UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 8-K

CURRENT REPORT

Pursuant to Section 13 or 15(d) of
the Securities Exchange Act of 1934

Date of Report (Date of earliest event reported): October 21, 2022

MORNINGSTAR, INC.

(Exact name of registrant as specified in its charter)

(312) 696-6000

(Registrant’s telephone number, including
area code)

N/A

(Former name or former address, if changed since last report)

Check the appropriate box below if the Form 8-K filing is intended to simultaneously satisfy the filing obligation of the registrant under any of the following provisions:

Indicate by check mark whether the registrant is an emerging growth company as defined in Rule 405 of the Securities Act of 1933 (§230.405 of this chapter) or Rule 12b-2 of the Securities Exchange Act of 1934 (§240.12b-2 of this chapter).

Emerging growth company ¨

If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. ¨

Securities registered pursuant to Section 12(b) of the Act: 

Item 7.01. Regulation FD Disclosure.

The following information is included in this Current Report on Form 8-K as a result of Morningstar, Inc.’s policy regarding public disclosure of corporate information. Answers to additional inquiries, if any, that comply with this policy are scheduled to become available around November 18, 2022.

Caution Concerning Forward-Looking Statements

This current report on Form 8-K contains forward-looking statements as that term is used in the Private Securities Litigation Reform Act of 1995. These statements are based on our current expectations about future events or future financial performance. Forward-looking statements by their nature address matters that are, to different degrees, uncertain, and often contain words such as “may,” “could,” “expect,” “intend,” “plan,” “seek,” “anticipate,” “believe,” “estimate,” “predict,” “potential,” “prospects,” or “continue.” These statements involve known and unknown risks and uncertainties that may cause the events we discuss not to occur or to differ significantly from what we expect. For us, these risks and uncertainties include, among others,

Investor Questions and Answers: October 21, 2022

We encourage current shareholders, potential shareholders, and other interested parties to send questions to us in writing and we make written responses available on a regular basis. The following answers respond to selected questions received through September 30, 2022. We retain the discretion to combine answers for duplicate or similar questions into one comprehensive response.

If you would like to submit a question, please send an e-mail to investors@morningstar.com or write to us at the following address:

Morningstar, Inc.

Investor Relations

22 W. Washington St.

Chicago, IL 60602

Operating Margin

We don’t currently disclose total spending on investments. That said, a significant portion of the recent growth in our operating expenses, including compensation cost increases, has been driven by investments to build the capabilities necessary to support growth. These include investments in product development, sales, and marketing to support key products that we’re prioritizing for growth including PitchBook, Morningstar Sustainalytics, and Wealth Management.

As to the timing of investments, we take a long-term view and invest where we see attractive opportunities to grow, achieve scale, and generate strong long-term returns. We are also being prudent with spending decisions given challenges in the economic environment. As we noted in our investor question responses published in August, while we expect that operating margins this year will be lower than in a typical year, we are focused on getting back on a path toward levels seen in recent historical peaks.

Sales Commissions

Sales commission expense for the remainder of 2022 and 2023 will depend in large part on performance against sales goals in those periods. We don’t provide guidance on future sales.

By way of background, for our licensed-based businesses, the costs associated with sales commissions are capitalized and amortized over the expected life of the related contract; for other products where it’s not possible to determine a contract life (including investment management), sales commissions are expensed. In the case of our licensed-based products, these commissions are based on the total annual contract value (ACV) of the associated contracts. From a cash flow perspective, sales commissions are generally paid quarterly.

License-Based Revenue

In aggregate, revenue renewal rates across our license-based products have been steady so far in 2022. We’re monitoring the environment closely, but don’t provide forecasts on future revenue expectations.

PitchBook

As we look at LCD’s capabilities, we see the biggest opportunities with lenders, investors, banks and service providers and, to a lesser extent, limited partners. We expect that the integration of LCD data and analysis into the PitchBook platform will expand our reach with those client segments.

Leveraged Commentary & Data Acquisition

As you note, the purchase price for LCD included $50 million in contingent consideration to be paid six months after closing, in addition to the $600 million paid when the transaction closed on June 1, 2022. The payment of the $50 million is contingent on the achievement of certain conditions related to the transition of LCD customer relationships. Specifically, at the time of closing, there were a number of LCD customer contracts which were bundled together with other S&P services. Morningstar and S&P have been working to separate those customer contracts into standalone Morningstar agreements. To encourage focus on this transition, the contingent consideration of up to $50 million will be paid based on the percentage of customer ACV that has been successfully unbundled as of December 1, 2022.

In the second quarter of 2022, we recorded one month of amortization related to the LCD acquisition totaling $1.5 million. This amount was included in our total reported depreciation and amortization in Q2 and reflects the expected monthly amortization going forward. We did not acquire any fixed assets with the transaction, so there is no depreciation associated with the acquisition.

DBRS Morningstar

DBRS Morningstar’s second quarter organic revenue growth was driven primarily by a strong year-over-year increase in U.S. CMBS ratings activity, where we enjoy a leading position, partially offset by declines in ratings activity in other sectors and geographies. U.S. CMBS issuance remained relatively robust through mid-May before slowing sharply. Unlike Moody’s and S&P, DBRS Morningstar currently has a smaller share of the U.S. corporate and collateralized loan obligation (CLOs) markets, which saw steep declines in issuance. The decrease in CLO issuance contributed to the overall declines you reference in structured finance issuance.

Investment Management

Investors can access Morningstar Investment Management model portfolios (also known as strategist models) on several third-party platforms globally (including in the U.S.) and via our turnkey asset-management program (TAMP) in the U.S. The exact products offered differ by geography.

Morningstar charges an investment management fee for model portfolios offered on third-party platforms and investments made via the TAMP with one exception. We do not charge a management fee on portfolios that use Morningstar funds or a mix of third-party and Morningstar funds; in this case the investor pays an expense ratio on the underlying funds. In all other cases, the total fees paid depend on the underlying investments. ETF-only portfolios charge the lowest fees. Select Equity portfolios charge the highest fees, with asset allocation portfolios using third-party mutual funds or a combination of third-party mutual funds and ETFs landing in the middle. Investors in the TAMP also pay Morningstar an administration fee, which covers platform technology, trading, reporting, and servicing. For more detail on fees, please refer to the Morningstar Managed Portfolios Program Brochure and Appendix, available at advisorinfo.sec.gov. (Enter “Morningstar Investment Services” in the firm search box.)

Product growth trends in Morningstar models are consistent with what we observe in the broader market for managed accounts. Products that offer advisors flexibility and choice continue to be in high demand with unified managed accounts and separately managed accounts growing ahead of ETFs and mutual fund models. We expect that trend to continue. To meet the demand for flexibility, we plan to open our TAMP to third-party models in the coming months, migrating to an open architecture model.

Direct Indexing

Direct indexing represents an attractive growth opportunity for Morningstar. In a 2021 report, Cerulli projected that Direct Indexing would grow at a 12.4% annual rate through 2026 and we believe that estimate is a conservative one, given technological advances and the increasing demand for personalized portfolios.

We believe that our competitive advantage starts with the breadth of our capabilities and proprietary IP across Morningstar Indexes, Morningstar Sustainalytics, and Morningstar Equity Research, and the strength of our brand with advisors. We marry this with the Morningstar turnkey asset management platform’s cloud-based digital platform that supports key workflows including proposal generation, risk assessment, performance calculation and reconciliation, trading executing and billing services, client reporting, sales, marketing, and compliance support. We stand out for our ability to bring all the direct indexing components together using in-house capabilities.

Our pricing is generally in line with or lower than our competitors in this market.

Capital Allocation

We make significant share repurchases when we believe that the return potential is attractive compared to other uses of capital. We do not do so for the purpose of share-based compensation.

Sustainalytics

On July 2, 2020, Morningstar closed on the acquisition of the remaining stake in Sustainalytics that it did not previously own. The transaction was structured with purchase consideration consisting of three cash payments: an initial cash payment at closing and two additional cash earn-out payments made on June 30, 2021, and June 30, 2022, determined based on a multiple of Morningstar Sustainalytics’ revenues for the years ended December 31, 2020, and 2021, respectively. The total consideration across the three payments was EUR 147.1 million.

SIGNATURES

Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned hereunto duly authorized.