core of the powerful digital solutions that investors across our client segments rely on. We have a keen focus on innovation across data, research, product, and delivery so that we can effectively cater to the evolving needs and expectations of investors globally.

The company has seven operating segments which are presented as the following five 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. Prior period segment information is presented on a comparable basis to the basis on which current period segment information is presented and reviewed by the chief operating decision maker (CODM). For additional information about our segment reporting, refer to Note 7 of the Notes to our Unaudited Condensed Financial Statements.

In addition to reviewing revenue by our reportable segments, we review revenue by type. We leverage our proprietary data and research to sell products and services across our portfolio that generate revenue in three primary ways:

License-based: The majority of our research, data, and proprietary platforms are accessed via subscription services that grant access on either a per user or enterprise-basis for a specified period of time.

Asset-based: We charge basis points and other fees for assets under management (AUM) or advisement (AUMA).

Transaction-based: Revenue is transactional, or one-time, in nature, compared with the recurring revenue streams represented by our license and asset-based products.

Three Months Ended March 31, 2024 vs. Three Months Ended March 31, 2023
 
Consolidated Results
 Three months ended March 31,
Key Metrics (in millions)20242023Change
Consolidated revenue$542.8 $479.7 13.2 %
Operating income92.6 24.5 278.0 %
Operating margin17.1 %5.1 %12.0 pp
Cash provided by operating activities$93.6 $23.4 300.0 %
Capital expenditures(34.1)(29.5)15.6 %
Free cash flow$59.5 $(6.1)NMF
Cash used for investing activities$(26.7)$(0.7)NMF
Cash used for financing activities$(43.5)$(48.8)(10.9)%
___________________________________________________________________________________________
pp — percentage points
NMF — not meaningful


29

Supplemental Information

To supplement our consolidated financial statements presented in accordance with U.S. Generally Accepted Accounting Principles (GAAP), we use the following non-GAAP measures:

consolidated revenue, excluding acquisitions, divestitures, adoption of new accounting standards or revisions to accounting practices (accounting changes), and the effect of foreign currency translations (organic revenue);
consolidated operating income, excluding intangible amortization expense, all merger and acquisition (M&A)-related expenses (including M&A-related earn-outs), and expenses related to the significant reduction and shift of the company's operations in China (adjusted operating income);
consolidated operating margin, excluding intangible amortization expense, all M&A-related expenses (including M&A-related earn-outs), and expenses related to the significant reduction and shift of the company's operations in China (adjusted operating margin); and
cash provided by or used for operating activities less capital expenditures (free cash flow).

These non-GAAP measures may not be comparable to similarly titled measures reported by other companies and should not be considered an alternative to any measure of performance as promulgated under GAAP.

We present organic revenue because we believe it helps investors better compare our period-to-period results, and our management team uses this measure to evaluate the performance of our business.

We present adjusted operating income and adjusted operating margin because we believe they better reflect period-over-period comparisons and improve overall understanding of the underlying performance of the business absent the impact of M&A and the shift of the company's operations in China.

We present free cash flow solely as supplemental disclosure to help investors better understand how much cash is available after capital expenditures. Our management team uses free cash flow as a metric to evaluate the health of our business.


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Consolidated Revenue

Revenue by type (1)
Three months ended March 31,
(in millions)20242023Change
Morningstar Data and Analytics
License-based $196.7 $179.8 9.4 %
Asset-based