Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations
The discussion included in this section, as well as under "Item 1—Business" and other 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 “committed,” “consider,” “estimate,”“forecast,” “future,” “goal,” “is designed to,” “maintain,” “may,” “might,” “objective,” “ongoing,” “could,” “expect,” “intend,” “plan,” “possible,” “potential,” “seek,” “anticipate,” “believe,” “estimate,” “predict,” “potential,” “prospects”, “continue,” “seek,” “strategy,” “strive,” “will,” “would,” or the negative thereof, and similar expressions. These statements involve known and unknown risks and uncertainties that may cause the events we discuss not to occur or to differ significantly from what we expect. For us, these risks and uncertainties include, among others:
•failing to maintain and protect our brand, independence, and reputation;
•failure to prevent and/or mitigate cybersecurity events and the failure to protect confidential information, including personal information about individuals;
•compliance failures, regulatory action, or changes in laws applicable to our credit ratings operations, investment advisory, environmental, social, and governance (ESG), and index businesses;
•failing to innovate our product and service offerings or anticipate our clients’ changing needs;
•the impact of artificial intelligence (AI) and related new technologies on our business, legal, and regulatory exposure profile and reputation;
•failure to detect errors in our products or failure of our products to perform properly due to defects, malfunctions or similar problems;
•failing to recruit, develop, and retain qualified employees;
•prolonged volatility or downturns affecting the financial sector, global financial markets, and the global economy and its effect on our revenue from asset-based fees and credit ratings business;
•failing to scale our operations and increase productivity in order to implement our business plans and strategies;
•liability for any losses that result from errors in our automated advisory tools or errors in the use of the information and data we collect;
•inadequacy of our operational risk management, business continuity programs and insurance coverage in the event of a material disruptive event;
•failing to efficiently integrate and leverage acquisitions and other investments, which may not realize the expected business or financial benefits, to produce the results we anticipate;
•failing to maintain growth across our businesses in today's fragmented geopolitical, regulatory and cultural world;
•liability relating to the information and data we collect, store, use, create, and distribute or the reports that we publish or are produced by our software products;
•the potential adverse effect of our indebtedness on our cash flows and financial and operational flexibility;
•challenges in accounting for tax complexities in the global jurisdictions we operate in could materially affect our tax obligations and tax rates; and
•failing to protect our intellectual property rights or claims of intellectual property infringement against us.
A more complete description of these risks and uncertainties, among others, 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, future events, or otherwise, except as may be required by law. You are, however, advised to review any further disclosures we make on related subjects, and about new or additional risks, uncertainties, and assumptions in our future filings with the Securities and Exchange Commission (SEC) on Forms 10-K, 10-Q, and 8-K.
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This section includes comparisons of certain 2023 financial information to the same information for 2022. Year-to-year comparisons of the 2022 financial information to the same information for 2021 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, 2022, filed with the SEC on February 24, 2023. This section also includes comparisons of 2022 segment financial information to the same information for 2021.
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.
Understanding Our Company
Key Business Characteristics
Our mission is to empower investor success. The investing ecosystem is complex, and navigating it with confidence requires a trusted, independent voice. We deliver our perspective to institutions, advisors, and individuals with a single-minded purpose: to empower investors with the conviction that they can make better-informed decisions and realize success on their own terms.
Our strategy is to deliver insights and experiences that are essential to the investor workflow. Proprietary data sets, meaningful analytics, independent research, and effective investment strategies are at the core of the powerful digital solutions that investors across our client segments rely on. We have a keen focus on innovation across data, research, product, and delivery so that we can effectively cater to the evolving needs and expectations of investors globally.
Segments
Effective as of December 31, 2023, the company concluded that it has seven operating segments which are presented as the following five reportable segments: Morningstar Data and Analytics, PitchBook, Morningstar Wealth, Morningstar Credit, and Morningstar Retirement. The operating segments of Morningstar Sustainalytics and Morningstar Indexes do not individually meet the quantitative segment reporting thresholds and have been combined and presented as part of Corporate and All Other, which is not a reportable segment. Prior period segment information is presented on a comparable basis to the basis on which current period segment information is presented and reviewed by the chief operating decision maker (CODM). For additional information about our segment reporting, refer to Note 6 of the Notes to our Consolidated Financial Statements in Part II of this Report.
Revenue
We offer an extensive line of investment-related 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.
Our segments sell many of our research and data products and services through license agreements on either a per user or enterprise-basis. Morningstar Data and Analytics and PitchBook generate most of our licensed-based revenue. Our license agreements typically range from one to three years and are accounted for as subscription services available to customers and not as a license under the accounting guidance.
Our Morningstar Wealth and Morningstar Retirement segments generate most of our asset-based revenue where basis points and other fees are charged for assets under management or advisement (AUMA). Our asset-based arrangements typically range from one to three years.
Our transaction-based revenue, which is recognized primarily in our Morningstar Credit and Morningstar Wealth segments, is one-time in nature, compared with the recurring revenue streams represented by our license and asset-based products.
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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 $544.0 million (of which $517.7 million was classified as a current liability with an additional $26.3 million included in long-term liabilities) at the end of 2023. We expect to recognize this deferred revenue in future periods as we fulfill the service obligations under our license and subscription agreements.
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 resulting in reduced 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, 2023, we had wholly- or majority-owned subsidiaries in 31 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, 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.
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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 (including adjusted operating income);
• Operating margin (including adjusted operating margin); and
• Free cash flow.
Organic revenue, adjusted operating income, adjusted operating margin, 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 standard changes (accounting changes), 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 mergers and acquisitions (M&A)-related expenses (including M&A-related earn-outs) and amortization, as well as all expenses related to the significant reduction and shift of the company's operations in China. We define adjusted operating margin as operating margin excluding all M&A-related expenses (including M&A-related earn-outs) and amortization, as well as all expenses related to the significant reduction and shift of the company's operations in China. 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 and the shift of the company's operations in China.
We define free cash flow as cash provided by or used for operating activities less capital expenditures. Free cash flow is presented solely as a supplemental disclosure to help investors better understand how much cash is available after making capital expenditures. Our management team uses free cash flow to evaluate the health of 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.
In addition to the measures described above, 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 tracks 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, 2024.
Regulatory Trends Affecting Our Business
In addition to the industry developments described under Part I, Item 1. Business - "Our Strategy" there are several longer-term regulatory trends we consider relevant to our business, as summarized below and as described in more detail in Part I, Item 1. Business - “Government Regulation” and in Part I, Item 1A - “Risk Factors” of this Report.
Even in its fragmented state, regulators globally continue 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.
With respect to our credit ratings business, the European Securities Market Authority or the U.K. Financial Conduct Authority may begin to make inconsistent modifications to the laws and regulations of the credit rating agency regulatory regimes, which would increase the cost and complexity of regulatory compliance for our credit ratings business.
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In the U.K. and Continental Europe, with respect to our Investment Management business, Morningstar continues to navigate the equivalence regimes and domestic laws governing matters of access in financial services post-Brexit. 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.
Interest from investors, regulators and other relevant stakeholders in firms adopting ESG-related business and operational risk strategies persists. Morningstar is impacted by these trends on the corporate level, as a United States (U.S.) public company with international operations, and on a business level, as a provider of ESG data, ratings and other services to help investors and companies identify, understand, and manage ESG-driven risks and opportunities and inform their decisions. These developments are expected to have long term impacts on our delivery of products and services, customer interactions, physical operations, technology systems, and dependencies on third parties.
Morningstar is monitoring proposed legislation in the U.S., European Union (EU), and in other jurisdictions relevant to its ESG business activities. These and other potential regulations may impact not only the scope of our disclosure obligations and the ESG-related products and services we provide to customers, but also present an opportunity to guide and inform investors who are looking to understand the regulations and develop their own workflows to ensure their compliance with new requirements.
The politicization of ESG-related business activities and investments has increased in recent years, particularly in the U.S. This politicization has led to the rise of anti-ESG proponents and actions, including individual and multi-state inquiries into companies’ ESG activities, the submission of anti-ESG shareholder proposals to U.S.-based public companies, and the filing of shareholder derivative lawsuits against U.S. companies. As Morningstar provides data and analysis with respect to ESG-related investments, Morningstar, along with other financial service providers, faces scrutiny in this political environment and expends resources in responding to inquiries. Morningstar continues to closely monitor the ESG and anti-ESG landscape.
Data privacy regulation continues to proliferate, as numerous national and state jurisdictions have adopted or are considering new data privacy regulations.
As a related matter, issues of cybersecurity as they relate to the identification and mitigation of cyber threats 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. In the U.S., the SEC recently adopted disclosure requirements regarding cybersecurity hygiene and preparedness and cyber incident reporting.
Regulators in various global jurisdictions have adopted or are considering regulations governing AI technologies, including the EU’s AI Act. Additionally, regulators have sought to clarify that existing regulations apply to novel use cases involving AI technologies. Combined, this regulatory activity creates a complex and potentially costly compliance environment as Morningstar deploys AI technologies in its products and in tools used in the workplace.
Finally, our company is impacted by government regulation and policies focused on macroeconomic trends such as inflation and unemployment. Central banks’ increases in interest rates to combat inflationary pressures increases our interest expense on our variable rate indebtedness, while the volatile rate environment reduces credit issuance putting negative pressure on our credit rating business. Our compensation expense reflects rising wage scales in many of the markets where we operate as unemployment rates remain low. Overall, our business, balance sheet, technological infrastructure, and teams have shown resilience and flexibility navigating global macroeconomic trends.
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Consolidated Results
Key metrics (in millions) 2023 2022 Change
Operating margin 11.3 % 9.0 % 2.3 pp
Cash provided by operating activities $ 316.4 $ 297.8 6.2 %
Cash used for investing activities $ (81.9) $ (799.3) (89.8) %
Cash provided by (used for) financing activities $ (278.4) $ 415.1 (167.1) %
___________________________________________________________________________________________
pp — percentage points
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Consolidated Revenue
Revenue by type (1)
Change
Morningstar Data and Analytics
Asset-based — — — — % — %
PitchBook
Asset-based — — — — % — %
Transaction-based — — — — % — %
Morningstar Wealth
Morningstar Credit
License-based $ 11.7 $ — $ — NMF — %
Asset-based — — — — % — %
Morningstar Retirement
Corporate and All Other (2)
_________________________________________________________________________
NMF — Not meaningful
(1) Starting with the quarter ended March 31, 2023, the company updated its revenue-type classifications to account for product areas with more than one revenue type. Prior periods have not been restated to reflect the updated classifications. Revenue from Morningstar Sustainalytics' second-party opinions product was reclassified from license-based to transaction-based. Revenue from Morningstar Indexes data and services products was reclassified from asset-based to license-based. Revenue from Morningstar DBRS and Morningstar Credit data products was reclassified from transaction-based to license-based.
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(2) Corporate and All Other provides a reconciliation between revenue from our reportable segments and consolidated revenue. Corporate and All Other includes Morningstar Sustainalytics and Morningstar Indexes as sources of revenues.
2023 versus 2022
In 2023, our consolidated revenue rose $168.0 million, or 9.0%. Foreign currency movements decreased revenue by $3.2 million in 2023.
License-based revenue, which represents subscription services available to customers, increased 14.0%, or 11.8% on an organic basis, during 2023. Reported and organic revenue growth was primarily driven by strong demand for PitchBook and Morningstar Data and Analytics products.
Asset-based revenue increased 3.8%, or 5.6% on an organic basis, during 2023, primarily due to increases in Morningstar Indexes as well as increases in Morningstar Retirement and Morningstar Wealthasset-based revenue, driven by the rebound in global asset values and net inflows across multiple products compared to the prior year.
Transaction-based revenue decreased 10.4%, or 11.5% on an organic basis, during 2023, primarily due to declines in Morningstar Credit revenue.
2022 versus 2021
In 2022, our consolidated revenue rose $171.3 million, or 10.1%. Foreign currency movements decreased revenue by $45.9 million in 2022.
License-based revenue increased 17.7%, or 18.0% on an organic basis, during 2022. Reported and organic revenue growth was primarily driven by strong demand for PitchBook and Morningstar Data and Analytics products.
Asset-based revenue increased 1.7%, or 1.5% on an organic basis, during 2022, driven by increases in Morningstar Indexes which was partially offset by lower asset-based revenue in Morningstar Wealth and Morningstar Retirement reflecting declines in global markets.
Transaction-based revenue decreased 11.0%, or 8.3% on an organic basis, during 2022, primarily due to declines in Morningstar Credit revenue.
Organic revenue
Organic revenue (revenue excluding acquisitions, divestitures, adoption of new accounting standard changes (accounting changes), 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 required 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 and product areas. 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.
Excluding revenue from acquisitions, accounting changes, and the impact of foreign currency translations, organic revenue increased 7.5% in 2023. PitchBook and Morningstar Data and Analytics were the largest drivers of the increase in organic revenue during 2023.
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The tables below reconcile consolidated revenue to organic revenue:
Less: acquisitions (30.9) — NMF
Less: accounting changes — — — %
Effect of foreign currency translations 3.2 — NMF
Revenue by geographical area
International revenue comprised approximately 28% of our consolidated revenue in 2023 and 2022. Approximately 59% of international revenue was generated from Continental Europe and the U.K. in 2023. Revenue from international operations increased $51.3 million, or 9.9%, in 2023 driven by strong demand for Morningstar Data and Analytics products.
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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; any loss of clients due to cancellations; 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 renewal rate percentages greater or lower than 100%.
Our revenue renewal rate calculation includes only those products that we consider to be license-based. These are primarily weighted toward Morningstar Data and Analytics and PitchBook products, but also includes other license-based products and services. For these license-based products and services, we estimate that our annual renewal rate was approximately 103% in 2023 versus 105% in 2022.
Consolidated Operating Expense
% of revenue 9.1 % 8.9 % 0.2 pp
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In 2023, operating expense increased $105.2 million, or 6.2%.
In July 2022, the company began to significantly reduce its operations in Shenzhen, China and to shift the work related to its global business functions to other Morningstar locations. Costs incurred in 2023 related to this transition totaled $15.6 million, due primarily to severance and personnel costs, transformation costs, which consisted of professional fees and the temporary duplication of headcount as the company hired replacement roles in other markets and continued to employ certain Shenzhen-based staff through the transition, and asset impairment costs. This compared to $35.7 million in 2022. During the third quarter of 2023, the company substantially completed these activities.
Excluding the impact of the China operations transition, M&A-related expenses, and intangible amortization, operating expenses increased 8.9% during 2023.
Higher compensation expense (which primarily consists of salaries, bonuses, and other company-sponsored benefits), depreciation expense, SaaS-based software subscriptions, facilities-related expenses, and commissions were the key contributors to operating expense growth in 2023. Foreign currency translations had a favorable impact of $8.3 million on operating expense in 2023.
Compensation expense increased $121.7 million in 2023. These higher costs reflect higher bonus expense and higher salary costs, including the impact of merit increases, in the PitchBook and Morningstar Data and Analytics segments to support growth.
Depreciation expense increased $15.4 million during 2023 as a result of higher capitalized software costs for product enhancements in prior periods. The shift in headcount to regions with higher compensation costs due to the company's China operations transition contributed to higher capitalized software costs. Higher leasehold improvements and additions of computer equipment also drove higher depreciation expense in 2023.
Higher software subscriptions were also a driver during 2023, increasing $10.9 million, due to the company's investment in various SaaS-based platforms across the business.
Facilities-related expense increased $8.7 million during 2023, in connection with lease expansion in certain geographies.
Sales commission expense increased $8.2 million in 2023, due to strong sales performance and higher amortization of capitalized commissions related to prior year sales performance.
On September 29, 2023, DBRS, Inc. (DBRS) entered into two settlements with the SEC requiring DBRS to pay an aggregate of $8.0 million in civil monetary penalties, thus resulting in $8.0 million of expense in 2023. Under the terms of the settlements, DBRS paid a $6.0 million civil monetary penalty to the SEC to resolve the investigation related to record-keeping, and paid a $2.0 million civil monetary penalty to the SEC to resolve the investigation related to commercial mortgage-backed securities (CMBS) ratings methodologies, both in early October 2023.
These increases were partially offset by lower stock-based compensation, professional fees, severance expense, and capitalized labor.
Stock-based compensation decreased $30.5 million in 2023, primarily driven by the PitchBook management bonus plan. The current year of the plan features lower target payouts versus the prior year. In 2022, higher stock-based compensation was driven in large part by the overachievement of targets under the prior year plan.
Professional fees decreased $17.1 million in 2023, reflecting efforts to reduce the use of outside professional services as well as lower expenses for third-party resources supporting M&A activity and the transition of the company's China-based activities. In addition, professional fees in 2022 reflected the impact of higher legal fees primarily associated with a completed independent investigation regarding certain research practices of Morningstar Sustainalytics.
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Severance expense decreased $12.7 million in 2023, compared to the prior year when severance related to the transition and shift of the company's China operations totaled $25.9 million. This decline was partially offset by $9.0 million of severance expense during 2023, respectively, related to targeted reorganizations and headcount reductions in certain parts of the business, including Morningstar Sustainalytics, Morningstar Wealth, and Morningstar DBRS. During 2023, the most significant reductions were at Morningstar Sustainalytics. These reorganizations were in part in response to slower than anticipated progress against growth targets due in part to softening demand for ESG solutions for Morningstar Sustainalytics, the impact of sharp market declines in 2022 for Morningstar Wealth, and weak credit issuance activity, especially in U.S. CMBS, for Morningstar DBRS. In addition, the company incurred $2.4 million in severance expense related to the company's China operations transition during 2023.
An increase of $11.7 million in capitalized software development related to the shift in headcount to regions with higher compensation costs due to the company's China operations transition and accelerated product development efforts for our key product areas reduced operating expense in 2023.
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 75% of our employees in this category.
Cost of revenue increased $64.2 million, or 8.2%, in 2023. Higher compensation expense of $66.1 million was the largest contributor to the increase, primarily due the factors noted above. Cloud computing and production expense also increased $5.6 million and $4.7 million, respectively. These increases were partially offset by lower capitalized software expense of $11.7 million and lower professional fees of $10.7 million, due to the factors described above.
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, which in turn reduced operating expense. In 2023, we capitalized $100.0 million associated with software development activities, internal infrastructure, and software, compared with $88.3 million in 2022. The increase in capitalized software development related to the company's China operations transition resulted in a shift of headcount to higher compensation regions.
Sales and marketing
Sales and marketing expense increased $67.3 million, or 18.9%, in 2023. Higher compensation expense of $54.3 million was the largest contributor, primarily due to the factors noted above. Sales commission expense grew by $7.6 million due in large part to strong sales performance and higher amortization of capitalized commissions related to prior year sales performance, primarily for PitchBook. Advertising and marketing costs increased $5.3 million during 2023 due to higher pay-per-click advertising and marketing campaign expense.
General and administrative
General and administrative expense decreased $44.6 million, or 11.1%, in 2023. A decline in stock-based compensation expense of $32.4 million was the largest contributor to the decline during 2023. The decrease in stock-based compensation expense was primarily driven by the PitchBook management bonus plan. The current year of the plan features lower target payouts versus the prior year. In 2022, higher stock-based compensation was driven in large part by the overachievement of targets under the prior year plan.
Severance expense also declined $18.2 million during 2023 due to the factors noted above. The decline in severance expense was partially offset by an increase of $9.0 million of severance expense related to targeted reorganizations in certain areas of business during 2023 as noted above. Professional fees decreased $6.3 million during 2023.
These decreases were partially offset by an increase in expense related to settlements between the SEC and DBRS, Inc. totaling $8.0 million and higher rent expense of $6.8 million during 2023.
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Depreciation and amortization
In 2023, depreciation and amortization increased $18.3 million, or 11.0%, primarily due to depreciation expense.
Depreciation expense increased $15.4 million in 2023, driven mainly by depreciation expense from higher levels of capitalized software development over the past several years. Higher leasehold improvements and additions of computer equipment also drove higher depreciation expense in 2023.
Intangible amortization expense increased $3.8 million in 2023, primarily from additional amortization related to intangibles from the acquisitions of Leveraged Commentary & Data (LCD) and Praemium Portfolio Services Limited (Praemium).
Consolidated Operating Income and Operating Margin
Operating margin 11.3 % 9.0 % 2.3 pp
Consolidated operating income increased $62.8 million in 2023, or a 37.4% increase from 2022, reflecting an increase in revenue of $168.0 million, which was partially offset by an increase in operating expense of $105.2 million. Operating margin was 11.3% in 2023, an increase of 2.3 percentage points compared with 2022. Severance costs of $9.0 million related to certain reorganizations excluding our China activities negatively impacted operating margin and adjusted operating marginby 0.4 percentage points during 2023. In addition, the DBRS SEC settlements negatively impacted operating margin and adjusted operating margin by an additional 0.4 percentage points.
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Non-GAAP Financial Measures
We reported adjusted operating income of $326.5 million in 2023 compared with $298.9 million in 2022, which excludes intangible amortization expense, M&A-related expenses (including M&A-related earn-outs), and expenses related to the significant reduction and shift of the company's operations in China. Adjusted operating income is a non-GAAP financial measure; the table below shows a reconciliation to the most directly comparable GAAP financial measure.
Add: intangible amortization expense (1) 70.5 66.7 5.7 %
Add: M&A-related expenses (2) 9.8 17.1 (42.7) %
Add: M&A-related earn-outs (3) — 11.6 NMF
Add: Severance and personnel expenses (4) 5.5 27.5 (80.0) %
Add: Transformation costs (4) 7.0 8.2 (14.6) %
Add: Asset impairment costs (4) 3.1 — NMF
Morningstar Data and Analytics $ 339.8 $ 313.3 8.5 %
We reported adjusted operating margin of 16.0% in 2023 and 2022, which excludes intangible amortization expense, M&A-related expenses (including M&A-related earn-outs), and expenses related to the significant reduction and shift of the company's operations in China. Adjusted operating margin is a non-GAAP financial measure; the table below shows a reconciliation to the most directly comparable GAAP financial measure.
Operating margin 11.3 % 9.0 % 2.3 pp
Add: intangible amortization expense (1) 3.5 % 3.6 % (0.1) pp
Add: M&A-related expenses(2) 0.4 % 0.9 % (0.5) pp
Add: M&A-related earn-outs (3) — % 0.6 % (0.6) pp
Add: Severance and personnel expenses (4) 0.3 % 1.5 % (1.2) pp
Add: Transformation costs (4) 0.3 % 0.4 % (0.1)pp
Add: Asset impairment costs (4) 0.2 % — % 0.2 pp
Adjusted operating margin 16.0 % 16.0 % 0.0 pp
______________________________________________________________________________________________________
(1) Excludes finance lease amortization expense of $1.2 million in 2023 and $2.1 million in 2022.
(2) Reflects non-recurring expenses related to M&A activity including pre-deal due diligence, transaction costs, and post-close integration costs.
(3) Reflects the impact of M&A-related earn-outs included in operating expense.
(4) Reflects costs associated with the significant reduction of the company's operations in Shenzhen, China and the shift of work related to its global business functions to other Morningstar locations.
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Severance and personnel expenses include severance charges, incentive payments related to early signing of severance agreements, transition bonuses, and stock-based compensation related to the accelerated vesting of restricted stock unit (RSU) and market stock unit (MSU) awards. In addition, the reversal of accrued sabbatical liabilities is included in this category.
Transformation costs include professional fees and the temporary duplication of headcount. As the company hired replacement roles in other markets and shifted capabilities, it employed certain Shenzhen-based staff through the transition period, which resulted in elevated compensation costs on a temporary basis.
Asset impairment costs include the write-off or accelerated depreciation of fixed assets in the Shenzhen, China office that were not redeployed, in addition to lease abandonment costs as the company downsized its office space prior to the lease termination date.
(5) Corporate and All Other includes unallocated corporate expenses of $153.5 million in 2023 and $135.8 million in 2022, as well as adjusted operating income/loss from Morningstar Sustainalytics and Morningstar Indexes. Unallocated corporate expenses include finance, human resources, legal, and other management-related costs that are not considered when segment performance is evaluated.
Segment Results
Segment adjusted operating income reflects the impact of direct segment expenses as well as certain allocated centralized costs, such as information technology, sales and marketing, and research and data.
Morningstar Data and Analytics
The following table presents the results for Morningstar Data and Analytics:
Change
Morningstar Data and Analytics depreciation expense was $31.0 million, $23.4 million, and $29.5 million for 2023, 2022, and 2021, respectively.
2023 versus 2022
Morningstar Data and Analytics total revenue increased $50.6 million, or 7.3%, in 2023. Revenue grew 7.4% on an organic basis, driven primarily by increases in Morningstar Data and Morningstar Direct.
Morningstar Data contributed $26.2 million to Morningstar Data and Analytics revenue growth, with revenue increasing 10.3% on a reported and organic basis, supported by growth across all major geographies. At the product level, managed investment data, including fund data, continued to be a key driver of higher revenue, followed by growth in Morningstar Essentials and equity data. In 2023, Morningstar Data's coverage continued to evolve to meet client needs, with the addition of structured products and notes data and the continued expansion of coverage on other vehicle types.
Morningstar Direct contributed $17.1 million to Morningstar Data and Analytics revenue growth, with revenue increasing 9.3%, or 9.2%, on an organic basis, reflecting growth across all major geographies. Morningstar Direct licenses increased 0.8%. In 2023, Morningstar Direct introduced Direct Lens, which unifies the platform's portfolio capabilities in a clear and intuitive interface; self-service data feeds; and the Morningstar Data Python package, which gives data scientists, data strategists, and quantitative analysts seamless access to data in their favorite coding environments.
Morningstar Data and Analytics adjusted operating income increased $26.5 million, or 8.5%, and adjusted operating margin increased 0.5 percentage points in 2023, as revenue growth outpaced expense growth. Expense growth was primarily driven by higher compensation costs.
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2022 versus 2021
Morningstar Data and Analytics total revenue increased $29.1 million, or 4.4%, in 2022. Revenue grew 8.0% on an organic basis, driven primarily by demand for Morningstar Data and Morningstar Direct.
Morningstar Data contributed $11.5 million to Morningstar Data and Analytics revenue growth, with revenue increasing 4.7% or 9.4%, on an organic basis, driven by growth across geographies and strong demand for fund data. In 2022, Morningstar Data expanded the reach of its data sets to better cover the client portfolio with enhancements to fixed-income data and analytics and expanded coverage of 529 plan portfolios, public equities, collective investment trusts, and model portfolios. We also introduced new regulatory data solutions in response to global investor protection, capital adequacy, and sustainability regulations.
Morningstar Direct contributed $11.6 million to Morningstar Data and Analytics revenue growth, with revenue increasing 6.7%, or 10.7%, on an organic basis, driven by growth across geographies. Morningstar Direct licenses increased 5.7%, reflecting gains from both new and existing clients.In 2022, Morningstar Direct enriched and expanded Analytics Lab, which combines access to Morningstar's data and research with Jupyter Notebook, an open-source data-science tool, to allow clients to explore and analyze Morningstar data more efficiently in a flexible environment. Performance was also positively impacted by the release of the Sustainability and Portfolio Hubs, which act as a central repository of research and tools for related workflows, and broadened data coverage in fixed-income, exchange-traded funds (ETFs), ESG, model portfolios, and alternatives to better cover investor portfolios.
Morningstar Data and Analytics adjusted operating income increased $19.8 million, or 6.7%, and adjusted operating margin increased 1.0 percentage points in 2022, as revenue growth outpaced expense growth. Expense growth was primarily driven by higher compensation costs, as well as increased professional fees.
PitchBook
The following table presents the results for PitchBook:
Change
PitchBook depreciation expense was $26.8 million, $23.8 million, and $20.4 million for 2023, 2022, and 2021, respectively.
2023 versus 2022
PitchBook total revenue increased $101.2 million, or 22.5%, in 2023, which included positive contributions from the acquisition of LCD which closed June 1, 2022. Revenue grew 17.6% on an organic basis.
The PitchBook product area, which includes the PitchBook Platform as well as direct data, contributed $85.7 million to PitchBook revenue growth, with revenue increasing 21.0% on a reported and organic basis, as licenses grew 14.0%. Growth was primarily driven by strength in its core investor and advisor clients, which offset some continued softness with its company (corporate) market segment. During 2023, PitchBook substantially completed the integration of LCD core data offering and news onto the PitchBook Platform. At the same time, PitchBook introduced new capabilities to inform investor strategies, including the VC Exit Predictor, a proprietary tool and scoring methodology to predict exit outcomes for VC-backed companies, and the Manager Scoring tool, a new methodology that helps limited partners discover and evaluate top-performing private fund managers. Results exclude stand-alone LCD revenues.
PitchBook adjusted operating income increased $76.6 million, or 107.1%, and adjusted operating margin increased 10.9 percentage points in 2023, as revenue growth outpaced expense growth. Expense growth was primarily driven by higher compensation costs partially offset by a decrease in stock-based compensation expense in 2023 compared to 2022 when higher stock-based compensation costs reflected the overachievement of targets under the PitchBook management bonus plan.
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2022 versus 2021
PitchBook total revenue increased $149.1 million, or 49.4%, in 2022, which included positive contributions from the acquisition of LCD which closed June 1, 2022. Revenue grew 39.1% on an organic basis.
The PitchBook product area contributed $117.5 million to PitchBook revenue growth, with revenue increasing 40.5% on a reported and organic basis, as PitchBook continued to enhance core data sets and improve the user experience. Reported and organic results for the product area exclude contributions from the LCD acquisition. Licenses grew 28.0%. In 2022, PitchBook added new companies and funds to coverage in the Europe, Middle East, and Africa (EMEA) and Asia-Pacific regions, while enhancing alternative data sets including real assets and hedge funds. Notable product releases included Portfolio Forecasting, a tool that allows Limited Partners to efficiently manage cash flow, pace commitments, and hit allocation targets directly within the PitchBook Platform.
PitchBook adjusted operating income increased $16.1 million, or 29.1%, and adjusted operating margin decreased 2.5 percentage points in 2022, as expense growth outpaced revenue growth. Expense growth was primarily driven by higher compensation costs and increases in stock-based compensation expense due to the overachievement of targets under the PitchBook management bonus plan. Higher compensation costs reflected increased investment in the business, which also drove higher professional fees, and costs for the LCD business beginning on June 1, 2022.
Morningstar Wealth
The following table presents the results for Morningstar Wealth:
Change
Adjusted operating income (loss) $ (40.4) $ (14.3) $ 19.4 182.5 % NMF
Adjusted operating margin (17.6) % (6.2) % 8.1 % (11.4) pp (14.3) pp
Morningstar Wealth asset-based revenue represented 53.3% of total segment revenue in 2023. Revenue is based on quarter-end, prior quarter-end, or average asset levels during each quarter, which are often reported on a one-quarter lag for certain Investment Management products including Morningstar Managed Portfolios. The timing of this client asset reporting and the structure of our contracts often results in a lag between market movements and the impact on revenue. The following table summarizes our approximate Morningstar WealthAUMA:
Change
Morningstar Wealthdepreciation expense was $15.8 million, $18.1 million, and $13.3 million for 2023, 2022, and 2021, respectively.
2023 versus 2022
Morningstar Wealth total revenue increased $1.0 million, or 0.4%, in 2023. Revenue decreased 1.6% on an organic basis, primarily reflecting lower ad sales revenue on Morningstar.com.
Investment Management contributed $5.0 million to Morningstar Wealth revenue growth, with revenue increasing 4.3%. Organic revenue, which excluded Praemium for the first six months of 2023, decreased 0.1%, reflecting market headwinds in the first half of the year. Reported AUMA, calculated using the most recently available average quarterly or monthly data, increased 9.0% to $55.5 billion compared with the prior year, supported by stronger market performance which drove higher asset values. Positive net flows to Managed Portfolios over the trailing 12 months, reflecting strong net inflows outside the U.S. and relatively flat net flows in the U.S., offset lower AUMA in Institutional Asset Management which experienced significant outflows from a large institutional client.
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Morningstar Wealth adjusted operating loss increased $26.1 million, or 182.5%, and adjusted operating margin decreased 11.4 percentage points in 2023, as expense growth outpaced relatively flat revenue growth. Expense growth was primarily driven by higher compensation costs from headcount largely added during 2022 and reflects significant investments to build out the U.S. and international wealth platforms. Those investments supported the continued enhancement of the wealth platforms and products as well as the expansion of teams supporting go-to-market activities. Expenses also included $1.8 million in severance related to targeted reorganizations in Morningstar Wealth, which had a negative 0.8 percentage point impact on adjusted operating margin in 2023.
2022 versus 2021
Morningstar Wealth total revenue decreased $9.5 million, or 4.0%, in 2022. Revenue declined 1.9% on an organic basis, reflecting market-driven declines in Investment Management revenue.
Investment Management revenue was $7.9 million lower, and decreased 6.3%, or 4.3%, on an organic basis. Reported AUMA fell 2.5% to $50.9 billion compared with the prior year, reflecting the declines in global markets and softer net flows. Excluding $4.4 billion of assets related to the acquisition of Praemium's U.K. and international offerings in the second quarter of 2022, assets would have declined 10.9% compared with the prior year. In 2022, the company successfully closed the Praemium acquisition, which expanded its wealth management capabilities outside the U.S. During 2022, Investment Management also continued to enhance the advisor and client experience on its turnkey asset management platform and introduced direct indexing, which allows advisors to personalize index portfolios to address individual preferences and tax management needs, as part of an ongoing strategy to build a comprehensive wealth platform leveraging capabilities across Morningstar.
Morningstar Wealth adjusted operating loss increased $33.7 million, and adjusted operating margin decreased 14.3 percentage points in 2022, due to the decline in revenue described above, higher expenses, and the financial results of Praemium which the company began consolidating as of June 30, 2022. Expense growth was primarily driven by higher compensation costs due to higher headcount, as described above, as well as higher professional fees supporting the integration of third-party technology to support the investments in the U.S. wealth platform.
Morningstar Credit
The following table presents the results for Morningstar Credit:
Change
Morningstar Credit depreciation expense was $9.1 million, $8.9 million, and $9.6 million for 2023, 2022, and 2021, respectively.
2023 versus 2022
Morningstar Credit total revenue decreased $21.5 million, or 9.1%, in 2023. Revenue declined 8.5% on an organic basis, primarily due to sharp declines in CMBS ratings revenue driven by ongoing softness in U.S. CMBS ratings activity, and, to a lesser extent, declines in residential mortgage-backed securities (RMBS) related revenue. These declines were partially offset by an increase in asset-backed securities ratings revenues and modest gains in corporate ratings revenues. Revenue related to data products increased.
Morningstar Credit adjusted operating income decreased $37.4 million, or 63.3%, and adjusted operating margin decreased 14.8 percentage points in 2023, due to the decline in revenue described above and higher expenses. Expenses included $8.0 million related to the DBRS SEC settlements and $1.7 million in severance related to targeted reorganizations, which collectively had a negative 4.5 percentage point impact on adjusted operating margin in 2023. The remaining expense growth was primarily driven by higher compensation costs.
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2022 versus 2021
Morningstar Credit total revenue decreased $34.3 million, or 12.6%, in 2022. Revenue declined 10.0% on an organic basis, reflecting a sharp decrease in credit issuance in the second half of the year, including significant declines in CMBS and RMBS issuance. In 2022, areas of investment included added capabilities to support U.S. and European corporates, asset-based securities, and data products. Despite the challenging ratings environment, revenue grew for data products and U.S. corporates. Specifically for U.S. corporates, growth was driven by the addition of coverage and ratings for new middle-market credits.
Morningstar Credit adjusted operating income decreased $15.4 million, or 20.7%, and adjusted operating margin decreased 2.6% percentage points in 2022, due to the decline in revenue described above. Morningstar Credit expenses decreased driven in part by lower compensation costs and professional fees.
Morningstar Retirement
The following table presents the results for Morningstar Retirement:
Change
Morningstar Retirement asset-based revenue represented 98.2% of total segment revenue in 2023 and is based on quarter-end, prior quarter-end, or average asset levels during each quarter, which are often reported on a one-quarter lag. The timing of this client asset reporting and the structure of our contracts often results in a lag between market movements and the impact on revenue. The following table summarizes our approximate Morningstar RetirementAUMA:
Change
Morningstar Retirement depreciation expense was $11.0 million, $7.9 million, and $9.6 million for 2023, 2022, and 2021, respectively.
2023 versus 2022
Morningstar Retirement total revenue increased $6.5 million, or 6.3% on both a reported and organic basis, in 2023. AUMA, calculated using the most recently available average quarterly or monthly data, increased 18.4% to $230.4 billion compared with the prior year, supported by strong market performance. Net inflows to Managed Accounts over the trailing 12 months also contributed to higher AUMA, supported by participant growth, including the impact of the addition of large employer plans during 2023.
Morningstar Retirement adjusted operating income increased $2.7 million, or 5.3%, and adjusted operating margin decreased 0.4 percentage points in 2023, as expense growth outpaced revenue growth. Expense growth was primarily driven by increases in compensation costs, which were partially offset by lower professional fees.
2022 versus 2021
Morningstar Retirement total revenue decreased $0.6, or 0.6% on both a reported and organic basis, in 2022. AUMA decreased 8.6% to $194.6 billion compared with the prior year, reflecting declines in global markets. In 2022, despite market losses, net flows were positive, with particularly strong inflows to managed accounts, supported by growth in the number of participants and the onboarding of one of the nation’s largest defined contribution plans.
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Morningstar Retirement adjusted operating income decreased $4.0 million, or 7.2%, and adjusted operating margin decreased 3.6 percentage points in 2022, due to the decline in revenue described above and higher expenses. Expense growth was primarily driven by increases in compensation costs, which were partially offset by lower professional fees.
Corporate and All Other
2023 versus 2022
Morningstar Indexes contributed $15.3 million to Corporate and All Other revenue growth with revenue increasing 30.5%, or 24.7%, on an organic basis. Organic revenue excludes LCD index-related revenue for the first five months of the year. The increase in revenue was driven in part by higher investable product revenue, supported by market gains and net inflows. Licensed-data revenue also increased.
Morningstar Sustainalytics contributed $14.9 million to Corporate and All Other revenue growth with revenue increasing 14.4%, or 13.9%, on an organic basis. While still strong, revenue growth slowed across regions compared to the prior year reflecting softer demand for ESG solutions. Demand for regulatory and compliance solutions supported strong growth in EMEA.
Corporate and All Other increased $14.7 million in 2023 primarily due to compensation costs and professional fees in corporate areas.
2022 versus 2021
Morningstar Sustainalytics contributed $24.3 million to Corporate and All Other revenue growth with revenue increasing 30.8%, or 41.1%, on an organic basis. The increase in revenue was driven by strength in its licensing business, including demand for compliance and reporting-related solutions related to the EU Action Plan, as asset managers continued to look to Morningstar Sustainalytics to help them meet the various EU regulatory requirements.
Morningstar Indexes contributed $13.2 million to Corporate and All Other revenue growth with revenue increasing 35.7%, or 26.4%, on an organic basis. The growth in revenue was due primarily to strength in investable and licensed data products. Organic revenue excludes LCD index-related revenue.
Corporate and All Other increased $47.3 million in 2022. The increase was primarily due to the financial results of Morningstar Sustainalytics and Morningstar Indexes, as well as higher compensation costs and increases in stock-based compensation in corporate areas.
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Non-operating expense, net, Equity in investments of unconsolidated entities, and Effective tax rate and Income tax expense
Non-operating expense, net
The following table presents the components of non-operating expense, net:
Interest income $ 9.0 $ 1.7
Expense from equity method transaction, net (11.8) —
Other income (expense), net 11.5 (6.7)
Non-operating expense, net $ (49.1) $ (37.2)
Interest income reflects interest from our investment portfolio. Interest expense mainly relates to the outstanding principal balance under our Amended 2022 Credit Agreement and the $350.0 million aggregate principal amount of our 2030 Notes.
Expense from equity method transaction, net for 2023 primarily reflects the impact of the Termination Agreement (the Termination Agreement) with Morningstar Japan K.K. (now known as SBI Global Asset Management Co., Ltd. (Wealth Advisors)) and the Tender Offer Agreement (the Tender Offer Agreement) with SBI Global Asset Management Co., Ltd. (now known as SBI Asset Management Group Co., Ltd. (SBI)). Refer to Note 9 of the Notes to our Consolidated Financial Statements for additional information on the Termination Agreement and the Tender Offer Agreement.
Other income (expense), net includes foreign currency exchange gains (losses) and unrealized gains (losses) on investments.
Equity in investments of unconsolidated entities
Equity in investments of unconsolidated entities $ (7.4) $ (3.6)
Equity in investments of unconsolidated entitiesprimarily reflects 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.
Effective tax rate and income tax expense
The following table summarizes the components of our effective tax rate:
Equity in investments of unconsolidated entities (7.4) (3.6)
Income before income taxes $ 174.1 $ 127.0
Income tax expense $ 33.0 $ 56.5
Effective tax rate 19.0 % 44.5 %
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Our effective tax rate in 2023 was 19.0%, a decrease of 25.5 percentage points, compared with 44.5% in the prior year. This decrease is primarily attributable to the recognition of $13.7 million of tax benefits related to a retroactive tax election with respect to our 2021 and 2022 tax periods. We received confirmation of the approval of the tax election in the second quarter of 2023, which allowed us to recognize the tax benefits in that period.
Liquidity and Capital Resources
As of December 31, 2023, we had cash, cash equivalents, and investments of $389.0 million, down $25.6 million from the prior year.
Cash provided by operating activities is our main source of cash. In 2023, cash provided by operating activities was $316.4 million, reflecting $288.3 million of net income, adjusted for non-cash items, and an additional $28.1 million in positive changes from our net operating assets and liabilities. Cash provided by operating activities increased $18.6 million, or 6.2%, in 2023. Operating cash flow was impacted by higher cash earnings and lower bonus payments in the first quarter of 2023 relative to the prior-year period. We made annual bonus payments of $98.3 million during the first quarter of 2023 compared with $139.9 million in the first quarter of 2022. This was offset by payments related to the Termination Agreement, higher interest payments, and severance and other costs related to the significant reduction and shift of the company's operations in China.
Cash used for financing activities was $278.4 million in 2023. In 2022, cash provided by financing activities was $415.1 million. Financing cash flows were impacted by lower proceeds from our financing arrangements which was offset by lower share repurchases. On February 6, 2023, the company made its final $50.0 million contingent payment related to the acquisition of LCD, of which $4.5 million is reflected in operating cash flows and $45.5 million is reflected in financing cash flows.
We believe our available cash balances and investments, along with cash generated from operations and our credit facility, 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 76% of our cash, cash equivalents, and investments as of December 31, 2023 were held by our operations outside the U.S., up from 64% as of December 31, 2022. We generally consider our U.S. directly-owned foreign subsidiary earnings to be permanently reinvested.
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We intend to use our cash, cash equivalents, and investments for general corporate purposes, including working capital and funding future growth.
Amended 2022 Credit Agreement
On July 2, 2019, we entered into a senior credit agreement (the 2019 Credit Agreement). The 2019 Credit Agreement provided 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 2019 Revolving Credit Facility) and a term loan facility of $450.0 million. On May 6, 2022, the company terminated the 2019 Credit Agreement.
On May 6, 2022, the company entered into a new senior credit agreement (the 2022 Credit Agreement). The 2022 Credit Agreement provided the company with a five-year multi-currency credit facility with an initial borrowing capacity of up to $1.1 billion, including a $650.0 million term loan (the 2022 Term Facility) with an initial draw of $600.0 million and an option for a second draw of up to $50.0 million and a $450.0 million revolving credit facility (the 2022 Revolving Credit Facility). The 2022 Credit Agreement also provided 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 2022 Revolving Credit Facility.
The proceeds of the first draw under the 2022 Term Facility and initial borrowings under the 2022 Revolving Credit Facility were used to finance the acquisition of LCD and to repay a portion of the borrowings under the 2019 Revolving Credit Facility.
The 2022 Credit Agreement was amended (the Amended 2022 Credit Agreement) on September 13, 2022 (the First Amendment to the 2022 Credit Agreement) and on September 30, 2022 (the Second Amendment to the 2022 Credit Agreement). The First Amendment to the 2022 Credit Agreement terminated the unfunded term commitment related to the optional second draw of up to $50.0 million in the 2022 Term Facility and increased the 2022 Revolving Credit Facility to $600.0 million. The Second Amendment to the 2022 Credit Agreement increased the 2022 Term Facility to a fully funded $650.0 million facility (the Amended 2022 Term Facility) and increased the 2022 Revolving Credit Facility to $650.0 million (the Amended 2022 Revolving Credit Facility) for total borrowing capacity of $1.3 billion. As of December 31, 2023, our total outstanding debt under the Amended 2022 Credit Agreement was $623.9 million, net of debt issuance costs, with borrowing availability of $635.0 million under the 2022 Revolving Credit Facility. Except for incremental borrowing capacity, there were no material changes to the existing terms and conditions of the 2022 Credit Agreement.
The proceeds of the additional draw under the Amended 2022 Term Facility were used to repay borrowings under the 2022 Revolving Credit Facility. The proceeds of future borrowings under the Amended 2022 Revolving Credit Facility may be used for working capital, capital expenditures, or other general corporate purposes. See Note 3 of the Notes to our Consolidated Financial Statements for additional information on our Amended 2022 Credit Agreement.
Private Placement Debt Offering
On October 26, 2020, we completed the issuance and sale of $350.0 million aggregate principal amount of 2.32% senior notes due October 26, 2030 (the 2030 Notes), in a private placement exempt from the registration requirements of the Securities Act of 1933, as amended. Proceeds were primarily used to pay off a portion of the company's outstanding debt under the 2019 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. As of December 31, 2023, our total outstanding debt, net of issuance costs, under the 2030 Notes was $348.5 million. See Note 3 of the Notes to our Consolidated Financial Statements for additional information on our 2030 Notes.
Compliance with Covenants
Each of the Amended 2022 Credit Agreement and the 2030 Notes include customary representations, warranties, and covenants, including financial covenants, that require us to maintain specified ratios of consolidated earnings before interest, taxes, depreciation, and amortization (EBITDA) to consolidated interest charges and consolidated funded indebtedness to consolidated EBITDA, which are tested on a quarterly basis. We were in compliance with these financial covenants as of December 31, 2023, with consolidated funded indebtedness to consolidated EBITDA calculated at approximately 1.7x.
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Share repurchases
On December 6, 2022, the board of directors approved a share repurchase program that authorizes the company to repurchase up to $500.0 million in shares of the company's outstanding common stock, effective January 1, 2023. This authorization replaced the then-existing share repurchase program and expires on December 31, 2025. Under this authorization, we may repurchase shares from time to time at prevailing market prices on the open market or in private transactions in amounts that we deem appropriate. As of December 31, 2023, we repurchased a total of 8,484 shares for $1.4 million under this authorization and have $498.6 million available for future repurchases.
Dividends
In 2023, we also paid dividends of $63.9 million. While subsequent dividends will be subject to board approval, we expect to make regular quarterly dividend payments of 40.5 cents per share in 2024.
Wealth Advisors
On January 27, 2023, we entered into the Termination Agreement and the Tender Offer Agreement. Pursuant to the Termination Agreement, Wealth Advisors agreed to cease use of the Morningstar brand and Morningstar, and Wealth Advisors agreed to terminate the License Agreement originally entered into in 1998. As consideration for the transaction, Morningstar agreed to pay Wealth Advisors 8 billion Japanese yen upon the termination of the license agreement and the achievement of certain conditions related primarily to the termination of the use of the Morningstar brand by Wealth Advisors’ customers. On April 6, 2023, we made the first cash payment of 6 billion Japanese yen ($45.1 million), and on April 19, 2023, we made the second and final cash payment of 2 billion Japanese yen ($14.8 million), pursuant to the Termination Agreement.
As part of such transaction, pursuant to the Tender Offer Agreement, Morningstar agreed to tender up to 10 million shares in Wealth Advisors to SBI. The tender offer closed on February 28, 2023, and SBI purchased 8,040,600 shares of Wealth Advisors from Morningstar, resulting in net proceeds of $26.2 million and a pre-tax gain of $18.4 million. Refer to Note 9 of the Notes to our Consolidated Financial Statements for additional information on the Termination Agreement and the Tender Offer Agreement.
Other
We expect to continue making capital expenditures in 2024, 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.
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We also expect to use a portion of our cash and investments balances in the first quarter of 2024 to make annual bonus payments of approximately $124.3 million related to the 2023 bonus program compared with $98.3 million paid in the first quarter of 2023 for the 2022 bonus program.
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 a supplemental disclosure to help investors better understand how much cash is available after making capital expenditures. Our management team uses free cash flow to evaluate the health of 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 $ 316.4 $ 297.8 6.2 %
We generated free cash flow of $197.3 million in 2023, an increase of $29.0 million compared with 2022. The change reflects a $18.6 million increase in cash provided by operating activities as well as a $10.4 million decrease in capital expenditures. The increase in cash flow from operations was primarily driven by higher cash earnings and a lower bonus payment in the first quarter of 2023 compared to the prior period and offset by the cash payments related to the Termination Agreement, higher interest payments, and severance and other costs related to the significant reduction and shift of the company's operations in China.
Excluding the $4.5 million LCD contingent payment within operating cash flow, payments related to the Termination Agreement of $59.9 million, and $26.4 million of severance and other related costs paid for the China transition, which together totaled $90.8 million, as well as comparable items in the prior year, cash flow from operations would have increased 19.7% to $407.2 million and free cash flow would have increased 36.7% to $288.1 million in 2023.
Acquisitions
We paid a total of $672.3 million, less cash acquired, related to acquisitions over the past three years. We describe these acquisitions in Note 8 of the Notes to our Consolidated Financial Statements.
We paid a total of $62.9 million related to additional investments in unconsolidated entities over the past three years. We describe these investments in Note 9 of the Notes to our Consolidated Financial Statements.
Divestitures
We had no divestitures in 2023, 2022, or 2021.
Application of Critical Accounting Policies and Estimates
Our discussion and analysis of our financial condition and results of operations are based on our Consolidated Financial Statements, which have been prepared in accordance with GAAP. We discuss our significant accounting policies in Note 2 of the Notes to our Consolidated Financial Statements. The preparation of financial statements in accordance with GAAP requires our management team to make estimates and assumptions that affect the reported amounts of assets, liabilities, revenue, expense, and related disclosures included in our Consolidated Financial Statements.
We continually evaluate our estimates. We base our estimates on historical experience and various other assumptions that we believe are reasonable. Based on these assumptions and estimates, we make judgments about the carrying values of assets and liabilities that are not readily apparent from other sources. Our actual results could vary from these estimates and assumptions. If actual amounts are different from previous estimates, we include revisions in our results of operations for the period in which the actual amounts become known.
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We believe the following critical accounting policies reflect the significant judgments and estimates used in the preparation of our Consolidated Financial Statements:
Revenue Recognition
Most of our revenue comes from the sale of subscriptions for data, software, and Internet-based products and services. We recognize this revenue in equal amounts over the noncancellable term of the subscription or license, which generally ranges from one to three years. Our license-based revenue represents subscription services available to customers and not a license under the accounting guidance. We also provide research, investment management, retirement advice, and other services. We recognize this revenue when the service is provided or during the service obligation period defined in the contract.
We make judgments related to revenue recognition, including allocating the transaction price in a contract. For contracts that combine multiple products and services or other performance obligations, we make judgments regarding the value of each obligation in the arrangement based on selling prices of the items as if sold separately. We recognize revenue as we satisfy our performance obligations under the terms of the contracts with our customers. If arrangements include an acceptance provision, which exists infrequently, we begin recognizing revenue upon the receipt of customer acceptance.
We make judgments at the beginning of an arrangement regarding whether collection of the consideration to which we are entitled is probable and assess the likelihood of collection on a customer-by-customer basis. We typically sell to institutional customers with whom we have a history of successful collections.
Deferred revenue is the amount billed or collected in advance for subscriptions or services that has not yet been recognized as revenue. Deferred revenue totaled $544.0 million at the end of 2023 (of which $517.7 million was classified as a current liability with an additional $26.3 million, mainly credit rating surveillance, included in long-term liabilities). We expect to recognize this deferred revenue in future periods as we fulfill our performance obligations under our subscription and service agreements.
The amount of deferred revenue may increase or decrease based on the mix of contracted products and services and the volume of new and renewal subscriptions. The timing of future revenue recognition may change depending on the terms of the applicable agreements and the timing of fulfilling our service obligations.
Acquisitions, Goodwill, and Other Intangible Assets
We generally acquire businesses which are accounted for as business combinations. Our financial statements reflect the operations of an acquired business starting from the completion of the transaction. We record the estimated fair value of assets acquired and liabilities assumed as of the date of acquisition.
To account for each business combination, we utilize the acquisition method of accounting which requires the following steps (1) identifying the acquirer, (2) determining the acquisition date, (3) recognizing and measuring identifiable assets acquired and liabilities assumed, and (4) recognizing and measuring goodwill or a gain from a bargain purchase.
Regardless of whether an acquisition is considered to be a business combination or an asset acquisition, allocating the purchase price to the acquired assets and liabilities involves management judgment. We base the fair value estimates on available historical information and on future expectations and assumptions that we believe are reasonable, but these estimates are inherently uncertain.
Determining the fair value of intangible assets requires significant management judgment in the following areas:
•Identify the acquired intangible assets: For each acquisition, we identify the intangible assets acquired. These intangible assets generally consist of customer relationships, trademarks and trade names, technology-related intangibles (including internally developed software and databases), and in certain acquisitions, noncompete agreements.
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•Estimate the fair value of these intangible assets: We may consider various approaches to value the intangible assets. These include the cost approach, which measures the value of an asset based on the cost to reproduce it or replace it with another asset of like utility by applying the reproduction cost method or replacement cost method; the market approach, which values the asset through an analysis of sales and offerings of comparable assets which can be adjusted to reflect differences between the investment or asset being valued and the comparable investments or assets, such as historical financial condition and performance, expected economic benefits, time and terms of sale, utility, and physical characteristics, and the income approach, which measures the value of an asset based on the present value of the economic benefits it is expected to produce utilizing inputs such as estimated future cash flows based on forecasted revenue growth rates and margins, estimated attrition rates, and discount rate assumptions.
•Estimate the remaining useful life of the assets: For each intangible asset, we use judgment and assumptions to establish the remaining useful life of the asset. For example, for customer relationships, we determine the estimated useful life with reference to observed customer attrition rates. For technology-related assets such as databases, we make judgments about the demand for current data and historical metrics in establishing the remaining useful life. For internally developed software, we estimate an obsolescence factor associated with the software.
We record any excess of the purchase price over the estimated fair values of the net assets acquired as goodwill, which is not amortized.
We recognize the fair value of any contingent payments at the date of acquisition as part of the consideration transferred to acquire a business. Contingent payments are recognized at fair value at the date of acquisition using either a Monte Carlo simulation, which requires the use of management assumptions and inputs, such as projected financial information related to revenue growth and expected margin percentage, among other valuation related items, or calculating the weighted average of the estimated contingent payment scenarios. The liability associated with contingent consideration is remeasured to fair value at each reporting period subsequent to the date of acquisition considering factors that may impact the timing and amount of contingent payments until the term of the agreement has expired or the contingency is resolved. Any changes in the fair value measurement will be recorded in our Consolidated Statements of Income. In evaluating the characterization of contingent and deferred payments, we analyze relevant factors, including the nature of the payment, continuing employment requirements, incremental payments to employees of the acquired business, and timing and rationale underlying the transaction, to determine whether the payments should be accounted for as additional purchase consideration or post-combination related services.
We believe the accounting estimates related to purchase price allocations, subsequent goodwill impairment testing, and contingent payments are critical accounting estimates because changes in these assumptions could materially affect the amounts and classifications of assets and liabilities presented in our Consolidated Balance Sheets, as well as the amount of amortization and depreciation expense, if any, recorded in our Consolidated Statements of Income. The significance of this policy varies from period to period depending upon the volume of applicable acquisition transactions occurring.
Recently Adopted and Issued Accounting Pronouncements
Refer to Note 17 of the Notes to our Consolidated Financial Statements for recently adopted and issued accounting pronouncements as of December 31, 2023.
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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, 2023, our cash, cash equivalents, and investments balance was $389.0 million. Based on our estimates, a 100 basis-point change in interest rates would not have a material effect on the fair value of our investment portfolio.
We are subject to risk from fluctuations in the interest rates related to a portion of our long-term debt. The interest rates are based upon the applicable Secured Overnight Financing Rate (SOFR) rate plus an applicable margin for such loans or the lender's base rate plus an applicable margin for such loans. On an annualized basis, we estimate a 100 basis-point change in the SOFR rate would have a $6.2 million impact on our interest expense based on our outstanding principal balance and SOFR rates around December 31, 2023.
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, 2023:
Foreign denominated percentage of revenue 2.8 % 7.3 % 5.7 % 6.6 % 5.5 %
The table below shows our net investment exposure in foreign currencies as of December 31, 2023:
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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, 2023 and 2022, the related consolidated statements of income, comprehensive income (loss), equity, and cash flows for each of the years in the three-year period ended December 31, 2023, and the related notes and financial statement schedule II (collectively, the consolidated financial statements). In our opinion, the consolidated financial statements present fairly, in all material respects, the financial position of the Company as of December 31, 2023 and 2022, and the results of its operations and its cash flows for each of the years in the three-year period ended December 31, 2023, in conformity with U.S. generally accepted accounting principles.
We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States) (PCAOB), the Company’s internal control over financial reporting as of December 31, 2023, based on criteria established in Internal Control – Integrated Framework (2013) issued by the Committee of Sponsoring Organizations of the Treadway Commission, and our report dated February 29, 2024 expressed an adverse opinion on the effectiveness of the Company’s internal control over financial reporting.
Basis for Opinion
These consolidated financial statements are the responsibility of the Company’s management. Our responsibility is to express an opinion on these consolidated financial statements based on our audits. We are a public accounting firm registered with the PCAOB and are required to be independent with respect to the Company in accordance with the U.S. federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB.
We conducted our audits in accordance with the standards of the PCAOB. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the consolidated financial statements are free of material misstatement, whether due to error or fraud. Our audits included performing procedures to assess the risks of material misstatement of the consolidated financial statements, whether due to error or fraud, and performing procedures that respond to those risks. Such procedures included examining, on a test basis, evidence regarding the amounts and disclosures in the consolidated financial statements. Our audits also included evaluating the accounting principles used and significant estimates made by management, as well as evaluating the overall presentation of the consolidated financial statements. We believe that our audits provide a reasonable basis for our opinion.
Critical Audit Matter
The critical audit matter communicated below is a matter arising from the current period audit of the consolidated financial statements that was communicated or required to be communicated to the audit committee and that: (1) relates to accounts or disclosures that are material to the consolidated financial statements and (2) involved our especially challenging, subjective, or complex judgments. The communication of a critical audit matter does not alter in any way our opinion on the consolidated financial statements, taken as a whole, and we are not, by communicating the critical audit matter below, providing a separate opinion on the critical audit matter or on the accounts or disclosures to which it relates.
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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 $2,038.6 million in revenues, for the year ended December 31, 2023. The company’s process to account for and recognize revenue differs between certain revenue streams.
We identified the evaluation of the sufficiency of audit evidence over revenue as a critical audit matter. Evaluating the sufficiency of audit evidence obtained required especially subjective auditor judgment due to the multiple product revenue streams and the use of multiple processes to account for and recognize revenue. This included determining the revenue streams where procedures were performed and the nature and extent of audit evidence obtained over each revenue stream.
The following are the primary procedures we performed to address this critical audit matter. We used auditor judgment to determine the nature and extent of procedures to be performed, including the determination of the revenue streams over which those procedures were performed. For product revenue streams where procedures were performed, we:
● evaluated the design and tested the operating effectiveness of certain internal controls over the Company’s revenue recognition processes
● evaluated the company’s revenue recognition accounting policies
● selected certain revenue transactions and assessed recorded amounts by comparing them for consistency with underlying documentation, including the customer contract
● evaluated certain revenue transactions for consistency with the Company’s accounting policies, as applicable, including timing of revenue recognition
In addition, we evaluated the sufficiency of audit evidence obtained by assessing the results of the procedures performed, including the appropriateness of the nature and the extent of audit effort over revenue.
/s/ KPMG LLP
We have served as the Company’s auditor since 2011.
Chicago, Illinois
February 29, 2024
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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, 2023, based on criteria established in Internal Control – Integrated Framework (2013) issued by the Committee of Sponsoring Organizations of the Treadway Commission. In our opinion, because of the effect of the material weakness, described below, on the achievement of the objectives of the control criteria, the Company has not maintained effective internal control over financial reporting as of December 31, 2023, based on criteria established in Internal Control – Integrated Framework (2013) issued by the Committee of Sponsoring Organizations of the Treadway Commission.
We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States) (PCAOB), the consolidated balance sheets of the Company as of December 31, 2023 and 2022, the related consolidated statements of income, comprehensive income (loss), equity, and cash flows for each of the years in the three-year period ended December 31, 2023, and the related notes and financial statement schedule II (collectively, the consolidated financial statements), and our report dated February 29, 2024 expressed an unqualified opinion on those consolidated financial statements.
A material weakness is a deficiency, or a combination of deficiencies, in internal control over financial reporting, such that there is a reasonable possibility that a material misstatement of the company’s annual or interim financial statements will not be prevented or detected on a timely basis. A material weakness related to ineffective process-level controls over the disclosures required in accordance with FASB ASC 280, Segment Reporting, resulting from ineffective risk assessment of factors that are relevant to assessing whether operating segments can be aggregated, has been identified and included in management’s assessment. The material weakness was considered in determining the nature, timing, and extent of audit tests applied in our audit of the 2023 consolidated financial statements, and this report does not affect our report on those consolidated financial statements.
Basis for Opinion
The Company’s management is responsible for maintaining effective internal control over financial reporting and for its assessment of the effectiveness of internal control over financial reporting, included in the accompanying Management's Report on Internal Control Over Financial Reporting. Our responsibility is to express an opinion on the Company’s internal control over financial reporting based on our audit. We are a public accounting firm registered with the PCAOB and are required to be independent with respect to the Company in accordance with the U.S. federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB.
We conducted our audit in accordance with the standards of the PCAOB. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether effective internal control over financial reporting was maintained in all material respects. Our audit of internal control over financial reporting included obtaining an understanding of internal control over financial reporting, assessing the risk that a material weakness exists, and testing and evaluating the design and operating effectiveness of internal control based on the assessed risk. Our audit also included performing such other procedures as we considered necessary in the circumstances. We believe that our audit provides a reasonable basis for our opinion.
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Definition and Limitations of Internal Control Over Financial Reporting
A company’s internal control over financial reporting is a process designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles. A company’s internal control over financial reporting includes those policies and procedures that (1) pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of the assets of the company; (2) provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with generally accepted accounting principles, and that receipts and expenditures of the company are being made only in accordance with authorizations of management and directors of the company; and (3) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use, or disposition of the company’s assets that could have a material effect on the financial statements.
Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate.
/s/ KPMG LLP
Chicago, Illinois
February 29, 2024
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Morningstar, Inc. and Subsidiaries
Consolidated Statements of Income
Year ended December 31 (in millions except per share amounts) 2023 2022 2021
Operating expense:
Non-operating expense, net:
Interest expense, net (51.7) (28.4) (8.7)
Realized gain on sale of equity method investments — — 0.9
Expense from equity method transaction, net (11.8) — —
Other income (expense), net 11.5 (6.7) (3.7)
Non-operating expense, net (49.1) (37.2) (6.5)
Equity in investments of unconsolidated entities (7.4) (3.6) 5.4
Net income per share:
Dividends per common share:
Dividends declared per common share $ 1.53 $ 1.46 $ 1.31
Dividends paid per common share $ 1.50 $ 1.44 $ 1.26
Weighted average shares outstanding:
See notes to consolidated financial statements.
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Morningstar, Inc. and Subsidiaries
Consolidated Statements of Comprehensive Income (Loss)
Other comprehensive income, net of tax:
Foreign currency translation adjustment 12.6 (58.2) (15.1)
Unrealized gains (losses) on securities:
Unrealized holding gains (losses) arising during period 2.1 (7.0) 5.7
Other comprehensive income (loss), net 12.5 (63.7) (13.3)
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) 2023 2022
Assets
Current assets:
Cash and cash equivalents $ 337.9 $ 376.6
Income tax receivable 0.6 —
Other current assets 5.4 10.9
Property, equipment, and capitalized software, net 207.7 199.4
Investments in unconsolidated entities 100.2 96.0
Deferred tax assets, net 14.6 10.8
Liabilities and equity
Current liabilities:
Accounts payable and accrued liabilities 78.4 76.2
Current portion of long-term debt 32.1 32.1
Operating lease liabilities 36.4 37.3
Contingent consideration liability — 50.0
Other current liabilities 1.8 11.2
Deferred tax liabilities, net 35.6 62.9
Other long-term liabilities 17.5 13.9
Equity:
Morningstar, Inc. shareholders’ equity:
Accumulated other comprehensive loss:
Currency translation adjustment (86.4) (99.0)
Unrealized gain on available-for-sale investments, net of tax (0.1) —
Total accumulated other comprehensive loss (86.5) (99.0)
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 — — — — 5.7 5.7
Foreign currency translation adjustment, net — — — — (15.1) (15.1)
Other comprehensive 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)
Other comprehensive income (loss), net:
Foreign currency translation adjustment, net — — — — (58.2) (58.2)
Other comprehensive loss, net — — — — (63.7) (63.7)
Stock-based compensation — restricted stock units — — 35.9 — — 35.9
Stock-based compensation — performance share awards — — 37.2 — — 37.2
Stock-based compensation — market stock units — — 10.1 — — 10.1
Dividends declared ($1.46 per share) — — — (62.0) — (62.0)
Other comprehensive income (loss), net:
Unrealized gain on available-for-sale investments, net of tax — — — — 2.1 2.1
Foreign currency translation adjustment, net — — — — 12.6 12.6
Other comprehensive income, net — — — — 12.5 12.5
Stock-based compensation — restricted stock units — — 38.8 — — 38.8
Stock-based compensation — performance share awards — — 6.5 — — 6.5
Stock-based compensation — market stock units — — 7.5 — — 7.5
Common shares repurchased (8,484) — (1.4) — — — (1.4)
Dividends declared ($1.53 per share) — — — (65.3) — (65.3)
See notes to consolidated financial statements.
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Morningstar, Inc. and Subsidiaries
Consolidated Statements of Cash Flows
Operating activities
Stock-based compensation expense 52.8 83.2 41.9
Provision for bad debt 5.3 3.8 1.9
Equity in investments of unconsolidated entities 7.4 3.6 (5.4)
Gain on equity method transaction (49.6) — —
Acquisition earn-out accrual — 4.5 17.8
Changes in operating assets and liabilities:
Accounts payable and accrued liabilities (1.5) (2.0) 7.1
Accrued compensation and deferred commissions 14.9 (37.5) 58.0
Income taxes, current (7.8) 18.9 (6.1)
Other assets and liabilities 9.8 (12.8) (5.7)
Investing activities
Purchases of investment securities (15.7) (36.5) (71.1)
Proceeds from maturities and sales of investment securities 31.1 43.0 58.8
Acquisitions, net of cash acquired (0.8) (646.7) (24.8)
Proceeds from sale of equity method investments, net 26.2 — 1.1
Purchases of investments in unconsolidated entities (3.7) (29.4) (29.8)
Cash used for investing activities (81.9) (799.3) (167.7)
Financing activities
Common shares repurchased (1.4) (226.0) (1.3)
Proceeds from revolving credit facility 260.0 475.0 10.0
Repayment of revolving credit facility (365.0) (355.0) (10.0)
Proceeds from term facility — 650.0 —
Repayment of term facility (32.5) (19.1) (90.0)
Employee taxes withheld for stock awards (30.2) (29.9) (29.0)
Payment of acquisition-related earn-outs (45.5) (16.2) (34.4)
Cash provided by (used for) financing activities (278.4) 415.1 (211.8)
Effect of exchange rate changes on cash and cash equivalents 5.2 (20.8) (9.1)
Net increase (decrease) in cash and cash equivalents (38.7) (107.2) 61.3
Cash and cash equivalents—beginning of period 376.6 483.8 422.5
Cash and cash equivalents—end of period $ 337.9 $ 376.6 $ 483.8
Supplemental disclosure of cash flow information:
Cash paid for income taxes $ 73.2 $ 75.3 $ 80.9
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 insights 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 conduct business operations through wholly- or majority-owned subsidiaries in 32 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
FASB Financial Accounting Standards Board
SEC Securities and Exchange Commission
Principles of Consolidation
We conduct our business operations through wholly- 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 two categories: held-to-maturity 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.
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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. Investments in equity securities that we do not intend to hold for more than a year are presented in "Investments" in our Consolidated Balance Sheets. Investments in equity securities that we intend to hold for more than one year are included in "Investments in unconsolidated entities" in our Consolidated Balance Sheets.