MORNINGSTAR, INC., 10-Q filed on 10/28/2016
Quarterly Report
Document and Entity Information
9 Months Ended
Sep. 30, 2016
Oct. 21, 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-Q 
 
Document Period End Date
Sep. 30, 2016 
 
Document Fiscal Year Focus
2016 
 
Document Fiscal Period Focus
Q3 
 
Amendment Flag
false 
 
Entity Common Stock, Shares Outstanding
 
43,058,990 
Condensed Consolidated Statements of Income (USD $)
In Millions, except Per Share data, unless otherwise specified
3 Months Ended 9 Months Ended
Sep. 30, 2016
Sep. 30, 2015
Sep. 30, 2016
Sep. 30, 2015
Revenue
$ 196.1 
$ 195.3 
$ 586.4 
$ 587.2 
Operating expense:
 
 
 
 
Cost of revenue
84.9 
83.4 
256.3 
245.2 
Sales and marketing
23.1 
23.3 
71.1 
73.8 
General and administrative
25.8 
26.0 
76.1 
79.9 
Depreciation and amortization
18.1 
16.4 
52.0 
47.8 
Total operating expense
151.9 
149.1 
455.5 
446.7 
Operating income
44.2 
46.2 
130.9 
140.5 
Non-operating income (expense):
 
 
 
 
Interest income, net
0.2 
0.3 
0.5 
Gain on sale of investments, reclassified from other comprehensive income
0.3 
0.5 
0.4 
Other income, net
1.8 
1.2 
4.8 
0.8 
Non-operating income, net
2.1 
1.4 
5.6 
1.7 
Income before income taxes and equity in net income of unconsolidated entities
46.3 
47.6 
136.5 
142.2 
Equity in net income of unconsolidated entities
0.4 
0.5 
0.7 
1.5 
Income tax expense
16.5 
14.6 
46.5 
48.2 
Consolidated net income
30.2 
33.5 
90.7 
95.5 
Net income attributable to the noncontrolling interest
(0.2)
Net income attributable to Morningstar, Inc.
$ 30.2 
$ 33.5 
$ 90.7 
$ 95.3 
Net income per share attributable to:
 
 
 
 
Basic (in dollars per share)
$ 0.70 
$ 0.76 
$ 2.11 
$ 2.15 
Diluted (in dollars per share)
$ 0.70 
$ 0.76 
$ 2.09 
$ 2.15 
Dividends declared per common share (in dollars per share)
$ 0.22 
$ 0.19 
$ 0.66 
$ 0.57 
Dividends paid per common share (in dollars per share)
$ 0.22 
$ 0.19 
$ 0.66 
$ 0.57 
Weighted average shares outstanding:
 
 
 
 
Basic (in shares)
43.1 
44.2 
43.0 
44.3 
Diluted (in shares)
43.3 
44.3 
43.3 
44.4 
Condensed Consolidated Statements of Comprehensive Income (USD $)
In Millions, unless otherwise specified
3 Months Ended 9 Months Ended
Sep. 30, 2016
Sep. 30, 2015
Sep. 30, 2016
Sep. 30, 2015
Consolidated net income
$ 30.2 
$ 33.5 
$ 90.7 
$ 95.5 
Other comprehensive loss:
 
 
 
 
Foreign currency translation adjustment
(1.7)
(12.8)
(9.8)
(23.8)
Unrealized gains (losses) on securities, net of tax:
 
 
 
 
Unrealized holding gains (losses) arising during period
0.6 
(0.8)
1.1 
(1.3)
Reclassification (gains) losses included in net income
0.2 
(0.5)
(0.2)
Other comprehensive loss
(0.9)
(14.1)
(8.7)
(25.3)
Comprehensive income
29.3 
19.4 
82.0 
70.2 
Comprehensive income attributable to noncontrolling interest
(0.2)
(0.4)
Comprehensive income attributable to Morningstar, Inc.
$ 29.3 
$ 19.2 
$ 82.0 
$ 69.8 
Condensed Consolidated Balance Sheets (USD $)
In Millions, unless otherwise specified
Sep. 30, 2016
Dec. 31, 2015
Current assets:
 
 
Cash and cash equivalents
$ 219.4 
$ 207.1 
Investments
45.7 
41.5 
Accounts receivable, less allowance of $1.9 and $1.8, respectively
124.3 
139.3 
Other
23.7 
22.0 
Total current assets
413.1 
409.9 
Property, equipment, and capitalized software, less accumulated depreciation and amortization of $203.9 and $169.8, respectively
150.0 
134.5 
Investments in unconsolidated entities
51.0 
35.6 
Goodwill
370.7 
364.2 
Intangible assets, net
65.3 
74.2 
Other assets
9.4 
10.6 
Total assets
1,059.5 
1,029.0 
Current liabilities:
 
 
Accounts payable and accrued liabilities
35.0 
39.2 
Accrued compensation
57.7 
80.9 
Deferred revenue
144.9 
140.7 
Short-term debt
60.0 
35.0 
Other
16.6 
8.6 
Total current liabilities
314.2 
304.4 
Accrued compensation
9.9 
8.9 
Deferred tax liability, net
17.3 
19.8 
Deferred rent
22.6 
25.4 
Other long-term liabilities
33.5 
29.9 
Total liabilities
397.5 
388.4 
Morningstar, Inc. shareholders' equity:
 
 
Common stock, no par value, 200,000,000 shares authorized, of which 43,058,990 and 43,403,076 shares were outstanding as of September 30, 2016 and December 31, 2015, respectively
Treasury stock at cost, 9,961,108 and 9,478,449 shares as of September 30, 2016 and December 31, 2015, respectively
(657.3)
(619.8)
Additional paid-in capital
580.8 
575.5 
Retained earnings
801.5 
739.2 
Accumulated other comprehensive income (loss):
 
 
Currency translation adjustment
(63.3)
(53.5)
Unrealized loss on available-for-sale securities
(1.1)
Total accumulated other comprehensive loss
(63.3)
(54.6)
Total Morningstar, Inc. shareholders' equity
661.7 
640.3 
Noncontrolling interest
0.3 
0.3 
Total equity
662.0 
640.6 
Total liabilities and equity
$ 1,059.5 
$ 1,029.0 
Condensed Consolidated Balance Sheets (Parenthetical) (USD $)
In Millions, except Share data, unless otherwise specified
Sep. 30, 2016
Dec. 31, 2015
Statement of Financial Position [Abstract]
 
 
Allowance for doubtful accounts receivable
$ 1.9 
$ 1.8 
Accumulated depreciation and amortization
$ 203.9 
$ 169.8 
Common Stock, No Par Value
$ 0 
$ 0 
Common Stock, Shares Authorized
200,000,000 
200,000,000 
Common Stock, Shares, Outstanding
43,058,990 
43,403,076 
Treasury Stock, Shares
9,961,108 
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 Loss
Non Controlling Interests
Balance at Dec. 31, 2015
$ 640.6 
$ 0 
$ (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
90.7 
 
 
 
90.7 
 
Other comprehensive income (loss):
 
 
 
 
 
 
 
Unrealized gain on available-for-sale investments, net of income tax of $1.0
1.1 
 
 
 
 
1.1 
Reclassification of adjustments for gain included in net income, net of income tax of $0.5
 
 
 
 
 
 
Foreign currency translation adjustment
(9.8)
 
 
 
 
(9.8)
Other comprehensive loss, net
(8.7)
 
 
 
 
(8.7)
Issuance of common stock related to stock-option exercises and vesting of restricted stock units, net of shares withheld for taxes on settlements of restricted stock units
(4.0)
1.3 
(5.3)
 
 
 
Issuance of common stock related to stock-option exercises and vesting of restricted stock units, net of shares withheld for taxes on settlements of restricted stock units (in shares)
 
153,699 
 
 
 
 
 
Adjustments to Additional Paid in Capital, Share-based Compensation, Requisite Service Period Recognition
 
 
 
 
 
 
 
Stock-based compensation
10.6 
 
 
10.6 
 
 
 
Common share repurchased
(38.8)
 
(38.8)
 
 
 
 
Common share repurchased (in shares)
 
(497,785)
 
 
 
 
 
Dividends declared
(28.4)
 
 
 
(28.4)
 
 
Balance at Sep. 30, 2016
$ 662.0 
$ 0 
$ (657.3)
$ 580.8 
$ 801.5 
$ (63.3)
$ 0.3 
Balance (in shares) at Sep. 30, 2016
43,058,990 
43,058,990 
 
 
 
 
 
Condensed Consolidated Statement of Equity (Parenthetical) (USD $)
In Millions, unless otherwise specified
9 Months Ended
Sep. 30, 2016
Statement of Stockholders' Equity [Abstract]
 
Other Comprehensive Income (Loss), Unrealized Holding Gain (Loss) on Securities Arising During Period, Tax
$ 1.0 
Other Comprehensive Income (Loss), Reclassification Adjustment for Sale of Securities Included in Net Income, Tax
   
Condensed Consolidated Statements of Cash Flows (USD $)
In Millions, unless otherwise specified
9 Months Ended
Sep. 30, 2016
Sep. 30, 2015
Operating activities
 
 
Consolidated net income
$ 90.7 
$ 95.5 
Adjustments to reconcile consolidated net income to net cash flows from operating activities:
 
 
Depreciation and amortization
52.0 
47.8 
Deferred income taxes
(2.9)
(2.7)
Stock-based compensation expense
10.6 
13.5 
Provision for bad debt
0.7 
0.6 
Equity in net income of unconsolidated entities
(0.7)
(1.5)
Other, net
(5.2)
(0.5)
Changes in operating assets and liabilities, net of effects of acquisitions:
 
 
Accounts receivable
13.1 
9.0 
Other assets
(1.4)
(1.1)
Accounts payable and accrued liabilities
(3.9)
1.3 
Accrued compensation
(20.8)
(7.3)
Income taxes- current
6.3 
20.5 
Deferred revenue
4.1 
13.1 
Deferred rent
(2.7)
Other liabilities
3.3 
0.4 
Cash provided by operating activities
143.2 
188.6 
Investing activities
 
 
Purchases of investments
(24.4)
(28.3)
Proceeds from maturities and sales of investments
21.6 
24.8 
Capital expenditures
(47.5)
(39.9)
Acquisitions, net of cash acquired
(15.8)
(3.4)
Purchases of equity- and cost-method investments
(16.4)
Other, net
(6.5)
Cash used for investing activities
(82.5)
(53.3)
Financing activities
 
 
Common shares repurchased
(38.8)
(30.1)
Dividends paid
(28.5)
(25.3)
Proceeds from short-term debt
40.0 
15.0 
Repayment of short-term debt
(15.0)
(45.0)
Proceeds from stock-option exercises, net
0.4 
3.7 
Employee taxes paid from withholding of restricted stock units
(4.4)
(4.9)
Other, net
0.1 
Cash used for financing activities
(46.3)
(86.5)
Effect of exchange rate changes on cash and cash equivalents
(2.1)
(10.3)
Net increase in cash and cash equivalents
12.3 
38.5 
Cash and cash equivalents-beginning of period
207.1 
185.2 
Cash and cash equivalents-end of period
219.4 
223.7 
Supplemental disclosure of cash flow information:
 
 
Cash paid for income taxes
43.3 
27.3 
Interest Paid
0.8 
0.3 
Supplemental information of non-cash investing and financing activities:
 
 
Unrealized gain (loss) on available-for-sale investments
1.5 
(2.2)
Software and equipment obtained under long-term financing arrangement
$ 9.0 
$ 1.3 
Basis of Presentation of Interim Financial Information
Basis of Presentation of Interim Financial Information
Basis of Presentation of Interim Financial Information
 
The accompanying unaudited 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 (U.S. GAAP) requires management to make estimates and assumptions that affect the reported amount of assets, liabilities, revenue, and expenses. Actual results could differ from those estimates. In the opinion of management, the statements reflect all adjustments, which are of a normal recurring nature, necessary to present fairly our financial position, results of operations, equity, and cash flows. These financial statements and notes are unaudited and should be read in conjunction with our Audited Consolidated Financial Statements and Notes thereto included in our Annual Report on Form 10-K for the year ended December 31, 2015, filed with the SEC on February 26, 2016.

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

We discuss our significant accounting policies in Note 2 of our Audited Consolidated Financial Statements included in our Annual Report on Form 10-K for the year ended December 31, 2015, filed with the SEC on February 26, 2016.

On May 28, 2014, the FASB issued ASU No. 2014-09, Revenue from Contracts with Customers, which requires an entity to recognize the amount of revenue to which it expects to be entitled for the transfer of promised goods or services to customers. The ASU will replace most existing revenue recognition guidance in U.S. GAAP when it becomes effective. The original effective date for ASU 2014-09 would have required the Company to adopt beginning on January 1, 2017. In August 2015, the FASB issued ASU No. 2015-14, Revenue from Contracts with Customers - Deferral of the Effective Date, which defers the effective date of ASU 2014-09 for one year and permits early adoption as early as the original effective date of ASU 2014-09. The new standard is effective for us on January 1, 2018. The standard permits the use of either the retrospective or cumulative effect transition method. We are evaluating the effect that ASU No. 2014-09 will have on our consolidated financial statements and related disclosures. We have not yet selected a transition method nor have we determined the effect of the standard on our ongoing financial reporting.

On March 17, 2016, the FASB issued ASU No. 2016-08, Revenue from Contracts with Customers: Principal versus Agent Considerations (Reporting Revenue Gross versus Net), which provides guidance on assessing whether an entity is a principal or an agent in a revenue transaction and whether an entity reports revenue on a gross or net basis. On April 14, 2016, the FASB issued ASU No. 2016-10, Revenue from Contracts with Customers: Identifying Performance Obligations and Licensing, which provides guidance on identifying performance obligations and accounting for licenses of intellectual property. On May 6, 2016, the FASB issued ASU No. 2016-11, Revenue Recognition and Derivatives and Hedging: Rescission of SEC guidance because of ASU No. 2014-09 and ASU No. 2014-16 pursuant to staff announcements at the March 3, 2016 EITF Meeting, which rescinds the following SEC Staff Observer comments from ASC 605, Revenue Recognition, upon an entity's early adoption of ASC 606, Revenue from Contracts with Customers: Revenue and expense recognition for freight services in process, accounting for shipping and handling fees and costs, and accounting for consideration given by a vendor to a customer (including reseller of the vendor's products). On May 9, 2016, the FASB issued ASU No. 2016-12, Revenue from Contracts with Customers: Narrow-Scope Improvements and Practical Expedients, which makes narrow-scope amendments to ASU No. 2014-09 and provides practical expedients to simplify the transition to the new standard and clarify certain aspects of the standard.

The effective date and transition requirements for ASU No. 2016-08, ASU No. 2016-10, ASU No. 2016-11, and ASU No. 2016-12 are the same as the effective date and transition requirements of ASU No. 2014-09. We are evaluating the effect that ASU No. 2016-08, ASU No. 2016-10, ASU No. 2016-11, and ASU No. 2016-12 will have on our consolidated financial statements and related disclosures.

On February 25, 2016, the FASB issued ASU No. 2016-02, Leases, which will require lessees to recognize almost all leases on their balance sheet as a right-of-use asset and a lease liability. The new standard is effective for us on January 1, 2019. The new standard must be adopted using a modified retrospective transition, and provides for certain practical expedients. Transition will require application of the new guidance at the beginning of the earliest comparative period presented. We are evaluating the effect that ASU No. 2016-02 will have on our consolidated financial statements and related disclosures.

On March 15, 2016, the FASB issued ASU No. 2016-07, Investments - Equity Method and Joint Ventures: Simplifying the Transition to the Equity Method of Accounting, which eliminates the requirement to apply the equity method of accounting retrospectively when a reporting entity obtains significant influence over a previously held investment. The new standard is effective for us on January 1, 2017. Early adoption is permitted. The new standard should be applied prospectively for investments that qualify for the equity method of accounting after the effective date. We elected to early adopt ASU No. 2016-07 in the quarter ended March 31, 2016. The adoption of ASU No. 2016-07 did not have a material effect on our consolidated financial statements.

On March 30, 2016, the FASB issued ASU No. 2016-09, Compensation - Stock Compensation: Improvements to Employee Share-Based Payment Accounting, which includes amendments to accounting for income taxes at settlement, forfeitures, and net settlements to cover withholding taxes. The new standard is effective for us on January 1, 2017. Early adoption is permitted but requires all elements of the amendments to be adopted at once rather than individually. We elected to early adopt ASU No. 2016-09 in the quarter ended June 30, 2016, which requires us to reflect any adjustments as of January 1, 2016, the beginning of the annual period that includes the interim period of adoption. The primary impact of adoption was the recognition of excess tax benefits in our provision for income taxes rather than paid in capital for all periods in fiscal year 2016. Additional amendments to the accounting for income taxes and minimum statutory withholding tax requirements had no impact to retained earnings as of January 1, 2016, where the cumulative effective of these changes are required to be recorded. We have elected to continue to estimate forfeiture expected to occur to determine the amount of compensation cost to be recognized in each period.

We elected to apply the presentation requirements for cash flows related to excess tax benefits retrospectively to all periods presented which resulted in an increase to both net cash provided by operating activities and net cash used for financing activities of $2.1 million for the nine months ended September 30, 2015. The adoption did not have an impact on net cash provided by operating activities and net cash used for financing activities for the three months ended September 30, 2015. The presentation requirements for cash flows related to employee taxes paid for withheld shares had no impact to any of the periods presented in our consolidated cash flow statements because such cash flows have historically been presented as a financing activity.

Adoption of the new standard resulted in the recognition of excess tax benefits in our provision for income taxes rather than paid in capital of $0.8 million for the nine months ended September 30, 2016. The adoption did not have a material effect on our previously reported results for the quarter ended March 31, 2016 as most of our stock options and restricted stock units vest in the second quarter.

On August 26, 2016, the FASB issued ASU No. 2016-15, Statement of Cash Flows: Classification of Certain Cash Receipts and Cash Payments, which reduces diversity in practice of how certain transactions are classified in the statement of cash flows. The new guidance clarifies the classification of cash activity related to debt prepayment or debt extinguishment costs, settlement of zero-coupon debt instruments, contingent consideration payments made after a business combination, proceeds from the settlement of insurance claims, proceeds from the settlement of corporate and bank-owned life insurance policies, distributions received from equity-method investments, and beneficial interests in securitization transactions. The guidance also describes a predominance principle in which cash flows with aspects of more than one class that cannot be separated should be classified based on the activity that is likely to be the predominant source or use of cash flow. The new standard is effective for us on January 1, 2018. Early adoption is permitted, including adoption in an interim period, but requires all elements of the amendments to be adopted at once rather than individually. The new standard must be adopted using a retrospective transition method. We are evaluating the effect that ASU No. 2016-15 will have on our consolidated financial statements and related disclosures.
Credit Arrangements (Notes)
Credit Arrangements
Credit Arrangements

In March 2016, we increased our single-bank revolving credit facility from $75.0 million to $100.0 million. We had an outstanding principal balance of $60.0 million at an interest rate of LIBOR plus 100 basis points as of September 30, 2016, leaving borrowing availability of $40.0 million.
Acquisitions, Goodwill and Other Intangible Assets
Goodwill and Other Intangible Assets
Goodwill, and Other Intangible Assets

Acquisitions

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.

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.

Goodwill
 
The following table shows the changes in our goodwill balances from December 31, 2015 to September 30, 2016:
 
 
 
(in millions)

Balance as of December 31, 2015
 
$
364.2

Acquisitions and foreign currency translation
 
6.5

Balance as of September 30, 2016
 
$
370.7



We did not record any impairment losses in the first nine months of 2016 or 2015. We perform our annual impairment reviews in the fourth quarter.

Intangible Assets

The following table summarizes our intangible assets: 
 
 
As of September 30, 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
 
$
28.5

 
$
(27.7
)
 
$
0.8

 
9
 
$
28.3

 
$
(26.7
)
 
$
1.6

 
9
Customer-related assets
 
137.3

 
(97.6
)
 
39.7

 
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
 
92.6

 
(69.8
)
 
22.8

 
8
 
89.5

 
(64.4
)
 
25.1

 
8
Non-competition agreements
 
4.8

 
(2.9
)
 
1.9

 
5
 
4.6

 
(2.4
)
 
2.2

 
5
Total intangible assets
 
$
263.4

 
$
(198.1
)
 
$
65.3

 
10
 
$
260.1

 
$
(185.9
)
 
$
74.2

 
10
 
The following table summarizes our amortization expense related to intangible assets:
 
 
Three months ended September 30
 
Nine months ended September 30
(in millions)
 
2016

 
2015

 
2016

 
2015

Amortization expense
 
$
4.5

 
$
5.5

 
$
14.3

 
$
16.4


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

We expect intangible amortization expense for the remainder of 2016 and subsequent years as follows:
 
 
(in millions)

Remainder of 2016 (from October 1 through December 31)
 
$
4.0

2017
 
13.8

2018
 
11.7

2019
 
9.2

2020
 
5.6

Thereafter
 
21.0


 
Our estimates of future amortization expense for intangible assets may be affected by acquisitions, divestitures, changes in the estimated average useful life, and foreign currency translation.

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 net income per share:

 
 
Three months ended September 30
 
Nine months ended September 30
(in millions, except per share amounts)
 
2016

 
2015

 
2016

 
2015

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

 
 

 
 
 
 
Net income attributable to Morningstar, Inc.
 
$
30.2

 
$
33.5

 
$
90.7

 
$
95.3

 
 
 
 
 
 
 
 
 
Weighted average common shares outstanding
 
43.1

 
44.2

 
43.0

 
44.3

 
 
 
 
 
 
 
 
 
Basic net income per share attributable to Morningstar, Inc.
 
$
0.70

 
$
0.76

 
$
2.11

 
$
2.15

 
 
 
 
 
 
 
 
 
Diluted net income per share attributable to Morningstar, Inc.:
 
 
 
 
 
 
 
 
Net income attributable to Morningstar, Inc.
 
$
30.2

 
$
33.5

 
$
90.7

 
$
95.3

 
 
 
 
 
 
 
 
 
Weighted average common shares outstanding
 
43.1

 
44.2

 
43.0

 
44.3

Net effect of dilutive stock options, restricted stock units, and performance share awards
 
0.2

 
0.1

 
0.3

 
0.1

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

 
44.3

 
43.3

 
44.4

 
 
 
 
 
 
 
 
 
Diluted net income per share attributable to Morningstar, Inc.
 
$
0.70

 
$
0.76

 
$
2.09

 
$
2.15


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:

 
 
Three months ended September 30
 
Nine months ended September 30
(in thousands)
 
2016

 
2015

 
2016

 
2015

Weighted average restricted stock units
 
4

 
45

 
8

 
41

Weighted average performance share awards
 

 
5

 

 
7

Total
 
4

 
50

 
8

 
48



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

The accounting policies for our single reportable segment are the same as those described in “Note 2. Summary of Significant Accounting Policies” included in our Annual Report on Form 10-K for the year ended December 31, 2015. 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
 
 
 
 
 
 
 
 
 
 
Three months ended September 30
 
Nine months ended September 30
(in millions)
 
2016

 
2015

 
2016

 
2015

United States
 
$
143.5

 
$
145.2

 
$
430.6

 
$
437.3

 
 
 
 
 
 
 
 
 
United Kingdom
 
15.2

 
15.6

 
45.8

 
46.4

Continental Europe
 
16.0

 
14.7

 
47.3

 
43.4

Australia
 
8.3

 
7.5

 
24.1

 
23.2

Canada
 
7.1

 
6.6

 
20.6

 
20.6

Asia
 
5.0

 
4.6

 
15.1

 
13.4

Other
 
1.0

 
1.1

 
2.9

 
2.9

Total International
 
52.6

 
50.1

 
155.8

 
149.9

 
 
 
 
 
 
 
 
 
Consolidated revenue
 
$
196.1

 
$
195.3

 
$
586.4

 
$
587.2



Long-lived assets by geographical area
 
 
 
 
 
 
As of September 30
 
As of December 31
(in millions)
 
2016

 
2015

United States
 
$
135.8

 
$
116.9

 
 
 
 
 
United Kingdom
 
7.0

 
8.6

Continental Europe
 
2.1

 
2.2

Australia
 
0.7

 
0.9

Canada
 
0.5

 
0.7

Asia
 
3.8

 
5.2

Other
 
0.1

 

Total International
 
14.2

 
17.6

 
 
 
 
 
Consolidated property, equipment, and capitalized software, net
 
$
150.0

 
$
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 securities. 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 September 30
 
As of December 31
(in millions)
 
2016

 
2015

Available-for-sale
 
$
28.4

 
$
17.3

Held-to-maturity
 
15.9

 
15.3

Trading securities
 
1.4

 
8.9

Total
 
$
45.7

 
$
41.5



The following table shows the cost, unrealized gains (losses), and fair value of investments classified as available-for-sale and held-to-maturity:
 
 
 
As of September 30, 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
 
$
26.0

 
$
1.3

 
$
(1.2
)
 
$
26.1

 
$
17.4

 
$
0.3

 
$
(1.6
)
 
$
16.1

Mutual funds
 
2.2

 
0.1

 

 
2.3

 
1.3

 

 
(0.1
)
 
1.2

Total
 
$
28.2

 
$
1.4

 
$
(1.2
)
 
$
28.4

 
$
18.7

 
$
0.3

 
$
(1.7
)
 
$
17.3

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Held-to-maturity:
 
 

 
 

 
 

 
 

 
 

 
 

 
 

 
 

Certificates of deposit
 
$
14.1

 
$

 
$

 
$
14.1

 
$
15.3

 
$

 
$

 
$
15.3

Convertible note
 
1.8

 

 

 
1.8

 

 

 

 

Total
 
$
15.9

 
$

 
$

 
$
15.9

 
$
15.3

 
$

 
$

 
$
15.3


 
As of September 30, 2016 and December 31, 2015, investments with unrealized losses for greater than a 12-month period were not material to the Unaudited 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 September 30, 2016 and December 31, 2015.
 
 
 
As of September 30, 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
 
$
28.2

 
$
28.4

 
$
18.7

 
$
17.3

    Total
 
$
28.2

 
$
28.4

 
$
18.7

 
$
17.3

 
 
 
 
 
 
 
 
 
Held-to-maturity:
 
 

 
 

 
 

 
 

Due in one year or less
 
$
14.1

 
$
14.1

 
$
15.3

 
$
15.3

Due in one to three years
 
1.8

 
1.8

 

 

Total
 
$
15.9

 
15.9

 
$
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 Unaudited Condensed Consolidated Statements of Income: 

 
 
Three months ended September 30
 
Nine months ended September 30
(in millions)
 
2016

 
2015

 
2016

 
2015

Realized gains
 
$
0.5

 
$
0.1

 
$
1.6

 
$
1.0

Realized losses
 
(0.2
)
 
(0.1
)
 
(1.1
)
 
(0.6
)
Realized gains, net
 
$
0.3

 
$

 
$
0.5

 
$
0.4


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

The following table shows the net unrealized gains (losses) on trading securities as recorded in our Unaudited Condensed Consolidated Statements of Income:
 
 
 
Three months ended September 30
 
Nine months ended September 30
(in millions)
 
2016

 
2015

 
2016

 
2015

Unrealized gains (losses), net
 
$

 
$
(0.7
)
 
$
0.1

 
$
(1.0
)


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:
 
 
 
Fair Value
 
Fair Value Measurements as of September 30, 2016
 
 
as of
 
Using Fair Value Hierarchy
(in millions)
 
September 30, 2016
 
Level 1

 
Level 2

 
Level 3

Available-for-sale investments:
 
 

 
 

 
 

 
 

Equity securities and exchange-traded funds
 
$
26.1

 
$
26.1

 
$

 
$

Mutual funds
 
2.3

 
2.3

 

 

Trading securities
 
1.4

 
1.4

 

 

Cash equivalents
 
0.2

 
0.2

 

 

Total
 
$
30.0

 
$
30.0

 
$

 
$

 
 
 
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

 
$

 
$


 
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.

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 September 30, 2016 and December 31, 2015.
Stock-Based Compensation
Stock-Based Compensation
Stock-Based Compensation
 
Stock-Based Compensation Plans
 
All of our employees and our non-employee directors are eligible for awards under the Morningstar 2011 Stock Incentive Plan (the 2011 Plan), which provides for a variety of stock-based awards, including stock options, performance share awards, restricted stock units, and restricted stock.

The following table summarizes the stock-based compensation expense included in each of our operating expense categories:
 
 
Three months ended September 30
 
Nine months ended September 30
(in millions)
 
2016

 
2015

 
2016

 
2015

Cost of revenue
 
$
1.5

 
$
2.1

 
$
5.5

 
$
6.2

Sales and marketing
 
0.3

 
0.6

 
1.3

 
1.7

General and administrative
 
1.0

 
1.9

 
3.8

 
5.6

Total stock-based compensation expense
 
$
2.8

 
$
4.6

 
$
10.6

 
$
13.5



As of September 30, 2016, the total unrecognized stock-based compensation cost related to outstanding restricted stock units and performance share awards expected to vest was $28.1 million, which we expect to recognize over a weighted average period of 31 months.
Income Taxes
Income Taxes
Income Taxes

Effective Tax Rate

The following table shows our effective tax rate for the three months and nine months ended September 30, 2016 and September 30, 2015:
 
 
 
Three months ended September 30
 
Nine months ended September 30
(in millions)
 
2016

 
2015

 
2016

 
2015

Income before income taxes and equity in net income of unconsolidated entities
 
$
46.3

 
$
47.6

 
$
136.5

 
$
142.2

Equity in net income of unconsolidated entities
 
0.4

 
0.5

 
0.7

 
1.5

Net income attributable to noncontrolling interest
 

 

 

 
(0.2
)
Total
 
$
46.7

 
$
48.1

 
$
137.2

 
$
143.5

Income tax expense
 
$
16.5

 
$
14.6

 
$
46.5

 
$
48.2

Effective tax rate
 
35.3
%
 
30.4
%
 
33.9
%
 
33.6
%

 
Our effective tax rate in the third quarter and for the first nine months of 2016 was 35.3% and 33.9%, a respective increase of 4.9 and 0.3 percentage points compared with the same periods a year ago. During the third quarter of 2015, we recognized additional tax benefits for credits and incentives. We also recognized a deferred tax asset for net operating losses for certain of our foreign operations that we expect will be utilized over time based upon recent financial performance and forecasted taxable income. Both of these items reduced our effective tax rate in the third quarter of 2015.

Unrecognized Tax Benefits

The table below provides information concerning our gross unrecognized tax benefits as of September 30, 2016 and December 31, 2015, as well as the effect these gross unrecognized tax benefits would have on our income tax expense, if they were recognized.
 
 
As of September 30
 
As of December 31
(in millions)
 
2016

 
2015

Gross unrecognized tax benefits
 
$
18.7

 
$
14.5

Gross unrecognized tax benefits that would affect income tax expense
 
$
14.7

 
$
10.5

Decrease in income tax expense upon recognition of gross unrecognized tax benefits
 
$
13.4

 
$
9.4



Our Unaudited 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 September 30
 
As of December 31
Liabilities for Unrecognized Tax Benefits (in millions)
 
2016

 
2015

Current liability
 
$
7.1

 
$
4.2

Non-current liability
 
7.4

 
6.0

Total liability for unrecognized tax benefits
 
$
14.5

 
$
10.2



Because we conduct business globally, we file income tax returns in U.S. federal, state, local, and foreign jurisdictions. We are currently under audit by federal and various state and local tax authorities in the United States, as well as tax authorities in certain non-U.S. jurisdictions. It is possible, though not likely, that the examination phase of some of these audits will conclude in 2016. It is not possible to estimate the effect of current audits on previously recorded unrecognized tax benefits.

We have not provided federal and state income taxes on accumulated undistributed earnings of certain foreign subsidiaries because these earnings have been permanently reinvested. Approximately 80% of our cash, cash equivalents, and investments balance as of September 30, 2016 was held by our operations outside of the United States. We believe that our cash balances and investments in the United States, along with cash generated from our U.S. operations, will be sufficient to meet our U.S. operating and cash needs for the foreseeable future, without requiring us to repatriate earnings from these foreign subsidiaries. It is not practical to determine the amount of the unrecognized deferred tax liability related to the undistributed earnings.
 
Certain of our non-U.S. operations have incurred net operating losses (NOLs) which may become deductible to the extent these operations become profitable. For each of our operations, we evaluate whether it is more likely than not that the tax benefits related to NOLs will be realized. As part of this evaluation, we consider evidence such as tax planning strategies, historical operating results, forecasted taxable income, and recent financial performance. In the year that certain non-U.S. operations record a loss, we do not recognize a corresponding tax benefit, thus increasing our effective tax rate. Upon determining that it is more likely than not that the NOLs will be realized, we reduce the tax valuation allowances related to these NOLs, which results in a reduction to our income tax expense and our effective tax rate in the period.

Contingencies
Contingencies
Contingencies

We are involved in legal proceedings and litigation that have arisen in the normal course of our business. While it is difficult to predict the outcome of any particular proceeding, we do not believe the result of any of these matters will have a material adverse effect on our business, operating results, or financial position.
Share Repurchase Program
Share Repurchase Program
Share Repurchase Program
 
We have an ongoing authorization, originally approved by our board of directors in September 2010 and subsequently amended, to repurchase up to $1.0 billion in shares of our outstanding common stock. The authorization expires on December 31, 2017. We may repurchase shares from time to time at prevailing market prices on the open market or in private transactions in amounts that we deem appropriate.

As of September 30, 2016, we had repurchased a total of 9,880,917 shares for $662.3 million under this authorization, leaving approximately $337.7 million available for future repurchases.
Subsequent Events Subsequent Events
Subsequent Events
Subsequent Events

On October 14, 2016, we announced that the company had entered into a definitive agreement to acquire PitchBook Data, Inc. (PitchBook). PitchBook delivers data, research, and technology covering the breadth of the private capital markets, including venture capital, private equity, and mergers and acquisitions.

Morningstar owned approximately 20% of PitchBook as of September 30, 2016. We expect to pay approximately $180.0 million (subject to working capital adjustments) for the remaining ownership interest based on the terms of the definitive agreement. This agreed upon purchase price values PitchBook at approximately $225.0 million. Subject to customary closing conditions, we anticipate the transaction will close in the fourth quarter of 2016.
Summary of Significant Accounting Policies (Policies)
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 one reportable segment, all required financial segment information can be found directly in the Unaudited Condensed Consolidated Financial Statements.

The accounting policies for our single reportable segment are the same as those described in “Note 2. Summary of Significant Accounting Policies” included in our Annual Report on Form 10-K for the year ended December 31, 2015. We evaluate the performance of our reporting segment based on revenue and operating income.

We classify our investments into three categories: available-for-sale, held-to-maturity, and trading securities. 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:
Acquisitions, Goodwill and Other Intangible Assets (Tables)
The following table shows the changes in our goodwill balances from December 31, 2015 to September 30, 2016:
 
 
 
(in millions)

Balance as of December 31, 2015
 
$
364.2

Acquisitions and foreign currency translation
 
6.5

Balance as of September 30, 2016
 
$
370.7

The following table summarizes our intangible assets: 
 
 
As of September 30, 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
 
$
28.5

 
$
(27.7
)
 
$
0.8

 
9
 
$
28.3

 
$
(26.7
)
 
$
1.6

 
9
Customer-related assets
 
137.3

 
(97.6
)
 
39.7

 
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
 
92.6

 
(69.8
)
 
22.8

 
8
 
89.5

 
(64.4
)
 
25.1

 
8
Non-competition agreements
 
4.8

 
(2.9
)
 
1.9

 
5
 
4.6

 
(2.4
)
 
2.2

 
5
Total intangible assets
 
$
263.4

 
$
(198.1
)
 
$
65.3

 
10
 
$
260.1

 
$
(185.9
)
 
$
74.2

 
10
 
The following table summarizes our amortization expense related to intangible assets:
 
 
Three months ended September 30
 
Nine months ended September 30
(in millions)
 
2016

 
2015

 
2016

 
2015

Amortization expense
 
$
4.5

 
$
5.5

 
$
14.3

 
$
16.4

We expect intangible amortization expense for the remainder of 2016 and subsequent years as follows:
 
 
(in millions)

Remainder of 2016 (from October 1 through December 31)
 
$
4.0

2017
 
13.8

2018
 
11.7

2019
 
9.2

2020
 
5.6

Thereafter
 
21.0


 
Our estimates of future amortization expense for intangible assets may be affected by acquisitions, divestitures, changes in the estimated average useful life, and foreign currency translation.
Income Per Share (Tables)
The following table shows how we reconcile our net income and the number of shares used in computing basic and diluted net income per share:

 
 
Three months ended September 30
 
Nine months ended September 30
(in millions, except per share amounts)
 
2016

 
2015

 
2016

 
2015

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

 
 

 
 
 
 
Net income attributable to Morningstar, Inc.
 
$
30.2

 
$
33.5

 
$
90.7

 
$
95.3

 
 
 
 
 
 
 
 
 
Weighted average common shares outstanding
 
43.1

 
44.2

 
43.0

 
44.3

 
 
 
 
 
 
 
 
 
Basic net income per share attributable to Morningstar, Inc.
 
$
0.70

 
$
0.76

 
$
2.11

 
$
2.15

 
 
 
 
 
 
 
 
 
Diluted net income per share attributable to Morningstar, Inc.:
 
 
 
 
 
 
 
 
Net income attributable to Morningstar, Inc.
 
$
30.2

 
$
33.5

 
$
90.7

 
$
95.3

 
 
 
 
 
 
 
 
 
Weighted average common shares outstanding
 
43.1

 
44.2

 
43.0

 
44.3

Net effect of dilutive stock options, restricted stock units, and performance share awards
 
0.2

 
0.1

 
0.3

 
0.1

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

 
44.3

 
43.3

 
44.4

 
 
 
 
 
 
 
 
 
Diluted net income per share attributable to Morningstar, Inc.
 
$
0.70

 
$
0.76

 
$
2.09

 
$
2.15


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:

 
 
Three months ended September 30
 
Nine months ended September 30
(in thousands)
 
2016

 
2015

 
2016

 
2015

Weighted average restricted stock units
 
4

 
45

 
8

 
41

Weighted average performance share awards
 

 
5

 

 
7

Total
 
4

 
50

 
8

 
48

Segment and Geographical Area Information (Tables)
Schedule of Revenue from External Customers and Long-Lived Assets, by Geographical Areas [Table Text Block]
The tables below summarize our revenue and long-lived assets by geographical area:

External revenue by geographical area
 
 
 
 
 
 
 
 
 
 
Three months ended September 30
 
Nine months ended September 30
(in millions)
 
2016

 
2015

 
2016

 
2015

United States
 
$
143.5

 
$
145.2

 
$
430.6

 
$
437.3

 
 
 
 
 
 
 
 
 
United Kingdom
 
15.2

 
15.6

 
45.8

 
46.4

Continental Europe
 
16.0

 
14.7

 
47.3

 
43.4

Australia
 
8.3

 
7.5

 
24.1

 
23.2

Canada
 
7.1

 
6.6

 
20.6

 
20.6

Asia
 
5.0

 
4.6

 
15.1

 
13.4

Other
 
1.0

 
1.1

 
2.9

 
2.9

Total International
 
52.6

 
50.1

 
155.8

 
149.9

 
 
 
 
 
 
 
 
 
Consolidated revenue
 
$
196.1

 
$
195.3

 
$
586.4

 
$
587.2



Long-lived assets by geographical area
 
 
 
 
 
 
As of September 30
 
As of December 31
(in millions)
 
2016

 
2015

United States
 
$
135.8

 
$
116.9

 
 
 
 
 
United Kingdom
 
7.0

 
8.6

Continental Europe
 
2.1

 
2.2

Australia
 
0.7

 
0.9

Canada
 
0.5

 
0.7

Asia
 
3.8

 
5.2

Other
 
0.1

 

Total International
 
14.2

 
17.6

 
 
 
 
 
Consolidated property, equipment, and capitalized software, net
 
$
150.0

 
$
134.5

Investments and Fair Value Measurements (Tables)
We classify our investment portfolio as shown below:
 
 
 
As of September 30
 
As of December 31
(in millions)
 
2016

 
2015

Available-for-sale
 
$
28.4

 
$
17.3

Held-to-maturity
 
15.9

 
15.3

Trading securities
 
1.4

 
8.9

Total
 
$
45.7

 
$
41.5

The following table shows the cost, unrealized gains (losses), and fair value of investments classified as available-for-sale and held-to-maturity:
 
 
 
As of September 30, 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
 
$
26.0

 
$
1.3

 
$
(1.2
)
 
$
26.1

 
$
17.4

 
$
0.3

 
$
(1.6
)
 
$
16.1

Mutual funds
 
2.2

 
0.1

 

 
2.3

 
1.3

 

 
(0.1
)
 
1.2

Total
 
$
28.2

 
$
1.4

 
$
(1.2
)
 
$
28.4

 
$
18.7

 
$
0.3

 
$
(1.7
)
 
$
17.3

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Held-to-maturity:
 
 

 
 

 
 

 
 

 
 

 
 

 
 

 
 

Certificates of deposit
 
$
14.1

 
$

 
$

 
$
14.1