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Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations

The discussion included in this section, as well as other under "Business--Our Strategy," "Business--Trends Defining Our Business" and sections of this 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 “may,” “could,” “expect,” “intend,” “plan,” “seek,” “anticipate,” “believe,” “estimate,” “predict,” “potential,” or “continue.” 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;

•liability for any losses that result from an actual or claimed breach of our fiduciary duties or failure to comply with applicable securities laws;

•liability related to cybersecurity and the protection of 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;

•prolonged volatility or downturns affecting the financial sector, global financial markets, and global economy and its effect on our revenue from asset-based fees and credit ratings business;

•the impact of the current COVID-19 pandemic on our business, financial condition, and results of operations;

•inadequacy of our operational risk management and business continuity programs in the event of a material disruptive event;

•failing to respond to technological change, keep pace with new technology developments, or adopt a successful technology strategy;

•failing to differentiate our products and services and continuously create innovative, proprietary, and insightful financial technology solutions;

•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;

•trends in the financial services industry, including fee compression within the asset and wealth management sectors and increased industry consolidation;

•an outage of our database, technology-based products and services, or network facilities or the movement of parts of our technology and data infrastructure to the public cloud and other outsourced providers;

•the failure of acquisitions and other investments to be efficiently integrated and produce the results we anticipate;

•the failure to recruit, develop, and retain qualified employees;

•challenges faced by our non-U.S. operations, including the concentration of data and development work at our offshore facilities in China and India;

•our indebtedness could adversely affect our cash flows and financial flexibility; and

•the failure to protect our intellectual property rights or claims of intellectual property infringement against us.

A more complete description of these risks and uncertainties can be found in Item 1A—Risk Factors of this report. 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 or future events.

This section includes comparisons of certain 2020 financial information to the same information for 2019. Year-to-year comparisons of the 2019 financial information to the same information for 2018 can be found in “Management’s Discussion and Analysis of Financial Condition and Results of Operations” in Part II, Item 7 of the company’s Annual Report on Form 10-K for the fiscal year ended December 31, 2019.

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 prior year unless otherwise stated.

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Understanding Our Company

Key Business Characteristics

We offer an extensive line of products and services for individual investors, financial advisors, asset managers, retirement plan providers and sponsors, and institutional investors and other participants in the private capital markets. Many of our products are sold through subscriptions or license agreements. As a result, we typically generate recurring revenue.

Revenue

We generate revenue by selling a variety of investment-related products and services. We sell many of our products and services, including Morningstar Data, Morningstar Advisor Workstation, Morningstar Direct, and PitchBook, through license agreements. Our license agreements typically range from one to three years. We sell some of our other products, such as Premium Membership service, which represents subscription services available to customers and not a license under the accounting guidance, on Morningstar.com via subscriptions. These subscriptions are mainly offered for a one-year term, although we offer terms ranging from one month to three years.

Our investment management products have multiple fee structures, which vary by client and region. In general, we seek to receive asset-based fees for any work we perform that involves managing investments or acting as a subadvisor to investment portfolios. For any individual contract, we may receive flat fees, variable asset-based fees, or a combination of the two. Some of our contracts include minimum fee levels that provide us with a flat payment up to a specified asset level, above which we also receive variable asset-based fees. In the majority of our contracts that include variable asset-based fees, we bill clients quarterly in arrears based on average assets for the quarter. Other contracts may include provisions for monthly billing or billing based on assets as of the last day of the billing period rather than on average assets.

In our Workplace Solutions area, our contracts may include one-time setup fees, technology licensing fees, asset-based fees for managed retirement accounts, fixed and variable fees for advice and guidance, or a combination of these fee structures. We also offer plan sponsor advice and custom target-date consulting arrangements. Fees for these services may be based on the level of assets under advisement.

We also generate transaction-based revenue, primarily from DBRS Morningstar and from the sale of advertising on our websites and sponsorship of our conferences. For the year ended December 31, 2020, approximately 59.9% of the revenue generated by DBRS Morningstar came from one-time, transaction-based fees driven by our provision of ratings on newly-issued securities; whereas the remainder can be classified as transaction-related, with recurring annual fees tied to surveillance, credit research, or other services.

Deferred Revenue

We invoice some of our clients and collect cash in advance of providing services or fulfilling subscriptions for our customers. Deferred revenue totaled $340.3 million (of which $306.8 million was classified as a current liability with an additional $33.5 million included in other long-term liabilities) at the end of 2020. We expect to recognize this deferred revenue in future periods as we fulfill the service obligations under our license and subscription agreements.

Significant Operating Leverage

Our business requires significant investments to create and maintain proprietary software, databases, and content. While the fixed costs of the investments we make in our business are relatively high, the variable cost of adding customers is relatively low. This reflects our business focus on Internet-based platforms and assets under management. At times, we may make investments in building our databases and content that cause weaker short-term operating results. During other periods, our profitability may improve because we're able to increase revenue without increasing our cost base at the same rate. When revenue decreases, however, we may not be able to adjust our cost base at a corresponding rate.

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Operating Expense

We classify our operating expense into separate categories for cost of revenue, sales and marketing, general and administrative, and depreciation and amortization, as described below. We include stock-based compensation expense, as appropriate, in each of these categories.

• Cost of revenue. This category includes compensation expense for employees who produce the products and services we deliver to our customers. For example, this category covers production teams and analysts who write investment research reports. It also includes compensation expense for programmers, designers, and other employees who develop new products and enhance existing products. In some cases, we capitalize the compensation costs associated with certain software development projects. This reduces the expense that we would otherwise report in this category. Cost of revenue also includes other expenses, such as third-party data purchases and data lines.

• Sales and marketing. This category includes compensation expense for our sales teams, product managers, and marketing professionals. We also include the cost of advertising, direct mail campaigns, and other marketing and promotion efforts in this category.

• General and administrative. This category includes compensation expense for our management team and other corporate functions, including employees in our compliance, finance, human resources, and legal departments. It also includes costs for corporate systems and facilities.

• Depreciation and amortization. Our capital expenditures mainly relate to capitalized software development costs, information technology equipment, and leasehold improvements. We depreciate property and equipment using the straight-line method based on the useful lives of the assets, which range from three to seven years. We amortize leasehold improvements over the lease term or their useful lives, whichever is shorter. We amortize capitalized software development costs over their estimated economic life, generally three years. We also include amortization related to identifiable intangible assets, which is mainly driven by acquisitions, in this category. We amortize intangible assets using the straight-line method over their estimated economic useful lives, which range from one to twenty years.

International Operations

As of December 31, 2020, we had majority-owned operations in 28 countries outside of the U.S. and included their results of operations and financial condition in our consolidated financial statements. We also have investments outside of the U.S., and where we have significant influence, including MJKK, we apply the equity method of accounting.

How We Evaluate Our Business

When our analysts evaluate a stock, they focus on assessing the company's estimated intrinsic value, which is based on estimated future cash flows, discounted to their value in today's dollars. Our approach to evaluating our own business works the same way.

Our goal is to increase the intrinsic value of our business over time, which we believe is the best way to create value for our shareholders. We do not make public financial forecasts for our business because we want to avoid creating any incentives for our management team to make speculative statements about our financial results that could influence our stock price or take actions that help us meet short-term forecasts, but may not build long-term shareholder value.

We provide three specific measures that can help investors generate their own assessment of how our intrinsic value has changed over time:

• Revenue (including organic revenue);

• Operating income (loss) (including adjusted operating income); and

• Free cash flow.

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Organic revenue, adjusted operating income, and free cash flow are not measures of performance set forth under U.S. generally accepted accounting principles (GAAP).

We define organic revenue as consolidated revenue excluding acquisitions, divestitures, adoption of new accounting standards, and foreign currency translations. 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 exclude revenue from businesses acquired or divested from organic revenue for a period of 12 months after we complete the acquisition or divestiture. Organic revenue is not equivalent to any measure required under GAAP and may not be comparable to similarly titled measures reported by other companies.

We define adjusted operating income as operating income excluding all M&A-related expenses and amortization. We present adjusted operating income because we believe it better reflects period-over-period comparisons and improves overall understanding of the underlying performance of the business absent the impact of M&A.

We define free cash flow as cash provided by or used for operating activities less capital expenditures. We present free cash flow as supplemental information to help investors better understand trends in our business results over time. Our management team uses free cash flow to evaluate our business. Free cash flow is not equivalent to any measure required under GAAP and should not be considered an indicator of liquidity. Moreover, the free cash flow definition we use may not be comparable to similarly titled measures reported by other companies.

We calculate revenue renewal rates to evaluate how successful we've been in maintaining existing business for products and services that have revenue associated with periodic renewals. We use the annual contract value method, which is based on tracking the dollar value of renewals compared with the total dollar value of contracts up for renewal during the period. We include changes in the contract value in the renewal amount. We also include variable-fee contracts in this calculation and use the actual revenue for the previous comparable fiscal period as the base rate for calculating the renewal percentage. The renewal rate excludes setup and customization fees and contract renewals that were pending as of January 31, 2021.

COVID-19 Update

We continue to closely monitor the impact of the COVID-19 pandemic on all aspects of our business and in the geographies in which we operate, including how it affects team members, customers, suppliers, and global markets.

Given the dynamic nature of these circumstances, the long-term impact of the COVID-19 pandemic on our ongoing business, results of operations, and overall future financial performance cannot be reasonably estimated at this time. While the recurring nature of our licensed-based revenue showed continued resilience throughout 2020, a prolonged economic downturn caused by the COVID-19 pandemic could lead clients to adjust purchasing decisions or product and service implementations, or may cause them to cancel or reduce spending with us. Our asset-based revenue is subject to global market conditions and client investment decisions, although the structure of certain contracts and timing of client asset reporting may cause certain impacts to be reflected in results with a lag. Transaction-based revenue primarily includes DBRS Morningstar, which is dependent on overall credit market conditions and debt issuance levels. We continued to benefit from strong Canadian corporate issuances. Nevertheless, credit market conditions remain sensitive to the overall global economic environment.

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Our operations also continue to be affected by a range of external factors related to the COVID-19 pandemic that are not within our control. For example, many jurisdictions continue to impose a wide range of restrictions on the physical movement of our employees and vendors to limit the spread of COVID-19. We have taken numerous steps, and will continue to take further actions, in our approach to addressing the COVID-19 pandemic. We continue to evolve our business continuity plans and our incident management team is in place to respond to changes in our global environment quickly and effectively. To protect the health and safety of our team members, we continue to conduct business with a large portion of our global workforce in remote work environments, which has had relatively little impact on the productivity of our employees, including our ability to gather data. Based on the guidelines of local authorities and our own safety standards, we continued to re-open certain offices on a limited capacity basis and will continue to do so to provide flexibility for employees with a focus on social distancing and safety. We are also working closely with our clients to support them as they implement their own contingency plans, helping them access our products and services remotely. To date, there have been minimal interruptions in our ability to provide our products, services, and support to our clients.

The situation surrounding the COVID-19 pandemic remains fluid, and we continue to actively manage our response and assess potential impacts to our financial position and operating results. This includes the continued evaluation and implementation of certain cost control efforts to help us mitigate the impact that reduced revenues may have on our financial results. We are focusing on maintaining a strong balance sheet and liquidity position. 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 in a private placement exempt from the registration requirements of the Securities Act of 1933, as amended. Our cash, cash equivalents, and investments totaled $464.2 million at December 31, 2020, and we had $350.0 million of availability under our $350.0 million revolving credit facilities. At December 31, 2020, we remain in compliance with our financial covenants under these facilities.

On March 27, 2020, the Coronavirus Aid, Relief, and Economic Security (CARES) Act was signed into law. The CARES Act provides a substantial stimulus and assistance package intended to address the impact of the COVID-19 pandemic, including tax relief and government loans, grants, and investments. On December 27, 2020, an additional stimulus was approved as part of the Consolidated Appropriations Act, 2021 (CAA). Many of the more recent coronavirus relief provisions are extensions and modifications of CARES Act provisions. The CARES Act and CAA had no impact on our consolidated financial statements for the year ended December 31, 2020. We continue to monitor any effects that may result from the CARES Act, CAA, and other similar legislation or governmental actions in geographies in which our business operates.

Regulatory Trends Affecting Our Business

In addition to the industry developments described under "Business - Trends Defining Our Business", there are several longer-term regulatory trends we consider relevant to our business, as outlined below.

General

2020 was a year of extensive disruption and adaptation for all businesses. Due to the global pandemic, businesses were required to rapidly adopt remote working arrangements and the increased use of online and digital communications technologies. The demand also increased for firms to adopt ESG-related business and operational risk strategies. These developments will have long term impacts on our delivery of products and services, customer interactions, physical operations, technology systems, and dependencies on third parties. In this environment, regulators are expected to more closely scrutinize the change management processes of regulated entities like Morningstar to ensure they comply with laws and regulations and to assess whether they are based on sound internal governance principles and structures. Given more intense regulatory scrutiny and the novelty of some of the issues presented, the possibilities for inadvertent noncompliance with regulation have increased.

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In addition, the trend towards increasingly fragmented regulatory activity as a period of global regulatory response and coordination has been replaced by different jurisdictions and regulators reasserting their full control of their own regulatory agendas is continuing. The causes of this trend are varied, including the change of administrations in the United States and the likely end to a period of more relaxed financial regulatory activity, the end of the transition period for the withdrawal of the U.K. from the EU and the effect on trans-European financial services providers, the lack of federal legislation in the United States in important areas like data privacy and consumer protection that has resulted in various states implementing divergent regulatory requirements, and the rise of disruptive technologies worldwide that permit greater personalization of interactions between financial services providers and their various customer segments.

The COVID-19 pandemic influenced the regulatory focus of 2020 as governments around the world tried to support users of financial services, and particularly those suffering serious detrimental impact from the pandemic. Many regulators, such as the FCA, made it clear that regulated firms must provide appropriate support to consumers facing financial difficulties. Even with these dramatic changes due to the pandemic, regulators globally have continued to focus on certain recurrent themes, including access to financial services, the quality of advice and the value of the services provided, the protection of customer data and transparency around the uses of such data, the minimization of conflicts of interest, and improvements in corporate governance and risk management.

Set forth below is a description of recent and prospective developments in regulation affecting each of our regulated lines of business as well as our business generally.

Investment Management

The U.K./EU Trade and Cooperation Agreement that was agreed on December 24, 2020 provides no new transition period for financial services, nor any new arrangements to replace the existing “passporting” regime. This leaves both the U.K. and EU to address matters of access in financial services through unilateral declarations of equivalence under existing equivalence regimes and through domestic laws. Morningstar Investment Management Europe Limited has lost the associated passporting rights required to deliver certain financial services across the EU and is operating under the temporary arrangements that the U.K. and certain EU-based state regulators have made. In anticipation of these developments, Morningstar Investment Consulting France SAS (MICF) applied for and has received provisional approval for categorization as a Markets in Financial Instruments Directive (MiFID) investment firm, permitted to provide investment advice as it pertains to certain types of securities across the EU. Authorization is expected once several related conditions are met.

In the U.S., the SEC's Regulation Best Interest became effective on June 30, 2020. The regulation requires brokers, who have previously been held to a suitability standard in relation to investment recommendations to their clients, to act in their clients’ best interests when making an investment recommendation. We have found this regulation to increase demand for certain of our solutions that assist brokers in demonstrating compliance with these obligations.

As in the U.S., recent regulations and guidance reports in places like Australia and New Zealand have focused on investment management compliance practices such as conflicts of interest and fee disclosures. The increased complexity and extent of regulatory change globally is a challenge for both Morningstar and its clients and we continue to expend resources to remain in compliance.

Retirement Solutions

On October 30, 2020, the U.S. Department of Labor (DOL) adopted amendments to the “Investment duties” regulation under Title I of ERISA, to confirm that ERISA requires plan fiduciaries to select investments and investment courses of action based solely on financial considerations relevant to the risk-adjusted economic value of a particular investment or investment course of action. While this regulation could have adverse effects on demand for our ESG-related retirement solutions, we anticipate that the DOL’s policy or enforcement priorities may change with the new administration in the U.S.

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Other recent regulatory developments in the U.S. are likely to have a positive impact on our Retirement Solutions business. For example, the Setting Every Community Up for Retirement Enhancement Act of 2019, better known as the SECURE Act, became effective in 2020 and is likely to increase the number of participants in defined- contribution plans increasing demand for our services. Also, the DOL announced a new prohibited transaction exemption that expands the scope of fiduciary investment advice to include rollover recommendations. While we do not anticipate any of Morningstar’s businesses will need to avail themselves of the exemption, we provide tools and other resources designed for financial institutions and investment professionals to help clients make an informed decision on possible rollover options that may be impacted by the change.

Indexes

The primary regulation concerning our index business is the EU Benchmarks Regulation, which seeks to ensure the use of benchmarks are free of conflicts of interest, are used appropriately, and reflect the actual market or economic reality they are intended to measure. Morningstar, Inc. received confirmation in August 2020 from the U.K. FCA that it was authorized to act as a third country benchmark administrator, within the EU, on a recognition basis.Morningstar Investment Management Europe Limited is currently appointed as the EU-based legal representative, but as this entity is domiciled in the U.K. and following the withdrawal of the U.K. from the EU, a different EU-based subsidiary will need to be qualified to act in this capacity. The EU has extended the associated benchmarks regulation transition period until the end of 2023.

Credit Ratings

On January 4, 2021, ESMA withdrew the registrations of all U.K.-based credit rating agencies, including DBRS Ratings Limited. Accordingly, all ratings of DBRS Ratings Limited will now require the endorsement of its EU-based credit ratings affiliate, DBRS Ratings GmbH. At present, the U.K. credit rating agency regulatory regime and the EU regime largely mirror each other, which should minimize any significant change in our overall operations. However, over time, either ESMA or the FCA may begin to make inconsistent modifications to those laws and regulations, which would increase the cost and complexity of regulatory compliance for our credit ratings business.

ESG

The EU has similarly taken the lead with respect to regulation of ESG. In July 2020, an EU-wide taxonomy (or combined glossary and classification system) of environmentally sustainable activities, as well as new disclosure requirements for certain financial services firms and large public interest entities was adopted. Portions of the regulation relating to climate change mitigation and adaptation are expected to become effective in January 2022 with the full regulation to become effective in January 2023. Also, an EU regulation on sustainability-related disclosures will take effect on March 10, 2021. The regulation will require various investment market participants to implement policies and make certain disclosures with regards to sustainability risks and sustainability factors relevant to their investment activities. ESMA has also proposed to the European Commission that legislation should be adopted regulating providers of ESG ratings and assessment tools, including by adopting a regulatory model similar to that in place with respect to credit rating agencies.

Regulators in other jurisdictions as diverse as China and the UAE have also begun to work on ESG-disclosure related frameworks. While green bond issuances are on the rise in the U.S., there is no set framework or statutory definition in the U.S. for such financings. While legal authority to regulate sustainable investing and finance exists in the U.S., there has not yet been systemic consideration of the regulation of sustainable finance in the U.S.

Data Privacy and Cybersecurity

Data privacy regulation continues to proliferate, as numerous national and state jurisdictions are considering new data privacy regulations. The GDPR continues to be a major influence on the global privacy landscape. Many non-EU countries are following the EU’s lead and implementing rules similar to GDPR in their jurisdictions to enable cross-border data exchange. Australia, Brazil, China, India, and Korea have all implemented, or are moving to implement, data privacy laws that resemble GDPR in certain respects. A recent decision from the Court of Justice of the EU has called in to question common practices regarding international data flows and the use of data transfer mechanisms, causing us, our clients and companies across the financial services industry, to reconsider our compliance practices.

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In the U.S., the California Consumer Privacy Act (CCPA) went into effect in January 2020. CCPA, heavily influenced by GDPR, is the first comprehensive data privacy law in the U.S. to date. In November 2020, California voters adopted the California Privacy Rights Act (CPRA), which adds additional privacy requirements, such as rights of correction and rights to opt out of automated decision-making technologies and expanded opt out and data portability rights. CPRA is expected to become effective on January 1, 2023. Several other states have adopted or are considering the adoption of privacy regulations.

With the new U.S. administration and control by one party of both houses of Congress, 2021 is thought by some observers to be a year in which comprehensive Federal privacy regulation could be successfully adopted.Regardless, since operations in the financial services industry require the processing of significant amounts of personally identifiable information, we believe the burdens of regulation, and possibly inconsistent regulation, will proliferate, particularly in the application of such laws and regulations to particular persons, categories of personal information, or types of transactions.

As a related matter, issues of cybersecurity as they relate to the identification and mitigation of system vulnerabilities also continue to grow in prominence and laws governing data breaches continue to proliferate globally. Financial regulators have also increased scrutiny on the data protection practices of the entities, such as Morningstar, that they oversee. Several countries including Singapore, Hong Kong, and Australia have shown increasing sensitivity in regard to information security, outsourcing and the use of cloud based services.For example, the SEC's Office of Compliance Inspections and Examinations prioritized cybersecurity during its 2020 examination programs with an emphasis on, among other things, proper configuration of network storage devices and information security governance.

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Supplemental Operating Metrics (Unaudited)

The tables below summarize our key product metrics and other supplemental data.

Revenue by type

Key product area revenue

Morningstar Advisor Workstation 87.2 88.5 (1.5) % (1.3) %

As of December 31,

Select business metrics

Advisor Workstation clients (U.S.) 187 (7) 185 (7) 1.1 %

Morningstar.com Premium Membership subscriptions (U.S.) 113,320 109,967 3.0 %

As of December 31,

Workplace Solutions

Investment Management

Morningstar Managed Portfolios $ 28.6 $ 48.6 (41.2) % (10)

Asset Allocation Services 6.9 8.9 (22.5) %

Investment Management (total) $ 47.9 $ 72.4 (33.8) %

Asset value linked to Morningstar Indexes ($bil) 80.6 67.7 19.1 %

Our employees (approximate)

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(1) Organic revenue excludes acquisitions, divestitures, adoption of new accounting standards, and the effect of foreign currency translations.

(2) License-based revenue includes Morningstar Data, Morningstar Direct, Morningstar Advisor Workstation, PitchBook, Sustainalytics, and other similar products.

(3) Asset-based revenue includes Morningstar Investment Management, Workplace Solutions, and Morningstar Indexes.

(4) Transaction-based revenue includes DBRS Morningstar, Internet advertising sales, and Morningstar-sponsored conferences.

(5) For the year ended December 31, 2020 and for the six months ended December 31, 2019, transaction-based revenue, derived primarily from one-time ratings fees was 59.9% and 63.0%, respectively, of such revenue. Recurring revenue from surveillance, research, and other services comprised the remainder in such periods.

(6) Revenue from DBRS Morningstar is excluded from the reporting of organic revenue growth through the second quarter of 2020.

(7) Revised to reflect updated enterprise client reporting for Advisor Workstation.

(8) The asset totals shown above (including assets we either manage directly or for which we provide consulting or subadvisory work) only include assets for which we receive variable fees based on basis-points of asset balances. Some of our client contracts include services for which we receive a flat fee, but we do not include those assets in the total reported.

Excluding changes related to new contracts and cancellations, changes in the value of assets under advisement can come from two primary sources: gains or losses related to overall trends in market performance and net inflows or outflows caused when investors add to or redeem shares from these portfolios.

Aside from Morningstar Managed Portfolios, it's difficult for our Investment Management business to quantify these cash inflows and outflows. The information we receive from most of our clients does not separately identify the effect of cash inflows and outflows on asset balances for each period. We also cannot specify the effect of market appreciation or depreciation because the majority of our clients have discretionary authority to implement their own portfolio allocations.

(9) Many factors can cause changes in assets under management and advisement for our managed retirement accounts, including employer and employee contributions, plan administrative fees, market movements, and participant loans and hardship withdrawals. The information we receive from the plan providers does not separately identify these transactions or the changes in balances caused by market movements.

(10) The decline in Morningstar Managed Portfolios assets was largely attributed to a TD Ameritrade contract change from a variable to fixed-fee arrangement. Excluding the assets from this contract in the prior-year period, assets in Morningstar Managed Portfolios increased 1.8%. TD Ameritrade subsequently canceled its contract in the fourth quarter as a result of its completed merger with Charles Schwab. The cancellation will not impact future asset reporting, but will begin to impact Investment Management revenue growth in the first quarter of 2021.

(11) Revised to reflect updated asset reporting.

(12) The decline in Institutional Asset Management assets was attributed to the non-renewal of a client contract in the third quarter of 2020.

Consolidated Results

Key metrics (in millions) 2020 2019 Change

Cash used for investing activities $ (123.8) $ (746.3) (83.4) %

Cash provided by (used for) financing activities $ (182.2) $ 373.7 (148.8) %

Cash provided by operating activities $ 384.3 $ 334.4 14.9 %

Capital expenditures (76.7) (80.0) (4.1) %

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pp — percentage points

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Consolidated Revenue

In 2020, our consolidated revenue rose $210.5 million, or 17.9%. Foreign currency movements decreased revenue by $2.1 million in 2020.

We experienced strong revenue growth across all revenue types during 2020.

License-based revenue, which represents subscription services available to customers, increased 15.0% during 2020 driven by demand for license-based products, such as PitchBook, Sustainalytics, Morningstar Data, and Morningstar Direct. Licensed-based revenue grew 10.4%, when excluding Sustainalytics and other acquisitions and foreign currency translations. PitchBook exhibited strong levels of both new account sales as well as existing client renewals and upgrades, which resulted in an increase in revenue of $52.7 million during 2020. The number of PitchBook Platform licenses increased to 52,288 at the end of 2020, compared with 36,695 at the end of 2019. Continued global demand for our data and research helped to drive revenue growth of $18.3 million and $9.5 million for Morningstar Data and Morningstar Direct, respectively. Morningstar Data and Morningstar Direct reported positive and balanced revenue contribution across geographies, with higher growth rates in Europe and Asia, during the year.

Asset-based revenue increased 5.8% during 2020, primarily driven by Workplace Solutions, Morningstar Managed Portfolios, and Morningstar Indexes. Positive market performance, growth in managed retirement accounts, and strong demand for the new advisor-based platform contributed to 7.8% growth in Workplace revenue compared to the prior-year period. Investment Management revenue grew 2.1% in 2020, as market performance and the gross contribution of Morningstar Funds Trust within Managed Portfolios offset the negative impact of an Institutional Asset Management client loss and soft net flows. Morningstar Indexes experienced growth of assets under management linked to investment products, driven by market gains, ongoing demand for strategic-beta and market-cap weighted indexes, and rising interest in ESG indexes. Average assets under management and advisement (calculated based on available average quarterly or monthly data) were approximately $211.4 billion in 2020, compared with $213.4 billion in 2019.

Transaction-based revenue grew 49.2% during 2020, primarily driven by the contribution of DBRS Morningstar. Strong Canadian corporate credit issuances primarily drove DBRS Morningstar's revenue growth for the year. Recurring annual fees tied to surveillance, research, and other services represented 40.1% of credit ratings revenue.

Organic revenue

Organic revenue (revenue excluding acquisitions, divestitures, adoption of new accounting standards, and the effect of foreign currency translations) is considered a non-GAAP financial measure. The definition of organic revenue we use may not be the same as similarly titled measures used by other companies. Organic revenue 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 exclude revenue from acquired businesses from our organic revenue growth calculation for a period of 12 months after we complete the acquisition. For divestitures, we exclude revenue in the prior period for which there is no comparable revenue in the current period.

We began including DBRS Morningstar revenue in our organic revenue calculation in the third quarter of 2020. As such, organic revenue for the year-ended December 31, 2020 only includes DBRS Morningstar revenue for the last six months of 2020 and Sustainalytics for the last six months of 2020.

Excluding revenue from acquisitions and the impact of foreign currency translations, organic revenue increased 8.2% in 2020. PitchBook, Morningstar Data, and Morningstar Direct were the main drivers of the increase in organic revenue during 2020.

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The tables below reconcile consolidated revenue with organic revenue:

Less: acquisitions (132.9) (20.1) NMF

Effect of foreign currency translations (2.1) — NMF

____________________________________________________________________________________________

NMF — Not meaningful

Revenue by geographical area

Year ended December 31

International revenue comprised approximately 30% of our consolidated revenue in 2020, compared with 27% in 2019. Approximately 55% of international revenue is generated within Continental Europe and the U.K.

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Revenue from international operations increased $106.1 million, or 33.9%, in 2020. The increase in 2020 is primarily due to our acquisition of DBRS, which has a significant revenue base in Canada and Europe, and our acquisition of Sustainalytics, which has a revenue base in Europe.

International organic revenue

International organic revenue (international revenue excluding acquisitions, divestitures, adoption of new accounting standards, and the effect of foreign currency translations) is considered a non-GAAP financial measure. The definition of international organic revenue we use may not be the same as similarly titled measures used by other companies. International organic revenue should not be considered an alternative to any measure of performance as promulgated under GAAP.

International organic revenue increased 8.3% during 2020 primarily driven by Morningstar Data and Morningstar Direct across all geographies.

The tables below present a reconciliation from international revenue to international organic revenue:

Less: acquisitions (78.1) — NMF

Effect of foreign currency translations (2.1) — NMF

International organic revenue $ 338.5 $ 312.6 8.3 %

Revenue Renewal Rates

As discussed in How We Evaluate Our Business, we calculate revenue renewal rates to help measure how successful we've been in maintaining existing business for products and services that have renewable revenue.The figures for license-based products includes the effect of price changes; increasing client bases upon contract renewal; changes to the contract value upon renewal (such as increased users); and changes in the value of variable-fee contracts. These factors, therefore, can result in a renewal rate percentage greater than 100%.

In 2020, we modified our revenue renewal rate calculation to include only those products that we consider license-based. These are primarily weighted toward Morningstar Data, Morningstar Direct, PitchBook, and Morningstar Advisor Workstation, but also includes other license-based products and services across Morningstar. In 2020, we did not include Sustainalytics in our calculation. For these license-based products and services, we estimate that our annual renewal rate was approximately 99% in 2020.

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Consolidated Operating Expense

% of revenue 10.0 % 10.0 % — pp

In 2020, operating expense increased $184.9 million, or 18.7%. The increase primarily reflects the inclusion of Sustainalytics' purchase accounting and operating expenses for both DBRS Morningstar and Sustainalytics. Excluding the impacts from DBRS Morningstar and Sustainalytics, operating expenses for the remainder of Morningstar increased 3.2%. Throughout 2020, we implemented measures to better manage costs amidst the uncertain environment, which led to lower growth rates in compensation and benefits and decreases in certain discretionary spending categories. Certain other corporate expense categories, like travel, decreased as global restrictions took effect and employees adapted to a virtual work environment. Foreign currency translations had an unfavorable impact of $1.5 million on operating expense in 2020.

Compensation expense (which primarily consists of salaries, bonus, and other company-sponsored benefits) increased $136.8 million in 2020, with the acquisition of DBRS and Sustainalytics contributing $68.6 million of the increase and $27.8 million due to M&A-related earn-outs. See Note 8 of the Notes to our Consolidated Financial Statements for additional information. The remaining increase reflects additional headcount in data collection and analysis, product and software development, and sales and service support.

Professional fees increased $25.7 million during 2020 related to third-party contractors assisting with software development and technology improvements as well as costs for third-party assistance with regulatory matters and M&A-related activity. In addition, DBRS Morningstar contributed $6.9 million of the professional fee increase. Amortization expense increased $22.3 million primarily from additional amortization related to new intangibles from the acquisition of DBRS and Sustainalytics. Production expense increased $11.3 million during 2020, primarily from fees paid to sub-advisors and other costs related to the Morningstar Funds Trust, as well as cloud-based computing costs. Rent expense increased $10.3 million in connection with lease expansion in certain geographies as well as the addition of Sustainalytics' leases. Sales commissions also grew $7.8 million largely due to strong PitchBook sales performance and additional headcount under the sales commission plans throughout the organization.

These increases were partially mitigated by lower spend in categories directly impacted by the COVID-19 pandemic, such as employee travel-related expense, which decreased $15.3 million during 2020. An increase of $9.1 million in capitalized software development also reduced operating expense during 2020.

In addition, stock-based compensation expense declined $7.7 million due to PitchBook’s management bonus plan, which features lower incentive targets in years one and two compared with year three, and was renewed in 2020. Given 2019 was year three of the prior PitchBook management bonus plan, stock-based compensation expense was lower in 2020, which is year one of the new plan, compared with 2019.

We had 7,979 employees worldwide at the end of 2020, compared with 6,737 at the end of 2019. This increase reflects continued investment in resources to support our key growth initiatives, including operations in India and the U.S. This increase also includes approximately 750 employees who joined Morningstar as a result of the Sustainalytics acquisition in July 2020.

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Cost of revenue

Cost of revenue is our largest category of operating expense, representing about one-half of our total operating expense. Our business relies heavily on human capital, and cost of revenue includes the compensation expense for employees who produce our products and services. We include compensation expense for approximately 80% of our employees in this category.

Cost of revenue increased $73.3 million, or 15.2%, in 2020. Higher compensation expense of $60.1 million was the largest contributor. Professional fees increased $12.5 million during 2020 related to third-party contractors assisting with software development and technology improvements. Higher production expense of $11.3 million also contributed to the unfavorable variance in this category, mainly due to $5.2 million in fees paid to sub-advisors and other costs related to the Morningstar Funds Trust, as well as cloud-based computing costs. These increases were offset by higher capitalized software expense due primarily to an increase in development activity in key growth areas, as well as a decrease in employee travel-related expenses of $7.7 million, resulting from the impact of the COVID-19 pandemic.

Continuous focus on development of our major software platforms, in addition to bringing new products and capabilities to market, resulted in an increase in capitalized software development over the prior year, which in turn reduced operating expense. In 2020, we capitalized $62.9 million in costs associated with software development activities, mainly related to enhanced capabilities in our products, internal infrastructure, and software compared with $53.8 million in 2019.

Sales and marketing

Sales and marketing expense increased $28.5 million, or 16.0%, in 2020, reflecting a $27.5 million increase in compensation expense. Sales commission expense was higher by $7.4 million largely due to strong PitchBook sales performance and additional headcount under sales commission plans throughout the organization. The increases in compensation and sales commission expense were partially mitigated by lower spend in certain expense categories impacted by the COVID-19 pandemic, such as employee travel-related expense and marketing expense for Morningstar-sponsored conferences, which decreased $5.4 million and $1.3 million, respectively, during 2020.

General and administrative

General and administrative expense increased $61.3 million, or 29.1%, during 2020. Compensation expense increased $49.1 million with over half of the increase due to M&A-related earn-outs.See Note 8 of the Notes to our Consolidated Financial Statements for additional information. Rent expense also increased $10.3 million during 2020 in connection with lease expansion in certain geographies as well as the addition of Sustainalytics' leases during the third quarter of 2020. Professional fees increased $12.5 million during 2020, primarily due to third-party assistance with regulatory matters and M&A-related activity. Stock-based compensation decreased $7.4 million as a result of PitchBook's management bonus plan, which features lower incentive targets in years one and two compared with year three, and was renewed in 2020. Given 2019 was year three of the prior PitchBook management bonus plan, stock-based compensation expense was lower in 2020, which is year one of the new plan.

Depreciation and amortization

Depreciation and amortization increased $21.8 million, or 18.5%, in 2020.

Depreciation expense declined $1.1 million in 2020, mainly due to timing of fixed assets being placed into service. Intangible amortization expense increased $22.3 million in 2020, primarily from additional amortization related to intangibles generated by the acquisitions of DBRS and Sustainalytics.

Amortization of intangible assets will be an ongoing expense. We estimate that this expense will total approximately $61.1 million for the year ending December 31, 2021. Our estimates of future amortization expense for intangible assets may be affected by additional acquisitions, divestitures, changes in the estimated average useful lives, impairments, and foreign currency translation.

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Consolidated Operating Income and Operating Margin

Consolidated operating income increased $25.6 million in 2020, reflecting an increase in operating expense of $184.9 million, which was more than offset by an increase in revenue of $210.5 million. Operating margin was 15.5% in 2020, a decrease of 0.6 percentage points compared with 2019.

We reported adjusted operating income, which excludes intangible amortization expense and M&A-related expenses (including M&A-related earn-outs), of $316.7 million in 2020. Adjusted operating income is a non-GAAP financial measure; the table below shows a reconciliation to the most directly comparable GAAP financial measure.

Add: intangible amortization expense 58.8 36.5 61.1 %

Add: M&A-related earn-outs 27.8 — NMF

We reported an adjusted operating margin, which excludes intangible amortization expense and M&A-related expenses (including M&A-related earn-outs), of 22.8% in 2020. Adjusted operating margin is a non-GAAP financial measure; the table below shows a reconciliation to the most directly comparable GAAP financial measure.

Add: intangible amortization expense 4.2 % 3.1 % 1.1 pp

Add: M&A-related expenses 1.1 % 0.6 % 0.5 pp

Add: M&A-related earn-outs 2.0 % — % 2.0 pp

Adjusted operating margin 22.8 % 19.8 % 3.0 pp

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Non-Operating Income, Net, Equity in Net Income (Loss) of Unconsolidated Entities, and Effective Tax Rate and Income Tax Expense

Non-Operating Income, Net

The following table presents the components of non-operating income, net:

Interest income $ 1.6 $ 2.4

Gain on sale of equity method investments 30.0 19.5

Holding gain on previously held equity interest 50.9 —

Other expense, net (5.7) (3.1)

Non-operating income, net $ 67.8 $ 8.9

Interest income reflects interest from our investment portfolio. Interest expense mainly relates to the outstanding principal balance under our credit facilities.

The gain on sale of equity method investments in 2019 relates to the sale of our equity ownership in one of our equity method investments during the third quarter of 2019. The gain on sale of equity method investments in 2020 relates to the sale of our equity ownership in two of our equity method investments during the fourth quarter of 2020.

The holding gain on previously held equity interest relates to our purchase of the remaining interest in Sustainalytics in July 2020.

Other expense, net primarily includes foreign currency losses.

Equity in Net Income (Loss) of Unconsolidated Entities

Equity in net income (loss) of unconsolidated entities $ 0.3 $ (0.9)

Equity in net income (loss) of unconsolidated entities primarily reflects income from MJKK offset by losses in our other equity method investments.

We describe our investments in unconsolidated entities in more detail in Note 10 of the Notes to our Consolidated Financial Statements.

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Effective Tax Rate and Income Tax Expense

The following table summarizes the components of our effective tax rate:

Equity in net income (loss) of unconsolidated entities 0.3 (0.9)

Income tax expense $ 59.7 $ 45.6

Effective tax rate 21.1 % 23.1 %

Our effective tax rate in 2020 was 21.1%, a decrease of 2.0 percentage points, compared with 23.1% in 2019. The decrease was primarily attributable to the non-taxable holding gain on the previously held equity interest in Sustainalytics offset by the M&A-related earn-outs that are not deductible for tax purposes.

Liquidity and Capital Resources

As of December 31, 2020, we had cash, cash equivalents, and investments of $464.2 million, up $96.7 million from the end of 2019. The increase reflects higher cash provided by operating activities offset primarily by $76.7 million of capital expenditures, $67.8 million of cash paid for the acquisitions, primarily for the acquisition of Sustainalytics, net debt repayments of $63.4 million, dividends paid of $51.4 million, and $41.9 million to repurchase common stock under our share repurchase program.

Cash provided by operating activities is our main source of cash. In 2020, cash provided by operating activities was $384.3 million, reflecting $345.4 million of net income, adjusted for non-cash items and $38.9 million in positive changes from our net operating assets and liabilities. Cash provided by operating activities increased $49.9 million, or 14.9%, in 2020.

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On July 2, 2019, we entered into a new senior credit agreement (the Credit Agreement), the initial borrowings under which were made to finance the DBRS acquisition, and repaid all outstanding obligations under the prior credit facility. The Credit Agreement provides the Company with a five year multi-currency credit facility with an initial borrowing capacity of up to $750.0 million, including a $300.0 million revolving credit facility and a term loan facility of $450.0 million. We had an outstanding principal balance of $100.8 million as of December 31, 2020 and a revolving credit facility borrowing availability of $300.0 million. See Note 3 of the Notes to our Consolidated

Financial Statements for additional information on our Credit Agreement.

On June 30, 2020, we entered into a new senior credit agreement that provides us with a $50.0 million 364-day senior revolving credit facility. This 364-day revolving facility was undrawn as of December 31, 2020.

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 pay off a portion of the Company's outstanding debt under its Credit Agreement. Interest on the 2030 Notes will be 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 occurring on April 30, 2021. As of December 31, 2020, our total outstanding debt (net of issuance costs) under the 2030 Notes was $348.3 million. See Note 3 of the Notes to our Consolidated Financial Statements for additional information on our 2030 Notes.

Each of the Credit Agreement, the 364-Day revolving credit facility, 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 tested on a quarterly basis. We were in compliance with these financial covenants as of December 31, 2020.

We believe our available cash balances and investments, along with cash generated from operations and our Credit Agreement, will be sufficient to meet our operating and cash needs for at least the next 12 months. We invest our cash reserves in cash equivalents and investments and maintain a conservative investment policy. We invest most of our investment balance in 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.

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Approximately 60% of our cash, cash equivalents, and investments as of December 31, 2020 was held by our operations outside the U.S., down from about 70% as of December 31, 2019. The amount of accumulated undistributed earnings of our foreign subsidiaries was approximately $243.5 million as of December 31, 2020. We have not recorded deferred income taxes on the $243.5 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). In February 2019, we repatriated approximately $45.8 million of our foreign earnings to the U.S. Otherwise, we generally consider our U.S. directly-owned foreign subsidiary earnings to be permanently reinvested.

We intend to use our cash, cash equivalents, and investments for general corporate purposes, including working capital and funding future growth.

In December 2017, 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. The authorization expired on December 31, 2020.

As of December 31, 2020, we repurchased a total of 559,105 shares for $67.5 million under this authorization. On December 4, 2020, the board of directors approved a new share repurchase program that authorizes the Company to repurchase up to $400.0 million in shares of the Company's outstanding common stock, effective January 1, 2021. The new authorization expires on December 31, 2023.

In 2020, we also paid dividends of $51.4 million. In February 2021, our board of directors declared a quarterly dividend of 31.5 cents per share. The dividend is payable on April 30, 2021 to shareholders of record as of April 9, 2021. While subsequent dividends will be subject to board approval, we expect to make regular quarterly dividend payments of 31.5 cents per share in 2021.

We expect to continue making capital expenditures in 2021, primarily for computer hardware and software provided by third parties, internally developed software, and leasehold improvements for new and existing office locations. We continue to adopt more public cloud and software-as-a-service applications for new initiatives and are in the process of migrating relevant parts of our data centers to the public cloud over the next several years. During this migration, we expect to run certain applications and infrastructure in parallel. These actions will have some transitional effects on our level of capital expenditures and operating expenses.

We also expect to use a portion of our cash and investments balances in the first quarter of 2021 to make annual bonus payments of approximately $86.7 million related to the 2020 bonus compared to $83.4 million in 2019.

Consolidated Free Cash Flow

As described in more detail above, we define free cash flow as cash provided by or used for operating activities less capital expenditures. We present free cash flow solely as supplemental disclosure to help investors better understand how much cash is available after we spend money to operate our business. Our management team uses free cash flow to evaluate our business. Free cash flow is not a measure of performance. Also, the free cash flow definition we use may not be comparable to similarly titled measures used by other companies.

Cash provided by operating activities $ 384.3 $ 334.4 14.9 %

Capital expenditures (76.7) (80.0) (4.1) %

We generated free cash flow of $307.6 million in 2020, an increase of $53.2 million compared with 2019. The change reflects a $49.9 million increase in cash provided by operating activities as well as a $3.3 million decrease in capital expenditures. Cash provided by operating activities increased primarily due to higher cash earnings in 2020 compared to 2019.

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Acquisitions

We paid a total of $750.1 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 $15.6 million related to additional investments in unconsolidated entities over the past three years. We describe these investments in Note 10 of the Notes to our Consolidated Financial Statements.

Divestitures

We sold our 15(c) board consulting services product line in 2018 and received a total of $10.5 million related to this sale. For more information, please see Note 9 of the Notes to our Consolidated Financial Statements.

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 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 significant judgments related to revenue recognition, including identifying 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 when 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, we begin recognizing revenue upon the receipt of customer acceptance.

We make judgments at the beginning of an arrangement regarding whether or not collection of the consideration to which we are entitled is probable. We typically sell to institutional customers with whom we have a history of successful collections and assess the probability of collection on a customer-by-customer basis.

Deferred revenue is the amount collected in advance for subscriptions, licenses, or services that has not yet been recognized as revenue. Deferred revenue totaled $340.3 million at the end of 2020 (of which $306.8 million was classified as a current liability with an additional $33.5 million included in other long-term liabilities). We expect to recognize this deferred revenue in future periods as we fulfill our service obligations under our subscription and service agreements.

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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. To the extent that there are material differences between our determination of deferred revenue and its expected realization and actual results, our financial condition or results of operations may be affected.

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 EBITDA margins, estimated attritions rate and weighted average cost of capital 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. Instead, it is subject to an impairment test annually or whenever indicators of impairment exist. We review the carrying value of goodwill for impairment at least annually based on our assessment of impairment indicators. If impairment indicators exist, we reduce the goodwill balance to reflect the revised fair value.

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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 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. 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.

Stock-Based Compensation

We include stock-based compensation expense in each of our operating expense categories. Our stock-based compensation expense primarily reflects grants of restricted stock units, performance share awards, and market stock units.

We measure stock-based compensation expense at the grant date based on the fair value of the award and recognize the expense ratably over the award's vesting period. We measure the fair value of our restricted stock units on the date of grant based on the market price of the underlying common stock as of the close of trading on the day before the grant. We estimate expected forfeitures of stock-based awards at the grant date and recognize compensation cost only for those awards expected to vest. We later adjust this forfeiture assumption to the actual forfeiture rate. Therefore, changes in the forfeiture assumptions do not change the total amount of expense ultimately recognized over the vesting period. Instead, different forfeiture assumptions would only affect the timing of expense recognition over the vesting period.

We adjust the stock-based compensation expense to reflect those awards that ultimately vested and update our estimate of the forfeiture rate that will be applied to awards not yet vested.

Income Taxes

Our effective tax rate is based on the mix of income and losses in our U.S. and non-U.S. operations, statutory tax rates, and tax-planning opportunities available to us in the various jurisdictions in which we operate. Significant judgment is required to evaluate our tax positions.

Because of timing differences required by tax law, the effective tax rate reflected in our Consolidated Financial Statements is different from the tax rate reported on our tax return (our cash tax rate). Some of these differences, such as expenses that are not deductible in our tax return, are permanent. Other differences, such as depreciation expense, reverse over time. These timing differences create deferred tax assets and liabilities. We determine our deferred tax assets and liabilities based on temporary differences between the financial reporting and the tax basis of assets and liabilities.

As of December 31, 2020, we had gross deferred tax assets of $73.3 million and gross deferred tax liabilities of $167.3 million. The deferred tax assets include $7.9 million of deferred tax assets related to $33.3 million of net operating losses (NOLs) of our non-U.S. operations. In assessing the realizability of our deferred tax assets, we consider whether it is more likely than not that some portion or all of the deferred tax assets will not be realized. We have recorded a valuation allowance against $8.8 million of the non-U.S. NOLs, reflecting the likelihood that the benefit of the NOLs will not be realized. We have not recorded a valuation allowance against the U.S. federal NOLs of $0.6 million because we expect the benefit of the U.S. federal NOLs to be fully utilized before expiration.

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In assessing the need for a valuation allowance, we consider both positive and negative evidence, including tax planning strategies, projected future taxable income, and recent financial performance. If we determine a lower allowance is required at some point in the future, we would record a reduction to our tax expense and valuation allowance. These adjustments would be made in the same period we determined the change in the valuation allowance was needed. This would cause our income tax expense, effective tax rate, and net income to fluctuate.

We use judgment to identify, recognize, and measure the amounts of uncertain tax positions to be recorded in the financial statements related to tax positions taken or expected to be taken in a tax return. We recognize liabilities to represent our potential future obligations to taxing authorities for the benefits taken in our tax returns. We adjust these liabilities, including any impact of the related interest and penalties, in light of changing facts and circumstances, such as the progress of a tax audit. A number of years may elapse before a particular matter for which we have established a reserve is audited and finally resolved. The number of years with open tax audits varies depending on the tax jurisdiction.

We use judgment to classify unrecognized tax benefits as either current or non-current liabilities in our Consolidated Balance Sheets. Settlement of any particular issue would usually require the use of cash. We generally classify liabilities associated with unrecognized tax benefits as non-current liabilities. It typically takes several years between our initial tax return filing and the final resolution of any uncertain tax positions with the tax authority. We recognize favorable resolutions of tax matters for which we have previously established reserves as a reduction to our income tax expense when the amounts involved become known.

Assessing the future tax consequences of events that have been recognized in our Consolidated Financial Statements or tax returns requires judgment. Variations in the actual outcome of these future tax consequences could materially impact our financial position, results of operations, or cash flows.

Contingencies

We are subject to various claims and contingencies related to legal proceedings and regulatory investigations. These legal proceedings and regulatory investigations involve inherent uncertainties including, but not limited to, court rulings, negotiations between affected parties, and government actions. Assessing the probability of loss for such contingencies and determining how to accrue the appropriate liabilities requires judgment. If actual results differ from our assessments, our financial position, results of operations, or cash flows would be affected.

Recently Issued Accounting Pronouncements

Refer to Note 18 of the Notes to our Consolidated Financial Statements for recently adopted accounting pronouncements and recently issued accounting pronouncements not yet adopted as of December 31, 2020.

Contractual Obligations

The table below shows our known contractual obligations as of December 31, 2020, and the expected timing of cash payments related to these contractual obligations:

Minimum payments related to long-term financing agreements 1.1 — — — — — 1.1

Unrecognized tax benefits (3) 7.6 — — — — — 7.6

(1) The non-cancelable operating lease obligations are mainly for office space.

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(2) The minimum payments on the term facility, revolving credit facilities, and the 2030 Notes reflect outstanding principal balance of $449.1 million and an estimate for interest and commitment fees.

(3) Represents unrecognized tax benefits (including penalties and interest, less the impact of any associated tax benefits). The amount included in the table represents items that may be resolved through settlement of tax audits during 2021. The table excludes $5.1 million of unrecognized tax benefits, included as a long-term liability in our Consolidated Balance Sheet as of December 31, 2020, for which we cannot make a reasonably reliable estimate of the period of payment.

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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 December 31, 2020, our cash, cash equivalents, and investments balance was $464.2 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 our long-term debt. The interest rates are based upon the applicable LIBOR rate plus an applicable margin for such loans or the lender's base rate plus an applicable margin for such loans. Based on December 31, 2020 estimated LIBOR rates, we estimate a 100 basis-point change in the LIBOR rate would have a $1.0 million impact on an annualized basis.

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 December 31, 2020:

Foreign denominated percentage of revenue 3.2 % 8.5 % 7.3 % 5.5 % 5.7 %

The table below shows our net investment exposure in foreign currencies as of December 31, 2020:

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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, 2020 and 2019, the related consolidated statements of income, comprehensive income, equity, and cash flows for each of the years in the three‐year period ended December 31, 2020 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, 2020 and 2019, and the results of its operations and its cash flows for each of the years in the three‐year period ended December 31, 2020, 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, 2020, 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 26, 2021 expressed an unqualified opinion on the effectiveness of the Company’s internal control over financial reporting.

Change in Accounting Principles

As discussed in Note 2 and Note 18 to the consolidated financial statements, the Company has changed its method of accounting for leases as of January 1, 2019 due to the adoption of Financial Accounting Standards Board’s (FASB) Accounting Standards Codification (ASC) Topic 842, Leases.

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 consolidatedfinancial 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 Matters

The critical audit matters communicated below are matters arising from the current period audit of the consolidated financial statements that were communicated or required to be communicated to the audit committee and that: (1) relate 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 critical audit matters 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 matters below, providing separate opinions on the critical audit matters or on the accounts or disclosures to which they relate.

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Evaluation of sufficiency of audit evidence over revenue

As discussed in Notes 2 and 5 to the consolidated financial statements, the Company has recorded $1,389.5

million in revenues, of which $934.9 million was related to licensed-based products, $223.8 million was related

to asset-based products, and $230.8 million was related to transaction-based products, for the year ended

December 31, 2020. These disaggregated portions of revenue contain multiple product revenue streams. 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 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 procedures

performed, including the appropriateness of the nature and extent of audit effort over revenue.

Evaluation of acquisition-date fair value of contingent consideration

As discussed in Notes 2 and 8 to the consolidated financial statements, on July 2, 2020 the Company acquired

the remaining 60% of Sustainalytics in a business combination. The acquisition agreement included a

contingent consideration provision, a portion of which was additional purchase consideration, and the remainder

of which was considered compensation expense. The acquisition date contingent consideration fair value is

$75.2 million, a portion of which was accounted for as acquisition consideration and a portion as compensation

expense.

We identified the evaluation of the acquisition-date fair value of the contingent consideration as a critical audit

matter. A higher degree of auditor judgment was required in evaluating forecasted revenue growth rates used as

changes could have a significant impact on the determination of fair value.

The following are the primary procedures we performed to address this critical audit matter. We evaluated the

design and tested the operating effectiveness of certain internal controls within the Company’s acquisition-date

fair value of contingent consideration process, including controls over the forecasted revenue growth rates. We

assessed the reasonableness of forecasted revenue growth rates by comparing them to historical actual results,

publicly available relevant competitor data, and subsequent actual results.

/s/ KPMG LLP

We have served as the Company’s auditor since 2011.

Chicago, Illinois

February 26, 2021

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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, 2020, based on criteria established in Internal Control – Integrated Framework (2013) issued by the Committee of Sponsoring Organizations of the Treadway Commission. In our opinion, the Company maintained, in all material respects, effective internal control over financial reporting as of December 31, 2020, 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, 2020 and 2019, the related consolidated statements of income, comprehensive income, equity, and cash flows for each of the years in the three-year period ended December 31, 2020 and the related notes and financial statement schedule II (collectively, the consolidated financial statements), and our report dated February 26, 2021 expressed an unqualified opinion on those consolidated financial statements.

The Company acquired Sustainalytics on July 2, 2020, and management excluded from its assessment of the effectiveness of the Company’s internal control over financial reporting as of December 31, 2020, the internal control over financial reporting of the operations of the acquired business. The total excluded assets and revenues of the acquired business are less than 5% of consolidated financial statement assets and revenues as of and for the year ended December 31, 2020. Our audit of internal control over financial reporting of the company also excluded an evaluation of the internal control over financial reporting of Sustainalytics.

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.

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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 26, 2021

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Morningstar, Inc. and Subsidiaries

Consolidated Statements of Income

Year ended December 31 (in millions except per share amounts) 2020 2019 2018

Operating expense:

Non-operating income:

Interest expense, net (9.5) (8.7) (1.8)

Gain on sale of a product line — — 10.5

Gain on sale of equity method investments 30.0 19.5 5.6

Holding gain on previously held equity interest 50.9 — —

Other (expense) income, net (5.7) (3.1) 1.8

Equity in net income (loss) of unconsolidated entities 0.3 (0.9) (2.1)

Net income per share:

Dividends per common share:

Dividends declared per common share $ 1.22 $ 1.14 $ 1.03

Dividends paid per common share $ 1.20 $ 1.12 $ 1.00

Weighted average shares outstanding:

See notes to consolidated financial statements.

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Morningstar, Inc. and Subsidiaries

Consolidated Statements of Comprehensive Income

Other comprehensive income (loss), net of tax:

Foreign currency translation adjustment 37.3 11.5 (26.6)

Unrealized gains (losses) on securities:

Unrealized holding gains (losses) arising during period 2.9 3.8 (1.0)

Reclassification of gains included in net income (1.6) (0.9) (0.8)

Other comprehensive income (loss) 38.6 14.4 (28.4)

See notes to consolidated financial statements.

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Morningstar, Inc. and Subsidiaries

Consolidated Balance Sheets

As of December 31 (in millions except share amounts) 2020 2019

Assets

Current assets:

Cash and cash equivalents $ 422.5 $ 334.1

Income tax receivable 2.2 6.3

Property, equipment, and capitalized software, net 155.1 154.7

Investments in unconsolidated entities 32.6 59.6

Deferred tax asset, net 12.6 10.7

Liabilities and equity

Current liabilities:

Accounts payable and accrued liabilities 64.5 58.9

Current portion of long-term debt — 11.0

Operating lease liabilities 39.9 35.8

Contingent consideration liability 35.0 —

Other current liabilities 11.1 2.5

Deferred tax liabilities, net 108.9 95.0

Other long-term liabilities 33.8 11.4

Equity:

Morningstar, Inc. shareholders’ equity:

Accumulated other comprehensive loss:

Currency translation adjustment (25.7) (63.0)

Unrealized gain on available-for-sale investments 3.7 2.4

Total accumulated other comprehensive loss (22.0) (60.6)

See notes to consolidated financial statements.

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Morningstar, Inc. and Subsidiaries

Consolidated Statements of Equity

Morningstar, Inc. Shareholders’ Equity

AccumulatedOtherComprehensiveLoss

Common Stock AdditionalPaid-inCapital

Other comprehensive loss:

Foreign currency translation adjustment, net — — — — (26.6) (26.6)

Other comprehensive loss, net — — — — (28.4) (28.4)

Stock-based compensation — restricted stock units — — 19.8 — — 19.8

Stock-based compensation — performance share awards — — 10.2 — — 10.2

Stock-based compensation — market stock units — — 1.7 — — 1.7

Dividends declared ($1.03 per share) — — — (43.9) — (43.9)

Other comprehensive income:

Foreign currency translation adjustment, net — — — — 11.5 11.5

Other comprehensive loss, net — — — — 14.4 14.4

Stock-based compensation — restricted stock units — — 20.4 — — 20.4

Stock-based compensation — performance share awards — — 20.6 — — 20.6

Stock-based compensation — market stock units — — 3.4 — — 3.4

Common shares repurchased (41,935) — (4.6) — — — (4.6)

Dividends declared ($1.14 per share) — — — (48.9) — (48.9)

Other comprehensive income:

Foreign currency translation adjustment, net — — — — 37.3 37.3

Other comprehensive income, net — — — — 38.6 38.6

Stock-based compensation — restricted stock units — — 22.2 — — 22.2

Stock-based compensation — performance share awards — — 10.2 — — 10.2

Stock-based compensation — market stock units — — 4.2 — — 4.2

Dividends declared ($1.22 per share) — — — (52.1) — (52.1)

See notes to consolidated financial statements.

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Morningstar, Inc. and Subsidiaries

Consolidated Statements of Cash Flows

Operating activities

Deferred income taxes (6.7) (6.0) (1.1)

Stock-based compensation expense 36.6 44.4 31.7

Provision for bad debt 2.8 2.3 2.5

Equity in net (income) loss of unconsolidated entities (0.3) 0.9 2.1

Gain on sale of a product line — — (10.5)

Gain on sale of equity method investments (30.0) (19.5) (5.6)

Holding gain on previously held equity interest (50.9) — —

Acquisition earn-out 27.8 — —

Changes in operating assets and liabilities

Accounts payable and accrued liabilities (9.5) 3.2 6.0

Accrued compensation and deferred commissions 18.2 17.1 15.6

Other assets and liabilities 1.9 (6.6) 10.3

Investing activities

Purchases of investment securities (56.4) (36.2) (35.7)

Proceeds from maturities and sales of investment securities 46.9 35.8 51.2

Acquisitions, net of cash acquired (67.8) (681.9) (0.4)

Proceeds from sale of a product line — — 10.5

Proceeds from sale of equity method investments, net 35.2 17.6 7.9

Purchases of equity- and cost-method investments (6.7) (1.5) (7.4)

Cash used for investing activities (123.8) (746.3) (49.9)

Financing activities

Common shares repurchased (41.9) (4.9) (20.9)

Proceeds from revolving credit facility 60.0 610.0 —

Repayment of revolving credit facility (130.0) (160.0) (110.0)

Repayment of term facility (343.4) (5.6) —

Proceeds from stock-option exercises 1.9 0.2 0.1

Employee taxes withheld for restricted stock units (25.1) (15.2) (13.3)

Cash provided by (used for) financing activities (182.2) 373.7 (188.8)

Effect of exchange rate changes on cash and cash equivalents 10.1 3.0 (15.0)

Net increase (decrease) in cash and cash equivalents 88.4 (35.2) 61.1

Cash and cash equivalents—beginning of period 334.1 369.3 308.2

Cash and cash equivalents—end of period $ 422.5 $ 334.1 $ 369.3

Supplemental disclosure of cash flow information:

Cash paid for income taxes $ 58.2 $ 63.3 $ 67.0

Cash paid for interest $ 11.1 $ 11.0 $ 3.7

Supplemental information of non-cash investing and financing activities:

Unrealized gain (loss) on available-for-sale investments $ 1.8 $ 3.9 $ (2.7)

See notes to consolidated financial statements.

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MORNINGSTAR, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

1.Description of Business

Morningstar, Inc. and its subsidiaries (Morningstar, we, our, the company) provide independent investment research for investors around the world. We offer an extensive line of products and services for individual investors, financial advisors, asset managers, retirement plan providers and sponsors, and private market/venture capital investors. We have operations in 29 countries.

COVID-19 Update

We continue to closely monitor the impact of the COVID-19 pandemic on all aspects of our business and in the geographies in which we operate, including how it affects our team members, customers, suppliers, and global markets. Since the situation surrounding the COVID-19 pandemic remains fluid, we are actively managing our response and have assessed potential impacts to our financial position and operating results related to our consolidated financial statements for the year ended December 31, 2020.

On March 27, 2020, the Coronavirus Aid, Relief, and Economic Security (CARES) Act was signed into law. The CARES Act provides a substantial stimulus and assistance package intended to address the impact of the COVID-19 pandemic, including tax relief and government loans, grants and investments. On December 27, 2020, an additional stimulus was approved as part of the Consolidated Appropriations Act, 2021 (CAA). Many of the more recent coronavirus relief provisions are extensions and modifications of CARES Act provisions. The CARES Act and CAA had no impact on our consolidated financial statements for the year ended December 31, 2020. We continue to monitor any effects that may result from the CARES Act, CAA, and other similar legislation or governmental actions in geographies in which our business operates.

2. Summary of Significant Accounting Policies

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

ASC Accounting Standards Codification

ASU Accounting Standards Update

EITF Emerging Issues Task Force

FASB Financial Accounting Standards Board

SEC Securities and Exchange Commission

Principles of Consolidation. We conduct our business operations through wholly owned or majority-owned operating subsidiaries. The accompanying consolidated financial statements include the accounts of Morningstar, Inc. and our subsidiaries. We consolidate assets, liabilities, and results of operations of subsidiaries in which we have a controlling interest and eliminate all significant intercompany accounts and transactions.

We account for investments in entities in which we exercise significant influence, but do not control, using the equity method.

As part of our investment management operations, we manage certain funds outside of the U.S. that are considered variable interest entities. For the majority of these variable interest entities, we do not have a variable interest. In cases where we do have a variable interest, we are not the primary beneficiary. Accordingly, we do not consolidate any of these variable interest entities.

Use of Estimates. The preparation of financial statements in conformity with accounting principles generally accepted in the U.S. (GAAP) requires us to make estimates and assumptions that affect the reported amounts of assets, liabilities, revenues, and expenses during the reporting period. Actual results may differ from these estimates.

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Cash and Cash Equivalents. Cash and cash equivalents consist of cash and investments with original maturities of three months or less. We state them at cost, which approximates fair value. We state the portion of our cash equivalents that are invested in money market funds at fair value, as these funds are actively traded and have quoted market prices.

Investments. We account for our investments in accordance with FASB ASC 320, Investments—Debt and Equity Securities (FASB ASC 320). We classify our investments into three categories: held-to-maturity, trading, and available-for-sale.

• Held-to-maturity: We classify certain investments, primarily certificates of deposit, as held-to-maturity securities, based on our intent and ability to hold these securities to maturity. We record held-to-maturity investments at amortized cost in our Consolidated Balance Sheets.

• Trading: We classify certain other investments, primarily equity securities, as trading securities. We include realized and unrealized gains and losses associated with these investments as a component of our operating income in our Consolidated Statements of Income. We record these securities at their fair values in our Consolidated Balance Sheets.

• Available-for-sale: Investments not considered held-to-maturity or trading securities are classified as available-for-sale securities. Available-for-sale securities primarily consist of equity securities, exchange-traded funds, and mutual funds. We report unrealized gains and losses for available-for-sale securities as other comprehensive income (loss), net of related income taxes. We record these securities at their fair values in our Consolidated Balance Sheets.

Fair Value Measurements. FASB ASC 820, Fair Value Measurements (FASB ASC 820) defines fair value, establishes a framework for measuring fair value, and expands disclosures about fair value measurements. Under FASB ASC 820, fair value is defined as the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants as of the measurement date. The standard applies whenever other standards require (or permit) assets or liabilities to be measured at fair value.

FASB ASC 820 uses a fair value hierarchy based on three broad levels of valuation inputs:

• Level 1: Valuations based on quoted prices in active markets for identical assets or liabilities that we have the ability to access.

• Level 2: Valuations based on quoted prices in markets that are not active or for which all significant inputs are observable, either directly or indirectly.

• Level 3: Valuations based on inputs that are unobservable and significant to the overall fair value measurement.

We provide additional information about our cash equivalents and investments that are subject to FASB ASC 820 in Note 7.

Concentration of Credit Risk. For the years ended December 31, 2020, 2019, and 2018, no single customer represented 5% or more of our consolidated revenue. If receivables from our customers become delinquent, we begin a collections process. We maintain an allowance for credit losses based on our estimate of the probable losses of accounts receivable.

Property, Equipment, and Depreciation. We state property and equipment at historical cost, net of accumulated depreciation. We depreciate property and equipment using the straight-line method based on the useful life of the asset, which ranges from three to seven years. We amortize leasehold improvements over the lease term or their useful lives, whichever is shorter.

Computer Software and Internal Product Development Costs. We capitalize certain costs in accordance with FASB ASC 350-40, Internal-Use Software, FASB ASC 350-50, Website Development Costs, and FASB ASC 985, Software. Internal product development costs mainly consist of employee costs for developing new web-based products and certain major enhancements of existing products. We amortize these costs on a straight-line basis over the estimated economic life, which is generally three years. We include capitalized software development costs related to projects that have not been placed into service in our construction in progress balance.

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The table below summarizes our depreciation expense related to capitalized developed software for the past three years:

Capitalized developed software depreciation expense $ 53.9 $ 61.1 $ 42.8

The table below summarizes our capitalized software development costs for the past three years:

Capitalized software development costs $ 60.3 $ 64.8 $ 53.5

Business Combinations. When we acquire a business, we account for the business combination in accordance with FASB ASC 805, Business Combinations (FASB ASC 805). We recognize and measure the fair value of the acquired business and allocate the purchase price to the identifiable tangible and intangible assets acquired and liabilities assumed based upon their estimated fair values at the date of acquisition. The difference between the purchase price and the estimated fair value of the net assets acquired or the excess of the aggregate estimated fair values of assets acquired and liabilities assumed is recorded as goodwill. In determining the estimated fair values of assets acquired and liabilities assumed in a business combination, we use various recognized valuation methods, including discounted cash flow, Monte Carlo simulations, and relief from royalty. For a business combination achieved in stages, we remeasure our previously held equity interest immediately before the acquisition to the acquisition date fair value and recognize any gain in our Consolidated Statements of Income.

We recognize the fair value of any contingent payments at the date of acquisition as part of the consideration transferred to acquire a business. 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 expense direct costs related to the business combination, such as accounting, legal, valuation, and other professional fees, as incurred. We recognize restructuring costs, including severance and relocation for employees of the acquired entity, as post-combination expenses unless the target entity meets the criteria of ASC 420, Exit or Disposal Cost Obligations, on the acquisition date.

As part of the purchase price allocation, we follow the requirements of FASB ASC 740, Income Taxes (FASB ASC 740). This includes establishing deferred tax assets or liabilities reflecting the difference between the values assigned for financial statement purposes and income tax purposes. In certain acquisitions, the goodwill resulting from the purchase price allocation may not be deductible for income tax purposes. FASB ASC 740 prohibits recognition of a deferred tax asset or liability for temporary differences in goodwill if goodwill is not amortizable and deductible for tax purposes.

Goodwill. Changes in the carrying amount of our recorded goodwill are mainly the result of business acquisitions, divestitures, and the effect of foreign currency translations. In accordance with FASB ASC 350, Intangibles—Goodwill and Other, we do not amortize goodwill; instead, goodwill is subject to an impairment test annually, or whenever indicators of impairment exist. An impairment would occur if the carrying amount of a reporting unit exceeded the fair value of that reporting unit. We performed annual impairment reviews in the fourth quarter of 2020and 2019. We did not record any impairment losses in 2020, 2019, and 2018.

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Intangible Assets. We amortize intangible assets using the straight-line method over their estimated useful lives, which range from one to twenty years. 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 2020, 2019, and 2018.

Revenue Recognition. On January 1, 2018, we began recognizing revenue in accordance with ASC Topic 606, Revenue from Contracts with Customers (ASC Topic 606). The Company has retained similar recognition and measurement upon adoption of ASC Topic 606 as under accounting standards in effect in prior periods.

Under ASC Topic 606, we recognize revenue by applying the following five-step model to each of our customer arrangements:

1.Identify the customer contract;

2.Identify the performance obligations in the contract;

3.Determine the transaction price;

4.Allocate the transaction price to the performance obligations; and

MORN US Equity

MORN · 10-K · period ended 2020-12-31

Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations

Item 7A. Quantitative and Qualitative Disclosures about Market Risk

Item 8. Financial Statements and Supplementary Data

MORN US Equity☆

MORN · 10-K · period ended 2020-12-31

Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations

Item 7A. Quantitative and Qualitative Disclosures about Market Risk

Item 8. Financial Statements and Supplementary Data

MORN US Equity