MORNINGSTAR, INC., 10-Q filed on 5/4/2011
Quarterly Report
Condensed Consolidated Statements of Income (USD $)
In Thousands, except Per Share data
3 Months Ended
Mar. 31,
2011
2010
Revenue
$ 151,767 
$ 128,290 
Operating expense (1):
 
 
Cost of goods sold
40,669 
34,316 
Development
11,988 
10,889 
Sales and marketing
26,482 
22,561 
General and administrative
30,617 
20,643 
Depreciation and amortization
10,202 
8,939 
Total operating expense
119,958 
97,348 
Operating income
31,809 
30,942 
Non-operating income (expense):
 
 
Interest income, net
524 
587 
Other income (expense), net
250 
(766)
Non-operating income (expense), net
774 
(179)
Income before income taxes and equity in net income of unconsolidated entities
32,583 
30,763 
Income tax expense
10,518 
10,995 
Equity in net income of unconsolidated entities
374 
389 
Consolidated net income
22,439 
20,157 
Net loss attributable to the noncontrolling interest
98 
31 
Net income attributable to Morningstar, Inc.
22,537 
20,188 
Net income per share attributable to Morningstar, Inc.:
 
 
Basic (in dollars per share)
0.45 
0.41 
Diluted (in dollars per share)
$ 0.44 
$ 0.40 
Weighted average shares outstanding:
 
 
Basic (in shares)
49,800 
48,828 
Diluted (in shares)
50,953 
50,332 
Condensed Consolidated Statements of Income (Parenthetical) (USD $)
In Thousands
3 Months Ended
Mar. 31,
2011
2010
(1) Includes stock-based compensation expense of:
 
 
Cost of goods sold
$ 879 
$ 715 
Development
471 
393 
Sales and marketing
422 
403 
General and administrative
1,877 
1,426 
Total stock-based compensation expense
$ 3,649 
$ 2,937 
Condensed Consolidated Balance Sheets (USD $)
In Thousands
Mar. 31, 2011
Dec. 31, 2010
Current assets:
 
 
Cash and cash equivalents
$ 193,374 
$ 180,176 
Investments
191,886 
185,240 
Accounts receivable, less allowance of $951 and $1,056, respectively
115,259 
110,891 
Deferred tax asset, net
2,648 
2,860 
Income tax receivable, net
9,361 
10,459 
Other
15,450 
17,654 
Total current assets
527,978 
507,280 
Property, equipment, and capitalized software, net
62,364 
62,105 
Investments in unconsolidated entities
24,664 
24,262 
Goodwill
325,318 
317,661 
Intangible assets, net
162,569 
169,023 
Other assets
7,335 
5,971 
Total assets
1,110,228 
1,086,302 
Current liabilities:
 
 
Accounts payable and accrued liabilities
40,528 
42,680 
Accrued compensation
36,799 
62,404 
Deferred revenue
157,660 
146,267 
Other
1,446 
1,373 
Total current liabilities
236,433 
252,724 
Accrued compensation
5,071 
4,965 
Deferred tax liability, net
18,503 
19,975 
Other long-term liabilities
26,468 
27,213 
Total liabilities
286,475 
304,877 
Morningstar, Inc. shareholders' equity:
 
 
Common stock, no par value, 200,000,000 shares authorized, of which 50,234,935 and 49,874,392 shares were outstanding as of March 31, 2011 and December 31, 2010, respectively
Treasury stock at cost, 276,073 shares as of March 31, 2011 and 279,456 shares as of December 31, 2010
(6,561)
(6,641)
Additional paid-in capital
471,079 
458,426 
Retained earnings
343,402 
323,408 
Accumulated other comprehensive income:
 
 
Currency translation adjustment
13,819 
4,503 
Unrealized gain on available-for-sale securities
1,012 
615 
Total accumulated other comprehensive income
14,831 
5,118 
Total Morningstar, Inc. shareholders' equity
822,756 
780,316 
Noncontrolling interest
997 
1,109 
Total equity
823,753 
781,425 
Total liabilities and equity
$ 1,110,228 
$ 1,086,302 
Condensed Consolidated Balance Sheets (Parenthetical) (USD $)
In Thousands, except Share data
Mar. 31, 2011
Dec. 31, 2010
Condensed Consolidated Balance Sheets
 
 
Accounts receivable, allowance (in dollars)
$ 951 
$ 1,056 
Common stock, no par value (in dollars per share)
 
 
Common stock, shares authorized
200,000,000 
200,000,000 
Common stock, shares outstanding
50,234,935 
49,874,392 
Treasury stock, shares
276,073 
279,456 
Condensed Consolidated Statement of Equity and Comprehensive Income (Loss)
In Thousands, except Share data
Common Stock
Treasury Stock
Additional Paid-In Capital
Retained Earnings
Accumulated Other Comprehensive Income (Loss)
Non Controlling Interests
Comprehensive Income (Loss)
Total
Balance at Dec. 31, 2010
(6,641)
458,426 
323,408 
5,118 
1,109 
 
781,425 
Balance (in shares) at Dec. 31, 2010
49,874,392 
 
 
 
 
 
 
 
Comprehensive income (less):
 
 
 
 
 
 
 
 
Net Income (loss)
 
 
 
22,537 
 
(98)
22,439 
22,439 
Unrealized gain on available-for-sale investments, net of income tax of $211
 
 
 
 
397 
 
397 
397 
Foreign currency translation adjustment, net
 
 
 
 
9,316 
(14)
9,302 
9,302 
Total comprehensive income (loss)
 
 
 
22,537 
9,713 
(112)
32,138 
32,138 
Issuance of common stock related to stock-option exercises and vesting of restricted stock units, net
 
80 
4,841 
 
 
 
 
4,921 
Issuance of common stock related to stock-option exercises and vesting of restricted stock units, net (in shares)
360,543 
 
 
 
 
 
 
 
Stock-based compensation - restricted stock units
 
 
2,785 
 
 
 
 
2,785 
Stock-based compensation - restricted stock
 
 
864 
 
 
 
 
864 
Excess tax benefit derived from stock-option exercises and vesting of restricted stock units
 
 
4,122 
 
 
 
 
4,122 
Dividends declared - common shares outstanding
 
 
 
(2,502)
 
 
 
(2,502)
Dividends declared - restricted stock units
 
 
41 
(41)
 
 
 
 
Balance at Mar. 31, 2011
(6,561)
471,079 
343,402 
14,831 
997 
 
823,753 
Balance (in shares) at Mar. 31, 2011
50,234,935 
 
 
 
 
 
 
 
Condensed Consolidated Statement of Equity and Comprehensive Income (Loss) (Parenthetical) (USD $)
In Thousands
3 Months Ended
Mar. 31, 2011
Condensed Consolidated Statement of Equity and Comprehensive Income (Loss)
 
Unrealized gain on available-for-sale investments, income tax
$ 211 
Condensed Consolidated Statements of Cash Flows (USD $)
In Thousands
3 Months Ended
Mar. 31,
2011
2010
Operating activities
 
 
Consolidated net income
$ 22,439 
$ 20,157 
Adjustments to reconcile consolidated net income to net cash flows from operating activities:
 
 
Depreciation and amortization
10,202 
8,939 
Deferred income tax benefit
(677)
(1,287)
Stock-based compensation expense
3,649 
2,937 
Provision for bad debt
285 
162 
Equity in net income of unconsolidated entities
(374)
(389)
Excess tax benefits from stock-option exercises and vesting of restricted stock units
(4,122)
(3,048)
Other, net
(512)
792 
Changes in operating assets and liabilities, net of effects of acquisitions:
 
 
Accounts receivable
(3,357)
(4,867)
Other assets
1,453 
(480)
Accounts payable and accrued liabilities
(2,600)
1,174 
Accrued compensation
(26,876)
(22,516)
Income taxes payable
5,297 
3,681 
Deferred revenue
9,847 
10,430 
Deferred rent
(399)
(392)
Other liabilities
91 
(843)
Cash provided by operating activities
14,346 
14,450 
Investing activities
 
 
Purchases of investments
(67,352)
(50,964)
Proceeds from maturities and sales of investments
62,359 
87,934 
Capital expenditures
(5,037)
(1,650)
Acquisitions, net of cash acquired
 
(738)
Other, net
(14)
 
Cash provided by (used for) investing activities
(10,044)
34,582 
Financing activities
 
 
Proceeds from stock-option exercises
4,921 
3,494 
Excess tax benefits from stock-option exercises and vesting of restricted stock units
4,122 
3,048 
Dividends paid
(2,494)
 
Other, net
(214)
315 
Cash provided by financing activities
6,335 
6,857 
Effect of exchange rate changes on cash and cash equivalents
2,561 
(1,032)
Net increase in cash and cash equivalents
13,198 
54,857 
Cash and cash equivalents-beginning of period
180,176 
130,496 
Cash and cash equivalents-end of period
193,374 
185,353 
Supplemental disclosure of cash flow information:
 
 
Cash paid for income taxes
6,962 
8,565 
Supplemental information of non-cash investing and financing activities:
 
 
Unrealized gain on available-for-sale investments
$ 609 
$ 46 
Basis of Presentation of Interim Financial Information
Basis of Presentation of Interim Financial Information

1. Basis of Presentation of Interim Financial Information

 

The accompanying condensed consolidated financial statements of Morningstar, Inc. and subsidiaries (Morningstar, we, our, the Company) have been prepared to conform to the rules and regulations of the Securities and Exchange Commission (SEC). The preparation of financial statements in conformity with accounting principles generally accepted in the United States requires management to make estimates and assumptions that affect the reported amount of assets, liabilities, revenue, and expenses. Actual results could differ from those estimates. In the opinion of management, the statements reflect all adjustments, which are of a normal recurring nature, necessary to present fairly our financial position, results of operations, equity, and cash flows. These financial statements and notes should be read in conjunction with our Consolidated Financial Statements and Notes thereto included in our Annual Report on Form 10-K for the year ended December 31, 2010, filed with the SEC on February 28, 2011.

 

The acronyms that appear in the Notes to our Condensed 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

Summary of Significant Accounting Policies
Summary of Significant Accounting Policies

2. Summary of Significant Accounting Policies

 

We discuss our significant accounting policies in Note 3 of our Consolidated Financial Statements included in our Annual Report on Form 10-K for the year ended December 31, 2010, as filed with the SEC on February 28, 2011.

 

In addition, effective January 1, 2011, we adopted FASB ASU No. 2009-13, Revenue Recognition (Topic 605): Multiple-Deliverable Revenue Arrangements. ASU 2009-13 supersedes EITF Issue 00-21, Revenue Arrangements with Multiple Deliverables and establishes the accounting and reporting guidance for arrangements when a vendor performs multiple revenue-generating activities, addresses how to separate deliverables, and specifies how to measure and allocate arrangement consideration. We are applying this guidance for revenue arrangements entered into or materially modified from January 1, 2011. The adoption of ASU 2009-13 does not significantly affect either the timing or amount of our revenue recognition.

 

In conjunction with the adoption of ASU 2009-13, we have updated our disclosures concerning revenue recognition, as follows:

 

Revenue recognition:  We recognize revenue in accordance with SEC SAB 104, 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 Licensed Data, Morningstar Advisor Workstation, including Morningstar Office, Morningstar Direct, Morningstar Equity Research, Premium membership fees for Morningstar.com, and a variety of other investment-related products and services. The revenue arrangements for these offerings are generally structured as licenses or subscriptions. We recognize revenue from licenses and subscription sales ratably as the product or service is delivered and over the service obligation period defined by the terms of the customer contract.

 

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 their ads are displayed on our site.

 

Investment Consulting represents a broad range of services. Pricing for the consulting services is based on the scope of work and the level of service required, 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 Advice 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 Advice offerings, we provide both a hosted solution as well as proprietary installed software advice solution. The installed customized software can be integrated with a client’s existing systems to help investors accumulate wealth, transition into retirement, and manage income during retirement. The revenue arrangements for Retirement Advice 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. This relative selling price 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, such taxes are excluded from revenue in our Consolidated Statements of Income.

 

Deferred revenue represents the portion of subscriptions billed or collected in advance of the service being provided, which we expect to recognize to 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 services have not yet been provided. The refund therefore results in a reduction of deferred revenue.

Acquisitions, Goodwill, and Other Intangible Assets
Acquisitions, Goodwill, and Other Intangible Assets

3. Acquisitions, Goodwill, and Other Intangible Assets

 

2011 Acquisitions

 

We did not complete any acquisitions in the first quarter of 2011.

 

2010 Acquisitions

 

The table below summarizes the acquisitions completed during 2010. Some of the purchase price allocations related to these acquisitions are preliminary as they relate to tax-related balances and values of certain intangible assets. Additional information concerning these acquisitions can be found in the Notes to our Consolidated Financial Statements included in our Annual Report on Form 10-K filed with the SEC on February 28, 2011.

 

Acquisition

 

Description

 

Date of Acquisition

 

Purchase Price*

Footnoted business of Financial Fineprint Inc.

 

Footnoted is a highly regarded blog for professional money managers, analysts, and sophisticated individual investors. Footnoted Pro, a service for institutional investors, provides insight on actionable items and trends in SEC filings.

 

February 1, 2010

 

Not separately disclosed

Aegis Equities Research

 

A leading provider of independent equity research in Sydney, Australia.

 

April 1, 2010

 

$10.7 million

Old Broad Street Research Ltd.

 

A premier provider of fund research, ratings, and investment consulting services in the United Kingdom.

 

April 12, 2010

 

$16.8 million

Realpoint, LLC

 

A Nationally Recognized Statistical Rating Organization (NRSRO) that specializes in structured finance.

 

May 3, 2010

 

$38.4 million in cash and 199,174 shares of restricted stock (valued at approximately $10 million as of the date the acquisition was announced in March 2010)

Morningstar Danmark A/S (Morningstar Denmark)

 

Acquisition of the 75% ownership interest not previously owned by Morningstar, bringing our ownership to 100%.

 

July 1, 2010

 

$14.6 million

Seeds Group

 

A leading provider of investment consulting services and fund research in France.

 

July 1, 2010

 

Not separately disclosed

Annuity intelligence business of Advanced Sales and Marketing Corporation

 

The Annuity Intelligence business provides a web-based service that leverages a proprietary database of more than 1,000 variable annuities that includes “plain-English” translations of complex but important information found in prospectuses and other public filings.

 

November 1, 2010

 

$14.1 million

 

 

* Total purchase price, less cash acquired, subject to post closing adjustments.

 

Goodwill

 

The following table shows the changes in our goodwill balances from December 31, 2010 to March 31, 2011:

 

 

 

($000)

 

Balance as of December 31, 2010

 

$

317,661

 

Adjustments to 2010 acquisitions

 

2,000

 

Other, primarily currency translation

 

5,657

 

Balance as of March 31, 2011

 

$

325,318

 

 

We did not record any impairment losses in the first quarter of 2011 and 2010, respectively. We perform our annual impairment reviews in the fourth quarter.

 

The following table summarizes our intangible assets:

 

 

 

As of  March 31, 2011

 

As of December 31, 2010

 

($000)

 

Gross

 

Accumulated
Amortization

 

Net

 

Weighted
Average
Useful Life
(years)

 

Gross

 

Accumulated
Amortization

 

Net

 

Weighted
Average
Useful Life
(years)

 

Intellectual property

 

$

32,202

 

$

(16,819

)

$

15,383

 

10

 

$

33,990

 

$

(15,970

)

$

18,020

 

10

 

Customer-related assets

 

136,950

 

(43,473

)

93,477

 

12

 

130,675

 

(39,951

)

90,724

 

11

 

Supplier relationships

 

240

 

(75

)

165

 

20

 

240

 

(72

)

168

 

20

 

Technology-based assets

 

81,328

 

(28,531

)

52,797

 

9

 

78,651

 

(25,682

)

52,969

 

9

 

Non-competition agreement

 

1,761

 

(1,014

)

747

 

4

 

1,751

 

(909

)

842

 

4

 

Intangible assets related to acquisitions with preliminary purchase price allocations

 

 

 

 

 

6,407

 

(107

)

6,300

 

10

 

Total intangible assets

 

$

252,481

 

$

(89,912

)

$

162,569

 

10

 

$

251,714

 

$

(82,691

)

$

169,023

 

10

 

 

The following table summarizes our amortization expense related to intangible assets:

 

 

 

Three months ended March 31

 

($000)

 

2011

 

2010

 

Amortization expense

 

$

6,513

 

$

5,468

 

 

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

 

Based on acquisitions completed through March 31, 2011, we expect intangible amortization expense for 2011 and subsequent years as follows:

 

 

 

($000)

 

2011

 

$

25,714

 

2012

 

24,315

 

2013

 

21,595

 

2014

 

20,334

 

2015

 

19,453

 

2016

 

14,836

 

 

Our estimates of future amortization expense for intangible assets may be affected by changes to the preliminary purchase price allocations, additional acquisitions, and currency translations.

Income Per Share
Income Per Share

4. Income Per Share

 

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

 

 

 

Three months ended March 31

 

(in thousands, except per share amounts)

 

2011

 

2010

 

 

 

 

 

 

 

Basic net income per share attributable to Morningstar, Inc.:

 

 

 

 

 

Net income attributable to Morningstar, Inc.:

 

$

22,537

 

$

20,188

 

Less: Distributed earnings available to participating securities

 

(10

)

 

Less: Undistributed earnings available to participating securities

 

(79

)

 

Numerator for basic net income per share — undistributed and distributed earnings available to common shareholders

 

$

22,448

 

$

20,188

 

Weighted average common shares outstanding

 

49,800

 

48,828

 

Basic net income per share attributable to Morningstar, Inc.

 

$

0.45

 

$

0.41

 

 

 

 

 

 

 

Diluted net income per share attributable to Morningstar, Inc.:

 

 

 

 

 

Numerator for basic net income per share — undistributed and distributed earnings available to common shareholders

 

$

22,448

 

$

20,188

 

Add: Undistributed earnings allocated to participating securities

 

79

 

 

Less: Undistributed earnings reallocated to participating securities

 

(78

)

 

Numerator for diluted net income per share — undistributed and distributed earnings available to common shareholders

 

$

22,449

 

$

20,188

 

 

 

 

 

 

 

Weighted average common shares outstanding

 

49,800

 

48,828

 

Net effect of dilutive stock options and restricted stock units

 

1,153

 

1,504

 

Weighted average common shares outstanding for computing diluted income per share

 

50,953

 

50,332

 

 

 

 

 

 

 

Diluted net income per share attributable to Morningstar, Inc.

 

$

0.44

 

$

0.40

Segment and Geographical Area Information
Segment and Geographical Area Information

5. Segment and Geographical Area Information

 

Morningstar has two operating segments:

 

·   Investment Information. The Investment Information segment includes all of our data, software, and research products and services. These products are typically sold through subscriptions or license agreements.

 

The largest products in this segment based on revenue are Licensed Data, Morningstar Advisor Workstation, including Morningstar Office, Morningstar.com, Morningstar Direct, Site Builder and Licensed Tools, and Morningstar Principia. Licensed Data is a set of investment data spanning all of our investment databases, including real-time pricing data, and is available through electronic data feeds. Advisor Workstation is a web-based investment planning system for advisors. Advisor Workstation is available in two editions: Morningstar Office for independent financial advisors and an enterprise edition for financial advisors affiliated with larger firms. Morningstar.com includes both Premium Memberships and Internet advertising sales. Morningstar Direct is a web-based institutional research platform. Site Builder and Licensed Tools are services that help institutional clients build customized websites or enhance their existing sites with Morningstar’s online tools and components. Principia is our CD-ROM-based investment research and planning software for advisors.

 

The Investment Information segment also includes Morningstar Equity Research, which we distribute through several channels. We also sell Equity Research to other companies that purchase our research for their own use or provide our research to their affiliated advisors or individual investor clients.

 

·   Investment Management. The Investment Management segment includes all of our asset management operations, which earn the majority of their revenue from asset-based fees.

 

The key products and services in this segment based on revenue are Investment Consulting, which focuses on investment monitoring and asset allocation for funds of funds, including mutual funds and variable annuities; Retirement Advice, including the Morningstar Retirement Manager and Advice by Ibbotson platforms; and Morningstar Managed Portfolios, a fee-based discretionary asset management service that includes a series of mutual fund, exchange-traded fund, and stock portfolios tailored to meet a range of investment time horizons, risk levels, and investment strategies that financial advisors can use for their clients’ taxable and tax-deferred accounts.

 

Our segment accounting policies are the same as those described in Note 2, except for the capitalization and amortization of internal product development costs, amortization of intangible assets, and costs related to corporate functions. We exclude these items from our operating segment results to provide our chief operating decision maker with a better indication of each segment’s ability to generate cash flow. This information is one of the criteria used by our chief operating decision maker in determining how to allocate resources to each segment. We include capitalization and amortization of internal product development costs, amortization of intangible assets, and costs related to corporate functions in the Corporate Items category. Our segment disclosures are consistent with the business segment information provided to our chief operating decision maker on a recurring basis; for that reason, we don’t present balance sheet information by segment. We disclose goodwill by segment in accordance with the requirements of FASB ASC 350-20-50, Intangibles - Goodwill - Disclosure.

 

The following tables show selected segment data for the three months ended March 31, 2011 and 2010:

 

 

 

Three months ended March 31, 2011

 

($000)

 

Investment
Information

 

Investment
Management

 

Corporate Items

 

Total

 

External revenue

 

$

120,399

 

$

31,368

 

$

 

$

151,767

 

Operating expense, excluding stock-based compensation expense, depreciation, and amortization

 

83,763

 

13,838

 

8,506

 

106,107

 

Stock-based compensation expense

 

2,470

 

442

 

737

 

3,649

 

Depreciation and amortization

 

1,859

 

42

 

8,301

 

10,202

 

Operating income (loss)

 

$

32,307

 

$

17,046

 

$

(17,544

)

$

31,809

 

 

 

 

 

 

 

 

 

 

 

U.S. capital expenditures

 

 

 

 

 

 

 

$

1,930

 

Non-U.S. capital expenditures

 

 

 

 

 

 

 

$

3,107

 

 

 

 

 

 

 

 

 

 

 

U.S. revenue

 

 

 

 

 

 

 

$

108,181

 

Non-U.S. revenue

 

 

 

 

 

 

 

$

43,586

 

 

 

 

Three months ended March 31, 2010

 

($000)

 

Investment
Information

 

Investment
Management

 

Corporate Items

 

Total

 

External revenue

 

$

103,524

 

$

24,766

 

$

 

$

128,290

 

Operating expense, excluding stock-based compensation expense, depreciation, and amortization

 

67,645

 

10,932

 

6,895

 

85,472

 

Stock-based compensation expense

 

1,488

 

493

 

956

 

2,937

 

Depreciation and amortization

 

1,645

 

48

 

7,246

 

8,939

 

Operating income (loss)

 

$

32,746

 

$

13,293

 

$

(15,097

)

$

30,942

 

 

 

 

 

 

 

 

 

 

 

U.S. capital expenditures

 

 

 

 

 

 

 

$

901

 

Non-U.S. capital expenditures

 

 

 

 

 

 

 

$

749

 

 

 

 

 

 

 

 

 

 

 

U.S. revenue

 

 

 

 

 

 

 

$

92,610

 

Non-U.S. revenue

 

 

 

 

 

 

 

$

35,680

 

 

 

 

 As of March 31, 2011

 

(000’s)

 

Investment
Information

 

Investment
Management

 

Corporate Items

 

Total

 

Goodwill

 

$

282,989

 

$

42,329

 

$

 

$

325,318

 

 

 

 

 

 

 

 

 

 

 

U.S. long-lived assets

 

 

 

 

 

 

 

$

39,351

 

Non-U.S. long-lived assets

 

 

 

 

 

 

 

$

23,013

 

 

 

 

As of December 31, 2010

 

(000’s)

 

Investment
Information

 

Investment
Management

 

Corporate Items

 

Total

 

Goodwill

 

$

275,611

 

$

42,050

 

$

 

$

317,661

 

 

 

 

 

 

 

 

 

 

 

U.S. long-lived assets

 

 

 

 

 

 

 

$

39,496

 

Non-U.S. long-lived assets

 

 

 

 

 

 

 

$

22,609

Investments and Fair Value Measurements
Investments and Fair Value Measurements

6. 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:

 

($000)

 

As of March 31
2011

 

As of December 31
2010

 

Available-for-sale

 

$

178,647

 

$

173,072

 

Held-to-maturity

 

7,707

 

7,476

 

Trading securities

 

5,532

 

4,692

 

Total

 

$

191,886

 

$

185,240

 

 

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 March 31, 2011

 

As of December 31, 2010

 

($000)

 

Cost

 

Unrealized
Gain

 

Unrealized
Loss

 

Fair
Value

 

Cost

 

Unrealized
Gain

 

Unrealized
Loss

 

Fair
Value

 

Available-for-sale:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Government obligations

 

$

109,817

 

$

33

 

$

(29

)

$

109,821

 

$

113,597

 

$

36

 

$

(56

)

$

113,577

 

Corporate bonds

 

50,642

 

49

 

(47

)

50,644

 

42,839

 

63

 

(24

)

42,878

 

Commercial paper

 

2,997

 

1

 

 

2,998

 

2,994

 

 

(3

)

2,991

 

Equity securities

 

5,450

 

676

 

(1

)

6,125

 

4,510

 

418

 

(6

)

4,922

 

Mutual funds

 

8,146

 

913

 

 

9,059

 

8,146

 

558

 

 

8,704

 

Total

 

$

177,052

 

$

1,672

 

$

(77

)

$

178,647

 

$

172,086

 

$

1,075

 

$

(89

)

$

173,072

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Held-to-maturity:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Certificates of deposit

 

$

7,707

 

$

 

$

 

$

7,707

 

$

7,476

 

$

 

$

 

$

7,476

 

 

As of March 31, 2011 and December 31, 2010, investments with unrealized losses for greater than a 12-month period were not material to the Condensed 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 March 31, 2011 and December 31, 2010. 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 March 31, 2011

 

As of December 31, 2010

 

($000)

 

Cost

 

Fair Value

 

Cost

 

Fair Value

 

Available-for-sale:

 

 

 

 

 

 

 

 

 

Due in one year or less

 

$

84,865

 

$

84,847

 

$

85,990

 

$

85,964

 

Due in one to three years

 

78,591

 

78,616

 

73,440

 

73,482

 

Equity securities and mutual funds

 

13,596

 

15,184

 

12,656

 

13,626

 

Total

 

$

177,052

 

$

178,647

 

$

172,086

 

$

173,072

 

 

 

 

 

 

 

 

 

 

 

Held-to-maturity:

 

 

 

 

 

 

 

 

 

Due in one year or less

 

$

7,454

 

$

7,454

 

$

7,223

 

$

7,223

 

Due in one to three years

 

253

 

253

 

253

 

253

 

Total

 

$

7,707

 

$

7,707

 

$

7,476

 

$

7,476

 

 

Held-to-maturity investments include a $1,600,000 certificate of deposit held as collateral against two bank guarantees for our office lease 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 Condensed Consolidated Statements of Income:

 

 

 

Three months ended March 31

 

($000)

 

2011

 

2010

 

Realized gains

 

$

64

 

$

17

 

Realized losses

 

 

(1

)

Realized gains, net

 

$

64

 

$

16

 

 

The following table shows the net unrealized gains on trading securities as recorded in our Condensed Consolidated Statements of Income:

 

 

 

Three months ended March 31

 

($000)

 

2011

 

2010

 

Unrealized gains, net

 

$

45

 

$

68

 

 

The fair value of our assets subject to fair value measurements and the necessary disclosures are as follows:

 

 

 

Fair Value

 

Fair Value Measurements as of

 

 

 

as of

 

March 31, 2011 Using Fair Value Hierarchy

 

($000)

 

March 31, 2011

 

Level 1

 

Level 2

 

Level 3

 

Available-for-sale investments

 

 

 

 

 

 

 

 

 

Government obligations

 

$

109,821

 

$

 

$

109,821

 

$

 

Corporate bonds

 

50,644

 

 

50,644

 

 

Commercial paper

 

2,998

 

 

2,998

 

 

Equity securities

 

6,125

 

6,125

 

 

 

Mutual funds

 

9,059

 

9,059

 

 

 

Trading securities

 

5,532

 

5,532

 

 

 

Total

 

$

184,179

 

$

20,716

 

$

163,463

 

$

 

 

 

 

Fair Value

 

Fair Value Measurements as of

 

 

 

as of

 

December 31, 2010 Using Fair Value Hierarchy

 

($000)

 

December 31, 2010

 

Level 1

 

Level 2

 

Level 3

 

Available-for-sale investments

 

 

 

 

 

 

 

 

 

Government obligations

 

$

113,577

 

$

 

$

113,577

 

$

 

Corporate bonds

 

42,878

 

 

42,878

 

 

Commercial paper

 

2,991

 

 

2,991

 

 

Equity securities

 

4,922

 

4,922

 

 

 

Mutual funds

 

8,704

 

8,704

 

 

 

Trading securities

 

4,692

 

4,692

 

 

 

Total

 

$

177,764

 

$

18,318

 

$

159,446

 

$

 

 

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.

 

In the first quarter of 2011, we revised the classification for our investments in government obligations, corporate bonds, and commercial paper. Because these investments typically lack quoted prices from active market exchanges, we believe classifying these investments as Level 2 in the fair value hierarchy is appropriate. We determine the fair value of these investments using prices for recently traded financial instruments with similar underlying terms as well as directly or indirectly observable inputs.

 

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.

Investments in Unconsolidated Entities
Investments in Unconsolidated Entities

7. Investments in Unconsolidated Entities

 

Our investments in unconsolidated entities consist primarily of the following:

 

($000)

 

As of March 31
2011

 

As of December 31
2010

 

Investment in MJKK

 

$

19,362

 

$

19,036

 

Other equity method investments

 

112

 

109

 

Investments accounted for using the cost method

 

5,190

 

5,117

 

Total investments in unconsolidated entities

 

$

24,664

 

$

24,262

 

 

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 March 31
2011

 

As of December 31
2010

 

Morningstar’s approximate ownership of MJKK

 

34

%

34

%

 

 

 

 

 

 

Approximate market value of Morningstar’s ownership in MJKK:

 

 

 

 

 

Japanese yen (¥000)

 

¥

2,657,000

 

¥

3,197,000

 

Equivalent U.S. dollars ($000)

 

$

32,553

 

$

38,361

 

 

Other Equity Method Investments. As of March 31, 2011 and December 31, 2010, other equity method investments include our investment in Morningstar Sweden AB (Morningstar Sweden). Morningstar Sweden develops and markets products and services customized for its respective market. Our ownership interest in Morningstar Sweden was approximately 24% as of March 31, 2011 and December 31, 2010.

 

Cost Method Investments. As of March 31, 2011 and December 31, 2010, our cost method investments consist mainly of minority investments in Pitchbook Data, Inc. (Pitchbook) and Bundle Corporation (Bundle). Pitchbook offers detailed data and information about private equity transactions, investors, companies, limited partners, and service providers. Bundle is a social media company dedicated to helping people make smarter spending and saving choices. Its website, Bundle.com, features a money comparison tool that shows spending trends across the United States, along with a range of information on saving, investing, and budgeting. We did not record any impairment losses on our cost method investments in the first quarter of 2011 and 2010, respectively.

Liability for Vacant Office Space
Liability for Vacant Office Space

8. Liability for Vacant Office Space

 

The following table shows the change in our liability for vacant office space from December 31, 2010 to March 31, 2011:

 

Liability for vacant office space

 

($000)

 

Balance as of December 31, 2010

 

$

2,429

 

Reduction of liability for lease payments

 

(365

)

Balance as of March 31, 2011

 

$

2,064

Stock-Based Compensation
Stock-Based Compensation

9. Stock-Based Compensation

 

Stock-Based Compensation Plans

 

In November 2004, we adopted the 2004 Stock Incentive Plan. The 2004 Stock Incentive Plan provides for grants of options, stock appreciation rights, restricted stock units, and performance shares. All of our employees and our non-employee directors are eligible for awards under the 2004 Stock Incentive Plan. Joe Mansueto, our chairman and chief executive officer, does not participate in the 2004 Stock Incentive Plan or prior plans.

 

Since the adoption of the 2004 Stock Incentive Plan, we have granted stock options, restricted stock units, and restricted stock.

 

Stock options granted under the 2004 Stock Incentive Plan generally vest ratably over a four-year period and expire 10 years after the date of grant. Almost all of the options granted under the 2004 Stock Incentive Plan have a premium feature in which the exercise price increases over the term of the option at a rate equal to the 10-year Treasury bond yield as of the date of grant.

 

Restricted stock units represent the right to receive a share of Morningstar common stock when that unit vests. Restricted stock units granted under the 2004 Stock Incentive Plan generally vest ratably over a four-year period. For restricted stock units granted through December 31, 2008, employees could elect to defer receipt of the Morningstar common stock issued upon vesting of the restricted stock unit.

 

In conjunction with the Realpoint acquisition in May 2010, we issued 199,174 shares of restricted stock to the selling employee-shareholders. The restricted stock vests ratably over a five-year period from the acquisition date and may be subject to forfeiture if the holder terminates his or her employment during the vesting period.

 

The following table summarizes the number of shares available for future grants under our 2004 Stock Incentive Plan:

 

(000)

 

As of March 31
2011

 

As of December 31
2010

 

Shares available for future grants

 

1,643

 

1,600

 

 

Prior to November 2004, we granted stock options under various plans, including the 1993 Stock Option Plan, the 2000 Morningstar Stock Option Plan, and the 2001 Morningstar Stock Option Plan (collectively, the Prior Plans). The 2004 Stock Incentive Plan amends and restates the Prior Plans. Under the 2004 Stock Incentive Plan, we will not grant any additional options under any of the Prior Plans, and any shares subject to an award under any of the Prior Plans that are forfeited, canceled, settled, or otherwise terminated without a distribution of shares, or withheld by us in connection with the exercise of options or in payment of any required income tax withholding, will not be available for awards under the 2004 Stock Incentive Plan.

 

Accounting for Stock-Based Compensation Awards

 

The following table summarizes our stock-based compensation expense and the related income tax benefit we recorded in the three months ended March 31, 2011 and 2010:

 

 

 

Three months ended March 31

 

($000)

 

2011

 

2010

 

Restricted stock units

 

$

2,785

 

$

2,937

 

Restricted stock

 

864

 

 

Total stock-based compensation expense

 

$

3,649

 

$

2,937

 

 

 

 

 

 

 

Income tax benefit related to the stock-based compensation expense

 

$

725

 

$

893

 

 

In accordance with FASB ASC 718, Compensation—Stock Compensation, we estimate forfeitures of employee stock-based awards and recognize compensation cost only for those awards expected to vest. Because our largest annual equity grants typically have vesting dates in the second quarter, we adjust the stock-based compensation expense at that time to reflect those awards that ultimately vested and update our estimate of the forfeiture rate that will be applied to awards not yet vested.

 

Restricted Stock Units

 

We measure the fair value of our restricted stock units on the date of grant based on the closing market price of the underlying common stock on the day prior to grant. We amortize that value to stock-based compensation expense, net of estimated forfeitures, ratably over the vesting period. The following table summarizes restricted stock unit activity during the first three months of 2011:

 

Restricted Stock Units (RSUs)

 

Unvested

 

Vested but
Deferred

 

Total

 

Weighted
Average
Grant Date Value
per RSU

 

RSUs outstanding—December 31, 2010

 

777,666

 

45,189

 

822,855

 

$

47.14

 

Granted

 

1,661

 

 

1,661

 

52.00

 

Vested

 

(12,709

)

 

(12,709

)

49.31

 

Issued

 

 

(20,572

)

(20,572

)

46.47

 

Forfeited

 

(44,266

)

 

(44,266

)

47.69

 

RSUs outstanding—March 31, 2011

 

722,352

 

24,617

 

746,969

 

47.10

 

 

As of March 31, 2011, the total amount of unrecognized stock-based compensation expense related to restricted stock units was approximately $23,296,000. We expect to recognize this expense over an average period of approximately 31 months.

 

Restricted Stock

 

Because of the terms of the restricted share agreements prepared in conjunction with the Realpoint acquisition, we account for these grants as stock-based compensation expense, and not as part of the acquisition consideration. See Note 3, in the Notes to our Condensed Consolidated Financial Statements, for additional information concerning the Realpoint acquisition.

 

We measured the fair value of the restricted stock on the date of grant based on the closing market price of our common stock on the day prior to the grant. We amortize this value to stock-based compensation expense over the vesting period. The stock-based compensation expense recorded in the first quarter of 2011 includes approximately $396,000 of expense recognized upon the accelerated vesting of a restricted stock grant. We have assumed that all of the remaining restricted stock will ultimately vest, and therefore we have not incorporated a forfeiture rate for purposes of determining the stock-based compensation expense.

 

As of March 31, 2011, the total amount of unrecognized stock-based compensation expense related to restricted stock was approximately $7,250,000. We expect to recognize this expense over 49 months, from April 2011 through April 2015.

 

Stock Option Activity

 

All stock options granted under the 2004 Stock Incentive Plan and the Prior Plans were vested as of January 1, 2010. As a result, we no longer recognize expense related to stock option grants. Because the options under these plans expire 10 years after the date of grant, some options granted under these plans remain outstanding as of March 31, 2011.

 

The following tables summarize stock option activity in the first three months of 2011 for our various stock option grants. The first table includes activity for options granted at an exercise price below the fair value per share of our common stock on the grant date; the second table includes activity for all other option grants.

 

Options Granted At an Exercise Price Below the Fair Value Per Share on the Grant Date

 

Underlying
Shares

 

Weighted
Average
Exercise
Price

 

Options outstanding—December 31, 2010

 

648,885

 

$

18.91

 

Exercised

 

(92,830

)

18.93

 

Options outstanding—March 31, 2011

 

556,055

 

19.11

 

 

 

 

 

 

 

Options exercisable— March 31, 2011

 

556,055

 

$

19.11

 

 

All Other Option Grants, Excluding Activity Shown Above

 

Underlying
Shares

 

Weighted
Average
Exercise
Price

 

Options outstanding—December 31, 2010

 

1,207,540

 

$

17.09

 

Canceled

 

(350

)

17.25

 

Exercised

 

(246,307

)

14.52

 

Options outstanding— March 31, 2011

 

960,883

 

17.88

 

 

 

 

 

 

 

Options exercisable— March 31, 2011

 

960,883

 

$

17.88

 

 

The following table summarizes the total intrinsic value (difference between the market value of our stock on the date of exercise and the exercise price of the option) of options exercised:

 

 

 

Three months ended March 31

 

($000)

 

2011

 

2010

 

Intrinsic value of options exercised

 

$

13,933

 

$

10,619

 

 

The table below shows additional information for options outstanding and exercisable as of March 31, 2011:

 

 

 

Options Outstanding and Exercisable

 

Range of Exercise Prices

 

Number of Options

 

Weighted
Average
Remaining
Contractual
Life (years)

 

Weighted
Average
Exercise
Price

 

Aggregate
Intrinsic
Value
($000)

 

$8.57 - $14.70

 

496,723

 

1.46

 

$

10.20

 

$

23,934

 

$19.13 - $42.94

 

1,020,215

 

3.69

 

22.29

 

36,816

 

$8.57 - $42.94

 

1,516,938

 

2.96

 

18.33

 

$

60,750

 

 

The aggregate intrinsic value in the table above represents the total pretax intrinsic value all option holders would have received if they had exercised all outstanding options on March 31, 2011. The intrinsic value is based on our closing stock price of $58.38 on that date.

 

Excess Tax Benefits Related to Stock-Based Compensation

 

FASB ASC 718, Compensation—Stock Compensation, requires that we classify the cash flows that result from excess tax benefits as financing cash flows. Excess tax benefits correspond to the portion of the tax deduction taken on our income tax return that exceeds the amount of tax benefit related to the compensation cost recognized in our Statement of Income. The following table summarizes our excess tax benefits for the three months ended March 31, 2011 and 2010:

 

 

 

Three months ended March 31

 

($000)

 

2011

 

2010

 

Excess tax benefits related to stock-based compensation

 

$

4,122

 

$

3,048

Income Taxes
Income Taxes

10. Income Taxes

 

The following table shows our effective income tax rate for the three months ended March 31, 2011 and 2010:

 

 

 

Three months ended March 31

 

($000)

 

2011

 

2010

 

Income before income taxes and equity in net income of unconsolidated entities

 

$

32,583

 

$

30,763

 

Equity in net income of unconsolidated entities

 

374

 

389

 

Net loss attributable to the noncontrolling interest

 

98

 

31

 

Total

 

$

33,055

 

$

31,183

 

Income tax expense

 

$

10,518

 

$

10,995

 

Effective tax rate

 

31.8

%

35.3

%

 

Our effective tax rate of 31.8% reflects the positive effect of certain income tax benefits, the difference between U.S. federal and foreign tax rates, and tax credits related to our research and development activities.

 

We conduct business globally and as a result, we file income tax returns in U.S. Federal, state, local, and foreign jurisdictions. In the normal course of business we are subject to examination by tax authorities throughout the world. The open tax years for our U.S. Federal tax returns and most state tax returns include the years 2007 to the present. In non-U.S. jurisdictions, the statute of limitations generally extends to years prior to 2004.

 

There were no significant changes to uncertain tax positions in the first quarter of 2011 as a result of lapses of statutes of limitation or audit activity. As of December 31, 2010, our Condensed Consolidated Balance Sheet included a current liability of $654,000 and a non-current liability of $8,173,000 for unrecognized tax benefits. These amounts include interest and penalties, less any associated tax benefits.

 

We are currently under audit by various state and local tax authorities in the United States. We are also under audit by the tax authorities in certain non-U.S. jurisdictions. It is likely that the examination phase of some of these state, local, and non-U.S. audits will conclude in 2011. It is not possible to estimate the impact of current audits on previously recorded unrecognized tax benefits.

 

Our effective tax rate reflects the fact that we are not recording an income tax benefit related to losses recorded by certain of our non-U.S. operations. The net operating losses (NOLs) may become deductible in certain non-U.S. tax jurisdictions to the extent these non-U.S. operations become profitable. In the year certain non-U.S. entities record a loss, we do not record a corresponding tax benefit, thus increasing our effective tax rate. For each of our operations, we evaluate whether it is more likely than not that the tax benefits related to NOLs will be realized. As part of this evaluation, we consider evidence such as tax planning strategies, historical operating results, forecasted taxable income, and recent financial performance. Upon determining that it is more likely than not that the NOLs will be realized, we reduce the tax valuation allowances related to these NOLs, which results in a reduction to our income tax expense and our effective tax rate in the period.

Contingencies
Contingencies

11. Contingencies

 

InvestPic, LLC

 

In November 2010, InvestPic, LLC filed a complaint in the United States District Court for the District of Delaware against Morningstar, Inc. and several other companies alleging that each defendant infringes U.S. Patent No. 6,349,291, which relates to methods for performing statistical analysis on investment data and displaying the analyzed data in graphical form. InvestPic seeks, among other things, unspecified damages because of defendants’ alleged infringing activities and costs. Morningstar is evaluating the lawsuit but cannot predict the outcome of the proceeding.

 

Egan-Jones Rating Co.

 

In June 2010, Egan-Jones Rating Co. filed a complaint in the Court of Common Pleas of Montgomery County, Pennsylvania against Realpoint, LLC and Morningstar, Inc. in connection with a December 2007 agreement between Egan-Jones and Realpoint for certain data-sharing and other services. In addition to damages, Egan-Jones filed a petition seeking an injunction to temporarily prevent Morningstar from offering corporate credit ratings through December 31, 2010. In September 2010, the court denied Egan-Jones’s request for a preliminary injunction against Morningstar’s corporate credit ratings business. Realpoint and Morningstar continue to vigorously contest liability on all of Egan-Jones’ claims for damages. We cannot predict the outcome of the proceeding.

 

Business Logic Holding Corporation

 

In November 2009, Business Logic Holding Corporation filed a complaint in the Circuit Court of Cook County, Illinois against Ibbotson Associates, Inc. and Morningstar, Inc. relating to Ibbotson’s prior commercial relationship with Business Logic. Business Logic is alleging that Ibbotson Associates and Morningstar violated Business Logic’s rights by using its trade secrets to develop a proprietary web-service software and user interface that connects plan participant data with the Ibbotson Wealth Forecasting Engine. Business Logic seeks, among other things, injunctive relief and unspecified damages. Ibbotson and Morningstar answered the complaint, and Ibbotson asserted a counterclaim against Business Logic alleging trade secret misappropriation and breach of contract, seeking damages and injunctive relief. While Morningstar and Ibbotson Associates are vigorously contesting the claims against them, we cannot predict the outcome of the proceeding.

 

Morningstar Associates, LLC Subpoena from the New York Attorney General’s Office

 

In December 2004, Morningstar Associates, LLC, a wholly owned subsidiary of Morningstar, Inc., received a subpoena from the New York Attorney General’s office seeking information and documents related to an investigation the New York Attorney General’s office is conducting. The subpoena asks for documents relating to the investment consulting services the company offers to retirement plan providers, including fund lineup recommendations for retirement plan sponsors. Morningstar Associates has provided the requested information and documents.

 

In 2005, Morningstar Associates received subpoenas seeking information and documents related to investigations being conducted by the SEC and United States Department of Labor. The subpoenas were similar in scope to the New York Attorney General subpoena. In January 2007 and September 2009, respectively, the SEC and Department of Labor each notified Morningstar Associates that it had ended its investigation, with no enforcement action, fines, or penalties.

 

In January 2007, Morningstar Associates received a Notice of Proposed Litigation from the New York Attorney General’s office. The Notice centers on disclosure relating to an optional service offered to retirement plan sponsors (employers) that select 401(k) plan services from ING, one of Morningstar Associates’ clients. The Notice gave Morningstar Associates the opportunity to explain why the New York Attorney General’s office should not institute proceedings. Morningstar Associates promptly submitted its explanation and has cooperated fully with the New York Attorney General’s office.

 

We cannot predict the scope, timing, or outcome of this matter, which may include the institution of administrative, civil, injunctive, or criminal proceedings, the imposition of fines and penalties, and other remedies and sanctions, any of which could lead to an adverse impact on our stock price, the inability to attract or retain key employees, and the loss of customers. We also cannot predict what impact, if any, this matter may have on our business, operating results, or financial condition.

 

Other matters

 

In addition to these proceedings, we are involved in legal proceedings and litigation that have arisen in the normal course of our business. Although the outcome of a particular proceeding can never be predicted, we do not believe that the result of any of these other matters will have a material adverse effect on our business, operating results, or financial position.

Quarterly Dividend and Share Repurchase Programs
Quarterly Dividend and Share Repurchase Programs

12. Quarterly Dividend and Share Repurchase Programs

 

In February 2011, our board of directors declared a quarterly dividend of 5 cents per share. The quarterly dividend was paid on April 29, 2011 to shareholders of record as of April 15, 2011. As of March 31, 2011, we recorded a liability for dividends payable of $2,502,000.

 

In September 2010, the board of directors approved a share repurchase program that authorizes the repurchase of up to $100 million in shares of our outstanding common stock. We may repurchase shares from time to time at prevailing market prices on the open market or in private transactions in amounts that we deem appropriate. As of March 31, 2011, we had repurchased 76,218 shares for $3,785,000 under this authorization.

Document and Entity Information
3 Months Ended
Mar. 31, 2011
Apr. 29, 2011
Document and Entity Information
 
 
Entity Registrant Name
Morningstar, Inc. 
 
Entity Central Index Key
0001289419 
 
Document Type
10-Q 
 
Document Period End Date
2011-03-31 
 
Amendment Flag
FALSE 
 
Current Fiscal Year End Date
12/31 
 
Entity Current Reporting Status
Yes 
 
Entity Filer Category
Large Accelerated Filer 
 
Entity Common Stock, Shares Outstanding
 
50,265,946 
Document Fiscal Year Focus
2011 
 
Document Fiscal Period Focus
Q1