MORNINGSTAR, INC., 10-K filed on 3/1/2017
Annual Report
Document and Entity Information Document (USD $)
12 Months Ended
Dec. 31, 2016
Feb. 17, 2017
Jun. 30, 2016
Document and Entity Information Abstract
 
 
 
Entity Registrant Name
MORNINGSTAR, INC. 
 
 
Entity Central Index Key
0001289419 
 
 
Current Fiscal Year End Date
--12-31 
 
 
Entity Filer Category
Large Accelerated Filer 
 
 
Document Type
10-K 
 
 
Document Period End Date
Dec. 31, 2016 
 
 
Document Fiscal Year Focus
2016 
 
 
Document Fiscal Period Focus
FY 
 
 
Amendment Flag
false 
 
 
Entity Common Stock, Shares Outstanding
 
42,930,200 
 
Entity Well-known Seasoned Issuer
Yes 
 
 
Entity Voluntary Filers
No 
 
 
Entity Current Reporting Status
Yes 
 
 
Entity Public Float
 
 
$ 1,466,028,352 
Condensed Consolidated Statements of Income (USD $)
In Millions, except Per Share data, unless otherwise specified
12 Months Ended
Dec. 31, 2016
Dec. 31, 2015
Dec. 31, 2014
Revenue
$ 798.6 
$ 788.8 
$ 760.1 
Operating expense:
 
 
 
Cost of revenue
344.3 
330.1 
318.6 
Sales and marketing
97.6 
96.6 
111.1 
General and administrative
105.2 
107.1 
108.9 
Depreciation and amortization
70.7 
64.4 
54.9 
Litigation Settlement
61.0 
Total operating expense
617.8 
598.2 
654.5 
Operating income
180.8 
190.6 
105.6 
Non-operating income:
 
 
 
Interest income, net
0.3 
1.3 
2.1 
Gain on sale of investments, reclassified from other comprehensive income
0.6 
0.6 
1.0 
Holding gain upon acquisition of additional ownership of equity-method investments
(37.1)
(5.2)
Other income, net
6.1 
1.2 
0.1 
Non-operating income, net
44.1 
3.1 
8.4 
Income before income taxes and equity in net income (loss) of unconsolidated entities
224.9 
193.7 
114.0 
Income tax expense
63.7 
62.7 
35.7 
Equity in net income (loss) of unconsolidated entities
(0.2)
1.8 
Consolidated net income
161.0 
132.8 
78.3 
Net income attributable to the noncontrolling interest
(0.2)
Net income attributable to Morningstar, Inc.
$ 161.0 
$ 132.6 
$ 78.3 
Net income per share attributable to Morningstar, Inc.:
 
 
 
Basic net income per share attributable to Morningstar, Inc. (in dollars per share)
$ 3.74 
$ 3.00 
$ 1.75 
Diluted net income per share attributable to Morningstar, Inc. (in dollars per share)
$ 3.72 
$ 3.00 
$ 1.74 
Dividends per common share:
 
 
 
Dividends declared per common share
$ 0.89 
$ 0.79 
$ 0.70 
Dividends paid per common share
$ 0.88 
$ 0.76 
$ 0.68 
Weighted average shares outstanding:
 
 
 
Basic (in shares)
43.0 
44.2 
44.7 
Diluted (in shares)
43.3 
44.3 
44.9 
Consolidated Consolidated Statements of Comprehensive Income (USD $)
In Millions, unless otherwise specified
12 Months Ended
Dec. 31, 2016
Dec. 31, 2015
Dec. 31, 2014
Consolidated net income
$ 161.0 
$ 132.8 
$ 78.3 
Other comprehensive income (loss), net of tax:
 
 
 
Foreign currency translation adjustment
(27.8)
(28.2)
(29.8)
Unrealized gains (losses) on securities:
 
 
 
Unrealized holding gains (losses) arising during period
3.3 
(1.0)
0.4 
Reclassification of gains included in net income
(2.4)
(0.4)
(0.6)
Other comprehensive loss
(26.9)
(29.6)
(30.0)
Comprehensive income
134.1 
103.2 
48.3 
Comprehensive (income) loss attributable to noncontrolling interest
(0.4)
0.1 
Comprehensive income attributable to Morningstar, Inc.
$ 134.1 
$ 102.8 
$ 48.4 
Condensed Consolidated Balance Sheets (USD $)
In Millions, unless otherwise specified
Dec. 31, 2016
Dec. 31, 2015
Current assets:
 
 
Cash and cash equivalents
$ 259.1 
$ 207.1 
Investments
44.9 
41.5 
Accounts receivable, less allowance of $2.1 and $1.8, respectively
145.8 
139.3 
Other
22.2 
22.0 
Total current assets
472.0 
409.9 
Property, equipment, and capitalized software, net
152.1 
134.5 
Investments in unconsolidated entities
40.3 
35.6 
Goodwill
556.8 
364.2 
Intangible assets, net
120.9 
74.2 
Other assets
8.8 
10.6 
Total assets
1,350.9 
1,029.0 
Current liabilities:
 
 
Accounts payable and accrued liabilities
44.6 
39.2 
Accrued compensation
71.7 
80.9 
Deferred revenue
165.4 
140.7 
Short-term debt
35.0 
Other current liabilities
13.2 
8.6 
Total current liabilities
294.9 
304.4 
Accrued compensation
10.3 
8.9 
Deferred tax liability, net
38.2 
19.8 
Long-term debt
250.0 
Deferred rent
24.8 
25.4 
Other long-term liabilities
35.9 
29.9 
Total liabilities
654.1 
388.4 
Morningstar, Inc. shareholders’ equity:
 
 
Common stock, no par value, 200,000,000 shares authorized, of which 42,932,994 and 43,403,076 shares were outstanding as of December 31, 2016 and December 31, 2015, respectively
Treasury stock at cost, 10,106,249 and 9,478,449 shares as of December 31, 2016 and December 31, 2015, respectively
(667.9)
(619.8)
Additional paid-in capital
584.0 
575.5 
Retained earnings
861.9 
739.2 
Accumulated other comprehensive loss:
 
 
Currency translation adjustment
(81.3)
(53.5)
Unrealized loss on available-for-sale investments
(0.2)
(1.1)
Total accumulated other comprehensive loss
(81.5)
(54.6)
Total Morningstar, Inc. shareholders’ equity
696.5 
640.3 
Noncontrolling interest
0.3 
0.3 
Total equity
696.8 
640.6 
Total liabilities and equity
$ 1,350.9 
$ 1,029.0 
Consolidated Balance Sheets (Parenthetical) (USD $)
In Millions, except Share data, unless otherwise specified
Dec. 31, 2016
Dec. 31, 2015
Statement of Financial Position [Abstract]
 
 
Allowance for doubtful accounts
$ 2.1 
$ 1.8 
Common stock, no par value
$ 0 
$ 0 
Common stock, shares authorized
200,000,000 
200,000,000 
Common stock, shares outstanding
42,932,994 
43,403,076 
Treasury stock, shares
10,106,249 
9,478,449 
Condensed Consolidated Statement of Equity (USD $)
In Millions, 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
$ 691.3 
 
$ (449.0)
$ 539.6 
$ 594.6 
$ 5.1 
$ 1.0 
Balance (in shares) at Dec. 31, 2013
 
44,967,423 
 
 
 
 
 
Increase (Decrease) in Stockholders' Equity
 
 
 
 
 
 
 
Net income
78.3 
 
 
 
78.3 
 
Other Comprehensive Income (loss)
 
 
 
 
 
 
 
Unrealized gain on available-for-sale investments, net of income tax
0.4 
 
 
 
 
0.4 
 
Reclassification of adjustments for gains included in net income, net of income tax
(0.6)
 
 
 
 
(0.6)
 
Foreign currency translation adjustment, net
(29.8)
 
 
 
 
(29.7)
(0.1)
Other comprehensive loss
(30.0)
 
 
 
 
(29.9)
(0.1)
Issuance of common stock related to stock-option exercises and vesting of restricted stock units, net
0.8 
 
1.4 
(0.6)
 
 
 
Issuance of common stock related to stock-option exercises and vesting of restricted stock units, net (in shares)
 
452,344 
 
 
 
 
 
Adjustments to Additional Paid in Capital, Share-based Compensation, Requisite Service Period Recognition [Abstract]
 
 
 
 
 
 
 
Stock-based compensation — restricted stock units
16.3 
 
 
16.3 
 
 
 
Stock-based compensation — restricted stock
0.4 
 
 
0.4 
 
 
 
Stock-based compensation — performance share awards
0.5 
 
 
0.5 
 
 
 
Stock-based compensation — stock-options
0.4 
 
 
0.4 
 
 
 
Excess tax benefit derived from stock-option exercises and vesting of restricted stock units
4.4 
 
 
4.4 
 
 
 
Dividends declared — common shares outstanding
(31.2)
 
 
 
(31.2)
 
 
Dividends declared — restricted stock units
(0.1)
 
 
0.1 
(0.2)
 
 
Common share repurchased
(76.7)
 
(76.7)
 
 
 
 
Common share repurchased (in shares)
 
(1,074,004)
 
 
 
 
 
Balance at Dec. 31, 2014
654.4 
 
(524.3)
561.1 
641.5 
(24.8)
0.9 
Balance (in shares) at Dec. 31, 2014
 
44,345,763 
 
 
 
 
 
Increase (Decrease) in Stockholders' Equity
 
 
 
 
 
 
 
Net income
132.8 
 
 
 
132.6 
 
0.2 
Other Comprehensive Income (loss)
 
 
 
 
 
 
 
Unrealized gain on available-for-sale investments, net of income tax
(1.0)
 
 
 
 
(1.0)
 
Reclassification of adjustments for gains included in net income, net of income tax
(0.4)
 
 
 
 
(0.4)
 
Foreign currency translation adjustment, net
(28.2)
 
 
 
 
(28.4)
0.2 
Other comprehensive loss
(29.6)
 
 
 
 
(29.8)
0.2 
Issuance of common stock related to stock-option exercises and vesting of restricted stock units, net
(1.7)
 
1.5 
(3.2)
 
 
 
Issuance of common stock related to stock-option exercises and vesting of restricted stock units, net (in shares)
 
298,435 
 
 
 
 
 
Adjustments to Additional Paid in Capital, Share-based Compensation, Requisite Service Period Recognition [Abstract]
 
 
 
 
 
 
 
Stock-based compensation — restricted stock units
16.1 
 
 
16.1 
 
 
 
Stock-based compensation — restricted stock
0.1 
 
 
0.1 
 
 
 
Stock-based compensation — performance share awards
1.0 
 
 
1.0 
 
 
 
Stock-based compensation — stock-options
0.2 
 
 
0.2 
 
 
 
Excess tax benefit derived from stock-option exercises and vesting of restricted stock units
2.6 
 
 
2.6 
 
 
 
Dividends declared — common shares outstanding
(34.8)
 
 
 
(34.8)
 
 
Dividends declared — restricted stock units
(0.1)
 
 
(0.1)
 
 
Purchase of remaining interest in majority-owned investment
(3.4)
 
 
(2.4)
 
 
(1.0)
Common share repurchased
(97.0)
 
(97.0)
 
 
 
 
Common share repurchased (in shares)
 
(1,241,122)
 
 
 
 
 
Balance at Dec. 31, 2015
640.6 
(619.8)
575.5 
739.2 
(54.6)
0.3 
Balance (in shares) at Dec. 31, 2015
43,403,076 
43,403,076 
 
 
 
 
 
Increase (Decrease) in Stockholders' Equity
 
 
 
 
 
 
 
Net income
161.0 
 
 
 
161.0 
 
Other Comprehensive Income (loss)
 
 
 
 
 
 
 
Unrealized gain on available-for-sale investments, net of income tax
3.3 
 
 
 
 
3.3 
 
Reclassification of adjustments for gains included in net income, net of income tax
(2.4)
 
 
 
 
(2.4)
 
Foreign currency translation adjustment, net
(27.8)
 
 
 
 
(27.8)
Other comprehensive loss
(26.9)
 
 
 
 
(26.9)
Issuance of common stock related to stock-option exercises and vesting of restricted stock units, net
(4.6)
 
1.4 
(6.0)
 
 
 
Issuance of common stock related to stock-option exercises and vesting of restricted stock units, net (in shares)
 
174,911 
 
 
 
 
 
Adjustments to Additional Paid in Capital, Share-based Compensation, Requisite Service Period Recognition [Abstract]
 
 
 
 
 
 
 
Stock-based compensation — restricted stock units
14.6 
 
 
14.6 
 
 
 
Stock-based compensation — performance share awards
(0.1)
 
 
(0.1)
 
 
 
Dividends declared — common shares outstanding
(38.3)
 
 
 
(38.3)
 
 
Common share repurchased
(49.5)
 
(49.5)
 
 
 
 
Common share repurchased (in shares)
 
(644,993)
 
 
 
 
 
Balance at Dec. 31, 2016
$ 696.8 
$ 0 
$ (667.9)
$ 584.0 
$ 861.9 
$ (81.5)
$ 0.3 
Balance (in shares) at Dec. 31, 2016
42,932,994 
42,932,994 
 
 
 
 
 
Condensed Consolidated Statement of Equity (Parenthetical) (USD $)
In Millions, unless otherwise specified
12 Months Ended
Dec. 31, 2016
Dec. 31, 2015
Dec. 31, 2014
Statement of Stockholders' Equity [Abstract]
 
 
 
Other Comprehensive Income (Loss), Unrealized Holding Gain (Loss) on Securities Arising During Period, Tax
$ 1.3 
$ 0.4 
$ 0.2 
Other Comprehensive Income (Loss), Reclassification Adjustment for Sale of Securities Included in Net Income, Tax
$ 1.8 
$ 0.1 
$ 0.4 
Condensed Consolidated Statements of Cash Flows (USD $)
In Millions, unless otherwise specified
12 Months Ended
Dec. 31, 2016
Dec. 31, 2015
Dec. 31, 2014
Operating activities
 
 
 
Consolidated net income
$ 161.0 
$ 132.8 
$ 78.3 
Adjustments to reconcile consolidated net income to net cash flows from operating activities:
 
 
 
Depreciation and amortization
70.7 
64.4 
54.9 
Deferred income taxes
4.7 
2.9 
3.0 
Stock-based compensation expense
14.5 
17.4 
17.6 
Provision for bad debt
1.3 
0.5 
0.5 
Equity in net (income) loss of unconsolidated entities
0.2 
(1.8)
Gain on sale of cost-method investment
(0.4)
Holding gain upon acquisition of additional ownership of equity-method investments
(37.1)
(5.2)
Other, net
(6.8)
(1.1)
(0.7)
Changes in operating assets and liabilities, net of effects of acquisitions:
 
 
 
Accounts receivable
(0.1)
(6.9)
(25.9)
Other assets
1.1 
0.7 
(5.3)
Accounts payable and accrued liabilities
3.4 
4.7 
(2.0)
Accrued compensation
(8.8)
7.0 
19.5 
Income taxes—current
1.0 
10.1 
2.3 
Deferred revenue
6.7 
10.6 
(1.7)
Deferred rent
(2.9)
(0.3)
3.0 
Other liabilities
4.8 
0.5 
(1.3)
Cash provided by operating activities
213.7 
241.5 
136.6 
Investing activities
 
 
 
Purchases of investments
(32.0)
(34.7)
(20.4)
Proceeds from maturities and sales of investments
28.6 
30.0 
111.6 
Capital expenditures
(62.8)
(57.3)
(58.3)
Acquisitions, net of cash acquired
(191.6)
(11.1)
(64.4)
Purchases of equity- and cost-method investments
(16.5)
(6.2)
Other, net
0.1 
(0.2)
0.3 
Cash used for investing activities
(274.2)
(79.5)
(31.2)
Financing activities
 
 
 
Common shares repurchased
(48.8)
(97.0)
(76.7)
Dividends paid
(37.9)
(33.7)
(30.5)
Proceeds from short-term debt
40.0 
50.0 
30.0 
Repayment of short-term debt
(15.0)
(45.0)
Proceeds from long-term debt
190.0 
Proceeds from stock-option exercises
0.4 
3.9 
6.6 
Employee taxes withheld for restricted stock units
(5.0)
(5.6)
(5.8)
Other, net
(0.1)
0.3 
Cash provided by (used for) financing activities
123.7 
(127.5)
(76.1)
Effect of exchange rate changes on cash and cash equivalents
(11.2)
(12.6)
(12.3)
Net increase in cash and cash equivalents
52.0 
21.9 
17.0 
Cash and cash equivalents—beginning of period
207.1 
185.2 
168.2 
Cash and cash equivalents—end of period
259.1 
207.1 
185.2 
Supplemental disclosure of cash flow information:
 
 
 
Cash paid for income taxes
58.0 
50.1 
30.4 
Cash paid for interest
1.2 
0.4 
0.3 
Supplemental information of non-cash investing and financing activities:
 
 
 
Unrealized gain (loss) on available-for-sale investments
1.2 
(2.0)
(0.4)
Software obtained under long-term financing arrangement
$ 9.0 
$ 5.3 
$ 0 
Description of Business
Description of Business
Description of Business
 
Morningstar, Inc. and its subsidiaries (Morningstar, we, our, the company), provides independent investment research for investors around the world. We offer an extensive line of products and services for financial advisors, asset managers, retirement plan providers and sponsors, and individual investors. We have operations in 27 countries.
Summary of Significant Accounting Policies
Summary of Significant Accounting Policies
Summary of Significant Accounting Policies

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


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

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

We account for investments in entities in which we exercise significant influence, but do not control, using the equity method.

As part of our investment management operations, we manage certain funds outside of the United States that are considered variable interest entities. For the majority of these variable interest entities, we do not have a variable interest in them. In cases where we do have a variable interest, we are not the primary beneficiary. Accordingly, we do not consolidate any of these variable interest entities.

Use of Estimates. The preparation of financial statements in conformity with accounting principles generally accepted in the United States requires us to make estimates and assumptions that affect the reported amounts of assets, liabilities, revenues, and expenses during the reporting period. Actual results may differ from these estimates.

Reclassifications. Certain amounts reported in prior years have been reclassified to conform to the current year presentation.

Cash and Cash Equivalents. Cash and cash equivalents consists of cash and investments with original maturities of three months or less. We state them at cost, which approximates fair value. We state the portion of our cash equivalents that are invested in money market funds at fair value, as these funds are actively traded and have quoted market prices.

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

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

Trading: We classify certain other investments, primarily equity securities, as trading securities as these relate mainly to investments tracking the strategies of our newsletter portfolios. We include realized and unrealized gains and losses associated with these investments as a component of our operating income in our Consolidated Statements of Income. We record these securities at their fair value in our Consolidated Balance Sheets.

Available-for-sale: Investments not considered held-to-maturity or trading securities are classified as available-for-sale securities. Available-for-sale securities primarily consist of equity securities, exchange-traded funds, and mutual funds. We report unrealized gains and losses for available-for-sale securities as other comprehensive income (loss), net of related income taxes. We record these securities at their fair value in our Consolidated Balance Sheets.

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

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

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

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

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

We provide additional information about our cash equivalents and investments that are subject to valuation under FASB ASC 820 in Note 6.

Concentration of Credit Risk. No single customer is large enough to pose a significant credit risk to our operations or financial condition. For the years ended December 31, 2016, 2015, and 2014, no single customer represented 5% or more of our consolidated revenue. If receivables from our customers become delinquent, we begin a collections process. We maintain an allowance for doubtful accounts based on our estimate of the probable losses of accounts receivable.

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

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

The table below summarizes our depreciation expense related to internally developed software for the past three years:
(in millions)
 
2016

 
2015

 
2014

Internally developed software depreciation expense
 
$
20.0

 
$
13.0

 
$
5.9



The table below summarizes our capitalized software development costs for the past three years:
(in millions)
 
2016

 
2015

 
2014

Capitalized software development costs
 
$
28.2

 
$
21.8

 
$
18.8



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

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

Goodwill. Changes in the carrying amount of our recorded goodwill are mainly the result of business acquisitions, divestitures, and the effect of foreign currency translations. In accordance with FASB ASC 350, Intangibles—Goodwill and Other, we do not amortize goodwill; instead, goodwill is subject to an impairment test annually, or whenever indicators of impairment exist. An impairment would occur if the carrying amount of a reporting unit exceeded the fair value of that reporting unit. We performed annual impairment reviews in the fourth quarter of 2016, 2015, and 2014. We did not record any impairment losses in 2016, 2015, or 2014.

Intangible Assets. We amortize intangible assets using the straight-line method over their estimated useful lives, which range from one to 25 years. We have no intangible assets with indefinite useful lives. In accordance with FASB ASC 360-10-35, Subsequent Measurement—Impairment or Disposal of Long-Lived Assets, we review intangible assets for impairment whenever events or changes in circumstances indicate that the carrying value may not be recoverable. If the value of future undiscounted cash flows is less than the carrying amount of an asset group, we record an impairment loss based on the excess of the carrying amount over the fair value of the asset group. We did not record any impairment losses in 2016, 2015, or 2014.

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

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

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

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

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

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

Our Workplace Solutions offerings help retirement plan participants plan and invest for retirement. We offer these services both through retirement plan providers (typically third-party asset management companies that provide administrative and record-keeping services) and directly to plan sponsors (employers that offer retirement plans to their employees). For our Workplace Solutions offerings, we provide both a hosted solution as well as proprietary installed software advice solution. Clients can integrate the installed customized software into their existing systems to help investors accumulate wealth, transition into retirement, and manage income during retirement.

The revenue arrangements for Workplace Solutions generally extend over multiple years. Our contracts may include one-time setup fees, implementation fees, technology licensing and maintenance fees, asset-based fees for managed retirement accounts, fixed and variable fees for advice and guidance, or a combination of these fee structures. Upon customer acceptance, we recognize revenue ratably over the term of the agreement. We recognize asset-based fees and variable fees in excess of any minimum once the value is fixed and determinable.

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

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

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

Sales Commissions. Through December 31, 2013, we paid sales commissions based on a formula driven by the total contract value of sales opportunities closed, with any subsequent adjustments (such as clawbacks for contract cancellations) reflected in future commission payouts. We considered the corresponding commission expense an incremental direct acquisition cost and treated it as a deferred charge, which we expensed over the term of the underlying sales contracts.

In the first quarter of 2014, we modified our sales incentive plan. The revised plan is based on a combination of net new sales and specific business objectives not solely tied to revenue growth. Because of this new structure and the discretion involved in determining the related incentives, we started expensing sales commissions as incurred instead of amortizing them over the contract terms.
However, we continued to amortize the deferred charge capitalized in connection with sales commissions paid in 2013 and previous periods as part of the previous incentive plan. This amortization added $0.6 million, $3.5 million, and $9.8 million of sales commission cost in 2016, 2015, and 2014, respectively.
Advertising Costs. Advertising costs include expenses incurred for various print and Internet ads, search engine fees, and direct mail campaigns. We expense advertising costs as incurred. The table below summarizes our advertising expense for the past three years:
(in millions)
 
2016

 
2015

 
2014

Advertising expense
 
$
7.6

 
$
8.3

 
$
7.5



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

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

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

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

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


Credit Arrangements
Credit Arrangements
Credit Arrangements

In November 2016, we amended and restated our credit agreement, which now provides us with a three-year credit facility with a borrowing capacity of up to $300.0 million. The credit agreement also provides for issuance of up to $25.0 million of letters of credit under the revolving credit facility.

The interest rate applicable to any loan under the credit agreement is, at our option, either: (i) the applicable London interbank offered rate (LIBOR) plus an applicable margin for such loans, which ranges between 1.00% and 1.75%, based on our consolidated leverage ratio or (ii) the lender's base rate plus the applicable margin for such loans, which ranges between 2.00% and 2.75%, based on our consolidated leverage ratio.

The credit agreement also contains financial covenants under which we: (i) may not exceed a maximum consolidated leverage ratio of 3.00 to 1.00 and (ii) are required to maintain a minimum consolidated interest coverage ratio of not less than 3.00 to 1.00. We were in compliance with the financial covenants as of December 31, 2016.

We had an outstanding principal balance of $250.0 million at a one-month LIBOR interest rate plus 100 basis points as of December 31, 2016, leaving borrowing availability of $50.0 million.
Income Per Share
Income Per Share
Income Per Share
 
The following table shows how we reconcile our net income and the number of shares used in computing basic and diluted income per share:

(in millions, except per share amounts)
 
2016

 
2015

 
2014

 
 
 
 
 
 
 
Basic net income per share attributable to Morningstar, Inc.:
 
 
 
 
 
 
Net income attributable to Morningstar, Inc.
 
$
161.0

 
$
132.6

 
$
78.3

 
 
 
 
 
 
 
Weighted average common shares outstanding
 
43.0

 
44.2

 
44.7

 
 
 
 
 
 
 
Basic net income per share attributable to Morningstar, Inc.
 
$
3.74

 
$
3.00

 
$
1.75

 
 
 
 
 
 
 
Diluted net income per share attributable to Morningstar, Inc.:
 
 
 
 
 
 
Net income attributable to Morningstar, Inc.
 
$
161.0

 
$
132.6

 
$
78.3

 
 


 


 
 
Weighted average common shares outstanding
 
43.0

 
44.2

 
44.7

Net effect of dilutive stock options and restricted stock units
 
0.3

 
0.1

 
0.2

Weighted average common shares outstanding for computing diluted income per share
 
43.3

 
44.3

 
44.9

 
 


 


 
 
Diluted net income per share attributable to Morningstar, Inc.
 
$
3.72

 
$
3.00

 
$
1.74

 
 
 
 
 
 
 

The following table shows the number of weighted average restricted stock units and performance share awards excluded from our calculation of diluted earnings per share because their inclusion would have been anti-dilutive:
(in thousands)
 
2016

 
2015

 
2014

Weighted average restricted stock units
 
13

 
38

 
47

Weighted average performance share awards
 

 
4

 
6

Total
 
13

 
42

 
53




Segment and Geographical Area Information
Segment and Geographical Area Information
Segment and Geographical Area Information

Segment Information

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

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

Geographical Area Information

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

External revenue by geographical area
 
 
 
 
 
 
 
 
Year ended December 31
(in millions)
 
2016

 
2015

 
2014

United States
 
$
590.5

 
$
585.1

 
$
550.8

 
 
 
 
 
 
 
United Kingdom
 
61.1

 
64.2

 
61.8

Continental Europe
 
62.6

 
58.8

 
62.7

Australia
 
32.2

 
30.5

 
35.0

Canada
 
28.2

 
27.9

 
30.8

Asia
 
20.0

 
18.5

 
15.8

Other
 
4.0

 
3.8

 
3.2

Total International
 
208.1

 
203.7

 
209.3

 
 
 
 
 
 
 
Consolidated revenue
 
$
798.6

 
$
788.8

 
$
760.1


Long-lived assets by geographical area
 
 
 
 
 
 
As of December 31
(in millions)
 
2016

 
2015

United States
 
$
139.1

 
$
116.9

 
 
 
 
 
United Kingdom
 
6.6

 
8.6

Continental Europe
 
1.9

 
2.2

Australia
 
0.6

 
0.9

Canada
 
0.4

 
0.7

Asia
 
3.4

 
5.2

Other
 
0.1

 

Total International
 
13.0

 
17.6

 
 
 
 
 
Consolidated property, equipment, and capitalized software, net
 
$
152.1

 
$
134.5

Investments and Fair Value Measurements
Investments and Fair Value Measurements
Investments and Fair Value Measurements
 
We classify our investments into three categories: available-for-sale, held-to-maturity, and trading. Our investment portfolio consists of stocks, bonds, options, mutual funds, money market funds, or exchange-traded products that replicate the model portfolios and strategies created by Morningstar. These investment accounts may also include exchange-traded products where Morningstar is an index provider. We classify our investment portfolio as shown below:
 
 
 
As of December 31
 
 
(in millions)
 
2016

 
2015

Available-for-sale
 
$
27.7

 
$
17.3

Held-to-maturity
 
15.7

 
15.3

Trading securities
 
1.5

 
8.9

Total
 
$
44.9

 
$
41.5


 
The following table shows the cost, unrealized gains (losses), and fair values related to investments classified as available-for-sale and held-to-maturity:
 
 
 
As of December 31, 2016
 
As of December 31, 2015
(in millions)
 
Cost

 
Unrealized
Gain

 
Unrealized
Loss

 
Fair
Value

 
Cost

 
Unrealized
Gain

 
Unrealized
Loss

 
Fair
Value

Available-for-sale:
 
 

 
 

 
 

 
 

 
 

 
 

 
 

 
 

Equity securities and exchange-traded funds
 
$
25.6

 
$
1.3

 
$
(1.5
)
 
$
25.4

 
$
17.4

 
$
0.3

 
$
(1.6
)
 
$
16.1

Mutual funds
 
2.2

 
0.1

 

 
2.3

 
1.3

 

 
(0.1
)
 
1.2

Total
 
$
27.8

 
$
1.4

 
$
(1.5
)
 
$
27.7

 
$
18.7

 
$
0.3

 
$
(1.7
)
 
$
17.3

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Held-to-maturity:
 
 
 
 
 
 
 
 
 
 

 
 

 
 

 
 

Certificates of deposit
 
$
13.8

 
$

 
$

 
$
13.8

 
$
15.3

 
$

 
$

 
$
15.3

Convertible note
 
1.9

 

 

 
1.9

 

 

 

 

Total
 
$
15.7

 
$

 
$

 
$
15.7

 
$
15.3

 
$

 
$

 
$
15.3


 
As of December 31, 2016 and December 31, 2015, investments with unrealized losses for greater than a 12-month period were not material to the Consolidated Balance Sheets and were not deemed to have other than temporary declines in value.

The table below shows the cost and fair value of investments classified as available-for-sale and held-to-maturity based on their contractual maturities as of December 31, 2016 and December 31, 2015.

 
 
As of December 31, 2016
 
As of December 31, 2015
(in millions)
 
Cost

 
Fair Value

 
Cost

 
Fair Value

Available-for-sale:
 
 

 
 

 
 

 
 

Equity securities, exchange-traded funds, and mutual funds
 
$
27.8

 
$
27.7

 
$
18.7

 
$
17.3

Total
 
$
27.8

 
$
27.7

 
$
18.7

 
$
17.3

 
 
 
 
 
 
 
 
 
Held-to-maturity:
 
 

 
 

 
 

 
 

Due in one year or less
 
$
13.8

 
$
13.8

 
$
15.3

 
$
15.3

Due in one to three years
 
1.9

 
1.9

 

 

Total
 
$
15.7

 
$
15.7

 
$
15.3

 
$
15.3



The following table shows the realized gains and losses arising from sales of our investments classified as available-for-sale recorded in our Consolidated Statements of Income: 
(in millions)
 
2016

 
2015

 
2014

Realized gains
 
$
1.6

 
$
1.3

 
$
1.5

Realized losses
 
(1.0
)
 
(0.7
)
 
(0.5
)
Realized gains, net
 
$
0.6

 
$
0.6

 
$
1.0


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

The following table shows the net unrealized losses on trading securities as recorded in our Consolidated Statements of Income:
 
(in millions)
 
2016

 
2015

 
2014

Unrealized losses, net
 
$

 
$
(0.8
)
 
$
(0.2
)


The table below shows the fair value of our assets subject to fair value measurements that are measured at fair value on a recurring basis using a fair value hierarchy:
 
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.

 
 
Fair Value
 
Fair Value Measurements as of December 31, 2016
 
 
as of
 
Using Fair Value Hierarchy
(in millions)
 
December 31, 2016
 
Level 1

 
Level 2

 
Level 3

Available-for-sale investments
 
 

 
 

 
 

 
 

Equity securities and exchange-traded funds
 
$
25.4

 
$
25.4

 
$

 
$

Mutual funds
 
2.3

 
2.3

 

 

Trading securities
 
1.5

 
1.5

 

 

Cash equivalents
 
0.2

 
0.2

 

 

Total
 
$
29.4

 
$
29.4

 
$

 
$

 
 
 
Fair Value
 
Fair Value Measurements as of December 31, 2015
 
 
as of
 
Using Fair Value Hierarchy
(in millions)
 
December 31, 2015
 
Level 1

 
Level 2

 
Level 3

Available-for-sale investments
 
 

 
 

 
 

 
 

Equity securities and exchange-traded funds
 
$
16.1

 
$
16.1

 
$

 
$

Mutual funds
 
1.2

 
1.2

 

 

Trading securities
 
8.9

 
8.9

 

 

Cash equivalents
 
0.2

 
0.2

 

 

Total
 
$
26.4

 
$
26.4

 
$

 
$


 
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. We did not hold any securities categorized as Level 2 or Level 3 as of December 31, 2016 and December 31, 2015.
Acquisitions, Goodwill, and Other Intangible Assets
Acquisitions, Goodwill, and Other Intangible Assets
Acquisitions, Goodwill, and Other Intangible Assets
 
2016 Acquisitions

Increased Ownership Interest in PitchBook Data, Inc. (PitchBook)

In December 2016, we acquired an additional 78% interest in PitchBook Data, Inc. (PitchBook), increasing our ownership to 100% from 22%. PitchBook delivers data, research, and technology covering the private capital markets, including venture capital, private equity, and mergers and acquisitions. We began consolidating the financial results of this acquisition in our Consolidated Financial Statements on December 1, 2016. PitchBook contributed $4.1 million of revenue and $7.5 million of operating expense during the one-month period that PitchBook was included in our consolidated results for 2016.

PitchBook's total preliminary estimated fair value of $235.1 million includes $188.2 million in cash paid to acquire the remaining 78% interest in PitchBook as well as a $46.9 million fair value related to our previous 22% ownership interest. The book value of this ownership immediately prior to the acquisition date was $9.8 million, and we recorded a preliminary non-cash holding gain of $37.1 million for the difference between the fair value and the book value of our previously held investment. We used the income approach and a discounted cash flow analysis of PitchBook’s projected revenue, operating expense, and other amounts to arrive at the estimated fair value. The gain is classified as "Holding gain upon acquisition of additional ownership of equity-method investments" in our Consolidated Statement of Income for the year ended December 31, 2016.

The transaction has been accounted for using the acquisition method of accounting, which requires that assets acquired and liabilities assumed be recognized at their fair values as of the acquisition date. The values assigned to the assets acquired and liabilities assumed are based on preliminary estimates of fair value available as of the date of this Annual Report on Form 10-K, and may be adjusted during the measurement period of up to 12 months from the date of acquisition as further information becomes available. Any changes in the fair values of the assets acquired and liabilities assumed during the measurement period may result in adjustments to goodwill. As of December 31, 2016, the primary areas that are not yet finalized due to information that may become available subsequently and may result in changes in the values assigned to various assets and liabilities, include the fair values of acquired intangible assets and related deferred tax liabilities, assumed deferred revenue, as well as assumed tax assets and liabilities.



The following table summarizes our preliminary allocation of the estimated fair values of the assets acquired and liabilities assumed at the date of acquisition, all of which are preliminary pending completion of the final valuation:
 
 
(in millions)

Cash and cash equivalents
 
$
12.4

Accounts receivable
 
10.8

Other current and non-current assets
 
3.5

Intangible assets
 
60.7

Goodwill
 
193.6

Deferred revenue
 
(22.4
)
Deferred tax liability, net
 
(12.8
)
Other current and non-current liabilities
 
(10.7
)
Total fair value of PitchBook
 
$
235.1



Accounts receivable acquired were recorded at gross contractual amounts receivable, which approximates fair value. We expect to collect substantially all of the gross contractual amounts receivable within a reasonable period of time after the acquisition date.

The preliminary allocation includes $60.7 million of acquired intangible assets, as follows:
 
 
(in millions)

 
Weighted Average Useful Life (years)
Customer-related assets
 
$
17.1

 
10
Technology-based assets
 
40.8

 
5
Intellectual property (trademarks and trade names)
 
2.8

 
4
Total intangible assets
 
$
60.7

 
6


We recognized a preliminary net deferred tax liability of $12.8 million mainly because the amortization expense related to certain intangible assets is not deductible for income tax purposes.

Preliminary goodwill of $193.6 million represents the excess over the fair value of the net tangible and intangible assets acquired with this acquisition. We paid this premium for a number of reasons, including the opportunity to offer comprehensive data coverage across the full life cycle of private market transactions. The preliminary goodwill is not deductible for income tax purposes.

Unaudited Pro Forma Information for PitchBook Acquisition

The following unaudited pro forma information presents a summary of our Consolidated Statements of Income for the years ended December 31, 2016 and 2015 as if we had completed the PitchBook acquisition as of January 1, 2015.

This unaudited pro forma information is presented for illustrative purposes and is not intended to represent or be indicative of the actual results of operations of the combined company that would have been achieved had the acquisition occurred at the beginning of the earliest period presented, nor is it intended to represent or be indicative of future results of operations.

In calculating the pro forma information below, we included an estimate of amortization expense related to the intangible assets acquired, stock-based compensation expense related to the PitchBook bonus plan (see Note 11 for additional information), and interest expense incurred on the long-term debt. The 2016 pro forma net income excludes the $37.1 million non-cash holding gain generated in connection with the transaction.
Unaudited Pro Forma Financial Information (in millions)
 
2016

 
2015

Revenue
 
$
834.1

 
$
813.3

Operating income
 
$
157.7

 
$
170.0

Net income
 
$
105.5

 
$
117.1

 
 
 
 
 
Basic net income per share attributable to Morningstar, Inc.
 
$
2.45

 
$
2.65

Diluted net income per share attributable to Morningstar, Inc.
 
$
2.44

 
$
2.65



RequiSight, LLC (RightPond)

On March 31, 2016, we acquired RequiSight, LLC, which does business as RightPond, a provider of business intelligence data and analytics on defined contribution and defined benefit plans for financial services firms. We began consolidating the financial results of RightPond in our Consolidated Financial Statements on March 31, 2016.

InvestSoft Technology, Inc. (InvestSoft)

On May 31, 2016, we acquired InvestSoft Technology, Inc. (InvestSoft), a provider of fixed-income analytics. We began consolidating the financial results of InvestSoft in our Consolidated Financial Statements on May 31, 2016.

2015 Acquisitions

Increased Ownership Interest in Ibbotson Associates Japan K.K. (IAJ)

In July 2015, we acquired an additional 28.9% interest in Ibbotson Associates Japan K.K. (IAJ), increasing our ownership to 100% from 71.1%. Because we previously owned more than 50% of the company, IAJ's financial results were consolidated in our Consolidated Financial Statements prior to acquiring the remaining interest.

Total Rebalance Expert (tRx)

In November 2015, we acquired Total Rebalance Expert (tRx), an automated, tax-efficient investment portfolio rebalancing platform for financial advisors. tRx streamlines the rebalancing process for advisors and automates the complexities involved in rebalancing and managing portfolios. We began consolidating the financial results of tRx in our Consolidated Financial Statements on November 2, 2015.

2014 Acquisitions

Increased Ownership Interest in HelloWallet Holdings, Inc.

In June 2014, we acquired an additional 81.3% interest in HelloWallet Holdings, Inc. (HelloWallet), increasing our ownership to 100% from 18.7%. HelloWallet combines behavioral economics and the psychology of decision-making with sophisticated technology to provide personalized, unbiased financial guidance to U.S. workers and their families through their employer benefit plans. We began consolidating the financial results of this acquisition in our Consolidated Financial Statements on June 3, 2014.

HelloWallet's total estimated fair value of $54.0 million includes $40.5 million in cash paid to acquire the remaining 81.3% interest in HelloWallet and pay off HelloWallet's indebtedness as well as $13.5 million related to the 18.7% of HelloWallet we previously held. We recorded a non-cash holding gain of $5.2 million for the difference between the fair value and the book value of our previously held investment. The gain is classified as "Holding gain upon acquisition of additional ownership of equity-method investments" in our Consolidated Statement of Income for the year ended December 31, 2014.

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

Cash and cash equivalents
 
$
3.7

Accounts receivable and other current assets
 
0.2

Other current and non-current assets
 
0.3

Deferred tax asset
 
8.6

Intangible assets
 
9.5

Goodwill
 
39.2

Deferred revenue
 
(2.9
)
Deferred tax liability
 
(3.6
)
Other current and non-current liabilities
 
(1.0
)
Total fair value of HelloWallet
 
$
54.0



The allocation includes $9.5 million of acquired intangible assets, as follows:
 
 
(in millions)

 
Weighted Average Useful Life (years)
Technology-based assets
 
$
6.7

 
5
Intellectual property (trademarks and trade names)
 
0.2

 
3
Non-competition agreement
 
2.6

 
5
Total intangible assets
 
$
9.5

 
5


We recognized a deferred tax liability of $3.6 million mainly because the amortization expense related to certain intangible assets is not deductible for income tax purposes.

We recognized a deferred tax asset of $8.6 million mainly because of net operating losses of HelloWallet which will become available to Morningstar.

Goodwill of $39.2 million represents the premium over the fair value of the net tangible and intangible assets acquired. We paid this premium for a number of reasons, including the opportunity to bring together HelloWallet's comprehensive financial wellness expertise with Morningstar's independent, research-based retirement advice to create a holistic retirement savings and advice offering.

ByAllAccounts, Inc.

In April 2014, we acquired ByAllAccounts, Inc. (ByAllAccounts), a provider of innovative data aggregation technology for financial applications for $27.9 million in cash. 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. We began including the financial results of this acquisition in our Consolidated Financial Statements on April 1, 2014.

The following table summarizes our allocation of the purchase price to the estimated fair values of the assets acquired and liabilities assumed at the date of the acquisition:
 
 
(in millions)

Cash and cash equivalents
 
$
0.3

Accounts receivable and other current assets
 
0.1

Deferred tax asset
 
4.0

Other current and non-current assets
 
0.3

Intangible assets
 
8.7

Goodwill
 
18.5

Deferred revenue
 
(0.1
)
Deferred tax liability
 
(3.3
)
Other current and non-current liabilities
 
(0.6
)
Total purchase price
 
$
27.9



The allocation includes $8.7 million of acquired intangible assets, as follows:

 
 
(in millions)

 
Weighted Average Useful Life (years)
Customer-related assets
 
$
5.5

 
24
Technology-based assets
 
3.0

 
4.5
Intellectual property (trademarks and trade names)
 
0.1

 
1
Non-competition agreement
 
0.1

 
3
Total intangible assets
 
$
8.7

 
19


We recognized a deferred tax liability of $3.3 million mainly because the amortization expense related to certain intangible assets is not deductible for income tax purposes.

We recognized a deferred tax asset of $4.0 million mainly because of net operating losses of ByAllAccounts which will become available to Morningstar.

Goodwill of $18.5 million represents the premium we paid over the fair value of the acquired net tangible and intangible assets. We paid this premium for a number of reasons, including the opportunity to integrate the service into our offerings as well as expand and develop ByAllAccounts' third-party distribution relationships.

Goodwill
 
The following table shows the changes in our goodwill balances from January 1, 2015 to December 31, 2016:
 
 
 
(in millions)

Balance as of January 1, 2015
 
$
370.1

Other, primarily foreign currency translation
 
(5.9
)
Balance as of December 31, 2015
 
$
364.2

Acquisition of PitchBook
 
193.6

Other acquisitions and foreign currency translation
 
(1.0
)
Balance as of December 31, 2016
 
$
556.8



We did not record any impairment losses in 2016, 2015, or 2014, as the estimated fair values of our reporting unit exceeded its carrying value. We perform our annual impairment testing during the fourth quarter of each year.

Intangible Assets

The following table summarizes our intangible assets: 
 
 
As of December 31, 2016
 
As of December 31, 2015
(in millions)
 
Gross

 
Accumulated
Amortization

 
Net

 
Weighted
Average
Useful  Life
(years)
 
Gross

 
Accumulated
Amortization

 
Net

 
Weighted
Average
Useful  Life
(years)
Intellectual property
 
$
30.9

 
$
(27.4
)
 
$
3.5

 
9
 
$
28.3

 
$
(26.7
)
 
$
1.6

 
9
Customer-related assets
 
152.0

 
(97.7
)
 
54.3

 
12
 
137.5

 
(92.3
)
 
45.2

 
12
Supplier relationships
 
0.2

 
(0.1
)
 
0.1

 
20
 
0.2

 
(0.1
)
 
0.1

 
20
Technology-based assets
 
133.2

 
(72.1
)
 
61.1

 
7
 
89.5

 
(64.4
)
 
25.1

 
8
Non-competition agreements
 
5.0

 
(3.1
)
 
1.9

 
5
 
4.6

 
(2.4
)
 
2.2

 
5
Total intangible assets
 
$
321.3

 
$
(200.4
)
 
$
120.9

 
10
 
$
260.1

 
$
(185.9
)
 
$
74.2

 
10

 
The following table summarizes our amortization expense related to intangible assets:
(in millions)
 
2016

 
2015

 
2014

Amortization expense
 
$
19.4

 
$
22.0

 
$
22.3


 
We did not record any impairment losses involving intangible assets in 2016, 2015, or 2014.

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

Based on acquisitions and divestitures completed through December 31, 2016, we expect intangible amortization expense for 2017 and subsequent years to be as follows:
 
 
(in millions)

2017
 
$
24.4

2018
 
22.3

2019
 
19.8

2020
 
16.1

2021
 
12.8

Thereafter
 
25.5


 
Our estimates of future amortization expense for intangible assets may be affected by additional acquisitions, divestitures, changes in the estimated average useful life, and foreign currency translation.
Investments in Unconsolidated Entities
Investments in Unconsolidated Entities
Investments in Unconsolidated Entities
 
Our investments in unconsolidated entities consist primarily of the following:
 
 
 
As of December 31
 
 
(in millions)
 
2016

 
2015

Investment in MJKK
 
$
25.1

 
$
24.3

Other-equity method investments
 
13.5

 
3.7

Investments accounted for using the cost method
 
1.7

 
7.6

Total investments in unconsolidated entities
 
$
40.3

 
$
35.6


 
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 December 31
 
 
 
 
2016

 
2015

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

 
 

Japanese yen (¥ in millions)
 
¥
8,558.2

 
¥
8,200.5

Equivalent U.S. dollars ($ in millions)
 
$
73.2

 
$
68.1



Other Equity Method Investments. As of December 31, 2016 and 2015, 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 December 31, 2016 and 2015. YCharts is a technology company that provides stock research and analysis. Our ownership interest in YCharts was approximately 22% as of December 31, 2016 and 2015.

As of December 31, 2016, other equity method investments also includes our investment in Ellevate Financial, Inc. (Ellevest) and United Income, Inc. (United Income). In March 2016, we acquired a minority equity stake in Ellevest. Previously, Ellevest was accounted for as a cost-method investment. Ellevest provides an engaging investing experience to help women meet their financial goals. Our ownership interest in Ellevest was approximately 22% as of December 31, 2016. In June 2016, we acquired a minority equity stake in United Income, which helps investors transition to retirement and manage their retirement income. Our ownership interest in United Income was approximately 38% as of December 31, 2016.

As of December 31, 2015, our cost-method investments also included a minority investment in PitchBook Data, Inc.(PitchBook). In December 2016, we purchased the remaining ownership interest in PitchBook. See Note 7 for additional information concerning our acquisition of PitchBook.

During 2014, we recorded an impairment loss of $1.7 million on our investment in an unconsolidated entity. We did not record any impairment losses on these investments in 2016 or 2015.
 
Property, Equipment, and Capitalized Software
Property, Equipment, and Capitalized Software
Property, Equipment, and Capitalized Software

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

 
 
As of December 31
 
 
(in millions)
 
2016

 
2015

Computer equipment
 
$
70.1

 
$
60.3

Capitalized software
 
189.8

 
144.0

Furniture and fixtures
 
26.0

 
24.3

Leasehold improvements
 
69.0

 
61.9

Telephone equipment
 
2.1

 
2.1

Construction in progress
 
9.9

 
11.7

Property, equipment, and capitalized software, at cost
 
366.9

 
304.3

Less accumulated depreciation
 
(214.8
)
 
(169.8
)
Property, equipment, and capitalized software, net
 
$
152.1

 
$
134.5



The following table summarizes our depreciation expense:
(in millions)
 
2016

 
2015

 
2014

Depreciation expense
 
$
51.3

 
$
42.4

 
$
32.6

Operating Leases
Operating Leases
Operating Leases

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

2017
 
$
23.9

2018
 
22.0

2019
 
17.9

2020
 
17.5

2021
 
16.0

Thereafter
 
27.4

Total
 
$
124.7


The following table summarizes our rent expense, including taxes, insurance, and related operating costs:

(in millions)
 
2016

 
2015

 
2014

Rent expense
 
$
26.3

 
$
27.1

 
$
24.5



Deferred rent includes build-out and rent abatement allowances received, which are amortized over the remaining portion of the original term of the lease as a reduction in office lease expense. We include deferred rent, as appropriate, in “Accounts payable and accrued liabilities” and “Deferred rent, noncurrent” on our Consolidated Balance Sheets.
 
 
As of December 31
 
 
(in millions)
 
2016

 
2015

Deferred rent
 
$
28.4

 
$
28.5



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, restricted stock units, restricted stock, performance share awards, and stock options. We granted restricted stock units, restricted stock, and stock options 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 December 31
(in millions)
 
2016

Shares available for future grants
 
3.7


 
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 past three years:
 
 
Year ended December 31
(in millions)
 
2016

 
2015

 
2014

Restricted stock units
 
$
14.6

 
$
16.1

 
$
16.3

Restricted stock
 

 
0.1

 
0.4

Performance share awards
 
(0.1
)
 
1.0

 
0.5

Stock options
 

 
0.2

 
0.4

Total stock-based compensation expense
 
$
14.5

 
$
17.4

 
$
17.6

 
 
 
 
 
 
 
Income tax benefit related to the stock-based compensation expense
 
$
4.3

 
$
5.0

 
$
5.1



The following table summarizes the stock-based compensation expense included in each of our operating expense categories for the past three years:
 
 
Year ended December 31
(in millions)
 
2016

 
2015

 
2014

Cost of revenue
 
$
7.5

 
$
8.1

 
$
7.8

Sales and marketing
 
1.9