Correspondence 0001104659-23-126375 from Morningstar, Inc. (MORN) (CIK 0001289419) (MORN)

Morningstar, Inc. (MORN) (CIK 0001289419)
Date: Dec. 15, 2023 · CIK: 0001289419 · Accession: 0001104659-23-126375

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AI Filing Summary & Sentiment

File numbers found in text: 000-51280

Referenced dates: June 15, 2023, November 17, 2023

Date

December 31, 2022

Author

Not clearly detected

Form

CORRESP

Company

Morningstar, Inc. (MORN) (CIK 0001289419)

Letter

FOIA Confidential Treatment Request by Morningstar, Inc. Pursuant to Rule 83 (17 C.F.R. 200.83). This letter requests confidential treatment of the bracketed portions of this letter (designated by “[***]”).

December 15,

Via EDGAR

Cara Lubitz

Marc Thomas

Office of Finance

Division of Corporation Finance

U.S. Securities & Exchange Commission

100 F Street, NE

Washington, D.C. 20549

Re: Morningstar, Inc.

Form 10-K for the Fiscal Year ended December 31, 2022

Response dated November 9, 2023

File No. 000-51280

Ladies and Gentlemen:

On behalf of Morningstar, Inc., an Illinois corporation (the “Company” or “Morningstar”), we are writing in response to the comments contained in the comment letter dated November 17, 2023 (the “Comment Letter”) of the staff (the “Staff”) of the Securities and Exchange Commission with respect to the Company’s Annual Report on Form 10-K for the year ended December 31, 2022 (the “Form 10-K”). For the convenience of the Staff’s review, we have set forth the comment contained in the Comment Letter along with the response of the Company.

Due to the commercially sensitive nature of certain information contained in this response, this letter is also a request for confidential treatment of the bracketed portions of this response (designated by “[***]”) pursuant to the Commission’s confidential treatment procedure under Rule 83.

Form 10-K for the Fiscal Year Ended December 31, 2022

6. Segment and Geographical Area Information, page 93

1. We note from your response that you have chosen Adjusted Operating Income as the reported measure of profit or loss for your segments. Please (i) provide us with a list of all measures of profit or loss at the product area level that are provided to the CODM; (ii) describe each of these measures; (iii) tell us the frequency with which they are provided; and (iv) tell us how you concluded that Adjusted Operating Income was the measure required to be disclosed under ASC 280-10-50-28. As examples only, your most recent response references operating profit (page 3), and page 13 of your response dated May 31, 2023 references operating income before central cost allocations, EBITDA including central cost allocations, EBITDA excluding central cost allocations, operating income, and operating margin.

Response:

The Chief Operating Decision Maker (“CODM”), Kunal Kapoor (Morningstar Chief Executive Officer), assesses business performance primarily through review of the Monthly Financial Book. The Monthly Financial Book is prepared by the Finance team and focuses on the performance of the Company at the consolidated level as well as revenue by its seven business components. Additionally, the Monthly Financial Book details various financial performance metrics of the Company’s operating segments (described below). Supplemental to the Monthly Financial Book, Quarterly Business Review (“QBR”) reports are prepared by the product area managers (previously defined in the Company’s response to the SEC comment letter dated June 15, 2023 as “Segment Managers”) with support from the Finance team and presented to the CODM on a periodic basis, which varies by business component. Additional discussion of the Monthly Financial Book and QBR reports follows:

Monthly Financial Book

The Monthly Financial Book is provided to the CODM and the Executive Leadership team on a monthly basis and presents information for the CODM to assess performance and make resource allocation decisions for the Company. While the majority of the Monthly Financial Book focuses on consolidated Company results and revenue reporting on a consolidated and disaggregated basis, the Company also presents various profitability measures at the segment level. Specifically, for the months prior to September 2023, the Monthly Financial Books included the following profitability measures for each of the Company’s seven business components, shown as an amount favorable/(unfavorable) compared to budget:

· Operating Income1 before allocations2

· Operating Income after allocations

· Operating Income margin (after allocations)

· EBITDA3 margin (after allocations)

The Company defines Operating Income as revenue less the following operating expenses: cost of revenue, sales and marketing, general and administrative, and depreciation and amortization. The only incremental costs to arrive at net income are interest expense, realized gains and losses on sale of investments or equity method investments, other income (loss), equity in investments of unconsolidated entities, and income tax amounts.

[***]

The Company defines EBITDA as consolidated earnings before interest, taxes, depreciation, and amortization. For the presentation of this metric at the product area level, this metric would be consistent with operating income except for the exclusion of depreciation and amortization.

As part of the reassessment of ASC 280, Segment Reporting (“ASC 280”), the Company revised its Monthly Financial Book in September of 2023. In response to the change to reporting under multiple segments, the Company was thoughtful as to which metrics would best allow the CODM to assess business performance and make resource allocation decisions across the segments. The Company has historically presented Adjusted Operating Income as a non-GAAP measure of financial performance on a consolidated basis within its earnings releases and Management’s Discussion and Analysis included in the Company’s periodic reports under the Securities Exchange Act. Adjusted Operating Income is defined as operating income4, excluding intangible amortization expense, all mergers and acquisitions (M&A)-related expenses (including M&A-related earn-outs), and items related to the significant reduction and shift of the Company’s operations in China. As Morningstar has made certain large-scale acquisitions in recent years, the Company is of the view that it needs to understand and assess the monthly performance of the business excluding acquired intangible amortization and other M&A-related costs, which can be substantial and may range from pre-acquisition due diligence costs to post-closing system and process integration activities, which are not reflective of the core business operations. In addition, the reduction and shift of operations out of China resulted in significant costs that the Company determined were not representative of ongoing business activities and had the potential to cloud the true expense profile of the Company for investors.

At the segment level, this is operating income after allocations.

Management notes that Adjusted Operating Income (as currently defined) for each of the Company’s seven business components as well as on a consolidated basis was not historically included in the Monthly Financial Book. Instead, the profitability measures bulleted above were included, shown as an amount favorable/(unfavorable) compared to budget.

To align with our segment reporting reassessment and highlight Adjusted Operating Income as the chosen segment profitability measure, the September 2023 Monthly Financial Book was updated to present only the following profitability measures at the segment level:

· Adjusted Segment Operating Income5 and respective Segment Adjusted Operating Income Margin

· Adjusted Segment EBITDA6 and respective Adjusted Segment EBITDA Margin

The above two measures are the only measures presented consistently at the segment level within the Monthly Financial Book from and after September 2023. [***]. As the Company settles into its new segment reporting structure, additional changes to the Monthly Financial Book may be considered, as needed, to support enhanced management and monitoring of the business.

QBR Reports

The QBR reports are presented by the Segment Managers to the CODM on a monthly or quarterly basis. There is variability in the meeting and reporting frequency. In addition, the content, both financial and non-financial, of each QBR report varies by business component based on the specific items the Segment Managers deem important for a given meeting. Given the varying frequency and content of the information presented in the QBR reports, they are not regularly reviewed by the CODM and are considered supplemental to the Monthly Financial Book.

The Company defines Adjusted Segment Operating Income as Operating Income plus: intangible amortization expense, M&A-related expenses (including M&A-related earnouts), and costs associated with the significant reduction and shift of the Company's operations in Shenzhen, China (including severance and personnel expenses, transformation costs, and asset impairment costs).

Adjusted Segment EBITDA presented by the Company at the segment level is calculated as Adjusted Operating Income, excluding depreciation expense.

The list below includes the types of profitability metrics (including margins) that may be included within individual business component QBR reports from quarter to quarter:

· Operating income pre-allocations

· Operating income after-allocations

· Adjusted operating income

· EBITDA before corporate allocation

· EBITDA after corporate allocation

Similar to the Monthly Financial Book, the Company is updating the QBR reports to consistently present Adjusted Operating Income on a prospective basis, and notes that, despite this update, the variability of the information provided and frequency of preparation will continue. In contrast to the QBR reports, the Monthly Financial Book is regularly reviewed, consistent month-to-month, and is the main source of data used by the CODM to measure business performance and allocate resources.

Conclusion on measure of profit or loss for segments

In deciding which measure of segment profit or loss to disclose, the Company considered the guidance in ASC 280-10-50-28, which states:

“If the chief operating decision maker uses only one measure of a segment’s profit or loss and only one measure of a segment’s assets in assessing segment performance and deciding how to allocate resources, segment profit or loss and assets shall be reported at those measures. If the chief operating decision maker uses more than one measure of a segment’s profit or loss and more than one measure of a segment’s assets, the reported measures shall be those that management believes are determined in accordance with the measurement principles most consistent with those used in measuring the corresponding amounts in the public entity’s consolidated financial statements.”

In considering the guidance above, the Company reviewed the metrics presented in both the Monthly Financial Book to determine the appropriate measure to disclose as the segment measure of profit or loss.

The Company has deemed the appropriate measure of segment profit or loss to disclose should be driven by the Monthly Financial Book since it is (1) regularly reviewed, (2) consistent and comparable from month-to-month, and (3) is the primary source of data used by the CODM to measure business performance and allocate resources. As such, this financial data is directly consistent with the guidance in ASC 280-10-50-1(b), “operating results are regularly reviewed by the public entity’s chief operating decision maker to make decisions about resources to be allocated to the segment and assess its performance”.

As more than one segment measure of profit or loss was historically presented within the Monthly Financial Book (i.e., Adjusted Operating Income and Adjusted EBITDA), the Company considered various factors in deciding which metric was most in line with ASC 280. As a starting point, the Company notes Adjusted Operating Income has been the metric historically presented as part of the Company’s consolidated earnings releases and Management’s Discussion and Analysis included in the Company’s periodic reports under the Securities Exchange Act. Since the Company began presenting Adjusted Operating Income in 2018, its investors and shareholders have come to rely on and track this metric in their evaluation of the Company’s performance. The Company also notes that several of its peer group present “adjusted” metrics, so its presentation of Adjusted Operating Income supports greater comparability across its competitors.

Importantly, Adjusted Operating Income is more levered than Adjusted EBITDA as it includes all allocated costs, inclusive of depreciation expense, and therefore, most consistent with the corresponding amounts and principles used in the Company’s consolidated financial statements, and is most quantitatively similar to net income as reported on a consolidated financial statement basis. To illustrate this point, the Company’s total segment Adjusted Operating Income and total segment Adjusted EBITDA for the three months ended September 30, 2023 was [***] and [***], respectively. Similarly, total segment Adjusted Operating Income and total segment Adjusted EBITDA for the nine months ended September 30, 2023 was [***] and [***], respectively. Adjusted EBITDA excludes depreciation and is therefore further from net income than Adjusted Operating Income.

Therefore, the Company concluded that Adjusted Operating Income is the segment measure of profit or loss required to be disclosed under ASC 280-10-50-28. Refer to the table below for a summary of conclusions reached:

Segment

Profitability

Metric Presented

beginning with

September 30, 2023 CODM

Package Frequency of

CODM review Three months

ended

September 30, 2023

(in millions) Nine months

ende

Show Raw Text

CORRESP
1
filename1.htm

FOIA
Confidential Treatment Request by Morningstar, Inc. Pursuant to Rule 83 (17 C.F.R. 200.83). This letter requests confidential
treatment of the bracketed portions of this letter (designated by “[***]”).

December 15,
2023

Via EDGAR

Cara Lubitz

Marc Thomas

Office of Finance

Division of
Corporation Finance

U.S. Securities &
Exchange Commission

100 F Street,
NE

Washington,
D.C. 20549

Re: Morningstar, Inc.

Form 10-K for the Fiscal Year ended December 31, 2022

Response dated November 9, 2023

File No. 000-51280

Ladies
and Gentlemen:

On
behalf of Morningstar, Inc., an Illinois corporation (the “Company” or “Morningstar”), we are writing in
response to the comments contained in the comment letter dated November 17, 2023 (the “Comment Letter”) of the staff
(the “Staff”) of the Securities and Exchange Commission with respect to the Company’s Annual Report on Form 10-K
for the year ended December 31, 2022 (the “Form 10-K”). For the convenience of the Staff’s review, we have
set forth the comment contained in the Comment Letter along with the response of the Company.

Due
to the commercially sensitive nature of certain information contained in this response, this letter is also a request for confidential
treatment of the bracketed portions of this response (designated by “[***]”) pursuant to the Commission’s confidential
treatment procedure under Rule 83.

Form 10-K
for the Fiscal Year Ended December 31, 2022

6. Segment
and Geographical Area Information, page 93

1. We
note from your response that you have chosen Adjusted Operating Income as the reported measure
of profit or loss for your segments. Please (i) provide us with a list of all measures
of profit or loss at the product area level that are provided to the CODM; (ii) describe
each of these measures; (iii) tell us the frequency with which they are provided; and
(iv) tell us how you concluded that Adjusted Operating Income was the measure required
to be disclosed under ASC 280-10-50-28. As examples only, your most recent response references
operating profit (page 3), and page 13 of your response dated May 31, 2023
references operating income before central cost allocations, EBITDA including central cost
allocations, EBITDA excluding central cost allocations, operating income, and operating margin.

Response:

The
Chief Operating Decision Maker (“CODM”), Kunal Kapoor (Morningstar Chief Executive Officer), assesses business performance
primarily through review of the Monthly Financial Book. The Monthly Financial Book is prepared by the Finance team and focuses on the
performance of the Company at the consolidated level as well as revenue by its seven business components. Additionally, the Monthly Financial
Book details various financial performance metrics of the Company’s operating segments (described below). Supplemental to the Monthly
Financial Book, Quarterly Business Review (“QBR”) reports are prepared by the product area managers (previously defined in
the Company’s response to the SEC comment letter dated June 15, 2023 as “Segment Managers”) with support from
the Finance team and presented to the CODM on a periodic basis, which varies by business component. Additional discussion of the Monthly
Financial Book and QBR reports follows:

Monthly
Financial Book

The
Monthly Financial Book is provided to the CODM and the Executive Leadership team on a monthly basis and presents information for the
CODM to assess performance and make resource allocation decisions for the Company. While the majority of the Monthly Financial Book focuses
on consolidated Company results and revenue reporting on a consolidated and disaggregated basis, the Company also presents various profitability
measures at the segment level. Specifically, for the months prior to September 2023, the Monthly Financial Books included the following
profitability measures for each of the Company’s seven business components, shown as an amount favorable/(unfavorable) compared
to budget:

· Operating
Income1 before allocations2

· Operating
Income after allocations

· Operating
Income margin (after allocations)

· EBITDA3
margin (after allocations)

1
The Company defines Operating Income as revenue less the following
operating expenses: cost of revenue, sales and marketing, general and administrative, and depreciation and amortization. The only incremental
costs to arrive at net income are interest expense, realized gains and losses on sale of investments or equity method investments, other
income (loss), equity in investments of unconsolidated entities, and income tax amounts.

2
[***]

3
The Company defines EBITDA as consolidated earnings before interest,
taxes, depreciation, and amortization. For the presentation of this metric at the product area level, this metric would be consistent
with operating income except for the exclusion of depreciation and amortization.

As
part of the reassessment of ASC 280, Segment Reporting (“ASC 280”), the Company revised its Monthly Financial Book
in September of 2023. In response to the change to reporting under multiple segments, the Company was thoughtful as to which metrics
would best allow the CODM to assess business performance and make resource allocation decisions across the segments. The Company has
historically presented Adjusted Operating Income as a non-GAAP measure of financial performance on a consolidated basis within its earnings
releases and Management’s Discussion and Analysis included in the Company’s periodic reports under the Securities Exchange
Act. Adjusted Operating Income is defined as operating income4, excluding intangible amortization expense, all mergers and
acquisitions (M&A)-related expenses (including M&A-related earn-outs), and items related to the significant reduction and shift
of the Company’s operations in China. As Morningstar has made certain large-scale acquisitions in recent years, the Company is
of the view that it needs to understand and assess the monthly performance of the business excluding acquired intangible amortization
and other M&A-related costs, which can be substantial and may range from pre-acquisition due diligence costs to post-closing system
and process integration activities, which are not reflective of the core business operations. In addition, the reduction and shift of
operations out of China resulted in significant costs that the Company determined were not representative of ongoing business activities
and had the potential to cloud the true expense profile of the Company for investors.

4
At the segment level, this is operating income after allocations.

Management
notes that Adjusted Operating Income (as currently defined) for each of the Company’s seven business components as well as on a
consolidated basis was not historically included in the Monthly Financial Book. Instead, the profitability measures bulleted above were
included, shown as an amount favorable/(unfavorable) compared to budget.

To
align with our segment reporting reassessment and highlight Adjusted Operating Income as the chosen segment profitability measure, the
September 2023 Monthly Financial Book was updated to present only the following profitability measures at the segment level:

· Adjusted
Segment Operating Income5 and respective Segment Adjusted Operating Income Margin

· Adjusted
Segment EBITDA6 and respective Adjusted Segment EBITDA Margin

The
above two measures are the only measures presented consistently at the segment level within the Monthly Financial Book from and after
September 2023. [***]. As the Company settles into its new segment reporting structure, additional changes to the Monthly Financial
Book may be considered, as needed, to support enhanced management and monitoring of the business.

QBR
Reports

The
QBR reports are presented by the Segment Managers to the CODM on a monthly or quarterly basis. There is variability in the meeting and
reporting frequency. In addition, the content, both financial and non-financial, of each QBR report varies by business component based
on the specific items the Segment Managers deem important for a given meeting. Given the varying frequency and content of the information
presented in the QBR reports, they are not regularly reviewed by the CODM and are considered supplemental to the Monthly Financial Book.

5
The Company defines Adjusted Segment Operating Income as Operating
Income plus: intangible amortization expense, M&A-related expenses (including M&A-related earnouts), and costs associated with
the significant reduction and shift of the Company's operations in Shenzhen, China (including severance and personnel expenses, transformation
costs, and asset impairment costs).

6
Adjusted Segment EBITDA presented by the Company at the segment
level is calculated as Adjusted Operating Income, excluding depreciation expense.

The
list below includes the types of profitability metrics (including margins) that may be included within individual business component
QBR reports from quarter to quarter:

· Operating
income pre-allocations

· Operating
income after-allocations

· Adjusted
operating income

· EBITDA
before corporate allocation

· EBITDA
after corporate allocation

Similar
to the Monthly Financial Book, the Company is updating the QBR reports to consistently present Adjusted Operating Income on a prospective
basis, and notes that, despite this update, the variability of the information provided and frequency of preparation will continue. In
contrast to the QBR reports, the Monthly Financial Book is regularly reviewed, consistent month-to-month, and is the main source of data
used by the CODM to measure business performance and allocate resources.

Conclusion
on measure of profit or loss for segments

In
deciding which measure of segment profit or loss to disclose, the Company considered the guidance in ASC 280-10-50-28, which states:

“If
the chief operating decision maker uses only one measure of a segment’s profit or loss and only one measure of a segment’s
assets in assessing segment performance and deciding how to allocate resources, segment profit or loss and assets shall be reported at
those measures. If the chief operating decision maker uses more than one measure of a segment’s profit or loss and more than one
measure of a segment’s assets, the reported measures shall be those that management believes are determined in accordance with
the measurement principles most consistent with those used in measuring the corresponding amounts in the public entity’s consolidated
financial statements.”

In
considering the guidance above, the Company reviewed the metrics presented in both the Monthly Financial Book to determine the appropriate
measure to disclose as the segment measure of profit or loss.

The
Company has deemed the appropriate measure of segment profit or loss to disclose should be driven by the Monthly Financial Book since
it is (1) regularly reviewed, (2) consistent and comparable from month-to-month, and (3) is the primary source of data
used by the CODM to measure business performance and allocate resources. As such, this financial data is directly consistent with the
guidance in ASC 280-10-50-1(b), “operating results are regularly reviewed by the public entity’s chief operating decision
maker to make decisions about resources to be allocated to the segment and assess its performance”.

As
more than one segment measure of profit or loss was historically presented within the Monthly Financial Book (i.e., Adjusted Operating
Income and Adjusted EBITDA), the Company considered various factors in deciding which metric was most in line with ASC 280. As a starting
point, the Company notes Adjusted Operating Income has been the metric historically presented as part of the Company’s consolidated
earnings releases and Management’s Discussion and Analysis included in the Company’s periodic reports under the Securities
Exchange Act. Since the Company began presenting Adjusted Operating Income in 2018, its investors and shareholders have come to rely
on and track this metric in their evaluation of the Company’s performance. The Company also notes that several of its peer group
present “adjusted” metrics, so its presentation of Adjusted Operating Income supports greater comparability across its competitors.

Importantly,
Adjusted Operating Income is more levered than Adjusted EBITDA as it includes all allocated costs, inclusive of depreciation expense,
and therefore, most consistent with the corresponding amounts and principles used in the Company’s consolidated financial statements,
and is most quantitatively similar to net income as reported on a consolidated financial statement basis. To illustrate this point, the
Company’s total segment Adjusted Operating Income and total segment Adjusted EBITDA for the three months ended September 30,
2023 was [***] and [***], respectively. Similarly, total segment Adjusted Operating Income and total segment Adjusted EBITDA for the nine
months ended September 30, 2023 was [***] and [***], respectively. Adjusted EBITDA excludes depreciation and is therefore further
from net income than Adjusted Operating Income.

Therefore,
the Company concluded that Adjusted Operating Income is the segment measure of profit or loss required to be disclosed under ASC 280-10-50-28.
Refer to the table below for a summary of conclusions reached:

Segment

Profitability

Metric Presented

beginning with

September 30, 2023
CODM

Package
Frequency
of

CODM review
Three
months

ended

September 30, 2023

(in millions)
Nine
months

ende

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