MORNINGSTAR, INC., 10-K filed on 2/28/2014
Annual Report
Document and Entity Information Document (USD $)
In Billions, except Share data, unless otherwise specified
12 Months Ended
Dec. 31, 2013
Feb. 21, 2014
Jun. 30, 2013
Document and Entity Information Abstract
 
 
 
Entity Registrant Name
MORNINGSTAR, INC. 
 
 
Entity Central Index Key
0001289419 
 
 
Current Fiscal Year End Date
--12-31 
 
 
Entity Filer Category
Large Accelerated Filer 
 
 
Document Type
10-K 
 
 
Document Period End Date
Dec. 31, 2013 
 
 
Document Fiscal Year Focus
2013 
 
 
Document Fiscal Period Focus
FY 
 
 
Amendment Flag
false 
 
 
Entity Common Stock, Shares Outstanding
 
44,700,741 
 
Entity Well-known Seasoned Issuer
Yes 
 
 
Entity Voluntary Filers
No 
 
 
Entity Current Reporting Status
Yes 
 
 
Entity Public Float
 
 
$ 1.6 
Condensed Consolidated Statements of Income (USD $)
In Thousands, except Per Share data, unless otherwise specified
12 Months Ended
Dec. 31, 2013
Dec. 31, 2012
Dec. 31, 2011
Revenue
$ 698,266 
$ 658,288 
$ 631,400 
Operating expense (1):
 
 
 
Cost of revenue
271,437 1
246,783 1
235,289 1
Sales and marketing
103,614 1
108,884 1
106,699 1
General and administrative
106,868 1
108,857 1
108,084 1
Depreciation and amortization
45,693 
43,096 
42,913 
Total operating expense
527,612 1
507,620 1
492,985 1
Operating income
170,654 
150,668 
138,415 
Non-operating income (expense):
 
 
 
Interest income, net
2,712 
5,153 
2,361 
Gain (loss) on sale of investments reclassified from other comprehensive income
4,207 
538 
260 
Equity Method Investments Holding Gain
3,635 
Other income (expense), net
(3,198)
(2,734)
(912)
Non-operating income (expense), net
7,356 
2,957 
1,709 
Income before income taxes and equity in net income of unconsolidated entities
178,010 
153,625 
140,124 
Income tax expense
56,031 
52,878 
43,658 
Equity in net income of unconsolidated entities
1,428 
2,027 
1,848 
Consolidated Net Income from Continuing Operations
123,407 
102,774 
98,314 
Gain on Sale of Discontinued Operation, Net of Tax
5,188 
Consolidated net income
123,407 
107,962 
98,314 
Net (income) loss attributable to the noncontrolling interest
122 
117 
43 
Net income attributable to Morningstar, Inc.
123,529 
108,079 
98,357 
Net Income from Continuing Operations, net of tax
123,529 
102,891 
98,357 
Net Income from Discontinued Operations, Net of Tax
$ 0 
$ 5,188 
$ 0 
Net income per share attributable to Morningstar, Inc.:
 
 
 
Basic (in dollars per share)
$ 2.68 
$ 2.23 
$ 1.96 
Diluted (in dollars per share)
$ 2.66 
$ 2.20 
$ 1.92 
Income (Loss) from Discontinued Operations, Net of Tax, Per Diluted Share
$ 0.00 
$ 0.10 
$ 0.00 
Income (Loss) from Continuing Operations, Per Diluted Share
$ 2.66 
$ 2.10 
$ 1.92 
Income (Loss) from Discontinued Operations, Net of Tax, Per Basic Share
$ 0.00 
$ 0.11 
$ 0.00 
Income (Loss) from Continuing Operations, Per Basic Share
$ 2.68 
$ 2.12 
$ 1.96 
Dividends per common share:
 
 
 
Dividends declared per common share
$ 0.55 
$ 0.43 
$ 0.25 
Dividends paid per common share
$ 0.38 
$ 0.53 
$ 0.20 
Weighted average shares outstanding:
 
 
 
Basic (in shares)
46,158 
48,497 
50,032 
Diluted (in shares)
46,491 
49,148 
50,988 
Consolidated Statements of Income (Parenthetical) (USD $)
In Thousands, unless otherwise specified
12 Months Ended
Dec. 31, 2013
Dec. 31, 2012
Dec. 31, 2011
Allocated Share-based Compensation Expense
$ 15,043 
$ 18,905 
$ 15,303 
Cost of Revenue [Member]
 
 
 
Allocated Share-based Compensation Expense
6,870 
6,416 
6,236 
Selling and Marketing Expense [Member]
 
 
 
Allocated Share-based Compensation Expense
1,975 
1,937 
1,871 
General and Administrative Expense [Member]
 
 
 
Allocated Share-based Compensation Expense
$ 6,198 
$ 10,552 
$ 7,196 
Consolidated Consolidated Statements of Comprehensive Income (USD $)
In Thousands, unless otherwise specified
12 Months Ended
Dec. 31, 2013
Dec. 31, 2012
Dec. 31, 2011
Consolidated net income
$ 123,407 
$ 107,962 
$ 98,314 
Other comprehensive income (loss), net of tax:
 
 
 
Foreign currency translation adjustment
(4,539)
6,838 
(2,345)
Unrealized gains (losses) on securities:
 
 
 
Unrealized holding gains (losses) arising during period
2,408 
1,455 
(773)
Reclasification of (gains) losses included in net income
(2,631)
(344)
(166)
Other comprehensive income (loss)
(4,762)
7,949 
(3,284)
Comprehensive income
118,645 
115,911 
95,030 
Comprehensive (income) loss attributable to noncontrolling interest
345 
268 
(179)
Comprehensive income attributable to Morningstar, Inc.
$ 118,990 
$ 116,179 
$ 94,851 
Condensed Consolidated Balance Sheets (USD $)
In Thousands, unless otherwise specified
Dec. 31, 2013
Dec. 31, 2012
Current assets:
 
 
Cash and cash equivalents
$ 168,160 
$ 163,889 
Investments
130,407 
157,529 
Accounts receivable, less allowance of $1,089 and 569, respectively
114,131 
114,361 
Deferred tax asset, net
3,892 
3,741 
Income tax receivable, net
3,942 
14,267 
Other
26,361 
20,823 
Total current assets
446,893 
474,610 
Property, equipment, and capitalized software, net
104,986 
84,022 
Investments in unconsolidated entities
38,714 
35,305 
Goodwill
326,450 
320,845 
Intangible assets, net
103,909 
116,732 
Other assets
9,716 
10,438 
Total assets
1,030,668 
1,041,952 
Current liabilities:
 
 
Accounts payable and accrued liabilities
52,877 
43,777 
Accrued compensation
71,403 
67,317 
Deferred revenue
149,225 
146,015 
Other
6,786 
256 
Total current liabilities
280,291 
257,365 
Accrued compensation
8,193 
8,281 
Deferred tax liability, net
23,755 
21,583 
Deferred Rent
13,192 
15,368 
Other long-term liabilities
13,947 
12,460 
Total liabilities
339,378 
315,057 
Morningstar, Inc. shareholders' equity:
 
 
Common stock, no par value, 200,000,000 shares authorized, of which 44,967,423 and 46,541,571 shares were outstanding as of December 31, 2013 and December 31, 2012, respectively
Treasury stock at cost, 7,202,896 shares as of December 31, 2013 and 5,214,070 shares as of December 31, 2012
(449,054)
(301,839)
Additional paid-in capital
539,507 
521,285 
Retained earnings
594,626 
496,354 
Accumulated other comprehensive income (loss):
 
 
Currency translation adjustment
4,609 
8,925 
Unrealized gain (loss) on available-for-sale investments
564 
787 
Total accumulated other comprehensive income
5,173 
9,712 
Total Morningstar, Inc. shareholders' equity
690,257 
725,517 
Noncontrolling interest
1,033 
1,378 
Total equity
691,290 
726,895 
Total liabilities and equity
$ 1,030,668 
$ 1,041,952 
Consolidated Balance Sheets (Parenthetical) (USD $)
In Thousands, except Share data, unless otherwise specified
Dec. 31, 2013
Dec. 31, 2012
Statement of Financial Position [Abstract]
 
 
Allowance for Doubtful Accounts Receivable, Current
$ 1,089 
$ 569 
Common Stock, No Par Value
$ 0 
$ 0 
Common Stock, Shares Authorized
200,000,000 
200,000,000 
Common Stock, Shares, Outstanding
44,967,423 
46,541,571 
Treasury Stock, Shares
7,202,896 
5,214,070 
Condensed Consolidated Statement of Equity (USD $)
In Thousands, except Share data, unless otherwise specified
Total
Common Stock
Treasury Stock
Additional Paid-In Capital
Retained Earnings
Accumulated Other Comprehensive Income (Loss)
Non Controlling Interests
Balance at Dec. 31, 2010
$ 781,425 
$ 5 
$ (6,641)
$ 458,426 
$ 323,408 
$ 5,118 
$ 1,109 
Balance (in shares) at Dec. 31, 2010
 
49,874,392 
 
 
 
 
 
Increase (Decrease) in Stockholders' Equity
 
 
 
 
 
 
 
Net income (loss)
98,314 
   
   
   
98,357 
   
(43)
Other Comprehensive Income (loss)
 
 
 
 
 
 
 
Unrealized gain on available-for-sale investments, net of income tax
(773)
   
   
   
   
(773)
Reclassification of adjustments for gains included in net income, net of income tax
(166)
   
   
   
   
(166)
Foreign currency translation adjustment, net
(2,345)
   
   
   
   
(2,567)
222 
Other comprehensive income (loss)
(3,284)
   
   
   
   
(3,506)
222 
Issuance of common stock related to stock-option exercises and vesting of restricted stock units, net
8,702 
612 
8,090 
   
   
   
Issuance of common stock related to stock-option exercises and vesting of restricted stock units, net (in shares)
 
931,667 
 
 
 
 
 
Adjustments to Additional Paid in Capital, Share-based Compensation, Requisite Service Period Recognition [Abstract]
 
 
 
 
 
 
 
Stock-based compensation - restricted stock units
12,765 
   
   
12,765 
   
   
   
Stock-based compensation - restricted stock
2,196 
 
 
2,196 
 
 
 
Stock-based compensation - stock options
342 
   
   
342 
   
   
   
Excess tax benefit derived from stock-option exercises and vesting of restricted stock units
9,525 
   
   
9,525 
   
   
   
Noncontrolling Interest, Increase from Subsidiary Equity Issuance
262 
   
   
(96)
   
   
358 
Dividends declared - common shares outstanding
(12,550)
 
 
 
(12,550)
 
 
Dividends declared - restricted stock units
(9)
 
 
184 
(193)
 
 
Common share repurchased
(40,672)
 
(40,672)
 
 
 
 
Common share repurchased (in shares)
 
(722,119)
 
 
 
 
 
Balance at Dec. 31, 2011
857,016 
(46,701)
491,432 
409,022 
1,612 
1,646 
Balance (in shares) at Dec. 31, 2011
 
50,083,940 
 
 
 
 
 
Increase (Decrease) in Stockholders' Equity
 
 
 
 
 
 
 
Net income (loss)
107,962 
   
   
   
108,079 
   
(117)
Other Comprehensive Income (loss)
 
 
 
 
 
 
 
Unrealized gain on available-for-sale investments, net of income tax
1,455 
   
   
   
   
1,455 
Reclassification of adjustments for gains included in net income, net of income tax
(344)
   
   
   
   
(344)
Foreign currency translation adjustment, net
6,838 
   
   
   
   
6,989 
(151)
Other comprehensive income (loss)
7,949 
   
   
   
   
8,100 
(151)
Issuance of common stock related to stock-option exercises and vesting of restricted stock units, net
4,809 
   
1,342 
3,467 
   
   
   
Issuance of common stock related to stock-option exercises and vesting of restricted stock units, net (in shares)
 
715,888 
 
 
 
 
 
Adjustments to Additional Paid in Capital, Share-based Compensation, Requisite Service Period Recognition [Abstract]
 
 
 
 
 
 
 
Stock-based compensation - restricted stock units
13,451 
   
   
13,451 
   
   
   
Stock-based compensation - restricted stock
5,013 
   
   
5,013 
   
   
   
Stock-based compensation - stock options
441 
 
 
441 
 
 
 
Excess tax benefit derived from stock-option exercises and vesting of restricted stock units
7,210 
   
   
7,210 
   
   
   
Dividends declared - common shares outstanding
(20,420)
   
   
   
(20,420)
   
   
Dividends declared - restricted stock units
(56)
   
   
271 
(327)
   
   
Common share repurchased
(256,480)
   
(256,480)
   
   
   
   
Common share repurchased (in shares)
 
(4,258,257)
 
 
 
 
 
Balance at Dec. 31, 2012
726,895 
(301,839)
521,285 
496,354 
9,712 
1,378 
Balance (in shares) at Dec. 31, 2012
46,541,571 
46,541,571 
 
 
 
 
 
Increase (Decrease) in Stockholders' Equity
 
 
 
 
 
 
 
Net income (loss)
123,407 
   
   
   
123,529 
   
(122)
Other Comprehensive Income (loss)
 
 
 
 
 
 
 
Unrealized gain on available-for-sale investments, net of income tax
2,408 
   
   
   
   
2,408 
Reclassification of adjustments for gains included in net income, net of income tax
(2,631)
   
   
   
   
(2,631)
Foreign currency translation adjustment, net
(4,539)
   
   
   
   
(4,316)
(223)
Other comprehensive income (loss)
(4,762)
   
   
   
   
(4,539)
(223)
Issuance of common stock related to stock-option exercises and vesting of restricted stock units, net
(1,275)
   
1,633 
(2,908)
   
   
   
Issuance of common stock related to stock-option exercises and vesting of restricted stock units, net (in shares)
 
437,263 
 
 
 
 
 
Adjustments to Additional Paid in Capital, Share-based Compensation, Requisite Service Period Recognition [Abstract]
 
 
 
 
 
 
 
Stock-based compensation - restricted stock units
14,163 
   
   
14,163 
   
   
   
Stock-based compensation - restricted stock
388 
   
   
388 
   
   
   
Stock-based compensation - stock options
492 
   
   
492 
   
   
   
Excess tax benefit derived from stock-option exercises and vesting of restricted stock units
5,898 
   
   
5,898 
   
   
   
Dividends declared - common shares outstanding
(24,977)
   
   
   
(24,977)
   
   
Dividends declared - restricted stock units
(91)
   
   
189 
(280)
   
   
Common share repurchased
(148,848)
   
(148,848)
   
   
   
   
Common share repurchased (in shares)
 
(2,011,411)
 
 
 
 
 
Balance at Dec. 31, 2013
$ 691,290 
$ 5 
$ (449,054)
$ 539,507 
$ 594,626 
$ 5,173 
$ 1,033 
Balance (in shares) at Dec. 31, 2013
44,967,423 
44,967,423 
 
 
 
 
 
Condensed Consolidated Statement of Equity (Parenthetical) (USD $)
In Thousands, unless otherwise specified
12 Months Ended
Dec. 31, 2013
Dec. 31, 2012
Dec. 31, 2011
Statement of Stockholders' Equity [Abstract]
 
 
 
Other Comprehensive Income (Loss), Unrealized Holding Gain (Loss) on Securities Arising During Period, Tax
$ 1,469 
$ 614 
$ 447 
Other Comprehensive Income (Loss), Reclassification Adjustment for Sale of Securities Included in Net Income, Tax
$ 1,576 
$ 194 
$ 94 
Condensed Consolidated Statements of Cash Flows (USD $)
In Thousands, unless otherwise specified
12 Months Ended
Dec. 31, 2013
Dec. 31, 2012
Dec. 31, 2011
Operating activities
 
 
 
Consolidated net income
$ 123,407 
$ 107,962 
$ 98,314 
Adjustments to reconcile consolidated net income to net cash flows from operating activities:
 
 
 
Depreciation and amortization
45,693 
43,096 
42,913 
Deferred income taxes
(1,133)
6,316 
(4,436)
Stock-based compensation expense
15,043 
18,905 
15,303 
Provision for bad debt
825 
1,016 
1,237 
Equity in net income of unconsolidated entities
(1,428)
(2,027)
(1,848)
Excess tax benefits from stock-option exercises and vesting of restricted stock units
(5,898)
(7,210)
(9,525)
Gain on sale of discontinued operations, Net of Tax
(5,188)
Loss on sale of cost-method investment
2,034 
Holding gain upon acquisition of additional ownership of equity method investment
(3,635)
Other, net
(1,830)
142 
592 
Changes in operating assets and liabilities, net of effects of acquisitions:
 
 
 
Accounts receivable
(1,593)
(17,124)
(3,858)
Other assets
(2,302)
223 
2,728 
Accounts payable and accrued liabilities
(1,244)
1,173 
(4,821)
Accrued compensation
3,153 
(8,861)
10,176 
Income taxes—current
16,794 
(1,205)
10,751 
Deferred revenue
3,658 
7,769 
9,578 
Deferred rent
(1,484)
407 
(1,030)
Other liabilities
(1,368)
(1,432)
(1,098)
Cash provided by operating activities
186,658 
145,996 
164,976 
Investing activities
 
 
 
Purchases of investments
(140,051)
(145,491)
(383,281)
Proceeds from maturities and sales of investments
171,243 
260,317 
297,956 
Capital expenditures
(33,583)
(30,039)
(23,322)
Acquisitions, net of cash acquired
(11,079)
300 
Proceeds from sale of a business, net
957 
5,734 
Purchases of cost and equity method investments
(2,751)
(10,304)
(2,450)
Other, net
403 
(25)
30 
Cash used for investing activities
(14,861)
80,192 
(110,767)
Financing activities
 
 
 
Proceeds from stock-option exercises, net
4,532 
9,101 
12,866 
Taxes Withheld For Restricted Stock Units
(5,807)
(4,292)
(4,164)
Excess tax benefits from stock-option exercises and vesting of restricted stock units
5,898 
7,210 
9,525 
Common shares repurchased
(153,514)
(251,813)
(40,672)
Dividends paid
(17,425)
(25,487)
(10,041)
Other, net
(56)
105 
(110)
Cash provided by (used for) financing activities
(166,372)
(265,176)
(32,596)
Effect of exchange rate changes on cash and cash equivalents
(1,154)
2,440 
(1,352)
Net increase (decrease) in cash and cash equivalents
4,271 
(36,548)
20,261 
Cash and cash equivalents - beginning of period
163,889 
200,437 
180,176 
Cash and cash equivalents - end of period
168,160 
163,889 
200,437 
Supplemental disclosure of cash flow information:
 
 
 
Cash paid for income taxes
40,364 
47,355 
38,054 
Supplemental information of non-cash investing and financing activities:
 
 
 
Unrealized gain (loss) on available-for-sale investments
(328)
1,723 
(1,480)
Equipment obtained under long-term financing arrangement
$ 4,860 
$ 4,551 
$ 0 
Description of Business
Description of Business
Description of Business
 
Morningstar, Inc. and its subsidiaries (Morningstar, we, our), is a provider of independent investment research to investors around the world. We offer an extensive line of products and services for individual investors, financial advisors, asset managers, and retirement plan providers and sponsors. We have operations in 27 countries.
Summary of Significant Accounting Policies
Summary of Significant Accounting Policies
Summary of Significant Accounting Policies

The acronyms that appear in these Notes to our Consolidated Financial Statements refer to the following:
ASC
Accounting Standards Codification
ASU
Accounting Standards Update
EITF
Emerging Issues Task Force
FASB
Financial Accounting Standards Board
SEC
Securities and Exchange Commission

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

We account and report the noncontrolling (minority) interest in our Consolidated Financial Statements in accordance with FASB ASC 810, Consolidation. A noncontrolling interest is the portion of equity (net assets) in a subsidiary not attributable, directly or indirectly, to the parent company. We report the noncontrolling interest in our Consolidated Balance Sheet within equity separate from the shareholders' equity attributable to Morningstar, Inc. In addition, we present the net income (loss) and comprehensive income (loss) attributable to Morningstar, Inc.'s shareholders and the noncontrolling interest in our Consolidated Statements of Income, Consolidated Statements of Comprehensive Income, and Consolidated Statements of Equity.

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 United States that are considered variable interest entities. For the majority of these variable interest entities, we do not have a variable interest in them. 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.

Comprehensive Income. In accordance with ASU No. 2011-05, Presentation of Comprehensive Income, we present the total of comprehensive income, the components of net income, and the components of other comprehensive income (OCI) in two separate but consecutive statements, our Consolidated Statements of Income and separately, our Consolidated Statements of Comprehensive Income. In addition, effective January 1, 2013, we adopted FASB ASU No. 2013-2, Comprehensive Income (Topic 220). We show the effects of items reclassified out of each component of accumulated other comprehensive income to net income on the face of the financial statement where net income is presented.

Use of Estimates. The preparation of financial statements in conformity with accounting principles generally accepted in the United States 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.

Reclassifications. Certain amounts reported in previous years have been reclassified to conform to the 2013 presentation. We now include development expense in the cost of revenue category, which we previously referred to as cost of goods sold. We previously reported development expense as a separate operating expense category. We have reclassified development expense to include it in cost of revenue for all periods presented.

Separately, as a result of our recent reorganization (including new positions created, changes in focus for some existing roles, and the refinement of employee cost categorizations as we moved to a more centralized structure), approximately 180 net positions shifted from the general and administrative and sales and marketing categories to cost of revenue. For 2013 as compared with both 2012 and 2011, changes related to our more centralized organizational structure added approximately $14 million of compensation expense to cost of revenue, and reduced the compensation expense in our sales and marketing and general and administrative expense categories by approximately $8 million and $6 million, respectively. These changes did not affect our total operating expense or operating income for any of the periods presented.

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 at fair value the portion of our cash equivalents that are invested in money market funds, which are actively traded and have quoted market prices.

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

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

Trading:  We classify certain other investments, primarily equity securities, as trading securities, primarily to satisfy the requirements of one of our wholly owned subsidiaries, which is a registered broker-dealer. We include realized and unrealized gains and losses associated with these investments as a component of our operating income in our Consolidated Statements of Income. We record these securities at their fair value in our Consolidated Balance Sheets.

Available-for-sale:  Investments not considered held-to-maturity or trading securities are classified as available-for-sale securities. Available-for-sale securities primarily consist of fixed-income 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 value in our Consolidated Balance Sheets.

Fair Value Measurements. We follow FASB ASC 820, Fair Value Measurements. FASB ASC 820 defines fair value, establishes a framework for measuring fair value, and expands disclosures about fair value measurements. Under FASB ASC 820, fair value is defined as the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date. The standard applies whenever other standards require (or permit) assets or liabilities to be measured at fair value. The standard does not expand the use of fair value in any new circumstances and does not require any new fair value measurements.

Effective January 1, 2012, we adopted FASB ASU No. 2011-04, Fair Value Measurement (Topic 820): Amendments to Achieve Common Fair Value Measurement and Disclosure Requirements in U.S. GAAP and IFRS. ASU No. 2011-04 clarifies existing fair value measurement and disclosure requirements, amends certain fair value measurement principles, and requires additional disclosures about fair value measurements. The adoption of ASU No. 2011-04 did not have a material impact on our Consolidated Financial Statements.

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

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

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

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

We provide additional information about our cash equivalents and investments that are subject to valuation under FASB ASC 820 in Note 5 in these Notes to our Consolidated Financial Statements.

The Fair Value Option for Financial Assets and Financial Liabilities. FASB ASC 825, Financial Instruments, permits entities the option to measure many financial instruments and certain other items at fair value with changes in fair value recognized in earnings each period. FASB ASC 825 allows the fair value option to be elected on an instrument-by-instrument basis when the asset or liability is initially recognized or when there's an event that gives rise to a new basis of accounting for that instrument. We do not apply this fair value option to any of our eligible assets.

Concentration of Credit Risk. No single customer is large enough to pose a significant credit risk to our operations or financial condition. For the years ended December 31, 2013, 2012, and 2011, no single customer represented 5% or more of our consolidated revenue. If receivables from our customers become delinquent, we begin a collections process. We maintain an allowance for doubtful accounts based on our estimate of the probable losses of accounts receivable.

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

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

The table below summarizes our capitalized software development costs for the past three years:
($000)
 
2013

 
2012

 
2011

Capitalized software development costs
 
$
8,142

 
$
8,527

 
$
5,315



Business Combinations. Over the past several years, we have acquired companies that complement our business operations. For each acquisition, we allocate the purchase price to the assets acquired, liabilities assumed, and goodwill. We follow FASB ASC 805, Business Combinations. We recognize and measure the fair value of the acquired operation as a whole, and the assets acquired and liabilities assumed at their full fair values as of the date control is obtained, regardless of the percentage ownership in the acquired operation or how the acquisition was achieved. We expense direct costs related to the business combination, such as advisory, accounting, legal, valuation, and other professional fees, as incurred. We recognize restructuring costs, including severance and relocation for employees of the acquired entity, as post-combination expenses unless the target entity meets the criteria of FASB ASC 420, Exit or Disposal Cost Obligations on the acquisition date.

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

Goodwill. Changes in the carrying amount of our recorded goodwill are mainly the result of business acquisitions and divestitures. In accordance with FASB ASC 350, Intangibles—Goodwill and Other, we do not amortize goodwill; instead, goodwill is subject to an impairment test annually, or whenever indicators of impairment exist. An impairment would occur if the carrying amount of a reporting unit exceeded the fair value of that reporting unit. We performed annual impairment reviews in the fourth quarter of 2013, 2012, and 2011. We did not record any significant impairment losses in 2013, 2012, and 2011.

Intangible Assets. We amortize intangible assets using the straight-line method over their estimated useful lives, which range from one to 25 years. We have no intangible assets with indefinite useful lives. In accordance with FASB ASC 360-10-35, Subsequent Measurement—Impairment or Disposal of Long Lived Assets, we review intangible assets for impairment whenever events or changes in circumstances indicate that the carrying value may not be recoverable. If the value of future undiscounted cash flows is less than the carrying amount of an asset group, we record an impairment loss based on the excess of the carrying amount over the fair value of the asset group. We recorded an impairment loss of approximately $800,000 in 2011. We did not record any impairment losses in 2013 or 2012. The impairment charge is included in our amortization expense on our Consolidated Statements of Income.

Revenue Recognition. We recognize revenue in accordance with SEC SAB Topic 13, Revenue Recognition, ASC 605-25, Revenue Recognition:  Multiple Element Arrangements, and ASC 985-605, Software: Revenue Recognition.

We recognize revenue when all of the following conditions are met:

There is persuasive evidence of an arrangement, as evidenced by a signed contract;
Delivery of our products and services is a prerequisite for recognition of revenue. If arrangements include an acceptance provision, we generally begin recognizing revenue upon the receipt of customer acceptance;
The amount of fees to be paid by the customer is fixed or determinable; and
The collectibility of the fees is reasonably assured.

We generate revenue through sales of Morningstar Data, Morningstar Advisor Workstation (including Morningstar Office), Morningstar Direct, Morningstar Equity Research, Premium Membership fees for Morningstar.com, our structured credit research and ratings offerings, and a variety of other investment-related products and services. We generally structure the revenue agreements for these offerings as licenses or subscriptions. We recognize revenue from licenses and subscription sales ratably as we deliver the product or service and over the service obligation period defined by the terms of the customer contract. For new-issue ratings and analysis for CMBS, we charge asset-based fees that are paid by the issuer on the rated balance of the transaction and recognize the revenue immediately upon issuance of the transaction.

We also generate revenue from Internet advertising, primarily from “impression-based” contracts. For advertisers who use our cost-per-impression pricing, we charge fees each time we display their ads on our site.

Our Investment Advisory business includes a broad range of services. Pricing for consulting services is based on the scope of work and the level of service provided, and includes asset-based fees for work we perform that involves investment management or acting as a subadvisor to investment portfolios. In arrangements that involve asset-based fees, we generally invoice clients quarterly in arrears based on average assets for the quarter. We recognize asset-based fees once the fees are fixed and determinable assuming all other revenue recognition criteria are met.

Our Retirement Solutions offerings help retirement plan participants plan and invest for retirement. We offer these services both through retirement plan providers (typically third-party asset management companies that offer proprietary mutual funds) and directly to plan sponsors (employers that offer retirement plans to their employees). For our Retirement Solutions offerings, we provide both a hosted solution as well as proprietary installed software advice solution. Clients can integrate the installed customized software into their existing systems to help investors accumulate wealth, transition into retirement, and manage income during retirement. The revenue arrangements for Retirement Solutions generally extend over multiple years. Our contracts may include one-time setup fees, implementation fees, technology licensing and maintenance fees, asset-based fees for managed retirement accounts, fixed and variable fees for advice and guidance, or a combination of these fee structures. Upon customer acceptance, we recognize revenue ratably over the term of the agreement. We recognize asset-based fees and variable fees in excess of any minimum once the value is fixed and determinable.

Some of our revenue arrangements with our customers combine multiple products and services. These products and services may be provided at different points in time or over different time periods within the same arrangement. We allocate fees to the separate deliverables based on the deliverables’ relative selling price, which is generally based on the price we charge when the same deliverable is sold separately.

We record taxes imposed on revenue-producing transactions (such as sales, use, value-added, and some excise taxes) on a net basis; therefore, we exclude such taxes from revenue in our Consolidated Statements of Income.

Deferred revenue represents the portion of licenses or subscriptions billed or collected in advance of the service being provided, which we expect to recognize as revenue in future periods. Certain arrangements may have cancellation or refund provisions. If we make a refund, it typically reflects the amount collected from a customer for which we have not yet provided services. The refund therefore results in a reduction of deferred revenue.

Advertising Costs. Advertising costs include expenses incurred for various print and Internet ads, search engine fees, and direct mail campaigns. We expense advertising costs as incurred. The table below summarizes our advertising expense for the past three years:
($000)
 
2013

 
2012

 
2011

Advertising expense
 
$
6,939

 
$
6,306

 
$
8,210



Stock-Based Compensation Expense. We account for our stock-based compensation expense in accordance with FASB ASC 718, Compensation—Stock Compensation. Our stock-based compensation expense reflects grants of restricted stock units, restricted stock, and stock options. We measure the fair value of our restricted stock units and restricted stock on the date of grant based on the closing market price of Morningstar's common stock on the day prior to grant. For stock options granted in 2011, we estimated the fair value of our stock options on the date of grant using a Black-Scholes option-pricing model. We amortize the fair values to stock-based compensation expense, net of estimated forfeitures, ratably over the vesting period.

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

Liability for Sabbatical Leave. In certain of our operations, we offer employees a sabbatical leave. Although the sabbatical policy varies by region, in general, Morningstar's full-time employees are eligible for six weeks of paid time off after four years of continuous service. We account for our sabbatical liability in accordance with FASB ASC 710-10-25, Compensated Absences. We record a liability for employees' sabbatical benefits over the period employees earn the right for sabbatical leave which is included in Accrued Compensation in our Consolidated Balance Sheet.

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

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

Income per Share. We compute and present income per share in accordance with FASB ASC 260, Earnings Per Share. The difference between weighted average shares outstanding and diluted shares outstanding primarily reflects the dilutive effect associated with our stock-based compensation plans. We further compute income per share in accordance with FASB ASC 260-10-45-59A, Participating Securities and the Two Class Method. Under the two-class method, we allocate earnings between common stock and participating securities. The two-class method includes an earnings allocation formula that determines earnings per share for each class of common stock according to dividends declared and undistributed earnings for the period. For purposes of calculating earnings per share, we reduce our reported net earnings by the amount allocated to participating securities to arrive at the earnings allocated to common stock shareholders.

ASC 260-10-45-59A requires the dilutive effect of participating securities to be calculated using the more dilutive of the treasury stock or the two-class method. We have determined the two-class method to be the more dilutive. As such, we adjusted the earnings allocated to common stock shareholders in the basic earnings per share calculation for the reallocation of undistributed earnings to participating securities to calculate diluted earnings per share.

Foreign Currency. We translate the financial statements of non-U.S. subsidiaries to U.S. dollars using the period-end exchange rate for assets and liabilities and an average exchange rate for revenue and expense. We use the local currency as the functional currency for all of our non-U.S. subsidiaries. We record translation adjustments for non-U.S. subsidiaries as a component of “Other comprehensive income (loss)” in our Consolidated Statements of Comprehensive Income. We include exchange gains and losses arising from transactions denominated in currencies other than the functional currency in “Other income (expense), net” in our Consolidated Statements of Income.



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

(in thousands, except per share amounts)
 
2013

 
2012

 
2011

 
 
 
 
 
 
 
Basic net income per share attributable to Morningstar, Inc.:
 
 
 
 
 
 
Net income attributable to Morningstar, Inc.:
 
$
123,529

 
$
108,079

 
$
98,357

Less: Distributed earnings available to participating securities
 
(10
)
 
(41
)
 
(40
)
Less: Undistributed earnings available to participating securities
 
(36
)
 
(47
)
 
(259
)
Numerator for basic net income per share — undistributed and distributed earnings available to common shareholders
 
$
123,483

 
$
107,991

 
$
98,058

 
 
 
 
 
 
 
Weighted average common shares outstanding
 
46,158

 
48,497

 
50,032

 
 
 
 
 
 
 
Basic net income per share attributable to Morningstar, Inc.:
 
 
 
 
 
 
Continuing operations
 
$
2.68

 
$
2.12

 
$
1.96

Discontinued operations
 

 
0.11

 

Total
 
$
2.68

 
$
2.23

 
$
1.96

 
 
 
 
 
 
 
Diluted net income per share attributable to Morningstar, Inc.:
 
 
 
 
 
 
Numerator for basic net income per share — undistributed and distributed earnings available to common shareholders
 
$
123,483

 
$
107,991

 
$
98,058

Add: Undistributed earnings allocated to participating securities
 
36

 
47

 
259

Less: Undistributed earnings reallocated to participating securities
 
(36
)
 
(46
)
 
(254
)
Numerator for diluted net income per share — undistributed and distributed earnings available to common shareholders
 
$
123,483

 
$
107,992

 
$
98,063

 
 


 


 
 
Weighted average common shares outstanding
 
46,158

 
48,497

 
50,032

Net effect of dilutive stock options and restricted stock units
 
333

 
651

 
956

Weighted average common shares outstanding for computing diluted income per share
 
46,491

 
49,148

 
50,988

 
 


 


 
 
Diluted net income per share attributable to Morningstar, Inc.:
 
 
 
 
 
 
Continuing operations
 
$
2.66

 
$
2.10

 
$
1.92

Discontinued operations
 

 
0.10

 

Total
 
$
2.66

 
$
2.20

 
$
1.92


The following table shows the number of weighted average stock options, restricted stock units, and restricted stock excluded from our calculation of diluted earnings per share from both continuing operations and net earnings because their inclusion would have been anti-dilutive:
(in thousands)
 
2013

 
2012

 
2011

Weighted average stock options
 

 
83

 
55

Weighted average restricted stock units
 
17

 
7

 

Weighted average restricted stock
 

 

 

Total
 
17

 
90

 
55


These stock options and restricted stock units could be included in the calculation in the future.
Segment and Geographical Area Information
Segment and Geographical Area Information
Segment, Enterprise-Wide, and Geographical Area Information

Segment Information

In the third quarter of 2013, we revised our segment structure to reflect our shift to a more centralized organizational structure. We now report our results in a single reportable segment, which reflects how our chief operating decision maker allocates resources and evaluates our financial results. We have revised our historical financial results to reflect this change.

Because we have a single reportable segment, all required financial segment information can be found directly in the Consolidated Financial Statements.

The accounting policies for our reportable segment are the same as those described in “Note 2. Summary of Significant Accounting Policies”. We evaluate the performance of our reporting segment based on revenue and operating income.

Products and Services Information

We derive revenue from two product groups. The investment information product group includes all of our data, software, and research products and services. These products are typically sold through subscriptions or license agreements. The investment management product group includes all of our asset management operations, which earn the majority of their revenue from asset-based fees. The table below summarizes our revenue by product group:
 
External revenue by product group
 
 
 
 
 
 
 
 
 
 
 
 
 
($000)
 
2013

 
2012

 
2011

Investment information
 
555,642

 
526,147

 
498,265

Investment management
 
142,624

 
132,141

 
133,135

Consolidated revenue
 
$
698,266

 
$
658,288

 
$
631,400



Geographical Area Information

The tables below summarize our revenue and long-lived assets by geographical area:

External revenue by geographical area
 
 
 
 
 
 
 
 
Year ended December 31
($000)
 
2013

 
2012

 
2011

United States
 
$
500,730

 
$
466,947

 
$
446,470

 
 
 
 
 
 
 
United Kingdom
 
56,298

 
56,794

 
53,427

Continental Europe
 
57,580

 
49,844

 
49,507

Australia
 
35,289

 
38,229

 
39,761

Canada
 
31,845

 
30,664

 
27,808

Asia
 
13,860

 
13,765

 
13,188

Other
 
2,664

 
2,045

 
1,239

Total International
 
197,536

 
191,341

 
184,930

 
 
 
 
 
 
 
Consolidated revenue
 
$
698,266

 
$
658,288

 
$
631,400


Long-lived assets by geographical area
 
 
 
 
 
 
As of December 31
($000)
 
2013

 
2012

United States
 
$
84,321

 
$
60,371

 
 
 
 
 
United Kingdom
 
6,873

 
7,435

Continental Europe
 
1,873

 
2,356

Australia
 
1,051

 
1,402

Canada
 
1,275

 
1,773

Asia
 
9,479

 
10,529

Other
 
114

 
156

Total International
 
20,665

 
23,651

 
 
 
 
 
Consolidated property, equipment, and capitalized software, net
 
$
104,986

 
$
84,022

Investments and Fair Value Measurements
Investments and Fair Value Measurements
Investments and Fair Value Measurements
 
We account for our investments in accordance with FASB ASC 320, Investments—Debt and Equity Securities. We classify our investments in three categories: available-for-sale, held-to-maturity, and trading. We monitor the concentration, diversification, maturity, and liquidity of our investment portfolio, which is primarily invested in fixed-income securities, and classify our investment portfolio as shown below:
 
 
 
As of December 31
 
 
($000)
 
2013

 
2012

Available-for-sale
 
$
91,461

 
$
125,786

Held-to-maturity
 
31,214

 
$
26,357

Trading securities
 
7,732

 
$
5,386

Total
 
$
130,407

 
$
157,529


 
The following table shows the cost, unrealized gains (losses), and fair values related to investments classified as available-for-sale and held-to-maturity:
 
 
 
As of December 31, 2013
 
As of December 31, 2012
($000)
 
Cost

 
Unrealized
Gain

 
Unrealized
Loss

 
Fair
Value

 
Cost

 
Unrealized
Gain

 
Unrealized
Loss

 
Fair
Value

Available-for-sale:
 
 

 
 

 
 

 
 

 
 

 
 

 
 

 
 

Government obligations
 
$
19,693

 
$
8

 
$
(3
)
 
$
19,698

 
$
40,669

 
$
29

 
$
(608
)
 
$
40,090

Corporate bonds
 
49,913

 
22

 
(124
)
 
49,811

 
49,339

 
36

 
(292
)
 
49,083

Foreign obligations
 
505

 

 
(2
)
 
503

 
2,437

 
1

 
(19
)
 
2,419

Commercial paper
 
9,482

 
7

 

 
9,489

 
2,000

 

 

 
2,000

Equity securities and exchange-traded funds
 
8,872

 
1,011

 
(141
)
 
9,742

 
19,613

 
1,359

 
(323
)
 
20,649

Mutual funds
 
2,095

 
221

 
(98
)
 
2,218

 
10,499

 
1,092

 
(46
)
 
11,545

Total
 
$
90,560

 
$
1,269

 
$
(368
)
 
91,461

 
$
124,557

 
$
2,517

 
$
(1,288
)
 
$
125,786

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Held-to-maturity:
 
 
 
 
 
 
 
 
 
 

 
 

 
 

 
 

Certificates of deposit
 
$
31,214

 
$

 
$

 
$
31,214

 
$
26,357

 
$

 
$

 
$
26,357


 
As of December 31, 2013 and December 31, 2012, investments with unrealized losses for greater than a 12-month period were not material to the Consolidated Balance Sheets and were not deemed to have other than temporary declines in value.

The table below shows the cost and fair value of investments classified as available-for-sale and held-to-maturity based on their contractual maturities as of December 31, 2013 and December 31, 2012. The expected maturities of certain fixed-income securities may differ from their contractual maturities because some of these holdings have call features that allow the issuers the right to prepay obligations without penalties.
 
 
 
As of December 31, 2013
 
As of December 31, 2012
($000)
 
Cost

 
Fair Value

 
Cost

 
Fair Value

Available-for-sale:
 
 

 
 

 
 

 
 

Due in one year or less
 
$
45,486

 
$
45,402

 
$
87,599

 
$
86,784

Due in one to two years
 
34,107

 
34,099

 
6,846

 
6,808

Equity securities, exchange-traded funds, and mutual funds
 
10,967

 
11,960

 
30,112

 
32,194

Total
 
$
90,560

 
$
91,461

 
$
124,557

 
$
125,786

 
 
 
 
 
 
 
 
 
Held-to-maturity:
 
 

 
 

 
 

 
 

Due in one year or less
 
$
31,210

 
$
31,210

 
$
26,352

 
$
26,352

Due in one to three years
 
4

 
4

 
5

 
5

Total
 
$
31,214

 
$
31,214

 
$
26,357

 
$
26,357


 
As of December 31, 2013 and December 31, 2012, held-to-maturity investments included a $1,500,000 certificate of deposit, held primarily as collateral against bank guarantees for our office leases, primarily in Australia.

The following table shows the realized gains and losses arising from sales of our investments classified as available-for-sale recorded in our Consolidated Statements of Income: 
($000)
 
2013

 
2012

 
2011

Realized gains
 
$
5,550

 
$
1,671

 
$
761

Realized losses
 
(1,343
)
 
(1,133
)
 
(501
)
Realized gains, net
 
$
4,207

 
$
538

 
$
260


 
We determine realized gains and losses using the specific identification method.

The following table shows the net unrealized gains (losses) on trading securities as recorded in our Consolidated Statements of Income:
 
($000)
 
2013

 
2012

 
2011

Unrealized gains (losses), net
 
$
827

 
$
269

 
$
(387
)


The fair value of our assets subject to fair value measurements and that are measured at fair value on a recurring basis using the fair value hierarchy and the necessary disclosures under FASB ASC 820, Fair Value Measurement, are as follows:
 
 
 
Fair Value
 
Fair Value Measurements as of December 31, 2013
 
 
as of
 
Using Fair Value Hierarchy
($000)
 
December 31, 2013
 
Level 1

 
Level 2

 
Level 3

Available-for-sale investments
 
 

 
 

 
 

 
 

Government obligations
 
$
19,698

 
$

 
$
19,698

 
$

Corporate bonds
 
49,811

 

 
49,811

 

Foreign obligations
 
503

 

 
503

 

Commercial paper
 
9,489

 

 
9,489

 

Equity securities and exchange-traded funds
 
9,742

 
9,742

 

 

Mutual funds
 
2,218

 
2,218

 

 

Trading securities
 
7,732

 
7,732

 

 

Cash equivalents
 
925

 
925

 

 

Total
 
$
100,118

 
$
20,617

 
$
79,501

 
$

 
 
 
Fair Value
 
Fair Value Measurements as of December 31, 2012
 
 
as of
 
Using Fair Value Hierarchy
($000)
 
December 31, 2012
 
Level 1

 
Level 2

 
Level 3

Available-for-sale investments
 
 

 
 

 
 

 
 

Government obligations
 
$
40,090

 
$

 
$
40,090

 
$

Corporate bonds
 
49,083

 

 
49,083

 

Foreign obligations
 
2,419

 

 
2,419

 

Commercial paper
 
2,000

 

 
2,000

 

Equity securities and exchange-traded funds
 
20,649

 
20,649

 

 

Mutual funds
 
11,545

 
11,545

 

 

Trading securities
 
5,386

 
5,386

 

 

Cash equivalents
 
398

 
398

 

 

Total
 
$
131,570

 
$
37,978

 
$
93,592

 
$


 
Level 1:
Valuations based on quoted prices in active markets for identical assets or liabilities that we have the ability to access.
Level 2:
Valuations based on quoted prices in markets that are not active or for which all significant inputs are observable, either directly or indirectly.
Level 3:
Valuations based on inputs that are unobservable and significant to the overall fair value measurement.

Based on our analysis of the nature and risks of our investments in equity securities and mutual funds, we have determined that presenting these investment categories each in the aggregate is appropriate.

There were no transfers between levels one and two during the year ended December 31, 2013.

We measure the fair value of money market funds, equity securities, and ETFs based on quoted prices in active markets for identical assets or liabilities. All other financial instruments were valued either based on recent trades of securities in inactive markets or based on quoted market prices of similar instruments and other significant inputs derived from observable market data. We did not hold any securities categorized as Level 3 as of December 31, 2013 and December 31, 2012.
Acquisitions, Goodwill, and Other Intangible Assets
Acquisitions, Goodwill, and Other Intangible Assets
Acquisitions, Goodwill, and Other Intangible Assets
 
2013 Acquisitions

Increased Ownership Interest in Morningstar Sweden AB

In May 2013, we acquired an additional 76% interest in Morningstar Sweden AB (Morningstar Sweden), increasing our ownership to 100% from 24%. Morningstar’s main offerings in Sweden include Morningstar Direct, Morningstar Data, Integrated Web Tools, and Morningstar.se, a website for individual investors that provides fund and ETF data, portfolio tools, and market analysis. We began consolidating the financial results of this acquisition in our Consolidated Financial Statements on May 2, 2013.

Morningstar Sweden's total estimated fair value of $18,513,000 included $14,554,000 in cash paid to acquire the remaining 76% interest in Morningstar Sweden and $3,959,000 related to the 24% of Morningstar Sweden we previously held. We determined the fair value of the previously held 24% investment independent of the acquired controlling interest by applying a minority interest discount based on analysis of comparable transactions. Accordingly, we recorded a non-cash holding gain of $3,635,000, which is classified as "Holding gain upon acquisition of additional ownership of equity-method investments" in our Consolidated Statement of Income for the year ended December 31, 2013.

The following table summarizes our allocation of the estimated fair values of the assets acquired and liabilities assumed at the date of acquisition:
 
 
($000)

Cash and cash equivalents
 
$
3,472

Accounts receivable and other current assets
 
519

Other non-current assets
 
244

Intangible assets
 
9,700

Goodwill
 
8,911

Deferred revenue
 
(1,191
)
Deferred tax liability
 
(2,272
)
Other current and non-current liabilities
 
(870
)
Total fair value of Morningstar Sweden
 
$
18,513



The allocation included acquired intangible assets, as follows:
 
 
($000)

 
Weighted Average Useful Life (years)
Customer-related assets
 
$
9,700

 
14
Total intangible assets
 
$
9,700

 
14


We recognized a deferred tax liability of $2,272,000 mainly because the amortization expense related to certain intangible assets is not deductible for income tax purposes.

Goodwill of $8,911,000 represents the premium over the fair value of the net tangible and intangible assets acquired with this acquisition. We paid this premium for a number of reasons, including the opportunity to offer Morningstar's full suite of products and services to investors in Sweden and further leverage Morningstar's global reach, investment databases, and technology expertise.

2012 and 2011 Acquisitions
 
We did not complete any acquisitions in 2012 and 2011.
 
Goodwill
 
The following table shows the changes in our goodwill balances from January 1, 2012 to December 31, 2013:
 
 
 
($000)

Balance as of January 1, 2012
 
$
318,492

Sale of Morningstar Investor Relations and other businesses
 
(937
)
Other, primarily currency translation
 
3,290

Balance as of December 31, 2012
 
$
320,845

Acquisition of remaining ownership in Morningstar Sweden
 
8,911

Other, primarily currency translation
 
(3,306
)
Balance as of December 31, 2013
 
$
326,450



We did not record any significant impairment losses in 2013, 2012, or 2011, as the estimated fair values of our reporting units exceeded their carrying values. We perform our annual impairment testing during the fourth quarter of each year.

Intangible Assets

The following table summarizes our intangible assets: 
 
 
As of December 31, 2013
 
As of December 31, 2012
($000)
 
Gross

 
Accumulated
Amortization

 
Net

 
Weighted
Average
Useful  Life
(years)
 
Gross

 
Accumulated
Amortization

 
Net

 
Weighted
Average
Useful  Life
(years)
Intellectual property
 
$
29,477

 
$
(23,128
)
 
$
6,349

 
9
 
$
30,621

 
$
(21,527
)
 
$
9,094

 
9
Customer-related assets
 
141,833

 
(74,311
)
 
67,522

 
12
 
132,798

 
(63,005
)
 
69,793

 
12
Supplier relationships
 
240

 
(108
)
 
132

 
20
 
240

 
(96
)
 
144

 
20
Technology-based assets
 
80,489

 
(50,673
)
 
29,816

 
9
 
81,333

 
(43,809
)
 
37,524

 
9
Non-competition agreement
 
1,661

 
(1,571
)
 
90

 
4
 
1,765

 
(1,588
)
 
177

 
4
Total intangible assets
 
$
253,700

 
$
(149,791
)
 
$
103,909

 
10
 
$
246,757

 
$
(130,025
)
 
$
116,732

 
10

 
The following table summarizes our amortization expense related to intangible assets:
($000)
 
2013

 
2012

 
2011

Amortization expense
 
$
21,454

 
$
23,944

 
$
27,267


 
In 2011, we recorded an impairment loss of approximately $800,000 for an acquired intangible asset. We did not record any significant impairment losses in 2013 or 2012.

We amortize intangible assets using the straight-line method over their expected economic useful lives.

Based on acquisitions and divestitures completed through December 31, 2013, we expect intangible amortization expense for 2014 and subsequent years to be as follows:
 
 
($000)

2014
 
$
20,485

2015
 
19,659

2016
 
15,101

2017
 
10,565

2018
 
8,568


 
Our estimates of future amortization expense for intangible assets may be affected by additional acquisitions, divestitures, changes in the estimated average useful life, and currency translations.
Discontinued Operations
Disposal Groups, Including Discontinued Operations, Disclosure [Text Block]
Discontinued Operations

In October 2012, we sold Morningstar Investor Relations Services to UK-based Investis, a leading specialist in digital corporate communications for public companies. In October 2012, we also sold the Morningstar Australasia trade publishing assets to Sterling Publishing Pty Ltd. We have not reclassified the operating results of these businesses to discontinued operations, nor have we reclassified the related assets and liabilities to held for disposition, because these amounts are not significant to our consolidated statements or segment disclosures.

The following table summarizes the amounts included in our Consolidated Statements of Income for discontinued operations for the years ended December 31, 2013, 2012, and 2011:

($000)
 
2013

 
2012

 
2011

Gain on sales of businesses
 
$

 
$
6,193

 
$

Income tax expense
 

 
1,005

 

Earnings from discontinued operations, net of tax
 
$

 
$
5,188

 
$

Investments in Unconsolidated Entities
Investments in Unconsolidated Entities
Investments in Unconsolidated Entities
 
Our investments in unconsolidated entities consist primarily of the following:
 
 
 
As of December 31
 
 
($000)
 
2013

 
2012

Investment in MJKK
 
$
21,782

 
$
20,540

Other equity method investments
 
6,166

 
6,288

Investments accounted for using the cost method
 
10,766

 
8,477

Total investments in unconsolidated entities
 
$
38,714

 
$
35,305


 
Morningstar Japan K.K. Morningstar Japan K.K. (MJKK) develops and markets products and services customized for the Japanese market. MJKK’s shares are traded on the Osaka Stock Exchange, “Hercules Market,” using the ticker 4765. We account for our investment in MJKK using the equity method. The following table summarizes our ownership percentage in MJKK and the market value of this investment based on MJKK’s publicly quoted share price: 
 
 
As of December 31
 
 
 
 
2013

 
2012

Morningstar’s approximate ownership of MJKK
 
34
%
 
34
%
Approximate market value of Morningstar’s ownership in MJKK:
 
 

 
 

Japanese yen (¥000)
 
¥
9,824,068

 
¥
3,109,579

Equivalent U.S. dollars ($000)
 
$
94,999

 
$
36,227



Other Equity Method Investments. As of December 31, 2013 and 2012, other equity method investments include our investments in Inquiry Financial Europe AB (Inquiry Financial) and YCharts, Inc. (YCharts). Inquiry Financial is a provider of sell-side consensus estimate data. Our ownership interest in Inquiry Financial was approximately 34% as of December 31, 2013 and 2012. YCharts is a technology company that provides stock research and analysis. Our ownership interest in YCharts was approximately 22% as of December 31, 2013 and 2012.

As of December 31, 2012, other equity-method investments also included our investment in Morningstar Sweden. Our ownership interest and profit-and-loss sharing interest in Morningstar Sweden was 24% at that date. In May 2013, we acquired the remaining 76% interest in Morningstar Sweden, increasing our ownership to 100%. See Note 6 for additional information concerning our acquisition of Morningstar Sweden.

We did not record any impairment losses on our equity method investments in 2013, 2012, or 2011.
 
Cost Method Investments. As of December 31, 2013 and December 31, 2012, our cost method investments consist mainly of minority investments in HelloWallet LLC (HelloWallet) Pitchbook Data, Inc. (Pitchbook). HelloWallet is a provider of personalized financial guidance to employees of Fortune 1000 companies. Pitchbook offers detailed data and information about private equity transactions, investors, companies, limited partners, and service providers.

We did not record any impairment losses on our cost method investments in 2013, 2012, or 2011.
 
Property, Equipment, and Capitalized Software
Property, Equipment, and Capitalized Software
Property, Equipment, and Capitalized Software

The following table shows our property, equipment, and capitalized software summarized by major category:

 
 
As of December 31
 
 
($000)
 
2013

 
2012

Computer equipment
 
$
47,830

 
$
42,312

Capitalized software
 
50,360

 
39,643

Furniture and fixtures
 
23,259

 
22,804

Leasehold improvements
 
52,512

 
51,333

Telephone equipment
 
2,032

 
1,951

Construction in progress
 
35,159

 
13,489

Property, equipment, and capitalized software, at cost
 
211,152

 
171,532

Less accumulated depreciation
 
(106,166
)
 
(87,510
)
Property, equipment, and capitalized software, net
 
$
104,986

 
$
84,022


The following table shows the amount of capitalized software development costs included in construction in progress:
 
 
As of December 31
 
 
($000)
 
2013

 
2012

Capitalized software development costs not yet placed into service
 
$
11,345

 
$
6,478



The following table summarizes our depreciation expense:
($000)
 
2013

 
2012

 
2011

Depreciation expense
 
$
24,239

 
$
19,152

 
$
15,646

Operating Leases
Operating Leases
Operating Leases

The following table shows our minimum future rental commitments due in each of the next five years and thereafter for all non-cancelable operating leases, consisting primarily of leases for office space:
<
Minimum Future Rental Commitments
 
($000)

2014
 
$
18,987