MORN US Equity☆

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--Regulatory Trends Affecting 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 related to cybersecurity and the protection of confidential information, including personal information about individuals;

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

•compliance failures, regulatory action, or changes in laws applicable to our credit ratings operations, or our investment advisory, ESG, and index businesses;

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

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

•inadequacy of our operational risk management and business continuity programs in the event of a material disruptive event, including an outage of our database, technology-based products and services or network facilities;

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

•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;

•failing to maintain growth across our businesses in today's fragmented geopolitical, regulatory and cultural world;

•liability relating to the information and data we collect, store, use, create, and distribute or the reports that we publish or are produced by our software products;

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

•the impact of the current COVID-19 pandemic and government actions in response thereto on our business, financial condition, and results of operations;

•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 2021 financial information to the same information for 2020. Year-to-year comparisons of the 2020 financial information to the same information for 2019 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, 2020.

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, PitchBook, and Sustainalytics, 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 most 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. Firms license Morningstar Indexes for both product creation (where we typically receive the greater of a minimum fee or basis points tied to assets under management) and data licensing (where we typically receive annual licensing fees).

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, 2021, 65.7% of the revenue generated by DBRS Morningstar came from one-time, transaction-based fees driven by ratings on newly-issued securities; the remainder can be classified as transaction-related, with 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 subscription services to our customers. Deferred revenue totaled $413.8 million (of which $377.4 million was classified as a current liability with an additional $36.4 million included in other long-term liabilities) at the end of 2021. We expect to recognize this deferred revenue in future periods as we fulfill the service obligations under our license and subscription agreements.

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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.

• 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 as well as professional fees for third-party development activities.

• Sales and marketing. This category includes compensation expense for our sales teams, product managers, and marketing professionals. We also include the cost of advertising, digital marketing 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 amortize capitalized software development costs over their estimated economic life, generally three years. 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 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, 2021, 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 the following 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);

• Operating margin (including operating margin); and

• Free cash flow.

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Organic revenue, adjusted operating income, adjusted operating margin, and adjusted net income per share, 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 define adjusted operating margin as operating margin excluding all M&A-related expenses and amortization. We present these measures because we believe they better reflect 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, 2022.

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 the global markets.

While the business environment in most of the jurisdictions in which we operate continues to move toward a state resembling pre-pandemic conditions, the long-term impact of the COVID-19 pandemic on our ongoing business, results of operations, and overall future financial performance continues to be difficult to reasonably estimate at this time. The threat of new variants of the virus and concerns over the adoption and efficacy of mitigants, such as vaccines and other treatments, continue to affect historical commercial and work patterns, although not with any significant impact on any of our sources of revenue during 2021.

Based on the guidelines of local authorities and our own safety standards, we have re-opened certain offices and will continue to do so. We continue to provide work flexibility for employees with a focus on health and safety while at the same time encouraging or requiring collaborative teams to begin returning to our offices on a regular schedule. Employees have been cleared to resume travel for approved business purposes in jurisdictions permitting such travel. Given the nature of our business, global supply chain disruptions have had little impact on the company, but could impact the availability of certain IT infrastructure over time. While 2021 saw growth in many financial markets, the speed and extent to which governments and central banks withdraw fiscal and monetary stimulus, and other national and global political conditions may undermine or reverse such growth. Certain long-term effects of the efforts of monetary authorities and governments to ameliorate the impacts of the pandemic are potentially starting to become evident, including both price and wage inflation as well as the competition for workers. We have noted these effects in our business related to the mobility of employees between jobs and the wage levels needed to hire or retain employees.

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Accordingly, the situation surrounding the COVID-19 pandemic remains fluid. We continue to actively manage our response and have assessed potential impacts to our financial position and operating results related to our consolidated financial statements during 2021. We remain focused on maintaining a strong balance sheet and liquidity position. At December 31, 2021, our cash, cash equivalents, and investments totaled $546.1 million and we had full availability of our $300.0 million revolving credit facility.

Regulatory Trends Affecting Our Business

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

General

With the continuing impact of the COVID-19 pandemic throughout 2021, businesses relied on remote working arrangements and increased their use of online and digital communications technologies. Demand by investors, regulators and other interested parties for firms to adopt environmental, social, and governance (ESG) related business and operational risk strategies persists. 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 scrutinize the change management processes of regulated entities, like Morningstar, more closely 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.

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 current administration in the United States (U.S.) signaling stricter financial regulatory activity, the end of the transition period for the withdrawal of the United Kingdom (U.K.) from the European Union (EU) and the effect on trans-European financial services providers, the lack of federal legislation in the U.S. 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.

Even in its fragmented state, regulators globally have continued to focus on certain recurring 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. Other themes have emerged globally, with increased attention to corporate ethics, in areas such as human rights and modern slavery, which impact not just financial service providers, like Morningstar, but all companies of a commensurate size.

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.

Credit Ratings

On January 4, 2021, the European Securities and Markets Authority (ESMA) withdrew the registrations of all U.K.-based credit rating agencies, including DBRS Ratings Limited. Accordingly, all ratings of DBRS Ratings Limited require the endorsement of its EU-based credit ratings affiliate, DBRS Ratings GmbH, for regulatory use in the EU. At present, the U.K. credit rating agency regulatory regime and the EU regime largely continue to mirror each other, which minimize any significant change in our overall operations. However, over time, either ESMA or the U.K. Financial Conduct Authority (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.

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Investment Management

In the U.S., on December 22, 2020, the SEC adopted amendments to its investment adviser advertising and cash solicitation fee rules under the Advisers Act. The rule replaces the current advertising rule’s broadly drawn limitations with principles-based provisions designed to accommodate the continual evolution and interplay of technology and advice and includes tailored requirements for certain types of advertisements. The amendments create a single rule that replaces the current advertising and cash solicitation rules. The final rule, which comes into effect on November 4, 2022, is designed to comprehensively and efficiently regulate investment advisers’ marketing communications. Morningstar is reviewing its use of hypothetical performance information in its adviser software products to align with the updated requirements and generally working with its adviser customers to prepare for the new regime. Morningstar Investment Management is also working on changes to its policies and practices to comply with the new rule.

In the U.K. and Europe, Morningstar continues to navigate the equivalence regimes and domestic laws governing matters of access in financial services post-Brexit. Morningstar Investment Consulting France SAS received its authorization as a Markets in Financial Instruments Directive (MiFID) investment firm in early 2021. This initiative enables Morningstar Investment Management to continue provision of related services to EU-based clients, post Brexit.In addition, the Investment Firms Regulation and Directive in the EU and the equivalent Investment Firms Prudential Regime in the U.K. have had an impact on the regulatory requirements for Morningstar Investment Management Europe Limited and Morningstar Investment Consulting France SAS. We have taken steps to ensure these entities remain in compliance with these regulations’ requirements in matters such as capital adequacy, liquid assets, risk management, regulatory reporting and remuneration.

Similarly, in other parts of the world, recent regulations and other guidance in jurisdictions, like Australia and New Zealand, have focused on investment management compliance practices, such as design and distribution obligations, 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.

Workplace 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 had some adverse effects on demand for Morningstar’s ESG-related retirement solutions, DOL has since changed course as we anticipated. DOL announced on March 10, 2021 the agency would not enforce the regulation. On October 14, 2021, DOL proposed a new rule that would encourage plan sponsors to consider ESG information when evaluating investments. We expect the revised rule will be finalized in 2022.

Other recent regulatory developments in the U.S. are likely to have a positive impact on our Workplace Solutions business. DOL finalized a new prohibited transaction exemption that expands the scope of fiduciary investment advice to include rollover recommendations and will start to enforce all its requirements after June 30, 2022. While we do not anticipate any of Morningstar’s businesses will need to avail themselves of the exemption, Morningstar provides tools and other resources designed for financial institutions and investment professionals to provide clients analysis on rollover recommendations, which is now required for some advisors.

ESG

While the EU has generally taken the lead with respect to regulation of ESG products and services, other jurisdiction have also adopted or begun to work in this area. In July 2019, ESMA issued Guidelines on the disclosure of ESG factors in credit rating agency (CRA) press releases. Pursuant to the Guidelines, the CRAs are expected to indicate within EU credit ratings public press releases when ESG factors are a key driver behind a change to a credit rating or rating outlook. The Guidelines began to apply on March 30, 2020. DBRS Morningstar evaluates and incorporates ESG risks in the assessment of its credit ratings globally and provides transparency in its rating action press releases in situations where one or more ESG factor(s) are associated key rating drivers, as applicable.

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The Sustainable Finance Disclosure Regulation came into effect in the EU on March 10, 2021. The regulation requires various investment market participants to implement policies and make certain disclosures with regards to sustainability risks and sustainability factors relevant to their investment activities. Portions of the regulation relating to climate change mitigation and adaptation came into effect in January 2022 with the full regulation expected to become effective in January 2023. We do not expect this disclosure requirement will have a material adverse effect on our business, operating results, or financial position.

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. In July 2021, the European Commission released its EuGBS proposal that, among other things, would set up a system for registering and supervising companies that act as external reviewers for green bonds aligned with the EuGBS Regulation framework. If adopted, the EuGBS Regulation would contain a suite of requirements covering the governance of external reviewers, as well as general principles requiring the external reviewer to employ appropriate systems, resources and procedures and to monitor and evaluate at least annually, the adequacy and effectiveness of its systems and internal control mechanisms and arrangements. Sustainalytics currently offers external reviews of green bonds that we expect may be in scope for the EuGBS Regulation. We understand that ESMA’s current timeline is to require registration of external reviewers in 2022-2023. We are currently undertaking an internal review of appropriate measures and an assessment of the need for additional resources that may be required to comply with such regulation. Furthermore, ESMA has 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. Morningstar is familiar with this regulatory model on account of DBRS Morningstar.

Morningstar is additionally monitoring proposed legislation in the EU relevant to its ESG business activities. In June 2021, the FCA and the International Organization of Securities Commissions (IOSCO) published consultation papers on the proposed regulation of climate-related issuer disclosures and the governance policies, quality assurance and control programs, data collection procedures and methodologies, and fee payment models of ESG rating and data product providers. In November 2021, IOSCO published its related final report that include several recommendations addressed to regulators, ESG ratings and data product providers and users of ESG ratings and data products.

Regulators in other jurisdictions including Canada, China, India, Japan, and the UAE have also adopted or begun to work on frameworks related to ESG-disclosure and registration requirements applicable to ESG rating providers or green bond verifiers. 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. Similarly, there has not yet been systemic consideration of the regulation of sustainable finance in the U.S. Morningstar continues to monitor these developments closely.

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. With our acquisition of Moorgate Benchmarks, Morningstar’s affiliates, Moorgate Benchmarks Limited and Moorgate Benchmarks GmbH, are permissioned to act as an U.K. and EU benchmark administrator, respectively. As such, Morningstar is well positioned for continued cross-border provision of indexes within the combined EU/U.K. markets even after the associated benchmarks regulation transition period ends in 2023. The potential for U.S. authorities to introduce a regulatory regime specific to index providers remains uncertain.

Data Privacy and Cybersecurity

Data privacy regulation continues to proliferate, as numerous national and state jurisdictions are considering new data privacy regulations. The General Data Protection Regulation (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.

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The expansion of international data transfer rules has caused Morningstar and other global companies to reconsider offshoring and compliance practices. In 2021, China, the EU, New Zealand, and the U.K. promulgated rules governing the transfer of personal data across international borders. EU cross-border transfer rules require companies to evaluate their ability to protect personal data transferred outside of the European Economic Area considering importing countries’ laws and surveillance practices. In addition to increased compliance costs, these rules have increased the risk of regulatory enforcement and business disruption associated with processing personal data in certain countries.

In the U.S., the growing number of state privacy laws and the absence of a comprehensive federal privacy law have contributed to a challenging compliance environment. In 2021, Colorado and Virginia enacted comprehensive consumer privacy laws scheduled to become effective in 2023. Several other states have adopted or are considering the adoption of privacy regulations. Additionally, the California Privacy Rights Act, which expands upon the California Consumer Privacy Act, goes into effect on January 1, 2023. State privacy laws typically adopt similar themes as GDPR, limiting companies’ ability to process certain categories of personal data and extending to customers the right to control their data. These laws may provide obligations inconsistent with other state or global privacy regulations and impose additional compliance costs. 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 regarding information security, outsourcing and the use of cloud-based services. In the U.S., the SEC has stated that is focused on cybersecurity issues involving four groups of entities: registered financial sector participants such as broker dealers and registered investment advisers; public companies; service providers that work with financial sector registrants but are not registered themselves; and the SEC itself. The SEC is focused on cybersecurity hygiene and preparedness, cyber incident reporting to the government, and in certain circumstances, disclosure to the public. This focus has the potential to impact not only Morningstar’s regulated businesses, but also those of its customers who may potentially need to implement increasing scrutiny of their service providers and commercial counterparties.

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Supplemental Operating Metrics (Unaudited)

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

Year ended December 31,

Revenue by type

Key product area revenue

Morningstar Advisor Workstation 91.9 87.2 5.4 % 4.8 %

As of December 31,

Select business metrics

Advisor Workstation clients (U.S. and Canada) 232 244 (7) (4.9) %

Morningstar.com Premium Membership subscriptions (U.S.) 115,541 113,320 2.0 %

As of December 31,

Workplace Solutions

Investment Management

Morningstar Managed Portfolios $ 32.4 $ 28.6 13.3 %

Institutional Asset Management 11.8 11.2 (10) 5.4 %

Asset Allocation Services 8.0 6.9 15.9 %

Investment Management (total) $ 52.2 $ 46.7 11.8 %

Asset value linked to Morningstar Indexes ($bil) 147.0 80.6 82.4 %

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 PitchBook, Morningstar Data, Morningstar Direct, Morningstar Advisor Workstation, Sustainalytics, and other similar products.

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

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

(5) For the years ended December 31, 2021 and 2020, DBRS Morningstar recurring revenue derived primarily from surveillance, research, and other transaction-related services was 34.3% and 40.1%, respectively.

(6) Investment Management revenue includes the contribution of the Morningstar Funds Trust, which records revenue as well as sub-advisory fees on a gross basis. For the full year 2021 and 2020, this contribution represented $21.5 million and $17.3 million, respectively.

(7) Revised to reflect updated enterprise client reporting for Advisor Workstation to include clients in Canada.

(8) The asset totals shown below (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) Revised to reclass CIT assets previously reported in Institutional Asset Management to Custom Models/CIT.

Consolidated Results

Key metrics (in millions) 2021 2020 Change

Cash provided by operating activities $ 449.9 $ 384.3 17.1 %

Cash used for investing activities $ (167.7) $ (123.8) 35.5 %

Cash used for financing activities $ (211.8) $ (182.2) 16.2 %

___________________________________________________________________________________________

pp — percentage points

Consolidated Revenue

In 2021, our consolidated revenue rose $309.8 million, or 22.3%. Foreign currency movements increased revenue by $26.7 million in 2021.

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We experienced strong revenue growth across all revenue types during 2021.

License-based revenue, which represents subscription services available to customers, increased 21.1% during 2021 driven by demand for license-based products, such as PitchBook, Sustainalytics, and Morningstar Data. Licensed-based organic revenue grew 15.4%. PitchBook revenue increased 44.3% during 2021, highlighting ongoing expansion of existing client relationships along with growth in new users. The number of PitchBook Platform licenses increased to 73,940 at the end of 2021, compared with 52,288 at the end of 2020. During 2021, significant investments in PitchBook's data, research, and product capabilities enhanced the workflows of PitchBook's core clients, expanded private markets coverage in the European region, and launched new functionality for alternative asset investors. Sustainalytics revenue grew 168.1%, or 44.4% on an organic basis, to $78.9 million on strong demand from both investor and corporate clients. Morningstar Data revenue grew 13.2% as a result of expansion of data use cases, ongoing demand for data to support regulatory needs, and growing demand for fund-level sustainability data as core client segments respond to increasing investor interest in ESG.

Asset-based revenue increased 18.4% during 2021, primarily from Workplace Solutions, Morningstar Indexes, and Investment Management. Workplace Solutions revenue growth of 23.6% was bolstered by higher market performance and higher assets under management in Morningstar Retirement Manager from both new and existing plans. Morningstar Indexes revenue increased 59.3%, driven by higher index data licensing sales and strong asset flows and market growth for investable products linked to Morningstar Indexes. Investment Management revenue grew 6.1% in 2021, as stronger year-over-year inflows and market performance more than offset the negative impact of previously-disclosed client losses. Average assets under management and advisement (calculated based on available average quarterly or monthly data) were approximately $249.4 billion in 2021, compared with $211.6 billion in 2020.

Transaction-based revenue increased 31.2% during 2021, primarily driven by the contribution of DBRS Morningstar. DBRS Morningstar revenue grew 30.8%, primarily from robust commercial and residential mortgage-backed securities (CMBS and RMBS) issuance following muted 2020 volumes. Revenue growth from fundamental ratings accelerated throughout 2021 as DBRS Morningstar continued to successfully expand its presence in the U.S. and European corporate middle markets alongside outsized issuance in Canadian non-bank financials. Annual fees tied to surveillance, research, and other services represented 34.3% 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 Sustainalytics revenue in our organic revenue calculation in the third quarter of 2021. As such, organic revenue for the year-ended December 31, 2021 only includes Sustainalytics revenue for the last six months of 2021.

Excluding revenue from acquisitions and the impact of foreign currency translations, organic revenue increased 17.6% in 2021. PitchBook, DBRS Morningstar, Morningstar Data, Workplace Solutions, and Sustainalytics were the main drivers of the increase in organic revenue during 2021.

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The tables below reconcile consolidated revenue with organic revenue:

Less: acquisitions (37.9) — NMF

Effect of foreign currency translations (26.7) — NMF

____________________________________________________________________________________________

NMF — Not meaningful

Revenue by geographical area

Year ended December 31

International revenue comprised approximately 30% of our consolidated revenue in both 2021 and 2020. Approximately 57% of international revenue is generated from Continental Europe and the U.K.

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Revenue from international operations increased $96.3 million, or 23.0%, in 2021. Over half of the increase in 2021 is due to our acquisition of Sustainalytics, which has a revenue base in Europe, and DBRS Morningstar, which has a significant revenue base in Canada and Europe. Acquisitions and foreign currency translations had a favorable impact of $27.0 million and $26.7 million, respectively, on international revenue in 2021.

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%.

Our revenue renewal rate calculation includes only those products that we consider to be license-based. These are primarily weighted toward PitchBook, Morningstar Data, Morningstar Direct, and Morningstar Advisor Workstation, but also includes other license-based products and services across Morningstar. For these license-based products and services, we estimate that our annual renewal rate was approximately 104% in 2021 versus 99%, with the year-over-year increase largely driven by PitchBook. Sustainalytics' revenue renewal rate is excluded from our calculation because fiscal year 2021 included only six months of organic revenue contribution.

Consolidated Operating Expense

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In 2021, operating expense increased $268.0 million, or 22.8%. Higher compensation expense, sales commissions, professional fees, and advertising and marketing costs were the key contributors to operating expense growth during 2021. Foreign currency translations had an unfavorable impact of $22.6 million on operating expense in 2021.

Compensation expense (which primarily consists of salaries, bonus, and other company-sponsored benefits) increased $177.4 million in 2021. Higher salary and bonus expense, which reflect increased headcount, merit raises, and higher bonus accruals driven by the company's strong financial performance, were the primary drivers of increased compensation expense during 2021.

Sales commissions also grew $23.3 million largely due to strong PitchBook sales performance and additional headcount under sales commission plans throughout the organization. Professional fees increased $18.2 million during 2021 related to ongoing M&A integration products and third-party contractors assisting with software development and technology improvements. Advertising and marketing costs increased $10.6 million in 2021 due to an increase in paid-search advertising and branded partnership campaigns at PitchBook, as well as the return to hybrid and in-person Morningstar conferences.

An increase of $16.1 million in capitalized software development related to accelerated product development efforts for our key product areas also reduced operating expense during 2021.

We had 9,556 employees worldwide at the end of 2021, compared with 7,979 at the end of 2020, which reflects further investments across many areas including data collection and analysis, product and software development, and sales and service to support our growth objectives.

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 $142.0 million, or 25.5%, in 2021. Higher compensation expense of $124.0 million was the largest contributor to the increase, largely reflecting additional salary and bonus expense. Professional fees increased $9.4 million during 2021 related to ongoing M&A integration projects and third-party contractors assisting with software development and technology improvements. Growth in mutual fund operating costs of $4.6 million also contributed to the unfavorable variance in this category, mainly due to fees paid to sub-advisors and other costs related to the Morningstar Funds Trust. These increases were partially mitigated by higher capitalized software expense of $16.1 million.

Continuous focus on the development of our major software platforms for our key product areas, in addition to bringing new products and capabilities to market, resulted in an increase in capitalized software development over the prior year period, which in turn reduced operating expense. In 2021, we capitalized $79.0 million in costs associated with software development activities, mainly related to enhanced capabilities in our products, internal infrastructure, and software compared with $62.9 million in 2020.

Sales and marketing

Sales and marketing expense increased $68.4 million, or 33.1%, in 2021, reflecting a $33.8 million increase in compensation expense. Sales commission expense was higher by $20.6 million largely due to strong PitchBook sales performance and additional headcount under sales commission plans throughout the organization. Advertising and marketing costs increased $10.6 million due to an increase in paid search advertising for PitchBook and Morningstar.com.

General and administrative

General and administrative expense increased $46.4 million, or 17.1%, during 2021. Compensation expense increased $19.6 million. Professional fees increased $8.4 million related to ongoing M&A integration projects and third-party contractors assisting with software development and technology improvements.

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Depreciation and amortization

Depreciation and amortization increased $11.2 million, or 8.0%, in 2021 primarily due to depreciation expense.

Depreciation expense increased $6.9 million in 2021, driven mainly by depreciation expense related to capitalized software development incurred over the past several years.

Consolidated Operating Income and Operating Margin

Consolidated operating income increased $41.8 million in 2021, reflecting an increase in operating expense of $268.0 million, which was more than offset by an increase in revenue of $309.8 million. Operating margin was 15.1% in 2021, a decrease of 0.4 percentage points compared with 2020.

In 2021, we reported adjusted operating income of $363.4 million, which excludes intangible amortization expense and M&A-related expenses (including M&A-related earn-outs). 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 62.0 58.8 5.4 %

Add: M&A-related earn-outs 27.0 27.8 (2.9) %

In 2021, we reported an adjusted operating margin of 21.3%, which excludes intangible amortization expense and M&A-related expenses (including M&A-related earn-outs). Adjusted operating margin is a non-GAAP financial measure; the table below shows a reconciliation to the most directly comparable GAAP financial measure.

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Add: intangible amortization expense 3.6 % 4.2 % (0.6) pp

Add: M&A-related expenses 1.0 % 1.1 % (0.1) pp

Add: M&A-related earn-outs 1.6 % 2.0 % (0.4) pp

Adjusted operating margin 21.3 % 22.8 % (1.5) pp

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

Non-Operating Income (Expense), Net

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

Interest income $ 1.7 $ 1.6

Realized gains on sale of equity method investments 0.9 30.0

Holding gain on previously held equity interest — 50.9

Other expense, net (3.7) (5.7)

Non-operating income (expense), net $ (6.5) $ 67.8

Interest income reflects interest from our investment portfolio. Interest expense primarily relates to the outstanding principal balance under our Credit Agreement and the $350.0 million aggregate principal amount of the 2.32% senior notes due October 26, 2030 (2030 Notes).

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

Other expense, net primarily includes foreign currency losses.

Equity in Net Income of Unconsolidated Entities

Equity in net income of unconsolidated entities $ 5.4 $ 0.3

Equity in net income of unconsolidated entities primarily reflects income and losses from certain of our

unconsolidated entities.

We describe our investments in unconsolidated entities in more detail in Note 9 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 5.4 0.3

Income tax expense $ 62.6 $ 59.7

Effective tax rate 24.5 % 21.1 %

Our effective tax rate in 2021 was 24.5%, an increase of 3.4 percentage points, compared with 21.1% in 2020. The increase was primarily attributable to minimum taxes and non-deductible expenses.

Liquidity and Capital Resources

As of December 31, 2021, we had cash, cash equivalents, and investments of $546.1 million, up $81.9 million from the end of 2020. The increase reflects higher cash provided by operating activities of $449.9 million offset by $101.8 million of capital expenditures, $90.0 million of net repayments of long-term debt, dividends paid of $54.2 million, $34.4 million for the payment of acquisition-related earn-outs included in financing activities, $29.8 million for purchases of equity method investments, and $24.8 million for acquisitions, net of cash acquired in investing activities.

Cash provided by operating activities is our main source of cash. In 2021, cash provided by operating activities was $449.9 million, reflecting $386.3 million of net income, adjusted for non-cash items and $63.6 million in positive changes from our net operating assets and liabilities. Cash provided by operating activities increased $65.6 million, or 17.1%, in 2021, primarily due to higher cash earnings.

On July 2, 2019, we entered into a senior credit agreement (the Credit Agreement). 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 $11.0 million on the term facility and borrowing availability on the revolving credit facility of $300.0 million as of December 31, 2021. See Note 3 of the Notes to our Consolidated Financial Statements for additional information on our Credit Agreement.

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On June 30, 2020, we entered into a senior credit agreement that provides us with a $50.0 million 364-day senior revolving credit facility. The 364-Day Revolving Credit Facility expired on June 29, 2021 and we chose not to renew the facility upon expiration.

On October 26, 2020, we completed the issuance and sale of 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, 2021, our total outstanding debt, net of issuance costs, under the 2030 Notes was $348.4 million. See Note 3 of the Notes to our Consolidated Financial Statements for additional information on our 2030 Notes.

Each of the Credit Agreement and the 2030 Notes include customary representations, warranties, and covenants, including financial covenants, that require us to maintain specified ratios of consolidated earnings before interest, taxes, depreciation, and amortization (EBITDA) to consolidated interest charges and consolidated funded indebtedness to consolidated EBITDA, which are tested on a quarterly basis. We were in compliance with these financial covenants as of December 31, 2021.

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 are focused on maintaining a strong balance sheet and liquidity position. We hold 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.

Approximately 57% of our cash, cash equivalents, and investments as of December 31, 2021 was held by our operations outside the U.S., down slightly from about 60% as of December 31, 2020. 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 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 authorization expires on December 31, 2023. As of December 31, 2021, we repurchased a total of 4,900 shares for $1.3 million under this authorization.

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In 2021, we also paid dividends of $54.2 million. Subsequent dividends will be subject to board approval and we expect to make regular quarterly dividend payments of 36 cents per share in 2022.

We expect to continue making capital expenditures in 2022, 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 continue to 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 2022 to make annual bonus payments of approximately $141.5 million related to the 2021 bonus program compared to $85.9 million in 2020.

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 $ 449.9 $ 384.3 17.1 %

We generated free cash flow of $348.1 million in 2021, an increase of $40.5 million compared with 2020. The change reflects a $65.6 million increase in cash provided by operating activities as well as a $25.1 million increase in capital expenditures. Cash provided by operating activities increased primarily due to higher earnings and the timing of working capital. Capital expenditures increased due to higher capitalized software development. Excluding $16.6 million of M&A-related earn-out payments, operating cash and free cash flow would have grown by 21.4% and 18.6%, respectively.

Acquisitions

We paid a total of $774.5 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 $38.0 million related to additional investments in unconsolidated entities over the past three years. We describe these investments in Note 9 of the Notes to our Consolidated Financial Statements.

Divestitures

We had no divestitures in 2021, 2020, or 2019.

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.

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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 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 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 $413.8 million at the end of 2021 (of which $377.4 million was classified as a current liability with an additional $36.4 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.

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.

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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.

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. The significance of this policy varies form period to period depending upon the volume of applicable acquisition transactions occurring.

Recently Issued Accounting Pronouncements

Refer to Note 17 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, 2021.

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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, 2021, our cash, cash equivalents, and investments balance was $546.1 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, 2021 estimated LIBOR rates, we estimate a 100 basis-point change in the LIBOR rate would have a $0.1 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, 2021:

Foreign denominated percentage of revenue 3.3 % 8.0 % 6.6 % 6.7 % 5.7 %

The table below shows our net investment exposure in foreign currencies as of December 31, 2021:

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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, 2021 and December 31, 2020, 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, 2021, 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, 2021 and December 31, 2020, and the results of its operations and its cash flows for each of the years in the three-year period ended December 31, 2021, 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, 2021, 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 25, 2022 expressed an unqualified opinion on the effectiveness of the Company’s internal control over financial reporting.

Basis for Opinion

These consolidated financial statements are the responsibility of the Company’s management. Our responsibility is to express an opinion on these consolidated financial statements based on our audits. We are a public accounting firm registered with the PCAOB and are required to be independent with respect to the Company in accordance with the U.S. federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB.

We conducted our audits in accordance with the standards of the PCAOB. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the consolidated financial statements are free of material misstatement, whether due to error or fraud. Our audits included performing procedures to assess the risks of material misstatement of the consolidated financial statements, whether due to error or fraud, and performing procedures that respond to those risks. Such procedures included examining, on a test basis, evidence regarding the amounts and disclosures in the consolidated financial statements. Our audits also included evaluating the accounting principles used and significant estimates made by management, as well as evaluating the overall presentation of the consolidated financial statements. We believe that our audits provide a reasonable basis for our opinion.

Critical Audit Matter

The critical audit matter communicated below is a matter arising from the current period audit of the consolidated financial statements that was communicated or required to be communicated to the audit committee and that: (1) relates to accounts or disclosures that are material to the consolidated financial statements and (2) involved our especially challenging, subjective, or complex judgments. The communication of a critical audit matter does not alter in any way our opinion on the consolidated financial statements, taken as a whole, and we are not, by communicating the critical audit matter below, providing a separate opinion on the critical audit matter or on the accounts or disclosures to which it relates.

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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 $1,699.3 million in revenues, of which $1,131.7 million was related to licensed-based products, $264.9 million was related to asset-based products, and $302.7 million was related to transaction-based products, for the year ended December 31, 2021. 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 the procedures performed, including the appropriateness of the nature and extent of audit effort over revenue.

/s/ KPMG LLP

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

Chicago, Illinois

February 25, 2022

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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, 2021, 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, 2021, 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, 2021 and 2020, 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, 2021, and the related notes and financial statement schedule II (collectively, the consolidated financial statements), and our report dated February 25, 2022 expressed an unqualified opinion on those consolidated financial statements.

Basis for Opinion

The Company’s management is responsible for maintaining effective internal control over financial reporting and for its assessment of the effectiveness of internal control over financial reporting, included in the accompanying Management's Report on Internal Control Over Financial Reporting. Our responsibility is to express an opinion on the Company’s internal control over financial reporting based on our audit. We are a public accounting firm registered with the PCAOB and are required to be independent with respect to the Company in accordance with the U.S. federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB.

We conducted our audit in accordance with the standards of the PCAOB. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether effective internal control over financial reporting was maintained in all material respects. Our audit of internal control over financial reporting included obtaining an understanding of internal control over financial reporting, assessing the risk that a material weakness exists, and testing and evaluating the design and operating effectiveness of internal control based on the assessed risk. Our audit also included performing such other procedures as we considered necessary in the circumstances. We believe that our audit provides a reasonable basis for our opinion.

Definition and Limitations of Internal Control Over Financial Reporting

A company’s internal control over financial reporting is a process designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles. A company’s internal control over financial reporting includes those policies and procedures that (1) pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of the assets of the company; (2) provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with generally accepted accounting principles, and that receipts and expenditures of the company are being made only in accordance with authorizations of management and directors of the company; and (3) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use, or disposition of the company’s assets that could have a material effect on the financial statements.

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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 25, 2022

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Morningstar, Inc. and Subsidiaries

Consolidated Statements of Income

Year ended December 31 (in millions except per share amounts) 2021 2020 2019

Operating expense:

Non-operating income (expense):

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

Realized gains on sale of equity method investments 0.9 30.0 19.5

Holding gain on previously held equity interest — 50.9 —

Other expense, net (3.7) (5.7) (3.1)

Non-operating income (expense), net (6.5) 67.8 8.9

Equity in net income (loss) of unconsolidated entities 5.4 0.3 (0.9)

Net income per share:

Dividends per common share:

Dividends declared per common share $ 1.31 $ 1.22 $ 1.14

Dividends paid per common share $ 1.26 $ 1.20 $ 1.12

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 (15.1) 37.3 11.5

Unrealized gains on securities:

Unrealized holding gain on available for sale investments 5.7 2.9 3.8

Reclassification of gains included in net income (3.9) (1.6) (0.9)

Other comprehensive income (loss), net (13.3) 38.6 14.4

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) 2021 2020

Assets

Current assets:

Cash and cash equivalents $ 483.8 $ 422.5

Income tax receivable 8.9 2.2

Other current assets 1.9 5.7

Property, equipment, and capitalized software, net 171.8 155.1

Investments in unconsolidated entities 63.3 32.6

Deferred tax asset, net 12.8 12.6

Liabilities and equity

Current liabilities:

Accounts payable and accrued liabilities 76.5 64.5

Operating lease liabilities 36.4 39.9

Contingent consideration liability 17.3 35.0

Other current liabilities 2.2 11.1

Deferred tax liabilities, net 101.7 108.9

Other long-term liabilities 13.8 33.8

Equity:

Morningstar, Inc. shareholders’ equity:

Accumulated other comprehensive loss:

Currency translation adjustment (40.8) (25.7)

Unrealized gain on available-for-sale investments 5.5 3.7

Total accumulated other comprehensive loss (35.3) (22.0)

See notes to consolidated financial statements.

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Morningstar, Inc. and Subsidiaries

Consolidated Statements of Equity

Morningstar, Inc. Shareholders’ Equity

AccumulatedOtherComprehensiveIncome (Loss)

Common Stock AdditionalPaid-inCapital

Other comprehensive income (loss), net:

Unrealized gain on available-for-sale investments, net of tax — — — — 3.8 3.8

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

Other comprehensive income (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 (loss), net:

Unrealized gain on available-for-sale investments, net of tax — — — — 2.9 2.9

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

Other comprehensive income (loss), 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)

Other comprehensive income (loss), net:

Unrealized gain on available-for-sale investments, net of tax — — — — 5.7 5.7

Foreign currency translation adjustment, net — — — — (15.1) (15.1)

Other comprehensive income (loss), net — — — — (13.3) (13.3)

Stock-based compensation — restricted stock units — — 25.8 — — 25.8

Stock-based compensation — performance share awards — — 10.6 — — 10.6

Stock-based compensation — market stock units — — 5.5 — — 5.5

Common shares repurchased (4,900) — (1.3) — — — (1.3)

Dividends declared ($1.31 per share) — — — (56.2) — (56.2)

See notes to consolidated financial statements.

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Morningstar, Inc. and Subsidiaries

Consolidated Statements of Cash Flows

Operating activities

Deferred income taxes (12.1) (6.7) (6.0)

Stock-based compensation expense 41.9 36.6 44.4

Provision for bad debt 1.9 2.8 2.3

Equity in net (income) loss of unconsolidated entities (5.4) (0.3) 0.9

Gain on sale of equity method investments (0.9) (30.0) (19.5)

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

Acquisition earn-out accrual 17.8 27.8 —

Changes in operating assets and liabilities

Accounts payable and accrued liabilities 7.1 (9.5) 3.2

Accrued compensation and deferred commissions 58.0 18.2 17.1

Income taxes, current (6.1) 8.0 (11.6)

Other assets and liabilities (5.7) 1.9 (6.6)

Investing activities

Purchases of investment securities (71.1) (56.4) (36.2)

Proceeds from maturities and sales of investment securities 58.8 46.9 35.8

Acquisitions, net of cash acquired (24.8) (67.8) (681.9)

Proceeds from sale of equity method investments, net 1.1 35.2 17.6

Purchases of equity- and cost-method investments (29.8) (6.7) (1.5)

Financing activities

Common shares repurchased (1.3) (41.9) (4.9)

Proceeds from revolving credit facility 10.0 60.0 610.0

Repayment of revolving credit facility (10.0) (130.0) (160.0)

Repayment of term facility (90.0) (343.4) (5.6)

Proceeds from stock-option exercises 0.2 1.9 0.2

Employee taxes withheld for restricted stock units (29.0) (25.1) (15.2)

Payment of acquisition-related earn-outs (34.4) — —

Cash provided by (used for) financing activities (211.8) (182.2) 373.7

Effect of exchange rate changes on cash and cash equivalents (9.1) 10.1 3.0

Net increase (decrease) in cash and cash equivalents 61.3 88.4 (35.2)

Cash and cash equivalents—beginning of period 422.5 334.1 369.3

Cash and cash equivalents—end of period $ 483.8 $ 422.5 $ 334.1

Supplemental disclosure of cash flow information:

Cash paid for income taxes $ 80.9 $ 58.2 $ 63.3

Supplemental information of non-cash investing and financing activities:

Unrealized gain (loss) on available-for-sale investments $ 2.1 $ 1.8 $ 3.9

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 and institutional investors in public and private capital markets, financial advisors, asset managers, retirement plan providers and sponsors, and issuers of securities. We have operations in 29 countries.

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 most 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.

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 debt securities in accordance with FASB ASC 320, Investments—Debt Securities (FASB ASC 320). We classify our debt securities 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 investments 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.

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•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 marketable debt securities. 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.

We account for our investments in equity securities in accordance with FASB ASC 321, Investments— Equity Securities (FASB ASC 321). We measure equity investments at fair value with the related realized and unrealized gains and losses recognized in our Consolidated Statements of Income. For equity investments without a readily determinable fair value, we measure these at cost less impairment and adjusting for observable price changes in orderly transactions. We will apply this measurement method to the investment until or if it becomes eligible to be measured at fair value, which is reassessed at each reporting period. We account for non-marketable equity investments through which we exercise significant influence, but do not have control over the investee, under the equity method.

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.

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.

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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. 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 and did not record any impairment losses in 2021, 2020, and 2019.

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 2021, 2020, and 2019.

Property, Equipment, and Depreciation. We state property and equipment at historical cost, net of accumulated depreciation in accordance with FASB ASC 360-10, Property, Plant, and Equipment. 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. Long-lived assets that are held and used are reviewed for impairment whenever events or changes in circumstances indicate that the carrying value may not be recoverable. If the value of future undiscounted cash flows is less than the carrying amount of an asset group, we record an impairment loss based on the excess of the carrying amount over the fair value of the asset group.

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.

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

Capitalized developed software depreciation expense $ 59.9 $ 53.9 $ 61.1

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

Capitalized software development costs $ 74.0 $ 60.3 $ 64.8

Leases. We account for our right-of-use assets and operating lease liabilities in accordance with FASB ASC 842, Leases (FASB ASC 842). We determine if a contract is or contains a lease at the inception of the contract. For identified operating leases, we recognize a lease liability and right-of-use asset on the consolidated balance sheet. The right-of-use asset represents our right to use an underlying asset for the lease term, and the operating lease liability represents the company's obligation to make lease payments.

Our lease agreements consist primarily of real estate leases for office space and non-real estate leases for office equipment. In cases where an agreement contains both a lease and non-lease component, we do not allocate consideration to both components, but account for each as a single lease component by class of underlying asset. There are few instances of short-term agreements in our lease portfolio, which are typically arranged as needed and paid on a month-to-month basis. These leases are not recognized on the Consolidated Balance Sheet, but monthly lease expense is recognized on the Consolidated Statements of Income.

Right-of-use assets and operating lease liabilities are measured using the present value of future lease payments of the lease term at the commencement date. Right-of-use assets also include initial direct costs incurred by the company, net of pre-payments and lease incentives. In the absence of an explicit rate in the lease agreement, the discount rate used to calculate present value is equal to the company's incremental borrowing rate. Operating lease expense is recognized on a straight-line basis over the life of the lease and is included in general and administrative expenses on the Consolidated Statements of Income.

Revenue Recognition. We recognize revenue in accordance with ASC Topic 606, Revenue from Contracts with Customers (ASC Topic 606). The company retained similar recognition and measurement upon adoption of ASC Topic 606 as under accounting standards in effect in periods prior to the adoption.

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

5.Recognize revenue when (or as) performance obligations are satisfied.

Revenues are recognized when (or as) performance obligations are satisfied by transferring a promised product or service to the customer. Products or services are transferred when (or as) the customer obtains control of the product or service. The transaction price for a customer arrangement is the amount we expect to be entitled to in exchange for transferring the promised product or service. The transaction price may include fixed amounts, variable amounts, or both. When the right to payment exceeds revenue recognized the result is an increase to deferred revenue. When a customer’s license-based contract is signed, the customer’s service is activated immediately. License-based arrangements, our largest source of revenue from customers, generally is billed for the entire term, or billed annually (if the contract term is longer than one year). Customers are typically given payment terms of thirty to sixty days, although some customers pay immediately.

Revenue from contracts with customers is derived from license-based arrangements, asset-based arrangements, and transaction-based arrangements.

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License-based revenue, which represents subscription services available to customers and not a license under the accounting guidance, is generated through subscription contracts with our customers of Morningstar Data, Morningstar Direct, Morningstar Advisor Workstation, Morningstar Enterprise Components, PitchBook Data, Sustainalytics, and other similar products. Our performance obligations under these contracts are typically satisfied over time, as the customer has access to the service during the term of the subscription license and the level of service is consistent during the contract period. Each individual day within the contract period is viewed to be a service and the entirety of the service subscription term is determined to be a series combined into a single performance obligation and recognized over-time and on a straight-line basis, typically over terms of 1 to 3 years.

Asset-based revenue is generated through contracts with our customers of Morningstar Investment Management, Workplace Solutions, and Morningstar Indexes. Our performance obligations under these contracts are a daily asset management performance obligation, which is determined to be a daily service and thus satisfied over time as the customer receives continuous access to a service for the contract term. We recognize revenue daily over the contract term based on the value of assets under management and a tiered fee agreed to with the customer. Asset-based arrangements typically have a term of 1 to 3 years. The fees from such arrangements represent variable consideration, and the customer does not make separate purchasing decisions that result in additional performance obligations. Significant changes in the underlying fund assets, or significant disruptions in the market, are evaluated to determine if revisions to estimates of earned asset-based fees for the current quarter are needed. An estimate of the average daily portfolio balance is a key input in determining revenue for a given period. Estimates are based on the most recently reported quarter, and, as a result, it is unlikely a significant reversal of revenue would occur.

Transaction-based revenue is generated through contracts with our customers for DBRS Morningstar products and services, Internet advertising on Morningstar.com, and Morningstar-sponsored conferences. Our performance obligations for DBRS Morningstar include the issuance of the rating and may include surveillance services for a period of time as agreed with the customer. We allocate the transaction price to the deliverables based on their relative selling price, which is generally determined by the price we charge when the same deliverable is sold separately. Our performance obligation for the issuance of the rating is satisfied when the rating is issued, which is when we recognize the related revenue. Our performance obligations for surveillance services are satisfied over time, as the customer has access to the service during the surveillance period and the level of service is consistent during the contract period. Therefore, we recognize revenue for this performance obligation on a straight-line basis.Our performance obligations for Internet advertising and Morningstar-sponsored conferences are satisfied as the service is delivered; therefore, we recognize revenue when the performance obligation is satisfied (as the customer’s advertisements are displayed and at the completion of the Morningstar-sponsored conference).

Our contracts with customers may include multiple performance obligations. For most of these arrangements, we generally allocate revenue to each performance obligation based on its estimated standalone selling price. We generally determine standalone selling prices based on prices charged to customers when the same performance obligation is sold separately.

Our contracts with customers may include third-party involvement in providing goods or services to the customer. The inclusion of third-party content does not result in separate performance obligations because is it not delivered separately from the other service offerings. In these arrangements, the customer has contracted to receive a single, integrated and bundled solution with third-party and Morningstar content delivered via Morningstar’s subscription services. Revenue and related costs of revenue from third-party content is presented on a gross basis within the consolidated financial statements.

Deferred revenue represents the portion of licenses or subscriptions billed or collected in advance of the service being provided which we expect to recognize as revenue in future periods.

Sales Commissions. We capitalize sales commissions, which are considered directly attributable to obtaining a customer contract under ASC Topic 606 and ASC 340-40, Other Assets and Deferred Costs - Contracts with Customers. Such costs are capitalized by developing estimates using a portfolio approach that aggregates these costs by legal entity within their geographical regions. Capitalized sales commissions are amortized using the straight-line method over a period that is consistent with the transfer of the products or services to the customer to which the sales commission relates. The period of transfer for each portfolio is the shorter of the weighted-average customer life, or the economic life of the underlying technology that delivers the products or services. As of December 31, 2021, the period of transfer was determined to be approximately two to three years. Discretionary amounts which are added to sales commission payments are expensed as incurred, as they are not considered to be directly attributable to obtaining a customer contract.

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Stock-Based Compensation Expense. We account for our stock-based compensation expense in accordance with FASB ASC 718, Compensation—Stock Compensation (FASB ASC 718). Our stock-based compensation expense reflects grants of restricted stock units, performance share awards, market stock units, and stock options. We measure the fair value of our restricted stock units, restricted stock, and performance share awards on the grant date based on the closing market price of Morningstar's common stock on the day prior to the grant. For market stock units, we estimate the fair value of the awards using a Monte Carlo valuation model. For stock options, we estimate the fair value of our stock options on the date of grant using the Black-Scholes option-pricing model. We amortize the fair values to stock-based compensation expense, net of estimated forfeitures, ratably over the vesting period.

We estimate expected forfeitures of all employee stock-based awards and recognize compensation cost only for those awards expected to vest. We determine forfeiture rates based on historical experience and adjust the estimated forfeitures to actual forfeiture experience, as needed.

Income Taxes. We record deferred income taxes for the temporary differences between the carrying amount of assets and liabilities for financial statement purposes and tax purposes in accordance with FASB ASC 740, which prescribes the minimum recognition threshold a tax position is required to meet before being recognized in the financial statements. It also provides guidance on derecognition, measurement, classification, interest and penalties, accounting in interim periods, and disclosure for uncertain tax positions.

We recognize interest and penalties related to unrecognized tax benefits as part of income tax expense in our Consolidated Statements of Income. We classify liabilities related to unrecognized tax benefits as either current or long-term liabilities in our Consolidated Balance Sheet, depending on when we expect to make payment.

3. Credit Arrangements

Debt

The following table summarizes our total debt and long-term debt as of December 31, 2021 and 2020.

(in millions) As of December 31, 2021 As of December 31, 2020

Credit Agreement

On July 2, 2019, the company entered into a senior credit agreement (the Credit Agreement). 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 (the Revolving Credit Facility) and a term loan facility of $450.0 million (the Term Facility). The Credit Agreement also provides for the issuance of up to $50.0 million of letters of credit and a $100.0 million sub-limit for a swingline facility under the Revolving Credit Facility. The Credit Agreement will expire on July 2, 2024. As of December 31, 2021, our total outstanding debt under the Credit Agreement was $11.0 million with borrowing availability of $300.0 million under the Revolving Credit Facility.

The interest rate applicable to any loan under the Credit Agreement is, at our option, either: (i) the applicable LIBOR plus an applicable margin for such loans, which ranges between 1.00% and 1.50%, based on our consolidated leverage ratio or (ii) the lender's base rate plus the applicable margin for such loans, which ranges between 0.00% and 0.50%, based on our consolidated leverage ratio.

The proceeds of the Term Facility and initial borrowings under the Revolving Credit Facility were used to finance the acquisition of DBRS. The proceeds of future borrowings under the Revolving Credit Facility may be used for working capital, capital expenditures or any other lawful corporate purpose.

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364-Day Revolving Credit Facility

On June 30, 2020, we entered into a 364-day revolving credit facility (364-Day Revolving Credit Facility) providing for borrowings in an aggregate principal amount of up to $50.0 million. The 364-Day Revolving Credit Facility expired on June 29, 2021 and we chose not to renew the facility upon expiration.

Private Placement Debt Offering

On October 26, 2020, we completed the issuance and sale of $350.0 million aggregate principal amount of 2.32% senior notes due October 26, 2030 (the 2030 Notes), in a private placement exempt from the registration requirements of the Securities Act of 1933, as amended. Proceeds were primarily used to pay off a portion of the company's outstanding debt under the 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, 2021, our total outstanding debt, net of issuance costs, under the 2030 Notes was $348.4 million.

Compliance with Covenants

Each of the Credit Agreement and the 2030 Notes include customary representations, warranties, and covenants, including financial covenants, that require us to maintain specified ratios of consolidated earnings before interest, taxes, depreciation, and amortization (EBITDA) to consolidated interest charges and consolidated funded indebtedness to consolidated EBITDA, which are tested on a quarterly basis. We were in compliance with these financial covenants as of December 31, 2021.

4. Income Per Share

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

Basic net income per share:

Weighted average common shares outstanding 43.0 42.9 42.7

Basic net income per share $ 4.50 $ 5.22 $ 3.56

Diluted net income per share:

Weighted average common shares outstanding 43.0 42.9 42.7

Net effect of dilutive stock options and restricted stock units 0.4 0.3 0.5

Diluted net income per share $ 4.45 $ 5.18 $ 3.52

During the periods presented, the number of anti-dilutive restricted stock units, performance share awards, or market stock units excluded from our calculation of diluted earnings per share was immaterial.

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5. Revenue

Disaggregation of Revenue

The following table presents our revenue disaggregated by revenue type. Sales and usage-based taxes are excluded from revenue.

Year ended December 31

License-based performance obligations are generally satisfied over time as the customer has access to the product or service during the term of the subscription license and the level of service is consistent during the contract period. License-based agreements typically have a term of 1 to 3 years and are accounted for as subscription services available to customers and not as a license under the accounting guidance. License-based revenue is generated from the sale of PitchBook, Morningstar Data, Morningstar Direct, Morningstar Advisor Workstation, Sustainalytics, and other similar products.

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

Transaction-based performance obligations are satisfied when the product or service is completed or delivered. Transaction-based revenue is generated by DBRS Morningstar, Internet advertising, and Morningstar-sponsored conferences. DBRS Morningstar revenue includes revenue from surveillance services, which is recognized over time, as the customer has access to the service during the surveillance period.

Contract liabilities

Our contract liabilities represent deferred revenue. We record contract liabilities when cash payments are received or due in advance of our performance, including amounts which may be refundable. The contract liabilities balance as of December 31, 2021 had a net increase of $73.5 million, primarily driven by cash payments received or payable in advance of satisfying our performance obligations. We recognized $296.2 million of revenue in 2021 that was included in the contract liabilities balance as of December 31, 2020.

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We expect to recognize revenue related to our contract liabilities for 2022 and subsequent years as follows:

(in millions) As of December 31, 2021

The aggregate amount of revenue we expect to recognize for 2022 and subsequent years is higher than our contract liability balance of $413.8 million as of December 31, 2021. The difference represents the value of future obligations for signed contracts where we have not yet begun to satisfy the performance obligations or have partially satisfied the performance obligations.

The table above does not include variable consideration for unsatisfied performance obligations related to certain of our licensed-based, asset-based, and transaction-based contracts as of December 31, 2021. We are applying the optional exemption available under ASC Topic 606, as the variable consideration relates to these unsatisfied performance obligations being fulfilled as a series. The performance obligations related to these contracts are expected to be satisfied over the next 1 to 3 years as services are provided to the client. For license-based contracts, the consideration received for services performed is based on the number of future users, which is not known until the services are performed. The variable consideration for this revenue can be affected by the number of user licenses, which cannot be reasonably estimated. For asset-based contracts, the consideration received for services performed is based on future asset values, which are not known until the services are performed. The variable consideration for this revenue can be affected by changes in the underlying value of fund assets due to client redemptions, additional investments, or movements in the market. For transaction-based contracts for Internet advertising, the consideration received for services performed is based on the number of impressions, which is not known until the impressions are created. The variable consideration for this revenue can be affected by the timing and quantity of impressions in any given period and cannot be reasonably estimated.

As of December 31, 2021, the table above also does not include revenue for unsatisfied performance obligations related to certain of our license-based and transaction-based contracts with durations of one year or less since we are applying the optional exemption under ASC Topic 606. For certain license-based contracts, the remaining performance obligation is expected to be less than one year based on the corresponding subscription terms or the existence of cancellation terms that may be exercised causing the contract term to be less than one year from December 31, 2021. For transaction-based contracts, such as new credit rating issuances and Morningstar-sponsored conferences, the related performance obligations are expected to be satisfied within the next 12 months.

Contract Assets

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

The following table summarizes our contract assets balance:

As of December 31

Accounts receivable, less allowance for credit losses $ 268.9 $ 205.1