MORNINGSTAR, INC., 10-Q filed on 5/2/2012
Quarterly Report
Document and Entity Information
3 Months Ended
Mar. 31, 2012
Apr. 27, 2012
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, 2012 
 
Document Fiscal Year Focus
2012 
 
Document Fiscal Period Focus
Q1 
 
Amendment Flag
false 
 
Entity Common Stock, Shares Outstanding
 
49,594,723 
Condensed Consolidated Statements of Income (USD $)
In Thousands, except Per Share data, unless otherwise specified
3 Months Ended
Mar. 31, 2012
Mar. 31, 2011
Revenue
$ 160,759 
$ 151,767 
Operating expense (1):
 
 
Cost of goods sold
50,316 
40,669 
Development
13,365 
11,988 
Sales and marketing
28,326 
26,482 
General and administrative
28,178 
30,617 
Depreciation and amortization
10,175 
10,202 
Total operating expense
130,360 
119,958 
Operating income (loss)
30,399 
31,809 
Non-operating income (expense):
 
 
Interest income (expense), net
869 
524 
Other income (expense), net
(210)
250 
Non-operating income (expense), net
659 
774 
Income before income taxes and equity in net income of unconsolidated entities
31,058 
32,583 
Income tax expense
11,511 
10,518 
Equity in net income of unconsolidated entities
566 
374 
Consolidated net income
20,113 
22,439 
Net (income) loss attributable to the noncontrolling interest
24 
98 
Net income attributable to Morningstar, Inc.
$ 20,137 
$ 22,537 
Net income per share attributable to:
 
 
Basic (in dollars per share)
$ 0.40 
$ 0.45 
Diluted (in dollars per share)
$ 0.40 
$ 0.44 
Dividends declared per common share
$ 0.10 
$ 0.05 
Dividends paid per common share
$ 0.10 
$ 0.05 
Weighted average shares outstanding:
 
 
Basic (in shares)
49,938 
49,800 
Diluted (in shares)
50,758 
50,953 
Condensed Consolidated Statements of Income (Parenthetical) (USD $)
In Thousands, unless otherwise specified
3 Months Ended
Mar. 31, 2012
Mar. 31, 2011
(1) Includes stock-based compensation expense of:
 
 
Allocated Share-based Compensation Expense
$ 3,866 
$ 3,649 
Cost of Sales
 
 
(1) Includes stock-based compensation expense of:
 
 
Allocated Share-based Compensation Expense
1,089 
879 
Development
 
 
(1) Includes stock-based compensation expense of:
 
 
Allocated Share-based Compensation Expense
499 
471 
Sales and Marketing
 
 
(1) Includes stock-based compensation expense of:
 
 
Allocated Share-based Compensation Expense
479 
422 
General and Administrative
 
 
(1) Includes stock-based compensation expense of:
 
 
Allocated Share-based Compensation Expense
$ 1,799 
$ 1,877 
Condensed Consolidated Statements of Comprehensive Income Consolidated Statements of Comprehensive Income (USD $)
In Thousands, unless otherwise specified
3 Months Ended
Mar. 31, 2012
Mar. 31, 2011
Consolidated net income
$ 20,113 
$ 22,439 
Other comprehensive income (loss), net of tax:
 
 
Foreign currency translation adjustment
6,965 
9,302 
Unrealized gains (losses) on securities:
 
 
Unrealized holding gains (losses) arising during period
909 
438 
Reclassification of adjustments for (gains) losses included in net income
55 
(41)
Other comprehensive income (loss), net
7,929 
9,699 
Other comprehensive income (loss), net
28,042 
32,138 
Comprehensive (income) loss attributable to noncontrolling interest
107 
112 
Comprehensive income attributable to Morningstar, Inc.
$ 28,149 
$ 32,250 
Condensed Consolidated Balance Sheets (USD $)
In Thousands, unless otherwise specified
Mar. 31, 2012
Dec. 31, 2011
Current assets:
 
 
Cash and cash equivalents
$ 165,348 
$ 200,437 
Investments
278,298 
269,755 
Accounts receivable, less allowance of $951 and $835, respectively
121,396 
113,312 
Deferred tax asset, net
4,570 
5,104 
Income tax receivable, net
3,554 
7,445 
Other
20,864 
15,980 
Total current assets
594,030 
612,033 
Property, equipment, and capitalized software, net
73,576 
68,196 
Investments in unconsolidated entities
34,943 
27,642 
Goodwill
322,016 
318,492 
Intangible assets, net
134,994 
139,809 
Other assets
6,826 
5,912 
Total assets
1,166,385 
1,172,084 
Current liabilities:
 
 
Accounts payable and accrued liabilities
46,032 
41,403 
Accrued compensation
39,951 
73,124 
Deferred revenue
171,013 
155,494 
Other
370 
612 
Total current liabilities
257,366 
270,633 
Accrued compensation
6,171 
5,724 
Deferred tax liability, net
14,556 
15,940 
Deferred rent
15,613 
14,604 
Other long-term liabilities
8,413 
8,167 
Total liabilities
302,119 
315,068 
Morningstar, Inc. shareholders' equity:
 
 
Common stock, no par value, 200,000,000 shares authorized, of which 49,895,998 and 50,083,940 shares were outstanding as of March 31, 2012 and December 31, 2011, respectively
Treasury stock at cost, 1,419,936 shares as of March 31, 2012 and 980,177 shares as of December 31, 2011
(73,476)
(46,701)
Additional paid-in capital
502,488 
491,432 
Retained earnings
424,086 
409,022 
Accumulated other comprehensive income:
 
 
Currency translation adjustment
8,984 
1,936 
Unrealized gain on available-for-sale securities
640 
(324)
Total accumulated other comprehensive income
9,624 
1,612 
Total Morningstar, Inc. shareholders' equity
862,727 
855,370 
Noncontrolling interest
1,539 
1,646 
Total equity
864,266 
857,016 
Total liabilities and equity
$ 1,166,385 
$ 1,172,084 
Condensed Consolidated Balance Sheets (Parenthetical) (USD $)
In Thousands, except Share data, unless otherwise specified
Mar. 31, 2012
Dec. 31, 2011
Statement of Financial Position [Abstract]
 
 
Allowance for Doubtful Accounts Receivable, Current
$ 951 
$ 835 
Common Stock, No Par Value
$ 0 
$ 0 
Common Stock, Shares Authorized
200,000,000 
200,000,000 
Common Stock, Shares, Outstanding
49,895,998 
50,083,940 
Treasury Stock, Shares
1,419,936 
980,177 
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, 2011
$ 857,016 
$ 5 
$ (46,701)
$ 491,432 
$ 409,022 
$ 1,612 
$ 1,646 
Balance (in shares) at Dec. 31, 2011
50,083,940 
50,083,940 
 
 
 
 
 
Increase (Decrease) in Stockholders' Equity
 
 
 
 
 
 
 
Net Income (Loss)
20,113 
 
 
 
20,137 
 
(24)
Other Comprehensive Income (loss)
 
 
 
 
 
 
 
Unrealized gains (losses) on available-for-sale investments, net of income tax of $503
909 
   
   
   
   
909 
Reclassification of adjustments for losses (gains) included in net income, net of income tax of $31
55 
   
   
   
   
55 
Foreign currency translation adjustment, net
6,965 
   
   
   
   
7,048 
(83)
Other comprehensive income (loss), net
7,929 
   
   
   
   
8,012 
(83)
Issuance of common stock related to stock-option exercises and vesting of restricted stock units, net
3,906 
103 
3,803 
   
   
   
Issuance of common stock related to stock-option exercises and vesting of restricted stock units, net (in shares)
 
253,963 
 
 
 
 
 
Adjustments to Additional Paid in Capital, Share-based Compensation, Requisite Service Period Recognition
 
 
 
 
 
 
 
Stock-based compensation - restricted stock units
3,278 
   
   
3,278 
   
   
   
Stock-based compensation - restricted stock
444 
   
   
444 
   
   
   
Stock-based compensation - stock options
144 
   
   
144 
   
   
   
Excess tax benefit derived from stock-option exercises and vesting of restricted stock units
3,313 
   
   
3,313 
   
   
   
Common share repurchased
(26,878)
   
(26,878)
   
   
   
   
Common share repurchased (in shares)
 
(441,905)
 
 
 
 
 
Dividends declared - common shares outstanding
(4,998)
   
   
   
(4,998)
   
   
Dividends declared - restricted stock units
(1)
   
   
74 
(75)
   
   
Balance at Mar. 31, 2012
$ 864,266 
$ 5 
$ (73,476)
$ 502,488 
$ 424,086 
$ 9,624 
$ 1,539 
Balance (in shares) at Mar. 31, 2012
49,895,998 
49,895,998 
 
 
 
 
 
Condensed Consolidated Statement of Equity (Parenthetical) (USD $)
In Thousands, unless otherwise specified
3 Months Ended
Mar. 31, 2012
Statement of Stockholders' Equity [Abstract]
 
Other Comprehensive Income (Loss), Unrealized Holding Gain (Loss) on Securities Arising During Period, Tax
$ 503 
Other Comprehensive Income (Loss), Reclassification Adjustment for Sale of Securities Included in Net Income, Tax
$ 31 
Condensed Consolidated Statements of Cash Flows (USD $)
In Thousands, unless otherwise specified
3 Months Ended
Mar. 31, 2012
Mar. 31, 2011
Operating activities
 
 
Consolidated net income
$ 20,113 
$ 22,439 
Adjustments to reconcile consolidated net income to net cash flows from operating activities:
 
 
Depreciation and amortization
10,175 
10,202 
Deferred income taxes
(1,453)
(677)
Stock-based compensation expense
3,866 
3,649 
Provision for bad debt
525 
285 
Equity in net income of unconsolidated entities
(566)
(374)
Excess tax benefits from stock-option exercises and vesting of restricted stock units
(3,313)
(4,122)
Other, net
310 
(512)
Changes in operating assets and liabilities, net of effects of acquisitions:
 
 
Accounts receivable
(7,439)
(3,357)
Other assets
(3,758)
1,453 
Accounts payable and accrued liabilities
703 
(2,600)
Accrued compensation
(35,168)
(26,876)
Income taxes- current
7,369 
5,297 
Deferred revenue
14,165 
9,847 
Deferred rent
716 
(399)
Other liabilities
(621)
91 
Cash provided by operating activities
5,624 
14,346 
Investing activities
 
 
Purchases of investments
(344,391)
(67,352)
Proceeds from maturities and sales of investments
338,146 
62,359 
Capital expenditures
(8,994)
(5,037)
Purchases of cost method investments
(6,750)
Other, net
(14)
Cash used for investing activities
(21,980)
(10,044)
Financing activities
 
 
Proceeds from stock-option exercises, net
3,906 
4,921 
Excess tax benefits from stock-option exercises and vesting of restricted stock units
3,313 
4,122 
Common shares repurchased
(23,033)
Dividends paid
(5,012)
(2,494)
Other, net
(17)
(214)
Cash provided by (used for) financing activities
(20,843)
6,335 
Effect of exchange rate changes on cash and cash equivalents
2,110 
2,561 
Net increase (decrease) in cash and cash equivalents
(35,089)
13,198 
Cash and cash equivalents-beginning of period
200,437 
180,176 
Cash and cash equivalents-end of period
165,348 
193,374 
Supplemental disclosure of cash flow information:
 
 
Cash paid for income taxes
5,553 
6,962 
Supplemental information of non-cash investing and financing activities:
 
 
Unrealized Gain (Loss) on Available For Sale Investments
$ 1,498 
$ 609 
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 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, 2011, filed with the SEC on February 24, 2012.
 
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
SEC: Securities and Exchange Commission
 
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 Consolidated Financial Statements included in our Annual Report on Form 10-K for the year ended December 31, 2011, filed with the SEC on February 24, 2012.

In addition, effective January 1, 2012, we adopted FASB ASU No. 2011-04, Fair Value Measurement (Topic 820): Amendments to Achieve Common Fair Value Measurement and Disclosure Requirements in U.S. GAAP and IFRSs. ASU No. 2011-04 clarifies existing fair value measurement and disclosure requirements, amends certain fair value measurement principles, and requires additional disclosures about fair value measurements. The adoption of ASU No. 2011-04 did not have a material impact on our Consolidated Financial Statements.
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, 2011 to March 31, 2012:
 
 
($000)

Balance as of December 31, 2011
$
318,492

Net change, primarily currency translation
3,524

Balance as of March 31, 2012
$
322,016



We did not record any significant impairment losses in the first quarter of 2012 or 2011. We perform our annual impairment reviews in the fourth quarter.

Intangible Assets

The following table summarizes our intangible assets: 
 
 
As of March 31, 2012
 
As of December 31, 2011
($000)
 
Gross

 
Accumulated
Amortization

 
Net

 
Weighted
Average
Useful  Life
(years)

 
Gross

 
Accumulated
Amortization

 
Net

 
Weighted
Average
Useful  Life
(years)

Intellectual property
 
$
32,331

 
$
(21,214
)
 
$
11,117

 
9

 
$
32,293

 
$
(20,455
)
 
$
11,838

 
9

Customer-related assets
 
135,888

 
(56,268
)
 
79,620

 
12

 
134,396

 
(52,611
)
 
81,785

 
12

Supplier relationships
 
240

 
(87
)
 
153

 
20

 
240

 
(84
)
 
156

 
20

Technology-based assets
 
81,240

 
(37,523
)
 
43,717

 
9

 
80,694

 
(35,130
)
 
45,564

 
9

Non-competition agreement
 
1,766

 
(1,379
)
 
387

 
4

 
1,751

 
(1,285
)
 
466

 
4

Total intangible assets
 
$
251,465

 
$
(116,471
)
 
$
134,994

 
10

 
$
249,374

 
$
(109,565
)
 
$
139,809

 
10

 
The following table summarizes our amortization expense related to intangible assets:
 
 
Three months ended March 31
($000)
 
2012

 
2011

Amortization expense
 
$
6,055

 
$
6,513


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

We expect intangible amortization expense for 2012 and subsequent years as follows:
 
 
($000)

2012
 
$
24,040

2013
 
21,319

2014
 
20,064

2015
 
19,192

2016
 
14,570

2017
 
9,967


 
Our estimates of future amortization expense for intangible assets may be affected by additional acquisitions, 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)
 
2012

 
2011

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

 
 

Net income attributable to Morningstar, Inc.:
 
$
20,137

 
$
22,537

Less: Distributed earnings available to participating securities
 
(16
)
 
(10
)
Less: Undistributed earnings available to participating securities
 
(46
)
 
(79
)
Numerator for basic net income per share — undistributed and distributed earnings available to common shareholders
 
$
20,075

 
$
22,448

 
 
 
 
 
Weighted average common shares outstanding
 
49,938

 
49,800

 
 
 
 
 
Basic net income per share attributable to Morningstar, Inc.
 
$
0.40

 
$
0.45

 
 
 
 
 
Diluted net income per share attributable to Morningstar, Inc.:
 
 
 
 
Numerator for basic net income per share — undistributed and distributed earnings available to common shareholders
 
$
20,075

 
$
22,448

Add: Undistributed earnings allocated to participating securities
 
46

 
79

Less: Undistributed earnings reallocated to participating securities
 
(45
)
 
(78
)
Numerator for diluted net income per share — undistributed and distributed earnings available to common shareholders
 
$
20,076

 
$
22,449

 
 


 


Weighted average common shares outstanding
 
49,938

 
49,800

Net effect of dilutive stock options and restricted stock units
 
820

 
1,153

Weighted average common shares outstanding for computing diluted income per share
 
50,758

 
50,953

 
 


 


Diluted net income per share attributable to Morningstar, Inc.
 
$
0.40

 
$
0.44


Segment and Geographical Area Information
Segment and Geographical Area Information
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 Morningstar Data (formerly Licensed Data), Morningstar Advisor Workstation (including Morningstar Office), Morningstar Direct, Morningstar.com, Morningstar Integrated Web Tools, and Morningstar Principia. Morningstar Data is a set of investment data spanning all of our investment databases, including real-time pricing and commodity 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 Direct is a web-based institutional research platform. Morningstar.com includes both Premium Memberships and Internet advertising sales. Morningstar Integrated Web Tools is a set of services that helps 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 sell Morningstar Equity Research to companies that purchase our research for their own use or provide our research to their affiliated advisors or individual investor clients.

The Investment Information segment also includes Morningstar Credit Research and Morningstar Structured Credit Ratings. Morningstar Structured Credit Ratings is provided by Morningstar Credit Ratings, LLC, a Nationally Recognized Statistical Rating Organization specializing in structured finance. It offers securities ratings, research, surveillance services, and data to help institutional investors identify risk in commercial mortgage-backed securities (CMBS) and residential mortgage-backed securities (RMBS).

We also offer a variety of financial communications and newsletters, other institutional and advisor software,
and investment indexes.

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 Advisory Services (formerly Investment Consulting), which focuses on investment monitoring and asset allocation for funds of funds, including mutual funds and variable annuities; Retirement Solutions, 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 and risk levels that financial advisors can use for their clients' taxable and tax-deferred accounts. In addition, we offer Managed Portfolios through our subsidiary Ibbotson Australia which provides asset management services primarily to institutional clients and individual investors.
 
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 present information about our operating segments and by geographical area:
 
 
 
Three months ended March 31, 2012
($000)
 
Investment
Information

 
Investment
Management

 
Corporate Items

 
Total

External revenue
 
$
126,925

 
$
33,834

 
$

 
$
160,759

Operating expense, excluding stock-based compensation expense, depreciation, and amortization
 
93,438

 
15,953

 
6,928

 
116,319

Stock-based compensation expense
 
2,559

 
551

 
756

 
3,866

Depreciation and amortization
 
2,244

 
39

 
7,892

 
10,175

Operating income (loss)
 
$
28,684

 
$
17,291

 
$
(15,576
)
 
$
30,399

 
 
 
 
 
 
 
 
 
U.S. capital expenditures
 
 

 
 

 
 

 
$
7,397

Non-U.S. capital expenditures
 
 

 
 

 
 

 
$
1,597

 
 
 
 
 
 
 
 
 
 
 
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

 
 
 
As of March 31, 2012
($000)
 
Investment
Information

 
Investment
Management

 
Corporate Items

 
Total

Goodwill
 
$
280,320

 
$
41,696

 
$

 
$
322,016

 
 
 
As of December 31, 2011
($000)
 
Investment
Information

 
Investment
Management

 
Corporate Items

 
Total

Goodwill
 
$
277,059

 
$
41,433

 
$

 
$
318,492

 

















External revenue by geographical area
 
 
 
 
 
 
Three months ended March 31
($000)
 
2012

 
2011

United States
 
$
114,469

 
$
108,181

United Kingdom
 
13,736

 
12,847

Europe, excluding the United Kingdom
 
12,055

 
11,580

Australia
 
9,348

 
9,293

Canada
 
7,350

 
6,617

Asia, excluding Japan
 
2,369

 
2,064

Japan
 
979

 
931

Other
 
453

 
254

Total Non-U.S.
 
46,290

 
43,586

 
 
 
 
 
Total
 
$
160,759

 
$
151,767



Long-lived assets by geographical area
 
 
 
 
 
 
As of March 31
 
As of December 31
($000)
 
2012

 
2011

United States
 
$
49,769

 
$
44,572

United Kingdom
 
7,967

 
7,512

Europe, excluding the United Kingdom
 
2,826

 
2,629

Australia
 
1,384

 
1,415

Canada
 
2,063

 
2,076

Asia, excluding Japan
 
9,282

 
9,656

Japan
 
240

 
282

Other
 
45

 
54

Total Non-U.S.
 
23,807

 
23,624

 
 
 
 
 
Total
 
$
73,576

 
$
68,196

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)
 
2012

 
2011

Available-for-sale
 
$
255,195

 
$
247,917

Held-to-maturity
 
17,023

 
16,347

Trading securities
 
6,080

 
5,491

Total
 
$
278,298

 
$
269,755




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, 2012
 
As of December 31, 2011
($000)
 
Cost

 
Unrealized
Gain

 
Unrealized
Loss

 
Fair
Value

 
Cost

 
Unrealized
Gain

 
Unrealized
Loss

 
Fair
Value

Available-for-sale:
 
 

 
 

 
 

 
 

 
 

 
 

 
 

 
 

Government obligations
 
$
116,672

 
$
69

 
$
(430
)
 
$
116,311

 
$
139,099

 
$
72

 
$
(402
)
 
$
138,769

Corporate bonds
 
91,259

 
62

 
(241
)
 
91,080

 
61,589

 
14

 
(280
)
 
61,323

Commercial paper
 
28,117

 
6

 
(6
)
 
28,117

 
29,964

 
2

 
(7
)
 
29,959

Equity securities and exchange-traded funds
 
8,839

 
808

 
(221
)
 
9,426

 
8,461

 
368

 
(558
)
 
8,271

Mutual funds
 
9,304

 
988

 
(31
)
 
10,261

 
9,298

 
363

 
(66
)
 
9,595

Total
 
$
254,191

 
$
1,933

 
$
(929
)
 
255,195

 
$
248,411

 
$
819

 
$
(1,313
)
 
$
247,917

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Held-to-maturity:
 
 

 
 

 
 

 
 

 
 

 
 

 
 

 
 

Certificates of deposit
 
$
17,023

 
$

 
$

 
$
17,023

 
$
16,347

 
$

 
$

 
$
16,347


 
As of March 31, 2012 and December 31, 2011, 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, 2012 and December 31, 2011. 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, 2012
 
As of December 31, 2011
($000)
 
Cost

 
Fair Value

 
Cost

 
Fair Value

Available-for-sale:
 
 

 
 

 
 

 
 

Due in one year or less
 
$
166,640

 
$
166,276

 
$
155,651

 
$
155,247

Due in one to two years
 
69,408

 
69,232

 
75,001

 
74,804

Equity securities, exchange-traded funds, and mutual funds
 
18,143

 
19,687

 
17,759

 
17,866

Total
 
$
254,191

 
$
255,195

 
$
248,411

 
$
247,917

 
 
 
 
 
 
 
 
 
Held-to-maturity:
 
 

 
 

 
 

 
 

Due in one year or less
 
$
17,018

 
$
17,018

 
$
16,342

 
$
16,342

Due in one to three years
 
5

 
5

 
5

 
5

Total
 
$
17,023

 
$
17,023

 
$
16,347

 
$
16,347


 
As of March 31, 2012 and December 31, 2011, 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)
 
2012

 
2011

Realized gains
 
$
212

 
$
64

Realized losses
 
(298
)
 

Realized gains (losses), net
 
$
(86
)
 
$
64


 
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)
 
2012

 
2011

Unrealized gains, net
 
$
428

 
$
45



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

 
Level 2

 
Level 3

Available-for-sale investments
 
 

 
 

 
 

 
 

Government obligations
 
$
116,311

 
$

 
$
116,311

 
$

Corporate bonds
 
91,080

 

 
91,080

 

Commercial paper
 
28,117

 

 
28,117

 

Equity securities and exchange-traded funds
 
9,426

 
9,426

 

 

Mutual funds
 
10,261

 
10,261

 

 

Trading securities
 
6,080

 
6,080

 

 

Cash equivalents
 
14,979

 
14,979

 

 

Total
 
$
276,254

 
$
40,746

 
$
235,508

 
$

 
 
 
Fair Value
 
Fair Value Measurements as of December 31, 2011
 
 
as of
 
Using Fair Value Hierarchy
($000)
 
December 31, 2011
 
Level 1

 
Level 2

 
Level 3

Available-for-sale investments
 
 

 
 

 
 

 
 

Government obligations
 
$
138,769

 
$

 
$
138,769

 
$

Corporate bonds
 
61,323

 

 
61,323

 

Commercial paper
 
29,959

 

 
29,959

 

Equity securities and exchange-traded funds
 
8,271

 
8,271

 

 

Mutual funds
 
9,595

 
9,595

 

 

Trading securities
 
5,491

 
5,491

 

 

Cash equivalents
 
30,818

 
30,818

 

 

Total
 
$
284,226

 
$
54,175

 
$
230,051

 
$


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

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

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, 2012 or December 31, 2011.
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)
 
2012


2011

Investment in MJKK
 
$
20,172

 
$
19,662

Other equity method investments
 
2,801

 
2,807

Investments accounted for using the cost method
 
11,970

 
5,173

Total investments in unconsolidated entities
 
$
34,943

 
$
27,642


 
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

 
As of December 31

 
 
2012

 
2011

Morningstar’s approximate ownership of MJKK
 
33
%
 
33
%
 
 
 
 
 
Approximate market value of Morningstar’s ownership in MJKK:
 
 

 
 

Japanese yen (¥000)
 
¥
3,366,418

 
¥
2,797,704

Equivalent U.S. dollars ($000)
 
$
40,936

 
$
36,146



Other Equity Method Investments. As of March 31, 2012 and December 31, 2011, other equity method investments consist of our investment in Morningstar Sweden AB (Morningstar Sweden) and YCharts, Inc. (YCharts). 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, 2012 and December 31, 2011. YCharts is a technology company that provides stock research and analysis. Our ownership interest in YCharts was approximately 20% as of March 31, 2012 and December 31, 2011.

We did not record any impairment losses on our equity method investments in the first three months of 2012 or 2011.
 
Cost Method Investments. As of March 31, 2012 and December 31, 2011, our cost method investments consist of minority investments in Pitchbook Data, Inc. (Pitchbook) and Bundle Corporation (Bundle). As of March 31, 2012, our cost method investments also include HelloWallet LLC (HelloWallet). 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. HelloWallet is a provider of personalized financial guidance to employees of Fortune 1000 companies. We paid approximately $6,750,000 for the minority equity stake in HelloWallet in the first quarter of 2012. We did not record any impairment losses on our cost method investments in the first three months of 2012 or 2011.
Liability for Vacant Office Space
Liability for Vacant Office Space
Liability for Vacant Office Space
 
We include our liability for vacant office space in "Accounts payable and accrued liabilities" and "Other long-term liabilities", as appropriate, on our Condensed Consolidated Balance Sheets. The following table shows the change in our liability for vacant office space from December 31, 2011 to March 31, 2012:

Liability for vacant office space
 
($000)

Balance as of December 31, 2011
 
$
919

Reduction of liability for lease and other related payments
 
(327
)
Balance as of March 31, 2012
 
$
592



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, 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

(000)
 
2012

Shares available for future grants
 
4,989


 

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, 2012 and March 31, 2011:
 
 
 
Three months ended March 31
($000)
 
2012

 
2011

Restricted stock units
 
$
3,278

 
$
2,785

Restricted stock
 
444

 
864

Stock options
 
144

 

Total stock-based compensation expense
 
$
3,866

 
$
3,649

 
 
 
 
 
Income tax benefit related to the stock-based compensation expense
 
$
930

 
$
725


 
The following table summarizes the amount of unrecognized stock-based compensation expense as of March 31, 2012 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
 
$
23,868

 
30

Restricted stock
 
5,475

 
37

Stock options
 
1,705

 
36

Total unrecognized stock-based compensation expense
 
$
31,048

 
32



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
 
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 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 2012:
Restricted Stock Units (RSUs)
 
Unvested

 
Vested but
Deferred

 
Total

 
Weighted
Average
Grant Date Value
per RSU

RSUs outstanding—December 31, 2011
 
741,043

 
20,076

 
761,119

 
$
50.66

Granted
 
666

 

 
666

 
59.98

Dividend equivalents
 
1,278

 

 
1,278

 
50.66

Vested
 
(9,879
)
 

 
(9,879
)
 
52.94

Vested but deferred
 

 

 

 

Issued
 

 

 

 

Forfeited
 
(8,765
)
 

 
(8,765
)
 
43.76

RSUs outstanding—March 31, 2012
 
724,343

 
20,076

 
744,419

 
50.72


 
Restricted Stock
 
In conjunction with the Realpoint acquisition 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. The stock-based compensation expense recorded in the first three months of 2011 included 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.
 
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.

In May 2011, we granted 86,106 stock options under the 2004 Stock Incentive Plan. In November 2011, we granted 6,095 stock options under the 2011 Plan. We estimated the fair value of the options on the date of grant using a Black-Scholes option-pricing model. The weighted average fair value of options granted during 2011 was $23.81 per share, based on the following assumptions:

Assumptions for Black-Scholes Option Pricing Model
 
 
Expected life (years):
 
7.4

Volatility factor:
 
35.1
%
Dividend yield:
 
0.35
%
Interest rate:
 
2.87
%


The following tables summarize stock option activity in the first three months of 2012 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, 2011
 
398,859

 
$
19.72

Granted
 

 

Canceled
 
(300
)
 
14.70

Exercised
 
(23,038
)
 
19.92

Options outstanding—March 31, 2012
 
375,521

 
19.92

 
 
 
 
 
Options exercisable—March 31, 2012
 
375,521

 
$
19.92


 
All Other Option Grants, Excluding Activity Shown Above
 
Underlying
Shares

 
Weighted
Average
Exercise
Price

Options outstanding—December 31, 2011
 
818,552

 
$
22.76

Granted
 

 

Canceled
 
(7,563
)
 
10.09

Exercised
 
(224,194
)
 
15.81

Options outstanding—March 31, 2012
 
586,795

 
25.73

 
 
 
 
 
Options exercisable—March 31, 2012
 
494,594

 
$
19.82

 
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)
 
2012

 
2011

Intrinsic value of options exercised
 
$
10,905

 
$
13,933


 

The table below shows additional information for options outstanding and exercisable as of March 31, 2012:
 
 
 
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)

$8.57 - $14.70
 
178,435

 
1.07

 
$
8.63

 
$
9,710

 
178,435

 
1.07

 
$
8.63

 
$
9,710

$19.88 - $45.31
 
691,680

 
2.92

 
22.76

 
27,867

 
691,680

 
2.92

 
22.76

 
27,867

$57.28 - $59.35
 
92,201

 
9.29

 
57.42

 
519

 

 

 

 

$8.57 - $59.35
 
962,316

 


 


 
$
38,096

 
870,115

 


 


 
$
37,577

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Vested or Expected to Vest
 
 
 
 
 
 
 
 
 
 
 
 
 
$8.57 - $59.35
 
962,316

 
3.19

 
$
23.46

 
$
38,096

 
 
 
 
 
 
 
 

 
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, 2012. The intrinsic value is based on our closing stock price of $63.05 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, 2012 and March 31, 2011:
 
 
Three months ended March 31
($000)
 
2012

 
2011

Excess tax benefits related to stock-based compensation
 
$
3,313

 
$
4,122

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, 2012 and March 31, 2011:
 
 
 
Three months ended March 31
($000)
 
2012

 
2011

Income before income taxes and equity in net income of unconsolidated entities
 
$
31,058

 
$
32,583

Equity in net income of unconsolidated entities
 
566

 
374

Net loss attributable to the noncontrolling interest
 
24

 
98

Total
 
$
31,648

 
$
33,055

Income tax expense
 
$
11,511

 
$
10,518

Effective tax rate
 
36.4
%
 
31.8
%

 
Our effective tax rate in the first quarter of 2012 was 36.4%, an increase of 4.6 percentage points compared with the prior-year period, primarily reflecting valuation allowances recorded in the first quarter of 2012 and certain deferred income tax benefits recorded in the first quarter of 2011.

Unrecognized Tax Benefits

The table below provides information concerning our gross unrecognized tax benefits as of March 31, 2012 and December 31, 2011. 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)
 
2012

 
2011

Gross unrecognized tax benefits
 
$
12,201

 
$
12,189

Gross unrecognized tax benefits which would affect income tax expense
 
$
11,918

 
$
11,907

Decrease in income tax expense upon recognition of gross unrecognized tax benefits
 
$
9,921

 
$
9,827



There were no significant changes to unrecognized tax benefits in the first quarter of 2012.

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)
 
2012

 
2011

Current liability
 
$
5,382

 
$
5,329

Non-current liability
 
6,439

 
6,200

Total liability for unrecognized tax benefits
 
$
11,821

 
$
11,529



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 2005.




We are currently under audit by the U.S. 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 2012. It is not possible to estimate the effect 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
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 Receiver seeks unspecified damages. The same day the Receiver filed his complaint, Morningstar sought leave from the court to file a counter suit against Stinson and two of his entities-Keystone State Capital Corporation and LG-for, among other things, fraud, misrepresentation, and breach of user agreements.

Morningstar believes the allegations against it by the Klass plaintiffs and the Receiver have no legal or factual basis and plans to vigorously contest the claims. Morningstar also intends to vigorously pursue its affirmative claims against Stinson, Keystone, and LG. We cannot predict the outcome of the proceedings.
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. In March 2012, Morningstar and InvestPic entered into a license agreement covering, among other things, the patent. The license agreement resolves the litigation. All other settlement terms are confidential.





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 (now known as Morningstar Credit Ratings, LLC) and Morningstar, Inc. in connection with a December 2007 agreement between Egan-Jones and Morningstar Credit Ratings 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. Morningstar Credit Ratings 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 asked 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.

We have not provided an estimate of loss or range of loss in connection with the matters described above because no such estimate can reasonably be made.






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.
Share Repurchase Program
Share Repurchase Program Disclosure [Text Block]
Share Repurchase Program
 
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. In December 2011, the board approved an increase to the 2010 share repurchase program. The board approval authorized the company to repurchase up to an additional $200 million in shares of our outstanding common stock with an expiration date of December 31, 2013. We may repurchase shares from time to time at prevailing market prices on the open market or in private transactions at our discretion. As of March 31, 2012, we had repurchased a total of 1,240,242 shares for $71,335,000 under this authorization.
Recently Issued Accounting Pronouncements
Recently Issued Accounting Pronouncements
Recently Issued Accounting Pronouncements

In September 2011, the FASB issued ASU No. 2011-08, Intangibles—Goodwill and Other (Topic 350): Testing Goodwill for Impairment. The objective of ASU No. 2011-08 is to simplify how entities test goodwill for impairment. ASU No.