MORNINGSTAR, INC., 10-Q filed on 5/1/2014
Quarterly Report
Document and Entity Information
3 Months Ended
Mar. 31, 2014
Apr. 25, 2014
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-Q 
 
Document Period End Date
Mar. 31, 2014 
 
Document Fiscal Year Focus
2014 
 
Document Fiscal Period Focus
Q1 
 
Amendment Flag
false 
 
Entity Common Stock, Shares Outstanding
 
44,734,223 
Condensed Consolidated Statements of Income (USD $)
In Thousands, except Per Share data, unless otherwise specified
3 Months Ended
Mar. 31, 2014
Mar. 31, 2013
Revenue
$ 181,165 
$ 168,856 
Operating expense (1):
 
 
Cost of revenue
75,714 1
61,650 1
Sales and marketing
28,428 1
27,980 1
General and administrative
26,104 1
27,327 1
Depreciation and amortization
12,387 1
11,339 1
Total operating expense
142,633 1
128,296 1
Operating income (loss)
38,532 
40,560 
Non-operating income (expense):
 
 
Interest income (expense), net
585 
741 
Gain (loss) on sale of investments reclassified from other comprehensive income
(24)
725 
Other income (expense), net
304 
(521)
Non-operating income (expense), net
865 
945 
Income before income taxes and equity in net income of unconsolidated entities
39,397 
41,505 
Equity in net income of unconsolidated entities
599 
497 
Income tax expense
13,650 
12,427 
Consolidated net income
26,346 
29,575 
Net (income) loss attributable to the noncontrolling interest
30 
43 
Net income attributable to Morningstar, Inc.
$ 26,376 
$ 29,618 
Net income per share attributable to:
 
 
Basic (in dollars per share)
$ 0.59 
$ 0.64 
Diluted (in dollars per share)
$ 0.58 
$ 0.63 
Dividends declared per common share
$ 0.17 
$ 0.125 
Dividends paid per common share
$ 0.17 
$ 0 
Weighted average shares outstanding:
 
 
Basic (in shares)
44,777 
46,406 
Diluted (in shares)
45,093 
46,814 
Condensed Consolidated Statements of Income (Parenthetical) (USD $)
In Thousands, unless otherwise specified
3 Months Ended
Mar. 31, 2014
Mar. 31, 2013
(1) Includes stock-based compensation expense of:
 
 
Allocated Share-based Compensation Expense
$ 3,939 
$ 3,783 
Cost of Revenue
 
 
(1) Includes stock-based compensation expense of:
 
 
Allocated Share-based Compensation Expense
1,762 
1,701 
Sales and Marketing
 
 
(1) Includes stock-based compensation expense of:
 
 
Allocated Share-based Compensation Expense
497 
512 
General and Administrative
 
 
(1) Includes stock-based compensation expense of:
 
 
Allocated Share-based Compensation Expense
$ 1,680 
$ 1,570 
Condensed Consolidated Statements of Comprehensive Income (USD $)
In Thousands, unless otherwise specified
3 Months Ended
Mar. 31, 2014
Mar. 31, 2013
Consolidated net income
$ 26,346 
$ 29,575 
Other comprehensive income (loss):
 
 
Foreign currency translation adjustment
2,472 
(9,071)
Unrealized gains on securities, net of tax:
 
 
Unrealized holding gains arising during period
116 
1,166 
Reclassification of (gains) losses included in net income
15 
(463)
Other comprehensive income (loss)
2,603 
(8,368)
Comprehensive income
28,949 
21,207 
Comprehensive income
142 
Comprehensive income attributable to Morningstar, Inc.
$ 28,954 
$ 21,349 
Condensed Consolidated Balance Sheets (USD $)
In Thousands, unless otherwise specified
Mar. 31, 2014
Dec. 31, 2013
Current assets:
 
 
Cash and cash equivalents
$ 204,633 
$ 168,160 
Investments
59,340 
130,407 
Accounts receivable, less allowance of $827 and $1,089, respectively
131,464 
114,131 
Deferred tax asset, net
4,381 
3,892 
Income tax receivable, net
3,942 
Other
25,124 
26,361 
Total current assets
424,942 
446,893 
Property, equipment, and capitalized software, net
107,438 
104,986 
Investments in unconsolidated entities
39,176 
38,714 
Goodwill
327,936 
326,450 
Intangible assets, net
98,947 
103,909 
Other assets
8,978 
9,716 
Total assets
1,007,417 
1,030,668 
Current liabilities:
 
 
Accounts payable and accrued liabilities
39,790 
42,131 
Accrued compensation
41,718 
71,403 
Deferred revenue
159,591 
149,225 
Other
6,758 
6,786 
Total current liabilities
247,857 
269,545 
Accrued compensation
7,495 
8,193 
Deferred tax liability, net
21,743 
23,755 
Deferred rent
23,541 
23,938 
Other long-term liabilities
10,064 
13,947 
Total liabilities
310,700 
339,378 
Morningstar, Inc. shareholders' equity:
 
 
Common stock, no par value, 200,000,000 shares authorized, of which 44,732,223 and 44,967,423 shares were outstanding as of March 31, 2014 and December 31, 2013, respectively
Treasury stock at cost, 7,485,203 shares as of March 31, 2014 and 7,202,896 shares as of December 31, 2013
(470,751)
(449,054)
Additional paid-in capital
545,358 
539,507 
Retained earnings
613,326 
594,626 
Accumulated other comprehensive income:
 
 
Currency translation adjustment
7,056 
4,609 
Unrealized gain on available-for-sale securities
695 
564 
Total accumulated other comprehensive income
7,751 
5,173 
Total Morningstar, Inc. shareholders' equity
695,689 
690,257 
Noncontrolling interest
1,028 
1,033 
Total equity
696,717 
691,290 
Total liabilities and equity
$ 1,007,417 
$ 1,030,668 
Condensed Consolidated Balance Sheets (Parenthetical) (USD $)
In Thousands, except Share data, unless otherwise specified
Mar. 31, 2014
Dec. 31, 2013
Statement of Financial Position [Abstract]
 
 
Allowance for Doubtful Accounts Receivable, Current
$ 827 
$ 1,089 
Common Stock, No Par Value
$ 0 
$ 0 
Common Stock, Shares Authorized
200,000,000 
200,000,000 
Common Stock, Shares, Outstanding
44,732,223 
44,967,423 
Treasury Stock, Shares
7,485,203 
7,202,896 
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, 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 
 
 
 
 
 
Increase (Decrease) in Stockholders' Equity
 
 
 
 
 
 
 
Net income (loss)
26,346 
 
 
 
26,376 
 
(30)
Other comprehensive income (loss):
 
 
 
 
 
 
 
Unrealized gain on available-for-sale investments, net of income tax of $54
116 
   
   
   
   
116 
Reclassification of adjustments for losses included in net income, net of income tax of $9
15 
   
   
   
   
15 
Foreign currency translation adjustment, net
2,472 
   
   
   
   
2,447 
25 
Other comprehensive income (loss)
2,603 
   
   
   
   
2,578 
25 
Issuance of common stock related to stock-option exercises and vesting of restricted stock units, net
1,271 
1,271 
   
   
   
Issuance of common stock related to stock-option exercises and vesting of restricted stock units, net (in shares)
 
47,107 
 
 
 
 
 
Adjustments to Additional Paid in Capital, Share-based Compensation, Requisite Service Period Recognition
 
 
 
 
 
 
 
Stock-based compensation - restricted stock units
3,692 
   
   
3,692 
   
   
   
Stock-based compensation - restricted stock
97 
   
   
97 
   
   
   
Stock-based compensation — performance share awards
27 
27 
Stock-based compensation - stock options
123 
   
   
123 
   
   
   
Excess tax benefit derived from stock-option exercises and vesting of restricted stock units
573 
   
   
573 
   
   
   
Common share repurchased
(21,697)
   
(21,697)
   
   
   
   
Common share repurchased (in shares)
 
(282,307)
 
 
 
 
 
Dividends declared - common shares outstanding
(7,606)
   
   
   
(7,606)
   
   
Dividends declared - restricted stock units
(2)
   
   
68 
(70)
   
   
Balance at Mar. 31, 2014
$ 696,717 
$ 5 
$ (470,751)
$ 545,358 
$ 613,326 
$ 7,751 
$ 1,028 
Balance (in shares) at Mar. 31, 2014
44,732,223 
44,732,223 
 
 
 
 
 
Condensed Consolidated Statement of Equity (Parenthetical) (USD $)
In Thousands, unless otherwise specified
3 Months Ended
Mar. 31, 2014
Statement of Stockholders' Equity [Abstract]
 
Other Comprehensive Income (Loss), Unrealized Holding Gain (Loss) on Securities Arising During Period, Tax
$ 54 
Other Comprehensive Income (Loss), Reclassification Adjustment for Sale of Securities Included in Net Income, Tax
$ 9 
Condensed Consolidated Statements of Cash Flows (USD $)
In Thousands, unless otherwise specified
3 Months Ended
Mar. 31, 2014
Mar. 31, 2013
Operating activities
 
 
Consolidated net income
$ 26,346 
$ 29,575 
Adjustments to reconcile consolidated net income to net cash flows from operating activities:
 
 
Depreciation and amortization
12,387 1
11,339 1
Deferred income taxes
(2,338)
(2,934)
Stock-based compensation expense
3,939 
3,783 
Provision for bad debt
(295)
175 
Equity in net income of unconsolidated entities
(599)
(497)
Excess tax benefits from stock-option exercises and vesting of restricted stock units
(573)
(1,587)
Other, net
(243)
(632)
Changes in operating assets and liabilities, net of effects of acquisitions:
 
 
Accounts receivable
(16,807)
(5,906)
Other assets
(3,301)
(6,575)
Accounts payable and accrued liabilities
4,539 
400 
Accrued compensation
(27,378)
(31,812)
Income taxes- current
7,221 
14,487 
Deferred revenue
10,151 
17,769 
Deferred rent
(506)
(461)
Other liabilities
(659)
(451)
Cash provided by operating activities
11,884 
26,673 
Investing activities
 
 
Purchases of investments
(1,697)
(3,694)
Proceeds from maturities and sales of investments
73,712 
61,152 
Capital expenditures
(20,793)
(9,118)
Other, net
260 
892 
Cash used for investing activities
51,482 
49,232 
Financing activities
 
 
Proceeds from stock-option exercises, net
1,278 
2,088 
Employee taxes withheld for restricted stock units
(7)
(82)
Excess tax benefits from stock-option exercises and vesting of restricted stock units
573 
1,587 
Common shares repurchased
(21,697)
(15,240)
Dividends paid
(7,644)
Other, net
(5)
(3)
Cash provided by (used for) financing activities
(27,502)
(11,650)
Effect of exchange rate changes on cash and cash equivalents
609 
(3,252)
Net increase (decrease) in cash and cash equivalents
36,473 
61,003 
Cash and cash equivalents-beginning of period
168,160 
163,889 
Cash and cash equivalents-end of period
204,633 
224,892 
Supplemental disclosure of cash flow information:
 
 
Cash paid for income taxes
8,785 
627 
Supplemental information of non-cash investing and financing activities:
 
 
Unrealized gain on available-for-sale investments
193 
1,102 
Equipment obtained under long-term financing arrangement
$ 0 
$ 4,860 
Basis of Presentation of Interim Financial Information
Basis of Presentation of Interim Financial Information
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 are unaudited and should be read in conjunction with our Audited Consolidated Financial Statements and Notes thereto included in our Annual Report on Form 10-K for the year ended December 31, 2013, filed with the SEC on February 28, 2014.

Certain prior period amounts have been reclassified to conform to our current period's presentation. We now include development expense in the cost of revenue category. We have reclassified development expense to include it in cost of revenue for all periods presented. We previously reported development expense as a separate operating expense category.

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 the first three months of 2014 as compared with the same period in 2013, changes related to our more centralized organizational structure added approximately $7 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 $4 million and $3 million, respectively. These changes did not affect our total operating expense or operating income for any of the periods presented.

The acronyms that appear in the Notes to our Unaudited Condensed Consolidated Financial Statements refer to the following:
 
ASC: Accounting Standards Codification
ASU: Accounting Standards Update
FASB: Financial Accounting Standards Board
 
Correction
Correction
Correction

In 2014, we identified and corrected an immaterial classification error related to the current and long-term balance for deferred rent included on our Consolidated Balance Sheets as of December 31, 2013. The correcting entries had the effect of decreasing accounts payable and accrued liabilities by $10.7 million and increasing deferred rent (long-term) by the same amount. The financial statements have been corrected to reduce the current balance and increase the long-term balance as shown in the table below:
 
 
As of December 31, 2013
($000)
 
Previously Reported

 
Correction

 
As Corrected

Accounts payable and accrued liabilities
 
$
52,877

 
$
(10,746
)
 
$
42,131

Deferred rent
 
$
13,192

 
$
10,746

 
$
23,938

Summary of Significant Accounting Policies
Summary of Significant Accounting Policies
Summary of Significant Accounting Policies

We discuss our significant accounting policies in Note 2 of our Audited Consolidated Financial Statements included in our Annual Report on Form 10-K for the year ended December 31, 2013, filed with the SEC on February 28, 2014.

In addition, effective January 1, 2014, we adopted FASB ASU No. 2013-05, Foreign Currency Matters (Topic 830): Parent's Accounting for the Cumulative Translation Adjustment upon Derecognition of Certain Subsidiaries or Groups of Assets within a Foreign Entity or an Investment in a Foreign Entity (a consensus of the FASB Emerging Issues Task Force). ASU No. 2013-05 specifies that when a reporting entity (parent) ceases to have a controlling financial interest in a subsidiary or group of assets that is a business within a foreign entity, the parent is required to apply the guidance in Subtopic 830-30 to release any related cumulative translation adjustment into net income. Accordingly, the cumulative translation adjustment should be released into net income only if the sale or transfer results in the complete or substantially complete liquidation of the foreign entity in which the subsidiary or group of assets had resided. Additionally, the amendments in this update clarify that the sale of an investment in a foreign entity includes both (1) events that result in the loss of a controlling financial interest in a foreign entity and (2) events that results in an acquirer obtaining control of an acquiree in which it held an equity interest immediately before the acquisition date (sometimes referred to as a step acquisition). The currency translation adjustment should be released into net income upon the occurrence of those events. The adoption of ASU No. 2013-05 did not have a material effect on our consolidated financial statements.

We also adopted FASB ASU No. 2013-11, Income Taxes (Topic 740): Presentation of an Unrecognized Tax Benefit When a Net Operating Loss Carryforward, a Similar Tax Loss, or a Tax Credit Carryforward Exists (a consensus of the FASB Emerging Issues Task Force), effective January 1, 2014. This update requires an entity to present an unrecognized tax benefit as a reduction of a deferred tax asset for a net operating loss (NOL) carryforward, or similar tax loss or tax credit carryforward, rather than as a liability when (1) the uncertain tax position would reduce the NOL or other carryforward under the tax law of the applicable jurisdiction and (2) the entity intends to use the deferred tax asset for that purpose. The update does not require new recurring disclosures. The adoption of ASU No. 2013-11 did not have a material effect on our consolidated financial statements.
Goodwill and Other Intangible Assets
Goodwill and Other Intangible Assets
Goodwill and Other Intangible Assets

Goodwill
 
The following table shows the changes in our goodwill balances from December 31, 2013 to March 31, 2014:
 
 
 
($000)

Balance as of December 31, 2013
 
$
326,450

Foreign currency translation
 
1,486

Balance as of March 31, 2014
 
$
327,936



We did not record any impairment losses in the first three months of 2014 or 2013. We perform our annual impairment reviews in the fourth quarter.

Intangible Assets

The following table summarizes our intangible assets: 
 
 
As of March 31, 2014
 
As of December 31, 2013
($000)
 
Gross

 
Accumulated
Amortization

 
Net

 
Weighted
Average
Useful  Life
(years)
 
Gross

 
Accumulated
Amortization

 
Net

 
Weighted
Average
Useful  Life
(years)
Intellectual property
 
$
29,778

 
$
(23,973
)
 
$
5,805

 
9
 
$
29,477

 
$
(23,128
)
 
$
6,349

 
9
Customer-related assets
 
141,991

 
(77,361
)
 
64,630

 
12
 
141,833

 
(74,311
)
 
67,522

 
12
Supplier relationships
 
240

 
(111
)
 
129

 
20
 
240

 
(108
)
 
132

 
20
Technology-based assets
 
80,870

 
(52,567
)
 
28,303

 
9
 
80,489

 
(50,673
)
 
29,816

 
9
Non-competition agreement
 
1,686

 
(1,606
)
 
80

 
4
 
1,661

 
(1,571
)
 
90

 
4
Total intangible assets
 
$
254,565

 
$
(155,618
)
 
$
98,947

 
10
 
$
253,700

 
$
(149,791
)
 
$
103,909

 
10
 
The following table summarizes our amortization expense related to intangible assets:
 
 
Three months ended March 31
($000)
 
2014

 
2013

Amortization expense
 
$
5,142

 
$
5,625


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

We expect intangible amortization expense for 2014 and subsequent years as follows:
 
 
($000)

2014
 
$
20,547

2015
 
19,719

2016
 
15,145

2017
 
10,577

2018
 
8,574

2019
 
7,386


 
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.

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:

 
 
Three months ended March 31
(in thousands, except per share amounts)
 
2014

 
2013

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

 
 

Net income attributable to Morningstar, Inc.:
 
$
26,376

 
$
29,618

Less: Distributed earnings available to participating securities
 
(3
)
 
(15
)
Less: Undistributed earnings available to participating securities
 
(7
)
 
(13
)
Numerator for basic net income per share — undistributed and distributed earnings available to common shareholders
 
$
26,366

 
$
29,590

 
 
 
 
 
Weighted average common shares outstanding
 
44,777

 
46,406

 
 
 
 
 
Basic net income per share attributable to Morningstar, Inc.
 
$
0.59

 
$
0.64

 
 
 
 
 
Diluted net income per share attributable to Morningstar, Inc.:
 
 
 
 
Numerator for basic net income per share — undistributed and distributed earnings available to common shareholders
 
$
26,366

 
$
29,590

Add: Undistributed earnings allocated to participating securities
 
7

 
13

Less: Undistributed earnings reallocated to participating securities
 
(7
)
 
(13
)
Numerator for diluted net income per share — undistributed and distributed earnings available to common shareholders
 
$
26,366

 
$
29,590

 
 


 


Weighted average common shares outstanding
 
44,777

 
46,406

Net effect of dilutive stock options and restricted stock units
 
316

 
408

Weighted average common shares outstanding for computing diluted income per share
 
45,093

 
46,814

 
 


 


Diluted net income per share attributable to Morningstar, Inc.
 
$
0.58

 
$
0.63


The following table shows the number of weighted average stock options, restricted stock units, performance share awards, and restricted stock excluded from our calculation of diluted earnings per share because their inclusion would have been anti-dilutive:
 
 
Three months ended March 31
(in thousands)
 
2014

 
2013

Weighted average stock options
 

 

Weighted average restricted stock units
 
6

 
9

Weighted average performance share awards
 
9

 

Weighted average restricted stock
 

 

Total
 
15

 
9


These restricted stock units and performance share awards 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

Beginning with 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.

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

The accounting policies for our single reportable segment are the same as those described in “Note 2. Summary of Significant Accounting Policies” included in our Annual Report on Form 10-K for the year ended December 31, 2013. 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
 
 
 
 
 
 
Three months ended March 31
($000)
 
2014

 
2013

Investment information
 
$
141,270

 
$
135,085

Investment management
 
39,895

 
33,771

Consolidated revenue
 
$
181,165

 
$
168,856



Geographical Area Information

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

External revenue by geographical area
 
 
 
 
 
 
Three months ended March 31
($000)
 
2014

 
2013

United States
 
$
129,952

 
$
121,413

 
 
 
 
 
United Kingdom
 
15,338

 
13,153

Continental Europe
 
15,626

 
13,167

Australia
 
8,168

 
9,352

Canada
 
7,667

 
7,736

Asia
 
3,709

 
3,424

Other
 
705

 
611

Total International
 
51,213

 
47,443

 
 
 
 
 
Consolidated revenue
 
$
181,165

 
$
168,856



Long-lived assets by geographical area
 
 
 
 
 
 
As of March 31
 
As of December 31
($000)
 
2014

 
2013

United States
 
$
88,154

 
$
84,321

 
 
 
 
 
United Kingdom
 
6,552

 
6,873

Continental Europe
 
1,666

 
1,873

Australia
 
1,005

 
1,051

Canada
 
1,101

 
1,275

Asia
 
8,854

 
9,479

Other
 
106

 
114

Total International
 
19,284

 
20,665

 
 
 
 
 
Consolidated property, equipment, and capitalized software, net
 
$
107,438

 
$
104,986

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 March 31
 
As of December 31
($000)
 
2014

 
2013

Available-for-sale
 
$
22,975

 
$
91,461

Held-to-maturity
 
28,448

 
31,214

Trading securities
 
7,917

 
7,732

Total
 
$
59,340

 
$
130,407




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, 2014
 
As of December 31, 2013
($000)
 
Cost

 
Unrealized
Gain

 
Unrealized
Loss

 
Fair
Value

 
Cost

 
Unrealized
Gain

 
Unrealized
Loss

 
Fair
Value

Available-for-sale:
 
 

 
 

 
 

 
 

 
 

 
 

 
 

 
 

Government obligations
 
$
5,652

 
$
6

 
$

 
$
5,658

 
$
19,693

 
$
8

 
$
(3
)
 
$
19,698

Corporate bonds
 
5,206

 
5

 

 
5,211

 
49,913

 
22

 
(124
)
 
49,811

Foreign obligations
 

 

 

 

 
505

 

 
(2
)
 
503

Commercial paper
 

 

 

 

 
9,482

 
7

 

 
9,489

Equity securities and exchange-traded funds
 
8,916

 
1,068

 
(123
)
 
9,861

 
8,872

 
1,011

 
(141
)
 
9,742

Mutual funds
 
2,106

 
233

 
(94
)
 
2,245

 
2,095

 
221

 
(98
)
 
2,218

Total
 
$
21,880

 
$
1,312

 
$
(217
)
 
$
22,975

 
$
90,560

 
$
1,269

 
$
(368
)
 
$
91,461

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Held-to-maturity:
 
 

 
 

 
 

 
 

 
 

 
 

 
 

 
 

Certificates of deposit
 
$
28,448

 
$

 
$

 
$
28,448

 
$
31,214

 
$

 
$

 
$
31,214


 
As of March 31, 2014 and December 31, 2013, 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, 2014 and December 31, 2013. 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, 2014
 
As of December 31, 2013
($000)
 
Cost

 
Fair Value

 
Cost

 
Fair Value

Available-for-sale:
 
 

 
 

 
 

 
 

Due in one year or less
 
$
9,855

 
$
9,864

 
$
45,486

 
$
45,402

Due in one to two years
 
1,003

 
1,005

 
34,107

 
34,099

Equity securities, exchange-traded funds, and mutual funds
 
11,022

 
12,106

 
10,967

 
11,960

    Total
 
$
21,880

 
$
22,975

 
$
90,560

 
$
91,461

 
 
 
 
 
 
 
 
 
Held-to-maturity:
 
 

 
 

 
 

 
 

Due in one year or less
 
$
28,443

 
$
28,443

 
$
31,210

 
$
31,210

Due in one to three years
 
5

 
5

 
4

 
4

Total
 
$
28,448

 
$
28,448

 
$
31,214

 
$
31,214


 
As of March 31, 2014 and December 31, 2013, 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 Condensed Consolidated Statements of Income: 
 
 
Three months ended March 31
($000)
 
2014

 
2013

Realized gains
 
$
161

 
$
1,564

Realized losses
 
(185
)
 
(839
)
Realized gains (losses), net
 
$
(24
)
 
$
725


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

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)
 
2014

 
2013

Unrealized gains, net
 
$
69

 
$
318



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 March 31, 2014
 
 
as of
 
Using Fair Value Hierarchy
($000)
 
March 31, 2014
 
Level 1

 
Level 2

 
Level 3

Available-for-sale investments:
 
 

 
 

 
 

 
 

Government obligations
 
$
5,658

 
$

 
$
5,658

 
$

Corporate bonds
 
5,211

 

 
5,211

 

Foreign obligations
 

 

 

 

Commercial paper
 

 

 

 

Equity securities and exchange-traded funds
 
9,861

 
9,861

 

 

Mutual funds
 
2,245

 
2,245

 

 

Trading securities
 
7,917

 
7,917

 

 

Cash equivalents
 
643

 
643

 

 

Total
 
$
31,535

 
$
20,666

 
$
10,869

 
$

 
 
 
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

 
$


 
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 each of these investment categories in the aggregate is appropriate.

We measure the fair value of money market funds, mutual funds, equity securities, and exchange-traded funds 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 March 31, 2014 and December 31, 2013.
Investments in Unconsolidated Entities
Investments in Unconsolidated Entities
Investments in Unconsolidated Entities
 
Our investments in unconsolidated entities consist primarily of the following:
 
 
 
As of March 31


As of December 31

($000)
 
2014


2013

Investment in MJKK
 
$
22,543

 
$
21,782

Other equity method investments
 
6,008

 
6,166

Investments accounted for using the cost method
 
10,625

 
10,766

Total investments in unconsolidated entities
 
$
39,176

 
$
38,714


 
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 Tokyo Stock Exchange under the ticker 47650. 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

 
As of December 31

 
 
2014

 
2013

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

 
 

Japanese yen (¥000)
 
¥
8,833,406

 
¥
9,824,068

Equivalent U.S. dollars ($000)
 
$
85,949

 
$
94,999



Other Equity Method Investments. As of March 31, 2014 and December 31, 2013, other equity method investments consist of our investment 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 March 31, 2014 and December 31, 2013. YCharts is a technology company that provides stock research and analysis. Our ownership interest in YCharts was approximately 22% as of March 31, 2014 and December 31, 2013.

We did not record any impairment losses on our equity method investments in the first three months of 2014 or 2013.
 
Cost Method Investments. As of March 31, 2014 and December 31, 2013, our cost method investments consist of minority investments in HelloWallet LLC (HelloWallet) and 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 the first three months of 2014 or 2013.
Stock-Based Compensation
Stock-Based Compensation
Stock-Based Compensation
 
Stock-Based Compensation Plans
 
Our shareholders approved the Morningstar 2011 Stock Incentive Plan (the 2011 Plan) on May 17, 2011. As of that date, we stopped granting awards under the Morningstar 2004 Stock Incentive Plan (the 2004 Plan). The 2004 Plan amended and restated the Morningstar 1993 Stock Option Plan, the Morningstar 2000 Stock Option Plan, and the Morningstar 2001 Stock Option Plan.

The 2011 Plan provides for a variety of stock-based awards, including, among other things, stock options, performance share awards, restricted stock units, and restricted stock. We granted stock options, restricted stock units, and restricted stock under the 2004 Plan.

All of our employees and our non-employee directors are eligible for awards under the 2011 Plan.

Grants awarded under the 2011 Plan or the 2004 Plan that are forfeited, canceled, settled, or otherwise terminated without a distribution of shares, or shares withheld by us in connection with the exercise of options, will be available for awards under the 2011 Plan. Any shares subject to awards under the 2011 Plan, but not under the 2004 Plan, that are withheld by us in connection with the payment of any required income tax withholding will be available for awards under the 2011 Plan.

The following table summarizes the number of shares available for future grants under our 2011 Plan:
 
 
 
As of March 31

(in thousands)
 
2014

Shares available for future grants
 
4,483


 
Accounting for Stock-Based Compensation Awards
 
The following table summarizes our stock-based compensation expense and the related income tax benefit we recorded:
 
 
Three months ended March 31
($000)
 
2014

 
2013

Restricted stock units
 
$
3,692

 
$
3,563

Restricted stock
 
97

 
97

Performance share awards
 
27

 

Stock options
 
123

 
123

Total stock-based compensation expense
 
$
3,939

 
$
3,783

 
 
 
 
 
Income tax benefit related to the stock-based compensation expense
 
$
1,079

 
$
1,030


 
The following table summarizes the amount of unrecognized stock-based compensation expense as of March 31, 2014 and the expected number of months over which the expense will be recognized:
 
 
Unrecognized stock-based compensation expense ($000)

 
Expected amortization period (months)
Restricted stock units
 
$
27,487

 
31
Restricted stock
 
420

 
13
Performance share awards
 
1,890

 
33
Stock options
 
462

 
14
Total unrecognized stock-based compensation expense
 
$
30,259

 
31


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. Our largest annual equity grants typically have vesting dates in the second quarter. We adjust the stock-based compensation expense annually in the third quarter 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
 
Restricted stock units represent the right to receive a share of Morningstar common stock when that unit vests. Restricted stock units to employees vest ratably over a four-year period. Restricted stock units granted to non-employee directors vest ratably over a three-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.

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 the 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 2014:
Restricted Stock Units (RSUs)
 
Unvested

 
Vested but
Deferred

 
Total

 
Weighted
Average
Grant Date Value
per RSU

RSUs outstanding—December 31, 2013
 
680,002

 
16,682

 
696,684

 
$
62.02

Granted
 

 

 

 

Dividend equivalents
 
885

 
37

 
922

 
57.49

Vested
 
(256
)
 

 
(256
)
 
53.31

Vested but deferred
 

 

 

 

Issued
 

 

 

 

Forfeited
 
(6,893
)
 

 
(6,893
)
 
61.66

RSUs outstanding—March 31, 2014
 
673,738

 
16,719

 
690,457

 
$
62.04


 
Restricted Stock
 
In conjunction with our acquisition of Realpoint LLC in May 2010, we issued 199,174 shares of restricted stock to the selling employee-shareholders under the 2004 Stock Incentive Plan. 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.

Because of the terms of the restricted stock agreements prepared in conjunction with the Realpoint acquisition, we account for the grant of restricted stock as stock-based compensation expense and not as part of the acquisition consideration.

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 the fair value of $9,363,000 to stock-based compensation expense over the vesting period. We have assumed that all of the remaining restricted stock will ultimately vest, and therefore have not incorporated a forfeiture rate for purposes of determining the stock-based compensation expense.
 
Performance Share Awards

In 2014, executive officers were granted performance share awards pursuant to which each executive becomes entitled to a number of shares of Morningstar common stock equal to the number of notional performance shares that become vested. Each award specifies a number of performance shares that will vest if pre-established target performance goals are attained. The number of performance shares that actually vest may be more or less than the specified number of performance shares to the extent Morningstar exceeds or fails to achieve, respectively, the target performance goals over a three-year performance period.

The performance conditions are not considered in the determination of the grant date fair value for these awards. We measure the fair value of our performance share awards on the date of grant based on the closing market price of the underlying common stock on the day prior to the grant date. We amortize that value to stock-based compensation expense, based on the satisfaction of the performance condition that is most likely to be satisfied over the three-year service period ratably over the vesting period.

Information as of March 31, 2014 regarding the Company's target performance share awards granted and shares that would be issued at current performance levels for performance share awards granted during the first three months of 2014 is as follows:
 
 
As of March 31, 2014

Target performance share awards granted
 
23,685

Fair value (1)
 
$
80.91

Number of shares that would be issued based on current performance levels
 
23,685

Unamortized expense, based on current performance levels
 
$
1,890,000


(1) Represents the closing market price of Morningstar's stock on March 14, 2014, which is the last closing price prior to the grant date.

Stock Options

Stock options granted to employees vest ratably over a four-year period. Grants to our non-employee directors vest ratably over a three-year period. All grants 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. Options granted under the 2011 Plan have an exercise price equal to the fair market value on the grant date.

The following tables summarize stock option activity in the first three months of 2014 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, 2013
 
179,559

 
$
21.47

Granted
 

 

Canceled
 

 

Exercised
 
(11,731
)
 
21.46

Options outstanding—March 31, 2014
 
167,828

 
21.68

 
 
 
 
 
Options exercisable—March 31, 2014
 
167,828

 
$
21.68


 
All Other Option Grants, Excluding Activity Shown Above
 
Underlying
Shares

 
Weighted
Average
Exercise
Price

Options outstanding—December 31, 2013
 
253,972

 
$
36.48

Granted
 

 

Canceled
 

 

Exercised
 
(35,213
)
 
29.22

Options outstanding—March 31, 2014
 
218,759

 
37.85

 
 
 
 
 
Options exercisable—March 31, 2014
 
184,236

 
$
34.18

 
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)
 
2014

 
2013

Intrinsic value of options exercised
 
$
2,526

 
$
5,588


 

The table below shows additional information for options outstanding and exercisable as of March 31, 2014:
 
 
 
Options Outstanding
 
Options Exercisable
Range of Exercise Prices
 
Number of  Options

 
Weighted
Average
Remaining
Contractual
Life (years)
 
Weighted
Average
Exercise
Price

 
Aggregate
Intrinsic
Value
($000)

 
Exercisable Shares

 
Weighted Average Remaining Contractual Life (years)
 
Weighted Average Exercise Price

 
Aggregate Intrinsic Value ($000)

$21.61 - $26.68
 
303,106

 
0.87
 
$
23.91

 
$
16,704

 
303,106

 
0.87
 
$
23.91

 
$
16,704

$39.31 - $49.38
 
11,806

 
1.61
 
46.86

 
380

 
11,806

 
1.61
 
46.86

 
380

$57.28 - $59.35
 
71,675

 
7.27
 
57.46

 
1,545

 
37,152

 
7.27
 
57.45

 
741

$21.61 - $59.35
 
386,587

 
2.08
 
$
30.83

 
$
18,629

 
352,064

 
1.57
 
$
28.22

 
$
17,825

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Vested or Expected to Vest
 
 
 
 
 
 
 
 
 
 
 
 
 
$21.61 - $59.35
 
386,587

 
2.08
 
$
30.83

 
$
18,629

 
 
 
 
 
 
 
 

 
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, 2014. The intrinsic value is based on our closing stock price of $79.02 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 Condensed Consolidated Statements of Income. The following table summarizes our excess tax benefits:
 
 
Three months ended March 31
($000)
 
2014

 
2013

Excess tax benefits related to stock-based compensation
 
$
573

 
$
1,587

Income Taxes
Income Taxes
Income Taxes

Effective Tax Rate

The following table shows our effective income tax rate for the three months ended March 31, 2014 and March 31, 2013:
 
 
 
Three months ended March 31
($000)
 
2014

 
2013

Income before income taxes and equity in net income of unconsolidated entities
 
$
39,397

 
$
41,505

Equity in net income of unconsolidated entities
 
599

 
497

Net loss attributable to the noncontrolling interest
 
30

 
43

Total
 
$
40,026

 
$
42,045

Income tax expense
 
$
13,650

 
$
12,427

Effective tax rate
 
34.1
%
 
29.6
%

 
Our effective tax rate in the first quarter of 2014 was 34.1%, an increase of 4.5 percentage points compared with the prior-year period. The effective tax rate increase primarily reflects deferred income tax benefits and additional tax credits and incentives that were recognized in the prior-year period.

Unrecognized Tax Benefits

The table below provides information concerning our gross unrecognized tax benefits as of March 31, 2014 and December 31, 2013. The table also provides the effect these gross unrecognized tax benefits would have on our income tax expense, if they were recognized.
 
 
As of March 31
 
As of December 31
($000)
 
2014

 
2013

Gross unrecognized tax benefits
 
$
11,053

 
$
12,958

Gross unrecognized tax benefits that would affect income tax expense
 
$
11,053

 
$
10,557

Decrease in income tax expense upon recognition of gross unrecognized tax benefits
 
$
9,665

 
$
9,262



Our Condensed Consolidated Balance Sheets include the following liabilities for unrecognized tax benefits. These amounts include interest and penalties, less any associated tax benefits.

 
 
As of March 31
 
As of December 31
Liabilities for Unrecognized Tax Benefits ($000)
 
2014

 
2013

Current liability
 
$
4,282

 
$
6,211

Non-current liability
 
6,491

 
6,012

Total liability for unrecognized tax benefits
 
$
10,773

 
$
12,223



We conduct business globally and, as a result, we file income tax returns in U.S. federal, state, local, and foreign jurisdictions. We are currently under audit by federal and various state and local tax authorities in the United States, as well as tax authorities in certain non-U.S. jurisdictions. It is possible, though not likely, that the examination phase of some of these audits will conclude in 2014. It is not possible to estimate the effect of current audits on previously recorded unrecognized tax benefits.

We have not provided federal and state income taxes on accumulated undistributed earnings of certain foreign subsidiaries because these earnings have been permanently reinvested. Approximately 57% of our cash, cash equivalents, and investments as of March 31, 2014 were held by our operations outside of the United States. As such, we believe that our cash balances and investments in the United States, along with cash generated from our U.S. operations, will be sufficient to meet our U.S. operating and cash needs for the foreseeable future, without requiring us to repatriate earnings from these foreign subsidiaries. It is not reasonably practical to determine the amount of the unrecognized deferred tax liability related to the undistributed earnings.
 
Certain of our non-U.S. operations have incurred net operating losses (NOLs) which may become deductible to the extent these operations become profitable. 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. In the year that certain non-U.S. operations record a loss, we do not recognize a corresponding tax benefit, thus increasing our effective tax rate. 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
Contingencies

Life's Good S.T.A.B.L. Hedge Fund

In September 2011, three individual investors in Life's Good S.T.A.B.L. Mortgage hedge fund (LG), Marta Klass, Gregory Martin, and Richard Roellig, filed a complaint in the United States District Court for the Eastern District of Pennsylvania against LG, its principal Robert Stinson, and several other parties, including Morningstar, Inc. (the Klass Matter). The plaintiffs claim that Morningstar committed fraud and aided and abetted the other defendants' breach of fiduciary duty through the 5-star rating LG obtained from Morningstar. The plaintiffs seek unspecified damages. Hedge fund managers self-report their performance data to Morningstar. More than a year before the Klass Matter, in June 2010, the SEC filed suit against LG and other entities claiming they were part of a Ponzi scheme operated by Stinson. As a result, LG and the other entities were placed in court-appointed receivership. Morningstar was not part of the SEC suit or receivership. Since that time, the Receiver, as part of his duties, has been investigating whether to assert claims against third parties. Morningstar is aware of 14 lawsuits filed by the Receiver seeking to recover money for the fund.

In November 2011, Morningstar filed a motion to dismiss the Klass Matter. On behalf of the entities in receivership, the Receiver filed a motion to stay the proceedings because the Receivership Order does not permit suits against the entities in receivership without court permission. The court granted the Receiver's motion and stayed the Klass Matter. In April 2012, the Receiver filed a complaint against Morningstar, in which the Receiver claims that Morningstar is liable for contribution and aiding and abetting Stinson's breach of fiduciary duty and fraud through the 5-star rating LG obtained from Morningstar. The same day the Receiver filed his complaint, Morningstar sought leave from the court to file a countersuit against Stinson and two of his entities-Keystone State Capital Corporation and LG for, among other things, fraud, misrepresentation, and breach of user agreements. In June 2012, the court denied Morningstar's motion for leave to file suit. The court took no position on the merits of Morningstar's claims, and did not preclude us from renewing our motion to file a complaint at a later time, but deferred to the Receiver's request not to subject the receivership estate to additional litigation at this early point in the receivership. A bench trial related to the Receiver’s claims against Morningstar was held between January 13 and January 28, 2014. At trial, the Receiver claimed that Morningstar is liable under a contribution theory for all or part of a $14.5 million disgorgement judgment that the SEC obtained against the entities and individuals in receivership. Morningstar contested liability and damages at trial and believes it is not liable for any amount. The parties filed post-trial proposed findings of fact and conclusions of law on March 14, 2014. It is not known when the court will issue its decision.

We believe the allegations against Morningstar by the Klass plaintiffs and the Receiver have no legal or factual basis, and we plan to continue to vigorously contest the claims. We also intend to refile our affirmative claims against Stinson, Keystone, and LG at a later time consistent with the court's order. We cannot predict the outcome of the proceedings.

We have not provided an estimate of loss or range of loss in connection with this matter because no such estimate can reasonably be made.

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., one of our wholly owned subsidiaries, and Morningstar, Inc. relating to Ibbotson's prior commercial relationship with Business Logic. Business Logic is alleging breach of contract and trade secret misappropriation in connection with Ibbotson's development of a proprietary web-service software and user interface that connects plan participant data with the Ibbotson Wealth Forecasting Engine. Ibbotson and Morningstar answered the complaint, and Ibbotson asserted a counterclaim against Business Logic alleging trade secret misappropriation and breach of contract, also seeking damages and injunctive relief. Business Logic filed a motion for summary judgment on its breach of contract claim, which was denied on October 1, 2013. Business Logic also filed a summary motion seeking to dismiss Ibbotson’s counterclaim, which was granted on April 15, 2014. On the same date, the Court granted Ibbotson’s motion for partial summary judgment to dismiss claims on certain enumerated trade secrets, and granted its motion for partial summary judgment on certain damages issues.

Business Logic's complaint seeks, among other things, compensatory damages, punitive damages, attorneys' fees, and injunctive relief. With regard to compensatory damages, based on the analysis of Ibbotson's retained damages expert (who has assumed, solely for purposes of his analysis, that Business Logic will prevail with regard to the issue of liability), and recognizing the uncertainty inherent in litigation and our intention to continue to vigorously defend the claims made by Business Logic, our best estimate of the range of possible loss is between
$0 and $5.4 million, excluding punitive damages or attorneys' fees, both of which are recoverable in certain circumstances under the Illinois Trade Secrets Act.

Business Logic's retained damages expert (who has also assumed for purposes of her estimate that Business Logic will prevail with regard to the issue of liability) estimated compensatory damages of $84 million, excluding punitive damages or attorneys' fees. Certain elements of the $84 million compensatory damages estimate were the subject of Ibbotson’s motion for partial summary judgment, which was granted on April 15, 2014. As a result, we believe the maximum compensatory damages award now recoverable is approximately $57 million, excluding prejudgment interest, punitive damages, and attorneys' fees. We dispute the conclusions reached and the methods employed by Business Logic's expert as to the remaining claims for damages.

With regard to Business Logic's claim for injunctive relief, no reasonable estimate of loss or range of loss is possible.

Morningstar and Ibbotson continue to vigorously contest all the claims against them in this matter. A jury trial is set to begin on July 7, 2014. We cannot predict the outcome of the proceeding.

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.
Share Repurchase Program
Share Repurchase Program
Share Repurchase Program
 
In September 2010, the board of directors approved a share repurchase program that authorizes the repurchase of 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, 2014, we had repurchased a total of 7,350,313 shares for $471,481,000 under this authorization.

The following table summarizes the board approvals for increases to the program and the total available under the program:
Date
 
Increase

 
Total program

September 2010
 
$
100
 million
 
$
100
 million
December 2011
 
$
200
 million
 
$
300
 million
December 2012
 
$
200
 million
 
$
500
 million
December 2013
 
$
200
 million
 
$
700
 million
Subsequent Events
Subsequent Events
Subsequent Events

On April 1, 2014, Morningstar acquired ByAllAccounts, Inc. (ByAllAccounts), a provider of innovative data aggregation technology for financial applications for $28 million in cash, subject to post-close adjustments. ByAllAccounts uses a knowledge-based process, including patented artificial intelligence technology, to collect, consolidate, and enrich financial account data and deliver it to virtually any platform. Clients include independent financial advisors, asset managers, wealth managers/family offices, trust companies, and broker-dealers.
Summary of Significant Accounting Policies (Policies)
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 the first three months of 2014 as compared with the same period in 2013, changes related to our more centralized organizational structure added approximately $7 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 $4 million and $3 million, respectively. These changes did not affect our total operating expense or operating income for any of the periods presented.
Beginning with 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.

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

The accounting policies for our single reportable segment are the same as those described in “Note 2. Summary of Significant Accounting Policies” included in our Annual Report on Form 10-K for the year ended December 31, 2013. We evaluate the performance of our reporting segment based on revenue and operating income.

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:
Investments and Fair value Measurements (Policies)
Investment, Policy [Policy Text Block]
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:
Correction (Tables)
Schedule of Error Corrections and Prior Period Adjustments
The financial statements have been corrected to reduce the current balance and increase the long-term balance as shown in the table below:
 
 
As of December 31, 2013
($000)
 
Previously Reported

 
Correction

 
As Corrected

Accounts payable and accrued liabilities
 
$
52,877

 
$
(10,746
)
 
$
42,131

Deferred rent
 
$
13,192

 
$
10,746

 
$
23,938

Goodwill and Other Intangible Assets (Tables)
The following table shows the changes in our goodwill balances from December 31, 2013 to March 31, 2014:
 
 
 
($000)

Balance as of December 31, 2013
 
$
326,450

Foreign currency translation
 
1,486

Balance as of March 31, 2014
 
$
327,936

The following table summarizes our intangible assets: 
 
 
As of March 31, 2014
 
As of December 31, 2013
($000)
 
Gross

 
Accumulated
Amortization

 
Net

 
Weighted
Average
Useful  Life
(years)
 
Gross

 
Accumulated
Amortization

 
Net

 
Weighted
Average
Useful  Life
(years)
Intellectual property
 
$
29,778

 
$
(23,973
)
 
$
5,805

 
9
 
$
29,477

 
$
(23,128
)
 
$
6,349

 
9
Customer-related assets
 
141,991

 
(77,361
)
 
64,630

 
12
 
141,833

 
(74,311
)
 
67,522

 
12
Supplier relationships
 
240

 
(111
)
 
129

 
20
 
240

 
(108
)
 
132

 
20
Technology-based assets
 
80,870

 
(52,567
)
 
28,303

 
9
 
80,489

 
(50,673
)
 
29,816

 
9
Non-competition agreement
 
1,686

 
(1,606
)
 
80

 
4
 
1,661

 
(1,571
)
 
90

 
4
Total intangible assets
 
$
254,565

 
$
(155,618
)
 
$
98,947

 
10
 
$
253,700

 
$
(149,791
)
 
$
103,909

 
10