Table of Contents

 
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington D.C. 20549

 
FORM 10-Q

 
x                             QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
 
FOR THE QUARTERLY PERIOD ENDED MARCH 31, 2009
 
OR
 
o                                TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
 
For the transition period from         to
 
Commission File Number: 000-51280

 
MORNINGSTAR, INC.
(Exact Name of Registrant as Specified in its Charter)

Illinois	 	36-3297908	
(State or Other Jurisdiction of	 	(I.R.S. Employer	
Incorporation or Organization)	 	Identification Number)	
 
22 West Washington Street
Chicago, Illinois
60602
(Address of Principal Executive Offices)
 
(312) 696-6000
(Registrant’s Telephone Number, Including Area Code)

 
Indicate by check mark whether the Registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the Registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes x No o
 
Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files). Yes o No o
 
Indicate by check mark whether the Registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See the definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act.

Large accelerated filer    o	Accelerated filer   x	Non-accelerated filer    o	Smaller reporting company   o	
 	(Do not check if a smaller reporting company)	 	
 
Indicate by check mark whether the Registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes o No x
 
As of May 1, 2009, there were 47,686,546 shares of the Company’s common stock, no par value, outstanding.

 

Table of Contents
 
MORNINGSTAR, INC. AND SUBSIDIARIES
IND  EX

PART 1	FINANCIAL INFORMATION	 	
 	 	 	
 	Item 1.	Unaudited Condensed Consolidated Financial Statements	 	
 	 	 	 	
 	 	Unaudited Condensed Consolidated Statements of Income for the three months ended March 31, 2009 and 2008	 	
 	 	 	 	
 	 	Unaudited Condensed Consolidated Balance Sheets as of March 31, 2009 and December 31, 2008	 	
 	 	 	 	
 	 	Unaudited Condensed Consolidated Statements of Equity and Comprehensive Income (Loss) for the three months ended March 31, 2009	 	
 	 	 	 	
 	 	Unaudited Condensed Consolidated Statements of Cash Flows for the three months ended March 31, 2009 and 2008	 	
 	 	 	 	
 	 	Notes to Unaudited Condensed Consolidated Financial Statements	 	
 	 	 	 	
 	Item 2.	Management’s Discussion and Analysis of Financial Condition and Results of Operations	 	
 	 	 	 	
 	Item 3.	Quantitative and Qualitative Disclosure about Market Risk	 	
 	 	 	 	
 	Item 4.	Controls and Procedures	 	
 	 	
PART 2	OTHER INFORMATION	 	
 	 	 	 	
 	Item 1.	Legal Proceedings	 	
 	 	 	 	
 	Item 1A.	Risk Factors	 	
 	 	 	 	
 	Item 6.	Exhibits	 	
 	 	 	 	
SIGNATURE	 	 	
 
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PART 1. FINANCIAL INFORMATION 
 
Item 1. Unaudited Condensed Consolidated Financial Statements 
 
Morningstar, Inc. and Subsidiaries
Unaudited Condensed Consolidated Statements of Income 

 	 	Three Months Ended March 31	 	
(in thousands except per share amounts)	 	2009	 	2008	 	
 	 	 	 	 	 	
Revenue	 	$	116,732	 	$	125,444	 	
 	 	 	 	 	 	
Operating expense (1):	 	 	 	 	 	
Cost of goods sold	 	30,252	 	32,938	 	
Development	 	9,300	 	10,115	 	
Sales and marketing	 	17,536	 	22,224	 	
General and administrative	 	17,153	 	19,325	 	
Depreciation and amortization	 	7,866	 	6,157	 	
Total operating expense	 	82,107	 	90,759	 	
 	 	 	 	 	 	
Operating income	 	34,625	 	34,685	 	
 	 	 	 	 	 	
Non-operating income (expense):	 	 	 	 	 	
Interest income, net	 	978	 	1,519	 	
Other income (expense), net	 	(444	)	272	 	
Non-operating income, net	 	534	 	1,791	 	
 	 	 	 	 	 	
Income before income taxes and equity in net income of unconsolidated entities	 	35,159	 	36,476	 	
 	 	 	 	 	 	
Income tax expense	 	10,668	 	13,504	 	
 	 	 	 	 	 	
Equity in net income of unconsolidated entities	 	382	 	352	 	
 	 	 	 	 	 	
Consolidated net income	 	24,873	 	23,324	 	
 	 	 	 	 	 	
Net (income) loss attributable to the noncontrolling interest	 	89	 	(248	)	
 	 	 	 	 	 	
Net income attributable to Morningstar, Inc.	 	$	24,962	 	$	23,076	 	
 	 	 	 	 	 	
Net income per share attributable to Morningstar, Inc.:	 	 	 	 	 	
Basic	 	$	0.53	 	$	0.51	 	
Diluted	 	$	0.51	 	$	0.47	 	
 	 	 	 	 	 	
Weighted average shares outstanding:	 	 	 	 	 	
Basic	 	47,378	 	45,224	 	
Diluted	 	49,167	 	49,010	 	

 

 	 	Three Months Ended March 31	 	
 	 	2009	 	2008	 	
(1) Includes stock-based compensation expense of:	 	 	 	 	 	
Cost of goods sold	 	$	549	 	$	436	 	
Development	 	354	 	321	 	
Sales and marketing	 	356	 	345	 	
General and administrative	 	1,466	 	1,642	 	
Total stock-based compensation expense	 	$	2,725	 	$	2,744	 	
 
See notes to unaudited condensed consolidated financial statements.
 
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Morningstar, Inc. and Subsidiaries
Unaudited Condensed Consolidated Balance Sheets 

(in thousands except share amounts)	 	March 31
2009	 	December 31
2008	 	
Assets	 	 	 	 	 	
Current assets:	 	 	 	 	 	
Cash and cash equivalents	 	$	156,712	 	$	173,891	 	
Investments	 	129,307	 	123,686	 	
Accounts receivable, less allowance of $640 and $466, respectively	 	88,165	 	89,537	 	
Deferred tax asset, net	 	3,660	 	3,538	 	
Income tax receivable	 	—	 	9,193	 	
Other	 	13,212	 	13,891	 	
Total current assets	 	391,056	 	413,736	 	
Property, equipment, and capitalized software, net	 	60,104	 	58,822	 	
Investments in unconsolidated entities	 	20,661	 	20,404	 	
Goodwill	 	186,292	 	187,242	 	
Intangible assets, net	 	113,915	 	119,812	 	
Other assets	 	3,578	 	3,924	 	
Total assets	 	$	775,606	 	$	803,940	 	
 	 	 	 	 	 	
Liabilities and equity	 	 	 	 	 	
Current liabilities:	 	 	 	 	 	
Accounts payable and accrued liabilities	 	$	26,499	 	$	30,071	 	
Accrued compensation	 	16,524	 	73,012	 	
Deferred revenue	 	133,071	 	130,270	 	
Income taxes payable	 	1,900	 	—	 	
Other	 	5	 	88	 	
Total current liabilities	 	177,999	 	233,441	 	
Accrued compensation	 	3,971	 	3,611	 	
Deferred tax liability, net	 	6,062	 	7,531	 	
Other long-term liabilities	 	23,263	 	23,428	 	
Total liabilities	 	211,295	 	268,011	 	
 	 	 	 	 	 	
Equity:	 	 	 	 	 	
Morningstar, Inc. shareholders’ equity:	 	 	 	 	 	
Common stock, no par value, 200,000,000 shares authorized, of which 47,564,595 and 47,282,958 shares were outstanding as of March 31, 2009 and December 31, 2008, respectively	 	4	 	4	 	
Treasury stock at cost, 228,625 shares at March 31, 2009 and 233,332 at December 31, 2008	 	(3,214	)	(3,280	)	
Additional paid-in capital	 	396,345	 	390,404	 	
Retained earnings	 	189,251	 	164,289	 	
Accumulated other comprehensive income (loss):	 	 	 	 	 	
Currency translation adjustment	 	(18,996	)	(16,366	)	
Unrealized gain on available-for-sale securities	 	613	 	481	 	
Total accumulated other comprehensive loss	 	(18,383	)	(15,885	)	
Total Morningstar, Inc. shareholders’ equity	 	564,003	 	535,532	 	
Noncontrolling interest	 	308	 	397	 	
Total equity	 	564,311	 	535,929	 	
Total liabilities and equity	 	$	775,606	 	$	803,940	 	
 
See notes to unaudited condensed consolidated financial statements.
 
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Morningstar, Inc. and Subsidiaries
Unaudited Condensed Consolidated Statement of Equity and Comprehensive Income  (Loss)
For the Three Months Ended March 31, 2009

 	 	Morningstar, Inc. Shareholders’ Equity	 	 	 	 	 	
 	 	 	 	 	 	 	 	 	 	 	 	Accumulated	 	 	 	 	 	
 	 	 	 	 	 	 	 	 	 	 	 	Other	 	 	 	 	 	
 	 	Common Stock	 	 	 	Additional	 	 	 	Comprehensive	 	Non-	 	 	 	
 	 	Shares	 	Par	 	Treasury	 	Paid-in	 	Retained	 	Income	 	controlling	 	Total	 	
(in thousands, except share amounts)	 	Outstanding	 	Value	 	Stock	 	Capital	 	Earnings	 	(Loss)	 	Interest	 	Equity	 	
Balance as of December 31, 2008	 	47,282,958	 	$	4	 	$	(3,280	)	$	390,404	 	$	164,289	 	$	(15,885	)	$	—	 	$	535,532	 	
Adoption of SFAS No. 160	 	—	 	—	 	—	 	—	 	—	 	—	 	397	 	397	 	
Balance as of January 1, 2009	 	47,282,958	 	4	 	(3,280	)	390,404	 	164,289	 	(15,885	)	397	 	535,929	 	
Comprehensive income:	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	
Consolidated net income (loss)	 	 	 	—	 	—	 	—	 	24,962	 	—	 	(89	)	24,873	 	
Unrealized gain on investments, net of income tax of $116	 	 	 	—	 	—	 	—	 	—	 	132	 	—	 	132	 	
Foreign currency translation adjustment	 	 	 	—	 	—	 	—	 	—	 	(2,630	)	—	 	(2,630	)	
Total comprehensive income (loss)	 	 	 	—	 	—	 	—	 	24,962	 	(2,498	)	(89	)	22,375	 	
Issuance of common stock related to stock option exercises and vesting of restricted stock units, net	 	281,637	 	—	 	66	 	2.866	 	—	 	—	 	—	 	2,932	 	
Stock-based compensation	 	 	 	—	 	—	 	2,725	 	—	 	—	 	—	 	2,725	 	
Tax benefit derived from stock option exercises and vesting of restricted stock units	 	 	 	—	 	—	 	350	 	—	 	—	 	—	 	350	 	
Balance as of March 31, 2009	 	47,564,595	 	$	4	 	$	(3,214	)	$	396,345	 	$	189,251	 	$	(18,383	)	$	308	 	$	564,311	 	

See notes to unaudited condensed consolidated financial statements.
 
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Morningstar, Inc. and Subsidiaries
Unaudited Condensed Consolidated Statements of Cash Flows 

 	 	Three Months Ended March 31	 	
(in thousands)	 	2009	 	2008	 	
 	 	 	 	 	 	
Operating activities	 	 	 	 	 	
Consolidated net income	 	$	24,873	 	$	23,324	 	
Adjustments to reconcile consolidated net income to net cash flows from operating activities:	 	 	 	 	 	
Depreciation and amortization	 	7,866	 	6,157	 	
Deferred income tax expense (benefit)	 	(1,311	)	2,876	 	
Stock-based compensation expense	 	2,725	 	2,744	 	
Provision for (recovery of) bad debt	 	223	 	(27	)	
Equity in net income of unconsolidated entities	 	(382	)	(352	)	
Excess tax benefits from stock option exercises and vesting of restricted stock units	 	(350	)	(5,967	)	
Other, net	 	409	 	24	 	
Changes in operating assets and liabilities, net of effects of acquisitions:	 	 	 	 	 	
Accounts receivable	 	169	 	(5,706	)	
Other assets	 	351	 	(1,967	)	
Accounts payable and accrued liabilities	 	(4,111	)	2,770	 	
Accrued compensation	 	(55,039	)	(41,930	)	
Income taxes — current	 	11,382	 	7,102	 	
Deferred revenue	 	4,060	 	9,221	 	
Deferred rent	 	(156	)	3,383	 	
Other liabilities	 	969	 	(275	)	
Cash provided by (used for) operating activities	 	(8,322	)	1,377	 	
 	 	 	 	 	 	
Investing activities	 	 	 	 	 	
Purchases of investments	 	(22,403	)	(24,301	)	
Proceeds from sale of investments	 	16,752	 	43,951	 	
Capital expenditures	 	(4,590	)	(6,711	)	
Acquisitions, net of cash acquired	 	(60	)	(50,902	)	
Other, net	 	98	 	—	 	
Cash used for investing activities	 	(10,203	)	(37,963	)	
 	 	 	 	 	 	
Financing activities	 	 	 	 	 	
Proceeds from stock options exercises	 	2,932	 	5,750	 	
Excess tax benefits from stock option exercises and vesting of restricted stock units	 	350	 	5,967	 	
Other	 	(176	)	—	 	
Cash provided by financing activities	 	3,106	 	11,717	 	
 	 	 	 	 	 	
Effect of exchange rate changes on cash	 	(1,760	)	1,230	 	
Net decrease in cash and cash equivalents	 	(17,179	)	(23,639	)	
Cash and cash equivalents — beginning of period	 	173,891	 	159,576	 	
Cash and cash equivalents — end of period	 	$	156,712	 	$	135,937	 	
 	 	 	 	 	 	
Supplemental disclosure of cash flow information:	 	 	 	 	 	
Cash paid for income taxes	 	$	665	 	$	2,057	 	
Supplemental information of non-cash investing and financing activities:	 	 	 	 	 	
Unrealized gain on available-for-sale investments	 	$	248	 	$	294	 	
 
See notes to unaudited condensed consolidated financial statements.
 
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MORNINGSTAR, INC. AND SUBSIDIARIES
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS 
 
1. Basis of Presentation of Interim Financial Information
 
The accompanying unaudited condensed consolidated financial statements of Morningstar, Inc. and subsidiaries (Morningstar, we, our, the Company) included herein have been prepared to conform to the rules and regulations of the Securities and Exchange Commission (SEC). The preparation of financial statements in conformity with accounting principles generally accepted in the United States requires management to make estimates and assumptions that affect the reported amount of assets, liabilities, revenue, and expenses. Actual results could differ from those estimates. In the opinion of management, the statements reflect all adjustments, which are of a normal recurring nature, necessary to present fairly our financial position, results of operations, equity, and cash flows. These financial statements and notes should be read in conjunction with our Consolidated Financial Statements and Notes thereto as of December 31, 2008 included in our Annual Report on Form 10-K filed with the SEC on March 5, 2009.
 
2. Summary of Significant Accounting Policies
 
We discuss our significant accounting policies in Note 2 of our Consolidated Financial Statements included in our Annual Report on Form 10-K filed with the SEC for the year ended December 31, 2008.  In addition, effective January 1, 2009, we adopted the following financial accounting standards:
 
SFAS No. 160, Accounting and Reporting of Noncontrolling Interests in Consolidated Financial Statements, an amendment of ARB No. 51
 
Statement of Financial Accounting Standards (SFAS) No. 160, Accounting and Reporting of Noncontrolling Interests in Consolidated Financial Statements, an amendment of ARB No. 51, amends the financial accounting and reporting of noncontrolling interests in consolidated financial statements.  A noncontrolling interest is the portion of equity (net assets) in a subsidiary not attributable, directly or indirectly, to the parent company.  We conduct our business operations outside of the United States through wholly owned or majority-owned operating subsidiaries.  As a result of adopting SFAS No. 160, the noncontrolling interest related to a majority-owned subsidiary is now reported in our consolidated statement of financial position within equity, separately from the shareholders’ equity attributable to Morningstar, Inc.  In addition, the net income or loss and comprehensive income or loss attributed to the Morningstar, Inc. shareholders and the noncontrolling interest is presented in our Statements of Income and Statement of Equity and Comprehensive Income.
 
SFAS No. 141(R), Business Combinations
 
SFAS No. 141(R), Business Combinations , modifies the financial accounting and reporting of business combinations. For business combinations which occur after January 1, 2009, SFAS No. 141(R) requires the acquirer to recognize and measure the fair value of the acquired operation as a whole, and the assets acquired and liabilities assumed at their full fair values as of the date control is obtained, regardless of the percentage ownership in the acquired operation or how the acquisition was achieved.   In addition, under SFAS No.141 (R), acquisition-related costs are expensed as incurred.  Prior to the adoption of SFAS 141 (R), direct costs incurred in connection with a business combination, such as finder’s fees, advisory, accounting, legal, valuation, and other professional fees were included as part of the cost of the acquired business.  Restructuring costs are recognized separately from the business combination accounting as post-combination expenses of the combined entity unless the criteria of SFAS No. 146, Accounting for Costs Associated with Exit or Disposal Activities , are met on the acquisition date by the target entity. Prior to the adoption of SFAS No. 141 (R), restructuring costs such as severance and relocation of employees of the acquired entity could be included in the purchase price allocation assuming certain criteria were met.
 
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3. Acquisitions, Goodwill, and Other Intangible Assets
 
We did not complete any acquisitions in the first quarter of 2009.  In the first quarter of 2008, we acquired the Hemscott data, media, and investor relations Web site businesses.  In addition, we completed 5 additional acquisitions throughout the remainder of 2008.
 
The table below summarizes the acquisitions completed during 2008. We did not make any significant changes to the purchase price allocations compared with the preliminary estimates existing at December 31, 2008.  Additional information concerning these acquisitions can be found in the Notes to our Consolidated Financial Statements included in our Annual Report on Form 10-K filed with the SEC on March 5, 2009.

Acquisition	 	Description	 	Date Completed	 	Purchase Price*	 	
Hemscott data, media, and investor relations Web site businesses	 	U.K.-based operation providing more than 20 years of comprehensive fundamental data on publicly listed companies in the United States, Canada, the United Kingdom, and Ireland; free and paid investment research sites and data services; online investor relations services in the United Kingdom	 	January 9, 2008	 	$51.3 million	 	
Financial Computer Support, Inc. (FCSI)	 	Leading provider of practice management software for independent advisors	 	September 2, 2008	 	$ 4.9 million	 	
Fundamental Data Limited (Fundamental Data)	 	Leading provider of data on closed-end funds in the United Kingdom	 	October 2, 2008	 	$ 18.6 million	 	
10-K Wizard Technology, LLC (10-K Wizard)	 	Leading provider of SEC filing research and alert services	 	December 4, 2008	 	$ 11.5 million	 	
Tenfore Systems Limited (Tenfore)	 	Global provider of real-time market data and financial data workstations based in the United Kingdom	 	December 17, 2008	 	$ 19.2 million	 	
InvestData (Proprietary) Limited (InvestData)	 	Leading provider of fund information in South Africa	 	December 29, 2008	 	Not disclosed	 	

* Total purchase price less cash acquired
 
Goodwill
 
The following table shows the changes in our goodwill balances from January 1, 2008 to March 31, 2009:

 	 	($000)	 	
Balance as of January 1, 2008	 	$	128,141	 	
Acquisition of the Hemscott data, media, and investor relations Web site businesses	 	35,683	 	
Acquisition of Fundamental Data	 	13,669	 	
Acquisition of 10-K Wizard	 	7,219	 	
Acquisition of Tenfore	 	13,916	 	
Acquisition of FCSI and InvestData	 	3,858	 	
Other, primarily currency translation	 	(15,244	)	
Balance as of December 31, 2008	 	187,242	 	
Other, primarily currency translation	 	(950	)	
Balance as of March 31, 2009	 	$	186,292	 	
 
We did not record any impairment losses in the first quarter of 2009 or 2008, respectively.
 
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The following table summarizes our intangible assets:

 	 	As of March 31, 2009	 	As of December 31, 2008	 	
($000)	 	Gross	 	Accumulated
Amortization	 	Net	 	Weighted
Average
Useful Life
(years)	 	Gross	 	Accumulated
Amortization	 	Net	 	Weighted
Average
Useful Life
(years)	 	
Intellectual property	 	$	26,119	 	$	(9,078	)	$	17,041	 	10	 	$	26,198	 	$	(8,338	)	$	17,860	 	10	 	
Customer-related assets	 	66,915	 	(19,393	)	47,522	 	10	 	67,325	 	(17,620	)	49,705	 	10	 	
Supplier relationships	 	240	 	(51	)	189	 	20	 	240	 	(48	)	192	 	20	 	
Technology-based assets	 	34,763	 	(10,698	)	24,065	 	9	 	34,845	 	(9,525	)	25,320	 	9	 	
Non-competition agreement	 	810	 	(417	)	393	 	5	 	810	 	(375	)	435	 	5	 	
Intangible assets related to acquisitions of FCSI, Fundamental Data, Tenfore, 10-K Wizard, and InvestData	 	26,549	 	(1,844	)	24,705	 	5	 	26,962	 	(662	)	26,300	 	5	 	
Total intangible assets	 	$	155,396	 	$	(41,481	)	$	113,915	 	9	 	$	156,380	 	$	(36,568	)	$	119,812	 	9	 	
 
We amortize intangible assets using the straight-line method over their expected economic useful lives. Amortization expense was $5,121,000 and $4,022,000 for the three months ended March 31, 2009 and March 31, 2008, respectively.
 
As of March 31, 2009, we estimate that aggregate amortization expense for intangible assets will be $20,115,000 in 2009; $18,648,000 in 2010; $17,215,000 in 2011; $16,564,000 in 2012; $14,430,000 in 2013; and $9,888,000 in 2014.  Our estimates of future amortization expense for intangible assets may be affected by changes to the preliminary purchase price allocations.
 
4. Income Per Share
 
The numerator for both basic and diluted income per share is net income attributable to Morningstar, Inc.  The denominator for basic income per share is the weighted average number of common shares outstanding during the period. For diluted income per share, the dilutive effect of outstanding employee stock options and restricted stock units is reflected in the denominator using the treasury stock method. The following table shows how we reconcile our net income and the number of shares used in computing basic and diluted income per share:

 	 	Three Months Ended March 31	 	
(in thousands, except per share amounts)	 	2009	 	2008	 	
 	 	 	 	 	 	
Basic income per share attributable to Morningstar, Inc.:	 	 	 	 	 	
Net income attributable to Morningstar, Inc.:	 	$	24,962	 	$	23,076	 	
Weighted average common shares outstanding	 	47,378	 	45,224	 	
Basic net income per share attributable to Morningstar, Inc.	 	$	0.53	 	$	0.51	 	
 	 	 	 	 	 	
Diluted income per share attributable to Morningstar, Inc.:	 	 	 	 	 	
Net income attributable to Morningstar, Inc.:	 	$	24,962	 	$	23,076	 	
 	 	 	 	 	 	
Weighted average common shares outstanding	 	47,378	 	45,224	 	
Net effect of dilutive stock options and restricted stock units	 	1,789	 	3,786	 	
Weighted average common shares outstanding for computing diluted income per share	 	49,167	 	49,010	 	
 	 	 	 	 	 	
Diluted net income per share attributable to Morningstar, Inc.	 	$	0.51	 	$	0.47	 	
 
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5. Segment and Geographical Area Information
 
Beginning in 2009, we changed our organizational structure and operating segments. Under the new structure, Morningstar has two operating segments:  Investment Information and Investment Management. Previously, we organized our operations based on three audience segments: Individual, Advisor, and Institutional. The new structure organizes our operations according to product lines and growth strategies rather than audience segments. Under the previous segment reporting, we allocated costs for our corporate functions to each of the segments. Beginning in 2009, we no longer allocate corporate costs to our business segments.  We have changed the presentation of the prior year’s segment information to conform with the current year’s presentation.
 
·   Investment Information . The Investment Information segment includes all of our data, software, and research products and services. These products are typically sold through subscriptions or license agreements.
 
The largest products in this segment based on revenue are Licensed Data, Morningstar Advisor Workstation, Morningstar.com, Morningstar Direct, and Morningstar Principia. Licensed Data is a set of investment data spanning all of our investment databases and available through electronic data feeds. Advisor Workstation is a Web-based investment planning system for advisors. Advisor Workstation is available in two editions: one for independent financial advisors and an enterprise edition for financial advisors affiliated with larger firms. Morningstar.com includes both Premium Memberships and Internet advertising sales. Morningstar Direct is a Web-based institutional research platform. Principia is our CD-ROM-based investment research and planning software for advisors.
 
The Investment Information segment also includes Morningstar Equity Research, which we distribute through several channels. Our equity research is distributed through six major investment banks to meet the requirements for independent research under the Global Analyst Research Settlement, as well as to several other companies that purchase our research for their own use or provide our research to their affiliated financial advisors or to individual investors.  This segment also includes a variety of financial communications and newsletters, real-time data, and investment indexes.
 
·   Investment Management . The Investment Management segment includes all of our asset management operations, which operate as registered investment advisors and earn the majority of their revenue from asset-based fees.
 
The key products and services in this segment based on revenue are Investment Consulting, which focuses on investment monitoring and asset allocation for funds of funds, including mutual funds and variable annuities; Retirement Advice, including the Morningstar Retirement Manager and Advice by Ibbotson platforms; and Morningstar Managed Portfolios, a fee-based discretionary asset management service that includes a series of mutual fund and exchange-traded fund portfolios tailored to meet a range of investment time horizons and risk levels that financial advisors can use for their clients’ taxable and tax-deferred accounts.
 
Our segment accounting policies are the same as those described in Note 2 to our Consolidated Financial Statements included in our Annual Report on Form 10-K as of December 31, 2008, except for the capitalization and amortization of internal product development costs, amortization of intangible assets, and costs related to corporate functions. We exclude these items from our operating segment results to provide our chief operating decision maker with a better indication of each segment’s ability to generate cash flow. This information is one of the criteria used by our chief operating decision maker in determining how to allocate resources to each segment. We include capitalization and amortization of internal product development costs, amortization of intangible assets, and costs related to corporate functions in the Corporate Items category to arrive at the consolidated financial information. Our segment disclosures include the business segment information provided to our chief operating decision maker on a recurring basis, and therefore, we do not present balance sheet information by segment. We disclose goodwill by segment in accordance with the requirements of SFAS No. 142, Goodwill and Other Intangible Assets .
 
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The following tables show selected segment data for the three months ended March 31, 2009 and 2008:

 	 	Three months ended March 31, 2009	 	
($000)	 	 
Investment
Information	 	Investment
Management	 	Corporate Items	 	Total	 	
Revenue	 	$	96,240	 	$	20,492	 	$	—	 	$	116,732	 	
Operating expense, excluding stock-based compensation expense, depreciation, and amortization	 	57,065	 	8,177	 	6,274	 	71,516	 	
Stock-based compensation expense	 	1,267	 	468	 	990	 	2,725	 	
Depreciation and amortization	 	1,071	 	20	 	6,775	 	7,866	 	
Operating income (loss)	 	$	36,837	 	$	11,827	 	$	(14,039	)	$	34,625	 	
 	 	 	 	 	 	 	 	 	 	
Capital expenditures	 	$	3,760	 	$	184	 	$	646	 	$	4,590	 	
 	 	 	 	 	 	 	 	 	 	
U.S. revenue	 	 	 	 	 	 	 	$	88,148	 	
Non-U.S. revenue	 	 	 	 	 	 	 	$	28,584	 	

 	 	As of  March 31, 2009	 	
($000)	 	 
Investment
Information	 	Investment
Management	 	Corporate Items	 	Total	 	
Goodwill	 	$	154,822	 	$	31,470	 	$	—	 	$	186,292	 	
 	 	 	 	 	 	 	 	 	 	
U.S. long-lived assets	 	 	 	 	 	 	 	$	45,585	 	
Non-U.S. long-lived assets	 	 	 	 	 	 	 	$	14,519	 	

 	 	Three months ended March 31, 2008	 	
($000)	 	 
Investment
Information	 	Investment
Management	 	Corporate Items	 	Total	 	
Revenue	 	$	96,506	 	$	28,938	 	$	—	 	$	125,444	 	
Operating expense, excluding stock-based compensation expense, depreciation, and amortization	 	60,895	 	13,122	 	7,841	 	81,858	 	
Stock-based compensation expense	 	1,289	 	504	 	951	 	2,744	 	
Depreciation and amortization	 	1,034	 	53	 	5,070	 	6,157	 	
Operating income (loss)	 	$	33,288	 	$	15,259	 	$	(13,862	)	$	34,685	 	
 	 	 	 	 	 	 	 	 	 	
Capital expenditures	 	$	5,380	 	$	1,032	 	$	299	 	$	6,711	 	
 	 	 	 	 	 	 	 	 	 	
U.S. revenue	 	 	 	 	 	 	 	$	95,163	 	
Non-U.S. revenue	 	 	 	 	 	 	 	$	30,281	 	

 	 	As of  March 31, 2008	 	
($000)	 	 
Investment
Information	 	Investment
Management	 	Corporate Items	 	Total	 	
Goodwill	 	$	125,192	 	$	31,470	 	$	—	 	$	156,662	 	
 	 	 	 	 	 	 	 	 	 	
U.S. long-lived assets	 	 	 	 	 	 	 	$	14,354	 	
Non-U.S. long-lived assets	 	 	 	 	 	 	 	$	10,946	 	

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6. Investments
 
We monitor the concentration, diversification, maturity, and liquidity of our investment portfolio, which is primarily invested in fixed-income securities. We classify our investment portfolio as follows:

($000)	 	March 31
2009	 	December 31
2008	 	
Available-for-sale	 	$	121,897	 	$	116,867	 	
Held-to-maturity	 	4,204	 	3,497	 	
Trading securities	 	3,206	 	3,322	 	
Total	 	$	129,307	 	$	123,686	 	
 
Held-to-maturity investments include a $2,500,000 certificate of deposit held as collateral against two bank guarantees for our office space lease in Australia.
 
7.  Fair Value Measurements
 
The fair value of our assets subject to fair value measurements and the necessary disclosures are as follows:

 	 	Fair Value	 	Fair Value Measurements as of March 31, 2009	 	
 	 	as of	 	Using Fair Value Hierarchy	 	
($000)	 	March 31, 2009	 	Level 1	 	Level 2	 	Level 3	 	
Available-for-sale investments	 	$	121,897	 	$	121,897	 	$	—	 	$	—	 	
Trading securities	 	3,206	 	3,206	 	—	 	—	 	
Total	 	$	125,103	 	$	125,103	 	$	—	 	$	—	 	

 	 	Fair Value	 	Fair Value Measurements as of December 31, 2008	 	
 	 	as of	 	Using Fair Value Hierarchy	 	
($000)	 	December 31, 2008	 	Level 1	 	Level 2	 	Level 3	 	
Available-for-sale investments	 	$	116,867	 	$	116,867	 	$	—	 	$	—	 	
Trading securities	 	3,322	 	3,322	 	—	 	—	 	
Total	 	$	120,189	 	$	120,189	 	$	—	 	$	—	 	

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.	
 
8. Investments In Unconsolidated Entities
 
Our investments in unconsolidated entities consist primarily of the following:
 
Morningstar Japan K.K. Morningstar Japan K.K. (MJKK) develops and markets products and services customized for the Japanese market. MJKK’s shares are traded on the Osaka Stock Exchange, “Hercules Market,” using the ticker 4765. As of March 31, 2009 and December 31, 2008, we owned approximately 34% of MJKK. We account for our investment in MJKK using the equity method. The book value of our investment in MJKK totaled $18,401,000 and $18,083,000 as of March 31, 2009 and December 31, 2008, respectively. The market value of our investment in MJKK was approximately ¥2.7 billion (approximately U.S. $27,349,000) as of March 31, 2009 and ¥2.9 billion (approximately U.S. $32,536,000) as of December 31, 2008.
 
Morningstar Korea, Ltd . Morningstar Korea provides financial information and services for investors in South Korea. Our ownership interest and profit- and loss-sharing interest in Morningstar Korea was 40% as of March 31, 2009 and December 31, 2008. We account for this investment using the equity method. Our investment totaled $1,528,000 and $1,560,000 as of March 31, 2009 and December 31, 2008, respectively.
 
Other Investments in Unconsolidated Entities . As of March 31, 2009 and December 31, 2008, the book value of our other investments in unconsolidated entities totaled $732,000 and $761,000, respectively, and consist primarily of our investments in Morningstar Danmark A/S (Morningstar Denmark) and Morningstar Sweden AB (Morningstar Sweden). Morningstar Denmark and Morningstar Sweden develop and market products and services customized for their respective markets. Our ownership interest in both Morningstar Denmark and Morningstar Sweden was approximately 25% as of March 31, 2009 and December 31, 2008. We account for our investments in Morningstar Denmark and Morningstar Sweden using the equity method.
 
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The following table shows condensed combined financial information, a portion of which is unaudited, for our investments in unconsolidated entities.

 	 	Three months ended March 31	 	
($000)	 	2009	 	2008	 	
Revenue	 	$	7,875	 	$	20,742	 	
Operating income	 	$	791	 	$	1,626	 	
Net income	 	$	641	 	$	1,129	 	
 
In April 2008, MJKK sold one of its subsidiaries.  The information for the three months ended March 31, 2008 includes the financial results of this subsidiary.
 
9. Stock-Based Compensation
 
Stock-Based Compensation Plans
 
In November 2004, we adopted the 2004 Stock Incentive Plan. The 2004 Stock Incentive Plan provides for grants of options, stock appreciation rights, restricted stock units, and performance shares. All of our employees and our non-employee directors are eligible for awards under the 2004 Stock Incentive Plan. Joe Mansueto, our chairman and chief executive officer, does not participate in the 2004 Stock Incentive Plan or prior plans.
 
Since the adoption of the 2004 Stock Incentive Plan, we have granted stock options and, beginning in 2006, restricted stock units. Stock options granted under the 2004 Stock Incentive Plan generally vest ratably over a four-year period and expire 10 years after the date of grant. Almost all of the options granted under the 2004 Stock Incentive Plan have a premium feature in which the exercise price increases over the term of the option at a rate equal to the 10-year Treasury bond yield as of the date of grant. Restricted stock units represent the right to receive a share of Morningstar common stock when that unit vests. Restricted stock units granted under the 2004 Stock Incentive Plan generally vest ratably over a four-year period. For restricted stock units granted through December 31, 2008, employees could elect to defer receipt of the Morningstar common stock issued upon vesting of the restricted stock unit. As of March 31, 2009, we had approximately 2,500,000 shares available for future grants under our 2004 Stock Incentive Plan.
 
Prior to November 2004, we granted stock options under various plans, including the 1993 Stock Option Plan, the 2000 Morningstar Stock Option Plan, and the 2001 Morningstar Stock Option Plan (collectively, the Prior Plans). Options granted under the Prior Plans generally vested over a four-year period and were substantially all vested as of March 31, 2009; however, because the options under these three plans expire 10 years after the date of grant, some options granted under these plans remain outstanding as of March 31, 2009. The 2004 Stock Incentive Plan amends and restates the Prior Plans. Under the 2004 Stock Incentive Plan, we will not grant any additional options under any of the Prior Plans, and any shares subject to an award under any of the Prior Plans that are forfeited, canceled, settled, or otherwise terminated without a distribution of shares, or withheld by us in connection with the exercise of options or in payment of any required income tax withholding, will not be available for awards under the 2004 Stock Incentive Plan.
 
In February 1999, we entered into an Incentive Stock Option Agreement and a Nonqualified Stock Option Agreement under the 1999 Incentive Stock Option Plan (the 1999 Plan) with Don Phillips, an officer of Morningstar. Under these agreements, we granted Don options to purchase 1,500,000 shares of common stock at an exercise price of $2.77 per share, equal to the fair value at the grant date. These options were fully vested and expired in February 2009. The 30,576 options remaining as of December 31, 2008 were exercised prior to the expiration date.
 
Accounting for Stock-Based Compensation Awards
 
In accordance with SFAS No. 123 (R), Stock Based Compensation , we estimate 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.  Estimated forfeitures are adjusted to actual forfeiture experience as needed.
 
The following table summarizes stock-based compensation expense:

 	 	Three months ended March 31	 	
($000)	 	2009	 	2008	 	
Stock-based compensation expense	 	$	2,725	 	$	2,744	 	

The income tax benefit related to the stock-based compensation expense above was $867,000 and $891,000 for the three months ended March 31, 2009 and 2008, respectively.
 
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Restricted Stock Units
 
We measure the fair value of our restricted stock units on the date of grant based on the closing market price of the underlying common stock on the day prior to grant. We amortize that value to stock-based compensation expense, net of estimated forfeitures, ratably over the vesting period.  The total grant date fair value of restricted stock units granted in the first quarter of 2009 was approximately $598,000. As of March 31, 2009, the total amount of unrecognized stock-based compensation expense related to restricted stock units was approximately $19,318,000. We expect to recognize this expense over an average period of approximately 31 months.
 
The following table summarizes restricted stock unit activity in the first three months of 2009:

Restricted Stock Units (RSUs)	 	Unvested	 	Vested but 
Deferred	 	Total	 	Weighted 
Average 
Grant Date Value 
per RSU	 	
RSUs outstanding—December 31, 2008	 	494,500	 	22,024	 	516,524	 	$	55.17	 	
Granted	 	18,734	 	—	 	18,734	 	31.94	 	
Vested	 	(11,089	)	—	 	(11,089	)	58.52	 	
Forfeited	 	(3,303	)	—	 	(3,303	)	54.04	 	
RSUs outstanding— March 31, 2009	 	498,842	 	22,024	 	520,866	 	53.90	 	

Stock Options
 
The following tables summarize stock option activity in the first three months of 2009 for our various stock option grants. The first table includes activity for options granted at an exercise price below the fair value per share of our common stock on the grant date; the second table includes activity for all other option grants.

Options Granted At an Exercise Price Below the Fair Value Per Share on the Grant Date	 	Underlying 
 Shares	 	Weighted
Average
Exercise
Price	 	
Options outstanding—December 31, 2008	 	1,110,652	 	$	 15.33	 	
Canceled	 	(50	)	14.70	 	
Exercised	 	(211,666	)	9.92	 	
Options outstanding—March 31, 2009	 	898,936	 	16.77	 	
 	 	 	 	 	 	
Options exercisable—March 31, 2009	 	898,911	 	$	16.77	 	

All Other Option Grants, Excluding Activity Shown Above	 	Underlying 
Shares	 	Weighted
Average
Exercise
Price	 	
Options outstanding—December 31, 2008	 	2,942,706	 	$	15.14	 	
Canceled	 	(1,267	)	23.22	 	
Exercised	 	(61,355	)	13.22	 	
Options outstanding—March 31, 2009	 	2,880,084	 	15.23	 	
 	 	 	 	 	 	
Options exercisable—March 31, 2009	 	2,662,639	 	$	14.55	 	
 
The total intrinsic value (difference between the market value of our stock on the date of exercise and the exercise price of the option) of options exercised during the three months ended March 31, 2009 and 2008 was $5,770,000 and $41,636,000, respectively.
 
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The table below shows additional information for options outstanding and options exercisable as of March 31, 2009:

 	 	Options Outstanding	 	Options Exercisable	 	
Range of Exercise Prices	 	Outstanding
Shares	 	Weighted
Average
Remaining
Contractual
Life (years)	 	Weighted
Average
Exercise
Price	 	Aggregate
Intrinsic
Value
($000)	 	Exercisable
Shares	 	Weighted
Average
Remaining
Contractual
Life (years)	 	Weighted
Average
Exercise
Price	 	Aggregate
Intrinsic
Value
($000)	 	
$8.57 - $14.70	 	2,355,083	 	2.10	 	$	12.66	 	$	50,608	 	2,354,767	 	2.10	 	$	12.66	 	$	50,601	 	
$17.54 - $39.83	 	1,423,937	 	5.96	 	20.41	 	19,888	 	1,206,783	 	5.92	 	19.84	 	17,506	 	
$8.57 - $39.83	 	3,779,020	 	3.56	 	15.58	 	$	70,496	 	3,561,550	 	3.39	 	15.09	 	$	68,107	 	
Vested or Expected to Vest:	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	
$8.57 - $39.83	 	3,759,085	 	3.54	 	$	15.54	 	$	70,277	 	 	 	 	 	 	 	 	 	

The aggregate intrinsic value in the table above represents the total pretax intrinsic value, based on our closing stock price of $34.15 on March 31, 2009, which would have been received by the option holders had all option holders exercised their options as of that date.
 
As of March 31, 2009, the total amount of unrecognized stock-based compensation expense related to non-vested stock options was approximately $364,000.  We expect to recognize this expense over a weighted average period of approximately 5 months.
 
10. Related Party Transactions
 
In 1989, under our 1989 Nonqualified Stock Option Plan (the 1989 Plan), we granted options to purchase 1,500,000 shares of common stock at an exercise price of $0.075 per share, equal to the fair value at date of issue, to Don Phillips, an officer of Morningstar. These options were not exercised and expired in February 1999. In February 1999, in conjunction with the expiration of options granted under the 1989 Plan, we entered into a Deferred Compensation Agreement (the Agreement) with Don. Under the terms of the Agreement, on any date that Don exercises the right to purchase shares under the 1999 Plan, we shall pay to him $2.69 per share in the form of cash or, at our election, shares of common stock. If on the date of purchase the fair value of Morningstar’s stock is below $2.77 per share, the amount paid per share will be reduced based on the terms of the Agreement. Our obligation to pay deferred compensation will not be increased by any imputed interest or earnings amount.
 
As of March 31, 2009 and December 31, 2008, our Condensed Consolidated Balance Sheets include a liability of $27,000 and $82,000, respectively, for the Agreement. The reduction in the liability since December 31, 2008 reflects amounts paid to Don in the first quarter of 2009 in accordance with the Agreement.
 
11. Income Taxes
 
The following table shows our effective income tax rate for the three months ended March 31, 2009 and 2008:

 	 	Three months ended March 31	 	
($000)	 	2009	 	2008	 	
Income before income taxes and equity in net income of unconsolidated entities	 	$	35,159	 	$	36,476	 	
Equity in net income of unconsolidated entities	 	382	 	352	 	
Net (income) loss attributable to the noncontrolling interest	 	89	 	(248	)	
Total	 	$	35,630	 	$	36,580	 	
Income tax expense	 	$	10,668	 	$	13,504	 	
Effective income tax expense rate	 	29.9	%	36.9	%	
 
Our effective tax rate declined by 7.0 percentage points in the first quarter of 2009.  The first-quarter 2009 income tax expense includes the impact of reversing a $1,420,000 reserve for uncertain tax positions as a result of a lapse in the statute of limitations.  This non-cash benefit contributed approximately 4 percentage points of the decrease in the effective tax rate in the quarter. In addition, the favorable, but variable, benefit from incentive stock-option transactions contributed approximately 2 percentage points to the decrease in the effective tax rate.
 
We conduct business globally and as a result, we file income tax returns in U.S. Federal, state, local, and foreign jurisdictions. In the normal course of business we are subject to examination by tax authorities throughout the world. The open tax years for our U.S. Federal tax return include the years 2005 to the present. Most of our state tax returns have open tax years from 2005 to the present. In non-U.S. jurisdictions, the statute of limitations generally extends to years prior to 2003.
 
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As of December 31, 2008, our Consolidated Balance Sheet included a current liability of $3,983,000 and a non-current liability of $3,756,000 for unrecognized tax benefits.  These amounts include interest and penalties, less any associated tax benefits. Other than the impact of reversing the $1,420,000 reserve for uncertain tax positions, there were no significant changes to uncertain tax positions in the first quarter of 2009 as a result of other lapses of statutes of limitation or audit activity.  We are currently under audit by the U.S. federal and various state and local tax authorities in the United States. We are also under audit by the tax authorities in certain non-U.S. jurisdictions. It is likely that the examination phase of some of these U.S. federal, state, local, and non-U.S. audits will conclude in 2009. It is not possible to estimate the impact of current audits on previously recorded unrecognized tax benefits.
 
Our effective income tax rate reflects the fact that we are not recording an income tax benefit related to losses recorded by certain of our non-U.S. operations. The net operating losses (NOLs) may become deductible in certain non-U.S. tax jurisdictions to the extent these non-U.S. operations become profitable. In the year certain non-U.S. entities record a loss, we do not record a corresponding tax benefit, thus increasing our effective tax rate. For each of our operations, we evaluate whether it is more likely than not that the tax benefits related to NOLs will be realized. As part of this evaluation, we consider evidence such as tax planning strategies, historical operating results, forecasted taxable income, and recent financial performance.  Upon determining that it is more likely than not that the NOLs will be realized, we reduce the tax valuation allowances related to these NOLs, which results in a reduction to our income tax expense and our effective tax rate in the period.
 
12. Contingencies
 
NewRiver, Inc.
 
In January 2009, NewRiver, Inc. filed a lawsuit in the Superior Court of the Commonwealth of Massachusetts against Morningstar, Inc. alleging that Morningstar inappropriately accessed a database containing SEC-filed mutual fund disclosure documents. In February 2009, the case was removed to the United States District Court for the District of Massachusetts. NewRiver seeks, among other things, a permanent injunction preventing Morningstar from accessing NewRiver’s Prospectus Express “Web-based data warehouse,” and unspecified damages. While Morningstar is vigorously contesting the claims against it, we cannot predict the outcome of the proceeding.
 
Morningstar Associates, LLC Subpoenas from the Securities and Exchange Commission, the New York Attorney General’s Office, and the Department of Labor
 
Securities and Exchange Commission
 
In February 2005, Morningstar Associates, LLC, a wholly owned subsidiary of Morningstar, Inc., received a request from the SEC for the voluntary production of documents relating to the investment consulting services the company offers to retirement plan providers, including fund lineup recommendations for retirement plan sponsors. In July 2005, the SEC issued a subpoena to Morningstar Associates that was virtually identical to its February 2005 request.
 
Subsequently, the SEC focused on disclosure relating to an optional service offered to retirement plan sponsors (employers) that select 401(k) plan services from ING, one of Morningstar Associates’ clients. In response to the SEC investigation, ING and Morningstar Associates revised certain documents for plan sponsors to further clarify the roles of ING and Morningstar Associates in providing that service. The revisions also help reinforce that Morningstar Associates makes its selections only from funds available within ING’s various retirement products.
 
In January 2007, the SEC notified Morningstar Associates that it ended its investigation, with no enforcement action, fines, or penalties.
 
New York Attorney General’s Office
 
In December 2004, Morningstar Associates received a subpoena from the New York Attorney General’s office seeking information and documents related to an investigation the New York Attorney General’s office is conducting. The request is similar in scope to the SEC subpoena described above. Morningstar Associates has provided the requested information and documents.
 
In January 2007, Morningstar Associates received a Notice of Proposed Litigation from the New York Attorney General’s office. The Notice centers on the same issues that became the focus of the SEC investigation described above. The Notice gave Morningstar Associates the opportunity to explain why the New York Attorney General’s office should not institute proceedings. Morningstar Associates promptly submitted its explanation and has cooperated fully with the New York Attorney General’s office.
 
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We cannot predict the scope, timing, or outcome of this matter, which may include the institution of administrative, civil, injunctive, or criminal proceedings, the imposition of fines and penalties, and other remedies and sanctions, any of which could lead to an adverse impact on our stock price, the inability to attract or retain key employees, and the loss of customers. We also cannot predict what impact, if any, this matter may have on our business, operating results, or financial condition.
 
United States Department of Labor
 
In May 2005, Morningstar Associates received a subpoena from the United States Department of Labor, seeking information and documents related to an investigation the Department of Labor is conducting. The Department of Labor subpoena is substantially similar in scope to the SEC and New York Attorney General subpoenas.
 
In January 2007, the Department of Labor issued a request for additional documents pursuant to the May 2005 subpoena, including documents and information regarding Morningstar Associates’ retirement advice products for plan participants. Morningstar Associates continues to cooperate fully with the Department of Labor.
 
We cannot predict the scope, timing, or outcome of this matter, which may include the institution of administrative, civil, injunctive, or criminal proceedings, the imposition of fines and penalties, and other remedies and sanctions, any of which could lead to an adverse impact on our stock price, the inability to attract or retain key employees, and the loss of customers. We also cannot predict what impact, if any, these matters may have on our business, operating results, or financial condition.
 
In addition to these proceedings, we are involved in legal proceedings and litigation that have arisen in the normal course of our business. Although the outcome of a particular proceeding can never be predicted, we do not believe that the result of any of these other matters will have a material adverse effect on our business, operating results, or financial condition.
 
13. Subsequent Events
 
We completed the following three acquisitions in April and May of 2009:
 
Global financial filings database business of Global Reports LLC :  In April 2009, we acquired the global financial filings database business of Global Reports LLC, a leading provider of online financial and Corporate and Social Responsibility reports for publicly traded companies around the world. Global Reports provides timely online access to full-color financial filings from more than 37,000 publicly traded companies in approximately 130 countries.
 
Equity research and data business of C.P.M.S. Computerized Portfolio Management Services Inc.:   In May 2009, we acquired the equity research and data business of C.P.M.S. Computerized Portfolio Management Services Inc. (C.P.M.S.).  C.P.M.S. tracks fundamental equity data for approximately 4,000 securities in the United States and Canada as well as tracks and provides brokerage earnings estimates for Canadian equities.
 
Andex Associates Inc.   In May 2009, we acquired Andex Associates Inc., based in Windsor, Ontario, Canada. The company is known for its Andex Charts, individual graphic charts detailing historical market returns, stock index growth, inflation rates, currency rates, and general economic conditions for the United States dating back to 1926, and for Canada dating back to 1950. The charts offer in-depth historical information to help investors understand the context and propensity of market downturns and recoveries.
 
The combined purchase price for these three acquisitions was approximately $18,000,000, subject to post-closing adjustments.
 
14. Recently Issued Accounting Pronouncements
 
In April 2009, the Financial Accounting Standards Board (FASB) issued three Final Staff Positions (FSPs) intended to provide additional application guidance and enhance disclosures regarding fair value measurements and impairments of securities.
 
·                   FSP FAS 157-4, Determining Fair Value When the Volume and Level of Activity for the Asset or Liability Have Significantly Decreased and Identifying Transactions That Are Not Orderly , provides guidelines for making fair value measurements more consistent with the principles presented in SFAS No. 157, Fair Value Measurements .
 
·                   FSP FAS 107-1 and APB 28-1, Interim Disclosures about Fair Value of Financial Instruments , enhances consistency in financial reporting by increasing the frequency of fair value disclosures.
 
·                   FSP FAS 115-2 and FAS 124-2, Recognition and Presentation of Other-Than-Temporary Impairments , provides additional guidance designed to create greater clarity and consistency in accounting for and presenting impairment losses on securities.
 
The FSPs are effective for interim and annual periods ending after June 15, 2009.  We are in the process of determining the effect the adoption of these FSPs will have on our Consolidated Financial Statements.
 
Also in April 2009, the FASB also issued an FSP to amend and clarify SFAS No. 141 (revised 2007), Business Combinations , to address application issues on initial recognition and measurement, subsequent measurement and accounting, and disclosure of assets and liabilities arising from contingencies in a business combination.  This FSP is effective for assets or liabilities arising from contingencies in business combinations for which the acquisition date is on or after January 1, 2009.
 
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Item 2.  Management’s Discussion and Analysis of Financial Condition and Results of Operations 
 
The discussion included in this section, as well as other sections of this Quarterly Report on Form 10-Q, contains forward-looking statements as that term is used in the Private Securities Litigation Reform Act of 1995. These statements are based on our current expectations about future events or future financial performance. Forward-looking statements by their nature address matters that are, to different degrees, uncertain, and often contain words such as “may,” “could,” “expect,” “intend,” “plan,” “seek,” “anticipate,” “believe,” “estimate,” “predict,” “potential,” or “continue.” These statements involve known and unknown risks and uncertainties that may cause the events we discuss not to occur or to differ significantly from what we expect. For us, these risks and uncertainties include, among others, general industry conditions and competition, including the current global financial crisis that began in 2007; the impact of market volatility on revenue from asset-based fees; damage to our reputation resulting from claims made about possible conflicts of interest; liability for any losses that result from an actual or claimed breach of our fiduciary duties; financial services industry consolidation; a prolonged outage of our database and network facilities; challenges faced by our non-U.S. operations; and the availability of free or low-cost investment information.
 
A more complete description of these risks and uncertainties can be found in our other filings with the SEC, including our Annual Report on Form 10-K for the year ended December 31, 2008. If any of these risks and uncertainties materialize, our actual future results may vary significantly from what we expect. We do not undertake to update our forward-looking statements as a result of new information or future events.
 
All dollar and percentage comparisons, which are often accompanied by words such as “increase,” “decrease,” “grew,” “declined,” “was up,” “was down,” “was flat,” or “was similar” refer to a comparison with the same period in the prior year unless otherwise stated.
 
Understanding our Company
 
Our Business
 
Our mission is to create great products that help investors reach their financial goals. We offer an extensive line of Internet, software, and print-based products for individual investors, financial advisors, and institutional clients. We also offer asset management services for advisors, institutions, and retirement plan participants. Many of our products are sold through subscriptions or license agreements. As a result, we typically generate recurring revenue.
 
We emphasize a decentralized approach to running our business to empower our managers and to create a culture of responsibility and accountability. During 2008 and previous years, we operated our business in three global segments: Individual, Advisor, and Institutional. Beginning in 2009, we changed our segment reporting to focus on two operating segments: Investment Information, which includes all of our data, software, and research products and services, and Investment Management, which includes our asset management operations.
 
Historically, we have focused primarily on organic growth by introducing new products and services and marketing our existing products. However, we have made and expect to continue to make selective acquisitions that support our five key growth strategies, which are:

·	 	Enhance our position in each of our key market segments by focusing on our three major Internet-based platforms;	
·	 	Become a global leader in funds-of-funds investment management;	
·	 	Continue building thought leadership in independent investment research;	
·	 	Create a premier global investment database; and	
·	 	Expand our international brand presence, products, and services.	
 
Industry Overview
 
We monitor developments in the economic and financial information industry on an ongoing basis and use these insights to help inform our company strategy, product development plans, and marketing initiatives.
 
The U.S. equity market continued its negative performance in the first quarter of 2009 despite an upturn in March. Morningstar’s U.S. Market Index, a broad market benchmark, was down 10.6% through March 31, 2009. Most global markets also experienced losses during the quarter. Total U.S. mutual fund assets declined to $9.2 trillion as of March 31,
 
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2009, based on data from the Investment Company Institute (ICI), compared with $11.7 trillion as of March 31, 2008. Many stock and bond funds experienced net outflows in the aftermath of the global financial turmoil that began in late 2007.
 
Market volatility took a toll on alternative asset classes, such as hedge funds. In aggregate, hedge funds included in Morningstar’s database, excluding funds of hedge funds, experienced net outflows of about $31 billion through February 2009.
 
Assets in exchange-traded funds (ETFs) also declined to $482 billion as of March 2009, compared with $571 billion as of March 31, 2008, based on data from the ICI.
 
Based on data from Nielsen/Net Ratings, aggregate page views and unique users to financial and investment sites were similar to levels shown in the first quarter of 2008, and the number of pages viewed per person and pages viewed per visit both increased over year-ago levels. We believe this indicates that while some investors may be disengaged because of the market downturn, many people are still interested in investment-related content.
 
Market weakness and economic uncertainty continued to weigh on online ad spending. Although advertisers have continued to shift spending from traditional media to the Internet, growth in online spending slowed in 2008, based on reports published by the Interactive Advertising Bureau and PricewaterhouseCoopers. Because of the severe market downturn and declining asset levels, ad spending for financial services firms declined 17% for full-year 2008 based on data from The Nielsen Company. We believe that weakness in industry-wide ad spending continued in the first quarter, and some industry surveys indicate that many investment management firms have planned to continue reducing their marketing budgets in 2009.
 
Overall, we believe the disruption in the financial markets continues to cause widespread investor uncertainty and spending cutbacks among asset management firms and other financial services companies. We remain cautious because of the difficult and uncertain market environment. On the positive side, however, we believe some of the uncertainty in the financial services sector began easing to some extent along with the market upturn toward the end of the first quarter.
 
  Three Months Ended March 31, 2009 vs. Three Months Ended March 31, 2008
 
First-Quarter Highlights
 
Consolidated Results

 	 	Three Months Ended March 31	 	
Key Metrics ($000)	 	2009	 	2008	 	Change	 	
Revenue	 	$	116,732	 	$	125,444	 	(6.9	)%	
Operating income	 	34,625	 	34,685	 	(0.2	)%	
Operating margin	 	29.7	%	27.6	%	2.1	pp	
 	 	 	 	 	 	 	 	
Cash used for investing activities	 	$	(10,203	)	$	(37,963	)	(73.1	)%	
Cash provided by financing activities	 	3,106	 	11,717	 	(73.5	)%	
 	 	 	 	 	 	 	 	
Cash provided by (used for) operating activities	 	$	(8,322	)	$	1,377	 	NMF       	
Capital expenditures	 	(4,590	)	(6,711	)	(31.6	)%	
Free cash flow	 	$	(12,912	)	$	(5,334	)	142.1	%	
 
NMF — not meaningful
pp — percentage points
 
We define free cash flow as cash provided by or used for operating activities less capital expenditures. We present free cash flow solely as supplemental disclosure to help you better understand how much cash is available after we spend money to operate our business. Our management team uses free cash flow to evaluate the performance of our business. Free cash flow is not a measure of performance set forth under U.S. generally accepted accounting principles (GAAP). Also, the free cash flow definition we use may not be comparable to similarly titled measures used by other companies.
 
Because we’ve made several acquisitions in recent years, comparing our financial results from year to year is complex. To make it easier for investors to compare our results in different periods, we provide information on both organic revenue, which reflects our underlying business excluding acquisitions, and revenue from acquisitions. We include an acquired operation as part of our revenue from acquisitions for 12 months after we complete the acquisition. After that, we include it as part of our organic revenue.
 
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Consolidated organic revenue (revenue excluding acquisitions and the impact of foreign currency translations) is considered a non-GAAP financial measure. The definition of organic revenue we use may not be the same as similarly titled measures used by other companies. Organic revenue should not be considered an alternative to any measure of performance as promulgated under GAAP.
 
The table below shows the period in which we included each acquired operation in revenue from acquisitions.

Acquisition	 	Revenue from Acquisitions	
 	 	 	
Hemscott data, media, and investor relations Web site businesses	 	January 1 through January 8, 2009	
Financial Computer Support, Inc.	 	January 1 through March 31, 2009	
Fundamental Data Limited	 	January 1 through March 31, 2009	
10-K Wizard Technology, LLC	 	January 1 through March 31, 2009	
Tenfore Systems Limited	 	January 1 through March 31, 2009	
InvestData (Proprietary) Limited	 	January 1 through March 31, 2009	
 
Consolidated Revenue
 
In the first quarter of 2009, our consolidated revenue decreased 6.9% to $116.7 million. The majority of the revenue decline was driven by our Investment Consulting business, which suffered because of continued negative market conditions as well as the impact of one client not renewing when its contract expired in the fourth quarter of 2008. Currency movements also had a significant negative effect as the U.S. dollar appreciated against most other major currencies during the quarter, offsetting the positive impact of additional revenue from acquisitions. While acquisitions contributed about five percentage points to our consolidated revenue growth, the impact of foreign currency translations reduced revenue by nearly the same amount.
 
The table below reconciles consolidated revenue with organic revenue (revenue excluding acquisitions and the impact of foreign currency translations):

 	 	Three Months Ended March 31	 	 	 	
($000)	 	2008	 	2007	 	Change	 	
Consolidated revenue	 	$	116,732	 	$	125,444	 	(6.9	)%	
Less: acquisitions	 	(5,928	)	—	 	NMF	 	
Unfavorable  impact of foreign currency translations	 	5,697	 	—	 	NMF	 	
Organic revenue	 	$	116,501	 	$	125,444	 	(7.1	)%	
 
The table below shows our consolidated revenue by segment for the three months ended March 31, 2009 and March 31, 2008:

 	 	Three Months Ended March 31	 	
 	 	2009	 	2008	 	
Revenue by Segment ($000)	 	Amount 	 	% of total	 	Amount 	 	% of total	 	
Investment Information	 	$	96,240	 	82.4	%	$	96,506	 	76.9	%	
Investment Management	 	20,492	 	17.6	 	28,938	 	23.1	 	
Consolidated revenue	 	$	116,732	 	100.0	%	$	125,444	 	100.0	%	
 
As previously announced, Morningstar now has two operating segments: Investment Information and Investment Management. Previously, we organized our operations based on three audience segments: Individual, Advisor, and Institutional. The changes were effective January 1, 2009. The new Investment Information segment includes all of our data, software, and research products and services. These products and services are typically sold through subscriptions or license agreements. The Investment Management segment includes all of our asset management operations, which operate as registered investment advisors and earn about half of their revenue from asset-based fees.
 
While revenue for the Investment Information segment was consistent with the year-ago quarter, revenue in the Investment Management segment was down about 29%. Investment Consulting was by far the most significant driver behind the revenue decline. We had lower revenue from asset-based fees as assets under advisement declined to $63.3 billion from $95.8 billion. The lower level of assets reflects both negative performance in the market and the impact of the client non-renewal mentioned above.
 
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Revenue from international operations decreased $1.7 million, or 5.6%, to $28.6 million in the first quarter of 2009. Acquisitions contributed $4.0 million of additional revenue outside the United States, but that was offset by the unfavorable impact of foreign currency translations, which reduced international revenue by $5.7 million. Excluding acquisitions and the impact of foreign currency translations, our non-U.S. revenue increased approximately 0.2%.
 
International organic revenue (international revenue excluding acquisitions and the impact of foreign currency translations) is considered a non-GAAP financial measure. The definition of international organic revenue we use may not be the same as similarly titled measures used by other companies. International organic revenue should not be considered an alternative to any measure of performance as promulgated under GAAP. The tables below present a reconciliation from international revenue to international organic revenue (international revenue excluding acquisitions and the impact of foreign currency translations):

 	 	Three Months Ended March 31	 	
($000)	 	2009	 	2008	 	Change	 	
International revenue	 	$	28,584	 	$	30,281	 	(5.6	)%	
Less: acquisitions	 	(3,952	)	—	 	NMF	 	
Unfavorable impact of foreign currency translations	 	5,697	 	—	 	NMF	 	
International organic revenue	 	$	30,329	 	$	30,281	 	0.2	%	
 
Consolidated Operating Expense

 	 	Three months ended March 31	 	
($000)	 	2009	 	2008	 	Change	 	
Operating expense	 	$	82,107	 	$	90,759	 	(9.5	)%	
% of revenue	 	70.3	%	72.4	%	(2.1	)pp	

In the first quarter of 2009, our consolidated operating expense decreased $8.7 million, or 9.5%. To better align operating expense with revenue in this challenging business environment, we took a number of steps to reduce costs beginning in 2008, with the largest cutbacks effective January 1, 2009. We changed our bonus plan in 2009 to reduce bonus expense, our single largest discretionary cost. About 80% of the decline in operating expense stems from lower bonus expense accrued during the quarter.
 
We also suspended matching contributions to our 401(k) program in the United States, which reduced operating expense by about $2.8 million. In addition, we reduced discretionary spending in advertising and marketing as well as travel. Advertising and marketing costs declined by $2.3 million in the first quarter of 2009 compared with the same period a year ago, primarily because of reduced spending for direct mail campaigns for books and newsletters, including three investing guides that we’re no longer publishing. In addition, travel costs were about $0.8 million lower, partly because we cancelled our annual global sales forum usually held in the first quarter.
 
Partially offsetting these operating expense reductions were additional costs related to acquisitions, including a $1.1 million increase in amortization expense. We completed five acquisitions in the second half of 2008. Because of the timing of these acquisitions, our first-quarter 2009 results include operating expense that did not exist in the same period last year. Headcount and salary expense also increased year over year, partly because of incremental employees added through acquisitions. We had approximately 2,370 employees worldwide as of March 31, 2009, a 16% increase from the same period a year ago and about in line with December 31, 2008.
 
Cost of Goods Sold

 	 	Three months ended March 31	 	
($000)	 	2009	 	2008	 	Change	 	
Cost of goods sold	 	$	30,252	 	$	32,938	 	(8.2	)%	
% of revenue	 	25.9	%	26.3	%	(0.4	)pp	
Gross profit	 	$	86,480	 	$	92,506	 	(6.5	)%	
Gross margin	 	74.1	%	73.7	%	0.4	pp	
 
Cost of goods sold is our largest category of operating expense, accounting for more than one-third of our total operating expense in both the first quarter of 2009 and 2008. Our business relies heavily on human capital, and cost of goods sold includes the compensation expense for employees who produce our products and services.
 
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Cost of goods sold was down $2.6 million in the first quarter of 2009, with the entire decline driven by lower bonus expense.
 
Our gross margin in the first quarter of 2009 increased slightly to 74.1%, compared with 73.7% in the first quarter of 2008.
 
Development Expense

 	 	Three months ended March 31	 	
($000)	 	2009	 	2008	 	Change	 	
Development expense	 	$	9,300	 	$	10,115	 	(8.1	)%	
% of revenue	 	8.0	%	8.1	%	(0.1	)pp	

Development expense decreased $0.8 million in the first quarter of 2009. While compensation expense rose because of higher headcount, that increase was more than offset by lower bonus expense. As a percentage of revenue, development expense declined modestly in the first quarter of 2009.
 
Sales and Marketing Expense

 	 	Three months ended March 31	 	
($000)	 	2009	 	2008	 	Change	 	
Sales and marketing expense	 	$	17,536	 	$	22,224	 	(21.1	)%	
% of revenue	 	15.0	%	17.7	%	(2.7	)pp	

Sales and marketing expense decreased $4.7 million in the first quarter of 2009. About half of the decline reflects lower spending on advertising and marketing, which we reduced from higher levels in 2008 because of the challenging business environment. In 2009, we also discontinued three of the publications we previously published in the first quarter of each year: the Morningstar Funds 500 , Morningstar Stocks 500 , and Morningstar ETFs 150 and therefore didn’t incur costs to promote these publications. Lower bonus expense and other compensation costs also contributed to lower sales and marketing expense in the first quarter.
 
As a percentage of revenue, sales and marketing expense decreased 2.7 percentage points compared with the first quarter of 2008.
 
General and Administrative Expense

 	 	Three months ended March 31	 	
($000)	 	2009	 	2008	 	Change	 	
General and administrative expense	 	$	17,153	 	$	19,325	 	(11.2	)%	
% of revenue	 	14.7	%	15.4	%	(0.7	)pp	

General and administrative expense decreased $2.1 million in the first quarter of 2009. Most of the decline reflects lower bonus expense. Decreases in other compensation costs, travel, and other general and administrative costs also contributed to lower expense in this area, but to a lesser extent.
 
As a percentage of revenue, general and administrative expense dropped 0.7 percentage points in the first quarter of 2009 compared with the same period in 2008.
 
Depreciation and Amortization Expense

 	 	Three months ended March 31	 	
($000)	 	2009	 	2008	 	Change	 	
Depreciation expense	 	$	2,745	 	$	2,135	 	28.6	%	
Amortization expense	 	5,121	 	4,022	 	27.3	%	
Total depreciation and amortization expense	 	$	7,866	 	$	6,157	 	27.8	%	
% of revenue	 	6.7	%	4.9	%	1.8	pp	
 
Depreciation and amortization expense rose $1.7 million in the first quarter of 2009 primarily from incremental amortization expense of intangible assets related to acquisitions made in 2008. As a percentage of revenue, this category of expense increased by 1.8 percentage points.
 
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We expect that amortization of intangible assets will be an ongoing cost for the remaining life of the assets. Based on acquisitions completed through March 31, 2009, we estimate that aggregate amortization expense for intangible assets will be $20.1 million in 2009. Our estimates of future amortization expense for intangible assets may be affected by changes to the preliminary purchase price allocations associated with our 2008 acquisitions.
 
Stock-Based Compensation Expense

 	 	Three months ended March 31	 	
($000)	 	2009	 	2008	 	Change	 	
Stock-based compensation expense	 	$	2,725	 	$	2,744	 	(0.7	)%	
% of revenue	 	2.3	%	2.2	%	0.1	pp	

Stock-based compensation expense remained relatively flat in the first quarter of 2009 and increased slightly as a percentage of revenue compared with the same period in 2008.
 
We include stock-based compensation expense in each of our operating expense categories. We began granting restricted stock units (RSUs) in May 2006 and made additional grants in 2007 and 2008, primarily in the second quarter of each year. We recognize the expense related to RSUs over the vesting period, which is generally four years.
 
We determine stock-based compensation expense in accordance with Statement of Financial Accounting Standards (SFAS) No. 123 (Revised 2004), Share-Based Payment (SFAS No. 123(R)). We record stock-based compensation expense only for those awards that ultimately vest. As a result, the stock-based compensation expense reflects an estimate of an expected forfeiture rate.
 
Based on grants made through March 31, 2009, we anticipate that stock-based compensation expense will be $9.6 million in 2009. This amount is subject to change based on additional equity grants or changes in our estimated forfeiture rate related to these grants. We usually make this adjustment in the second quarter, which is when most of our larger equity grants typically vest.
 
Bonus Expense

 	 	Three months ended March 31	 	
($000)	 	2009	 	2008	 	Change	 	
Bonus expense	 	$	5,190	 	$	12,537	 	(58.6	)%	
% of revenue	 	4.4	%	10.0	%	(5.6	)pp	

Bonus expense, which we include in each of our operating expense categories, declined $7.3 million in the first quarter of 2009. Most of this reduction reflects the changes we made to our bonus program for 2009 as part of our efforts to better align our cost structure with revenue in the challenging business environment. The significant reduction in bonus expense also reflects a slowdown in our financial performance in 2009 compared with 2008.
 
Changes in the size of our bonus pool vary each year based on a number of items, including changes in full-year operating income growth relative to the previous year and other factors. We review and update our estimates and the bonus pool size quarterly. We record bonus expense throughout the year and pay out annual bonuses to employees in the first quarter.
 
As a percentage of revenue, bonus expense declined by 5.6 percentage points in the first quarter of 2009.
 
Consolidated Operating Income

 	 	Three months ended March 31	 	
($000)	 	2009	 	2008	 	Change	 	
Operating income	 	$	34,625	 	$	34,685	 	(0.2	)%	
% of revenue	 	29.7	%	27.6	%	2.1	pp	

Consolidated operating income remained relatively flat, as it decreased $0.1 million in the first quarter of 2009, reflecting the impact of cost savings measures implemented in 2009. Even though revenue declined in the first quarter, we were able to reduce costs in all operating expense categories except depreciation and amortization, which rose because of additional amortization costs for acquisitions made in 2008. The margin improvement was primarily the result of operating expense reductions, which exceeded the decline in revenue.
 
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With operating expense declining more than revenue, our operating margin increased 2.1 percentage points in the first quarter of 2009.
 
Consolidated Free Cash Flow
 
Historically, free cash flow has been lower in the first quarter compared with the other three quarters of the year because of the timing of our annual bonus payments. We typically pay bonuses in the first quarter, and these payments reduce our cash flow from operations.
 
Free cash flow in the first quarter of 2009 was negative $12.9 million, reflecting cash used for operating activities of $8.3 million and capital expenditures of $4.6 million. We made bonus payments of $58.9 million in the first quarter of 2009, compared with $49.3 million in the first quarter of 2008.  Bonuses paid in the first quarter of 2009 included $10.0 million in payments deferred from 2007. We revised our bonus program in January 2009 and no longer defer payment of a portion of bonuses recorded in the prior year.
 
Compared with the prior-year period, free cash flow decreased by approximately $7.6 million, reflecting a $9.7 million decrease in operating cash flow partially offset by a decrease in capital expenditures of $2.1 million.
 
The increase of $9.6 million for bonus payments was the primary factor contributing to the decline in operating cash flow. In addition, in the first quarter of 2008, operating cash flow included a $3.4 million benefit from tenant improvement allowances related to the construction of our new corporate headquarters. This benefit did not recur in the first quarter of 2009. These items, which contributed to the decline in operating cash flow, were partially offset by higher net income adjusted for non-cash items. Excess tax benefits have a positive impact on cash provided by financing activities with an equal, but offsetting, impact on cash from operations. Excess tax benefits declined $5.6 million in the quarter, primarily reflecting lower average stock prices on the exercise dates and a reduction in the number of options exercised.
 
Capital expenditures decreased $2.1 million for the quarter mainly because of the timing of payments related to our new corporate headquarters.
 
To provide investors with additional insight into our financial results, we provide a comparison between the increase in consolidated net income and the change in operating cash flow:

 	 	Three months ended March 31	 	
($000)	 	2009	 	2008	 	Change	 	
Consolidated net income	 	$	24,873	 	$	23,324	 	$	1,549	 	
Adjustments to reconcile consolidated net income to net cash flows from operating activities:	 	 	 	 	 	 	 	
Excess tax benefits in accordance with SFAS No. 123(R)	 	(350	)	(5,967	)	5,617	 	
Depreciation and amortization expense	 	7,866	 	6,157	 	1,709	 	
Stock-based compensation expense	 	2,725	 	2,744	 	(19	)	
All other non-cash items included in net income	 	(1,061	)	2,521	 	(3,582	)	
Changes in operating assets and liabilities, net of effects of acquisitions:	 	 	 	 	 	 	 	
Cash paid for bonuses	 	(58,867	)	(49,253	)	(9,614	)	
Cash paid for income taxes	 	(665	)	(2,057	)	1,392	 	
Accounts receivable	 	169	 	(5,706	)	5,875	 	
Deferred revenue	 	4,060	 	9,221	 	(5,161	)	
Income taxes — current	 	12,047	 	9,159	 	2,888	 	
Accrued compensation	 	3,828	 	7,323	 	(3,495	)	
Deferred rent	 	(156	)	3,383	 	(3,539	)	
Other assets	 	351	 	(1,967	)	2,318	 	
Accounts payable and accrued liabilities	 	(4,111	)	2,770	 	(6,881	)	
All other	 	969	 	(275	)	1,244	 	
Cash provided by (used for) operating activities	 	$	(8,322	)	$	1,377	 	$	(9,699	)	
 
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Despite the $1.6 million increase in net income, operating cash flow decreased $9.7 million.  The gap between net income and operating cash flow primarily reflects the $9.6 million increase in bonuses paid in the first quarter of 2009.  The tenant improvement allowance of $3.4 million received in connection with the build-out of our new headquarters was a benefit to cash flow in the first quarter of 2008, but did not recur in the current year. The tenant improvement allowance received in 2008 is being amortized as a reduction in office lease expense over the lease term and will be deducted from net income to arrive at cash flow provided by (used for) operating activities.

Segment Results	 	 	 	 	 	 	 	
 	 	 	 	
 	 	Three months ended March 31	 	
Key Metrics ($000)	 	2009	 	2008	 	% Change	 	
Revenue	 	 	 	 	 	 	 	
Investment Information	 	$	96,240	 	$	96,506	 	(0.3	)%	
Investment Management	 	20,492	 	28,938	 	(29.2	)%	
Consolidated revenue	 	$	116,732	 	$	125,444	 	(6.9	)%	
 	 	 	 	 	 	 	 	
Operating income (loss)	 	 	 	 	 	 	 	
Investment Information	 	$	36,837	 	$	33,288	 	10.7	%	
Investment Management	 	11,827	 	15,259	 	(22.5	)%	
Intangible amortization and corporate depreciation expense	 	(6,775	)	(5,070	)	33.6	%	
Corporate unallocated	 	(7,264	)	(8,792	)	(17.4	)%	
Consolidated operating income	 	$	34,625	 	$	34,685	 	0.2	%	
 	 	 	 	 	 	 	 	
Operating margin	 	 	 	 	 	 	 	
Investment Information	 	38.3	%	34.5	%	3.8	pp	
Investment Management	 	57.7	%	52.7	%	5.0	pp	
Consolidated operating margin	 	29.7	%	27.6	%	2.1	pp	
 
Investment Information Segment
 
The Investment Information segment includes all of our data, software, and research products and services. These products are typically sold through subscriptions or license agreements.
 
The largest products in this segment based on revenue are Licensed Data, Morningstar Advisor Workstation, Morningstar.com, Morningstar Direct, and Morningstar Principia. Licensed Data is a set of investment data spanning all of our investment databases and available through electronic data feeds. Advisor Workstation is a Web-based investment planning system for advisors. Advisor Workstation is available in two editions: one for independent financial advisors and an enterprise edition for financial advisors affiliated with larger firms. Morningstar.com includes both Premium Memberships and Internet advertising sales. Morningstar Direct is a Web-based institutional research platform. Principia is our CD-ROM-based investment research and planning software for advisors.
 
The Investment Information segment also includes Morningstar Equity Research, which we distribute through several channels. Our equity research is distributed through six major investment banks to meet the requirements for independent research under the Global Analyst Research Settlement, as well as to several other companies that purchase our research for their own use or provide our research to their affiliated financial advisors or to individual investors.
 
In 2003 and 2004, 12 leading Wall Street investment banks agreed to a $1.5 billion settlement (the Global Analyst Research Settlement) with the Securities and Exchange Commission (SEC), the New York Attorney General, and other securities regulators to resolve allegations of undue influence of investment banking interests on securities research. Approximately $450 million of the $1.5 billion in fines that the investment banks agreed to pay in the settlement has been designated for independent research over a period of five years, with the independent research to be provided by companies that are not engaged in the investment banking industry. Each firm involved in the settlement is required to provide research from at least three providers of independent research that are not engaged in the investment banking industry. The period covered by the Global Analyst Research Settlement will expire in July 2009. After the settlement period expires, the companies covered by it will no longer be required to provide independent investment research to their clients. For further discussion about this issue, see Item 1A — Risk Factors in our 10-K report for the year ended December 31, 2008.
 
We also offer a variety of financial communications and newsletters, real-time data, and investment indexes.
 
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In the first quarter of 2009 and 2008, this segment represented 82.4% and 76.9%, respectively, of our consolidated revenue.

 	 	Three months ended March 31	 	
Key Metrics ($000)	 	2009	 	2008	 	% Change	 	
Revenue	 	$	96,240	 	$	96,506	 	(0.3	)%	
Operating income	 	$	36,837	 	$	33,288	 	10.7	%	
Operating margin (%)	 	38.3	%	34.5	%	3.8	pp	
 
In the first quarter of 2009, revenue decreased slightly to $96.2 million. Acquisitions contributed $5.9 million of revenue. Excluding the impact of acquisitions, revenue declined $6.2 million, primarily reflecting the unfavorable impact of currency translation.
 
One of the primary drivers of the decline in organic revenue was the decline in Internet advertising related to Morningstar.com. Negative trends in Internet advertising drove all of the decrease in this product’s revenue due to the market’s downturn. Subscriptions for Morningstar.com Premium service declined by 13,521, to 168,257 as of March 31, 2009, compared with 181,778 as of March 31, 2008. Subscriptions declined by 9,261 in the quarter compared with 177,518 as of December 31, 2008 as general market weakness affected subscriber growth and new trials. However, consistent with the trend over the past few years, we moderately increased subscription prices for Premium Membership in both January 2009 and 2008. Revenue growth therefore outweighed the decline in subscriptions.
 
Revenue from our Investment Research products was also down in the first quarter of 2009, primarily from our publications, including newsletters and books. In the first quarter of 2009, we discontinued three of the print publications we previously published in the first quarter of each year: the Morningstar Funds 500 , Morningstar Stocks 500 , and Morningstar ETFs 150 . Slightly offsetting this decrease was revenue from Morningstar Equity Research, which primarily includes revenue related to the Global Analyst Research Settlement. Revenue related to the Global Analyst Research Settlement accounted for approximately 6% of our Investment Information segment revenue and 5% of our consolidated revenue in the first quarter of 2009. As mentioned above, the period covered by the Global Analyst Research Settlement will expire in July 2009. After the settlement period expires, the banks covered by it will no longer be required to provide independent research to their clients. We expect our post-settlement equity research revenue to be significantly lower beginning in the second half of 2009.  For further discussion, see Item 1A—Risk Factors in our 10-K filed with the SEC on March 5, 2009.
 
Revenue growth in Advisor Software products partially offset these revenue declines discussed above. The growth was primarily from Morningstar Advisor Workstation, slightly offset by a decline in Principia revenue. The number of U.S. licenses for Morningstar Advisor Workstation increased to 194,857 as of March 31, 2009 compared with 190,267 as of December 31, 2008 and 178,619 as of March 31, 2008. The growth in users primarily reflects a new client contract that began in the first quarter. Principia revenue was down in the first quarter of 2009. The number of subscriptions for Principia was 40,993 as of March 31, 2009, a 12.2% decrease, from 46,690 as of March 31, 2008. The decline in the number of subscriptions partly reflects clients migrating from Principia to Advisor Workstation, but also reflects a lower retention rate as the economic environment weakened during the latter part of 2008 and continued in the first quarter of 2009.
 
Revenue from our data products, primarily Licensed Data, also increased in the first quarter of 2009, although by a smaller amount. This product continued to benefit from expanded sales efforts in Europe and other markets outside the United States, as well as continued strength in the United States. The number of licenses for Morningstar Direct increased 23.2% to 3,033 worldwide as of March 31, 2009, compared with 2,461 as of March 31, 2008.
 
In the first quarter of 2008, operating income for the Investment Information segment increased $3.5 million, or 10.7%, as operating expense declined more than revenue.
 
Operating expense decreased $3.8 million in the first quarter of 2009, as cost reductions for discretionary expense such as bonuses, advertising, and marketing were partially offset by additional operating expense from acquisitions. Lower bonus expense accounted for approximately one-third of the decrease in operating expense excluding acquisitions. Most of this reduction reflects the changes we made to our bonus program for 2009 as part of our efforts to better align our cost structure with revenue in the challenging business environment. Excluding acquisitions, other compensation-related expense was down, primarily because we suspended matching contributions to our 401(k) plan in the United States, reducing operating expense by about $1.6 million in this segment.
 
Sales and marketing costs decreased in the first quarter of 2009. Most of the decline reflects lower spending on advertising and marketing and lower travel costs, which we pared back because of the challenging business environment. In 2009, we also discontinued three of the publications we previously published in the first quarter of each year: the Morningstar Funds 500 , Morningstar Stocks 500 , and Morningstar ETFs 150 and therefore didn’t incur costs to promote these publications.
 
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Our Investment Information segment operating margin improved 3.8 percentage points. Operating expense reductions including lower bonus expense, advertising, and marketing as a percentage of revenue, outpaced the revenue decline. This margin expansion was partially offset by the impact of acquisitions in the quarter.
 
Investment Management Segment
 
The Investment Management segment includes all of our asset management operations, which operate as registered investment advisors and earn about half of their revenue from asset-based fees.
 
The key products and services in this segment based on revenue are Investment Consulting, which focuses on investment monitoring and asset allocation for funds of funds, including mutual funds and variable annuities; Retirement Advice, including the Morningstar Retirement Manager and Advice by Ibbotson platforms; and Morningstar Managed Portfolios, a fee-based discretionary asset management service that includes a series of mutual fund and exchange-traded fund portfolios tailored to meet a range of investment time horizons and risk levels that financial advisors can use for their clients’ taxable and tax-deferred accounts.
 
In the first quarter of 2009 and 2008, this segment represented 17.6% and 23.1%, respectively, of our consolidated revenue.

 	 	Three Months Ended March 31	 	
Key Metrics ($000)	 	2009	 	2008	 	% Change	 	
Revenue	 	$	20,492	 	$	28,938	 	(29.2	)%	
Operating income	 	$	11,827	 	$	15,259	 	(22.5	)%	
Operating margin (%)	 	57.7	%	52.7	%	5.0	pp	
 
Although revenue declined across all products in the Investment Management segment, Investment Consulting, which has been a leading contributor to revenue growth in recent years, declined significantly in the first quarter of 2009. Approximately one-third of the decline in the Investment Management segment’s revenue resulted from a Morningstar Associates client that did not renew an Investment Consulting contract in the fourth quarter of 2008. Also, in the first quarter of 2009, we did not reach agreement on renewal terms with another consulting client. This contract, which represented approximately 8% of the Investment Management segment’s revenue in the first quarter of 2009, expires on May 1, 2009. Combined, these contracts represented about $17 million of revenue in 2008.
 
We provided advisory services on approximately $63.3 billion in assets as of March 31, 2009, compared with approximately $66.2 billion as of December 31, 2008 and approximately $95.8 billion as of March 31, 2008. These totals include consulting relationships as well as agreements where we act as a portfolio construction manager for a mutual fund or variable annuity and receive a basis-point fee. We also provide Investment Consulting services for some assets under management for which we receive a flat fee.
 
Total assets under advisement for Investment Consulting declined approximately 33.9% compared with March 31, 2008, as assets under advisement from Morningstar Associates declined 47.9% and assets under advisement from Ibbotson Associates decreased about 16.3%.  Excluding changes related to contract cancellations or renewals, changes in the value of assets under advisement can come from two primary sources: gains or losses related to overall trends in market performance, and net inflows or outflows caused when investors add to or redeem shares from these portfolios. In the first quarter of 2009, the continuing losses in the U.S. stock market were the main factor behind the decline in assets for most portfolios. In addition, during the second quarter of 2008, an Investment Consulting client informed us that it was not planning to renew its contract in the fourth quarter of 2008. As a result, assets under advisement for Morningstar Associates declined more than the market compared with the prior-year period.
 
Retirement Advice revenue was also down in the first quarter of 2009, although to a lesser extent. Assets under management for Retirement Advice declined to $10.2 billion, compared with $11.0 billion at December 31, 2008 and $13.2 billion in the same period a year ago.

 	 	As of March 31	 	
Assets under advisement for Investment Consulting ($ billions)	 	2009	 	2008	 	
Ibbotson Associates	 	$	35.5	 	$	42.4	 	
Morningstar Associates	 	27.8	 	53.4	 	
Total	 	$	63.3	 	$	95.8	 	
 
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 	 	As of March 31	 	
Assets under management in managed retirement accounts ($ billions)	 	2009	 	2008	 	
Advice by Ibbotson	 	$	9.3	 	$	12.1	 	
Morningstar Retirement Manager	 	0.9	 	1.1	 	
Total	 	$	10.2	 	$	13.2	 	
 
Morningstar Managed Portfolios revenue was down in the first quarter of 2009 and was another factor that contributed to the revenue decline. Assets under management for Morningstar Managed Portfolios fell to $1.4 billion as of March 31, 2009, compared with $1.6 billion as of December 31, 2008 and $2.1 billion as of March 31, 2008, resulting from general market weakness.
 
Operating expense in the segment decreased $4.9 million, or 36%, primarily because of lower bonus and other compensation-related expenses, mainly as a result of suspending our 401(k) matching contributions in the United States.
 
Operating margin was 57.7% in the first quarter of 2009, compared with 52.7% in the prior-year period. Lower bonus expense and compensation-related expenses, as a percentage of revenue, contributed to the margin improvement.
 
Corporate Items
 
Under our new segment structure, we no longer allocate corporate costs to our business segments. This category also includes amortization expense related to intangible assets recorded when we allocate the purchase price of acquisitions. The table below shows the components of corporate items that impacted our consolidated operating income:

 	 	Three Months Ended March 31	 	
($000)	 	2009	 	2008	 	% Change	 	
Amortization expense	 	$	5,121	 	$	4,022	 	27.3	%	
Depreciation expense	 	1,654	 	1,048	 	57.8	%	
Corporate unallocated	 	7,264	 	8,792	 	(17.4	)%	
Corporate items	 	$	14,039	 	$	13,862	 	1.3	%	
 
Amortization of intangible assets increased $1.1 million in the first quarter of 2009, reflecting incremental amortization expense of intangible assets related to our 2008 acquisitions. Based on acquisitions completed through December 31, 2008, we estimate that aggregate amortization expense for intangible assets will be $20.1 million in 2009. Some of the purchase price allocations are preliminary, and the values assigned to intangible assets and the associated amortization expense may be affected by changes to these preliminary purchase price allocations.
 
Depreciation expense increased $0.6 million in the first quarter of 2009. In the fourth quarter of 2008, we relocated to our new corporate headquarters, resulting in higher depreciation expense compared with the prior-year period.
 
Corporate unallocated decreased $1.5 million in the first quarter of 2009. Lower bonus expense and other compensation-related expenses drove the decrease in this category.
 
Equity in Net Income of Unconsolidated Entities, Non-Operating Income, and Income Tax Expense
 
Equity in Net Income of Unconsolidated Entities

 	 	Three months ended March 31	 	
($000)	 	2009	 	2008	 	
Equity in net income of unconsolidated entities	 	$	382	 	$	352	 	

Equity in net income of unconsolidated entities includes our portion of the net income (loss) of Morningstar Japan K.K. (MJKK), Morningstar Korea, Ltd., Morningstar Danmark A/S, and Morningstar Sweden AB. In the first quarter of 2009 and 2008, equity in net income of unconsolidated entities was primarily from our position in MJKK. We describe our investments in unconsolidated entities in more detail in Note 8 of the Notes to our Unaudited Condensed Consolidated Financial Statements.
 
Non-Operating Income
 
The following table presents the components of net non-operating income:
 
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 	 	Three months ended March 31	 	
($000)	 	2009	 	2008	 	
Interest income, net	 	$	978	 	$	1,519	 	
Other income (expense), net	 	(444	)	272	 	
Non-operating income, net	 	$	534	 	$	1,791	 	
 
Net interest income mainly reflects interest from our investment portfolio. Net interest income decreased $0.5 million in the first quarter of 2009 as a result of lower returns on our investment balances.
 
Other income (expense) primarily represents foreign currency exchange gains and losses arising from the ordinary course of business related to our U.S. and non-U.S. operations. It also includes royalty income from MJKK and realized gains and losses from our investment portfolio. The large expense in the first quarter of 2009 was driven by a net foreign currency exchange loss from the stronger U.S. dollar.
 
Income Tax Expense
 
The following table summarizes the components of our effective tax rate:

 	 	Three months ended March 31	 	
($000)	 	2009	 	2008	 	
Income before income taxes and equity in net income of unconsolidated entities	 	$	35,159	 	$	36,476	 	
Equity in net income of unconsolidated entities	 	382	 	352	 	
Net (income) loss attributable to the noncontrolling interest	 	89	 	(248	)	
Total	 	$	35,630	 	$	36,580	 	
Income tax expense	 	$	10,668	 	$	13,504	 	
Effective tax rate	 	29.9	%	36.9	%	
 
Our effective tax rate declined by 7.0 percentage points in the first quarter of 2009. Lower income tax expense in the first quarter of 2009 includes the impact of reversing a $1.4 million reserve for uncertain tax positions as a result of a lapse in the statute of limitations. This non-cash credit contributed approximately 4 percentage points of the decrease in the effective tax rate. In addition, the favorable, but variable, benefit from incentive stock-option transactions contributed approximately 2.0 percentage points to the decrease in the effective tax rate.
 
As of December 31, 2008, our Consolidated Balance Sheet included a current liability of $3,983,000 and a non-current liability of $3,756,000 for unrecognized tax benefits. These amounts include interest and penalties, less any associated tax benefits. Other than the impact of reversing the $1.4 million reserve for uncertain tax positions, there were no significant changes to uncertain tax positions in the first quarter of 2009 as a result of other lapses of statutes of limitation or audit activity. We are currently under audit by the U.S. federal and various state and local tax authorities in the United States. We are also under audit by the tax authorities in certain non-U.S. jurisdictions. It is likely that the examination phase of some of these U.S. federal, state, local, and non-U.S. audits will conclude in 2009. It is not possible to estimate the impact of current audits on previously recorded unrecognized tax benefits.
 
  Liquidity and Capital Resources
 
We believe our available cash balances and investments, along with cash generated from operations, will be sufficient to meet our operating and cash needs for the foreseeable future. We invest our cash reserves in cash equivalents and investments, consisting primarily of fixed-income securities. We maintain a conservative investment policy for our investments and invest a portion of these assets in municipal securities with high-quality stand-alone credit ratings. The ongoing financial crisis, which accelerated during the latter half of 2008 and continued during the first quarter of 2009, has heightened our application of a conservative investment policy, emphasizing principal preservation. Despite adverse conditions in the credit markets, which have also adversely affected traditionally safe investments such as money market funds and high-grade commercial paper, we believe our investment portfolio remains marketable. Investments in our portfolio have a maximum maturity of two years; the weighted average maturity is approximately one year.
 
We intend to use our cash, cash equivalents, and investments for general corporate purposes, including for working capital and for funding future growth. To date we have not needed to access any significant commercial credit and have not attempted to borrow or establish any lines of credit.
 
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Cash and Cash Equivalents
 
As of March 31, 2009, we had cash, cash equivalents, and investments of $286.0 million, a decrease of $11.6 million compared with December 31, 2008. This decline mainly reflects cash used for operating activities and capital expenditures, partially offset by the proceeds received from employee stock option exercises.
 
Cash Provided by Operating Activities
 
Our main source of capital is cash generated from operating activities. We typically pay bonuses in the first quarter of the year. As a result, cash flow from operations in the first quarter tends to be lower compared with subsequent quarters.
 
In the first quarter of 2009, cash used for operating activities was $8.3 million, a decrease of $9.7 million, compared with cash provided by operating activities of $1.4 million in the first quarter of 2008. Changes in our net operating assets and liabilities reduced the cash flow benefit from net income (adjusted for non-cash items) by $15.0 million, primarily as a result of an increase of $9.6 million in bonus payments and a $3.5 million reduction in cash received for tenant improvement allowances.  Net income (adjusted for non-cash items) increased $5.3 million, partially offsetting the change in operating assets and liabilities.
 
We paid $58.9 million in annual bonus payments in the first quarter of 2009, compared with $49.3 million in the prior-year period.  The bonuses paid in 2009 included approximately $48.9 million of bonus expense recorded in 2008 and approximately $10.0 million of bonus payments deferred from 2007. In accordance with bonus program revisions adopted in January 2009, we are not deferring payments on any bonus expense recorded for 2008.
 
The $5.3 million increase in net income (adjusted for non-cash items) is primarily related to a lower impact related to excess tax benefits on operating cash flows.  Excess tax benefits have a positive impact on cash provided by financing activities with an equal, but offsetting, impact on cash from operations. Excess tax benefits declined $5.6 million in the quarter, primarily reflecting lower average stock prices on the exercise dates and a reduction in the number of options exercised.
 
Cash Used for Investing Activities
 
Cash used for investing activities consists primarily of cash used for acquisitions; purchases of investments, net of proceeds from the sale of investments; and capital expenditures. The level of investing activities can vary from period to period depending on the level of activity in these three categories.  In the first quarter of 2009, cash used for investing activities was $10.2 million, compared with $38.0 million in the first quarter of 2008.
 
We did not complete any acquisitions in the first quarter of 2009. In comparison, cash used for acquisitions, net of cash acquired, was $50.9 million in the first quarter of 2008. In January 2008, we acquired the Hemscott data, media, and investor relations Web site businesses.
 
Purchases of investments, net of proceeds from the sale of investments, were $5.6 million in the first quarter of 2009 as we transferred cash balances excess to our immediate needs into investments with longer maturities. In contrast, in the first quarter of 2008, the proceeds from the sales of investments exceeded the purchases of investments by $19.7 million. As of March 31, 2009 and December 31, 2008, we had investments, consisting primarily of fixed-income securities, of $129.3 million and $123.7 million, respectively. As of March 31, 2009, our investments represented approximately 45% of our total cash, cash equivalents, and investments, up approximately 4 percentage points compared with December 31, 2008.
 
Capital expenditures were $4.6 million in the first quarter of 2009, a decrease of $2.1 million, compared with $6.7 million in the first quarter of 2008.  In both periods, the amounts were almost entirely composed of capital expenditures for our new headquarters in Chicago.
 
Cash Provided by Financing Activities
 
Cash provided by financing activities consists primarily of proceeds from stock option exercises and excess tax benefits related to stock option exercises and vesting of restricted stock units. Excess tax benefits occur at the time a stock option is exercised when the intrinsic value of the option (the difference between the fair value of our stock on the date of exercise and the exercise price of the option) is greater than the fair value of the option at the time of grant. Similarly, excess tax benefits are generated upon vesting of restricted stock units when the market value of our common stock on the vesting date exceeds the grant price of the restricted stock units. These excess tax benefits reduce the cash we pay for income taxes in the year they are recognized. It is not possible to predict the timing of stock option exercises or the intrinsic value which will be achieved at the time options are exercised or upon vesting of restricted stock units. As a result, we expect cash flow from financing activities to vary over time. Note 9 in the Notes to our Consolidated Financial Statements includes additional information concerning stock options and restricted stock units outstanding as of March 31, 2009.
 
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Cash provided by financing activities was $3.1 million in the first quarter of 2009, consisting mainly of proceeds from stock option exercises of $2.9 million and excess tax benefits of $0.4 million. In 2009, cash provided by financing activities decreased by $8.6 million, or 73.5%, compared with the first quarter of 2008, driven mostly by a $5.6 decline in excess tax benefits and a $2.9 million reduction in proceeds from stock option exercises. The decrease was due primarily to a lower average stock price at the time the stock options were exercised and a fewer number of options being exercised.
 
Employees exercised approximately 273,000 and 738,000 stock options in the first quarters of 2009 and 2008, respectively. The total intrinsic value (the difference between the market value of our stock on the date of exercise and the exercise price of the option) of options exercised during the first quarter of 2009 and 2008 was $5.8 million and $41.6 million, respectively.
 
Subsequent Events
 
We completed the following three acquisitions in April and May of 2009:
 
Global financial filings database business of Global Reports LLC :  In April 2009, we acquired the global financial filings database business of Global Reports LLC, a leading provider of online financial and Corporate and Social Responsibility reports for publicly traded companies around the world. Global Reports provides timely online access to full-color financial filings from more than 37,000 publicly traded companies in approximately 130 countries.
 
Equity research and data business of C.P.M.S. Computerized Portfolio Management Services Inc.:   In May 2009, we acquired the equity research and data business of C.P.M.S. Computerized Portfolio Management Services Inc. (C.P.M.S.). C.P.M.S. tracks fundamental equity data for approximately 4,000 securities in the United States and Canada as well as tracks and provides brokerage earnings estimates for Canadian equities.
 
Andex Associates Inc.   In May 2009, we acquired Andex Associates Inc., based in Windsor, Ontario, Canada. The company is known for its Andex Charts, individual graphic charts detailing historical market returns, stock index growth, inflation rates, currency rates, and general economic conditions for the United States dating back to 1926, and for Canada dating back to 1950. The charts offer in-depth historical information to help investors understand the context and propensity of market downturns and recoveries.
 
The combined purchase price for these three acquisitions was approximately $18.0 million, subject to post-closing adjustments.
 
Application of Critical Accounting Policies and Estimates
 
Our critical accounting policies and estimates are discussed in the Management’s Discussion and Analysis section of our Annual Report on Form 10-K filed with the Securities and Exchange Commission (SEC) for the year ended December 31, 2008.  In addition, effective January 1, 2009, we adopted the following financial accounting standards:
 
SFAS No. 160, Accounting and Reporting of Noncontrolling Interests in Consolidated Financial Statements, an amendment of ARB No. 51
 
Statement of Financial Accounting Standards (SFAS) No. 160, Accounting and Reporting of Noncontrolling Interests in Consolidated Financial Statements, an amendment of ARB No. 51, amends the financial accounting and reporting of noncontrolling interests in consolidated financial statements.  A noncontrolling interest is the portion of equity (net assets) in a subsidiary not attributable, directly or indirectly, to the parent company.  We conduct our business operations outside of the United States through wholly owned or majority-owned operating subsidiaries.  As a result of adopting SFAS No. 160, the noncontrolling interest related to a majority-owned subsidiary is now reported in our consolidated statement of financial position within equity, separately from the shareholders’ equity attributable to Morningstar, Inc.  In addition, the net income or loss and comprehensive income or loss attributed to the Morningstar, Inc. shareholders and the noncontrolling interest is presented in our Statements of Income and Statement of Equity and Comprehensive Income.
 
SFAS No. 141(R), Business Combinations
 
SFAS No. 141(R), Business Combinations , modifies the financial accounting and reporting of business combinations.   For business combinations which occur after January 1, 2009, SFAS No. 141(R) requires the acquirer to recognize and measure the fair value of the acquired operation as a whole, and the assets acquired and liabilities assumed at their full fair values as of the date control is obtained, regardless of the percentage ownership in the acquired operation or how the acquisition was achieved.   In addition, under SFAS No. 141 (R), acquisition-related costs are expensed as incurred.  Prior to the adoption of SFAS 141 (R), direct costs incurred in connection with a business combination, such as finder’s fees, advisory, accounting, legal, valuation, and other professional fees were included as part of the cost of the acquired business.  Restructuring costs are recognized separately from the business combination accounting as post-combination expenses of the combined entity unless the criteria of SFAS No. 146 are met on the acquisition date by the target entity.   Prior to the adoption of SFAS No. 141 (R), restructuring costs such as severance and relocation of employees of the acquired entity could be included in the purchase price allocation assuming certain criteria were met.
 
Recently Issued Accounting Pronouncements
 
In April 2009, the Financial Accounting Standards Board (FASB) issued three Final Staff Positions (FSPs) intended to provide additional application guidance and enhance disclosures regarding fair value measurements and impairments of securities.

·	FSP FAS 157-4, Determining Fair Value When the Volume and Level of Activity for the Asset or Liability Have Significantly Decreased and Identifying Transactions That Are Not Orderly , provides guidelines for making fair value measurements more consistent with the principles presented in SFAS No. 157, Fair Value Measurements .	
 	 	
·	FSP FAS 107-1 and APB 28-1, Interim Disclosures about Fair Value of Financial Instruments , enhances consistency in financial reporting by increasing the frequency of fair value disclosures.	
 	 	
·	FSP FAS 115-2 and FAS 124-2, Recognition and Presentation of Other-Than-Temporary Impairments , provides additional guidance designed to create greater clarity and consistency in accounting for and presenting impairment losses on securities.	
 
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The FSPs are effective for interim and annual periods ending after June 15, 2009. We are in the process of determining the effect the adoption of these FSPs will have on our Consolidated Financial Statements.
 
In April 2009, the FASB also issued an FSP to amend and clarify SFAS No. 141 (revised 2007), Business Combinations , to address application issues on initial recognition and measurement, subsequent measurement and accounting, and disclosure of assets and liabilities arising from contingencies in a business combination.  This FSP is effective for assets or liabilities arising from contingencies in business combinations for which the acquisition date is on or after January 1, 2009.
 
Rule 10b5-1 Sales Plans
 
Rule 10b5-1 Plans
 
Our directors and executive officers may exercise stock options or purchase or sell shares of our common stock in the market from time to time. We encourage them to make these transactions through plans that comply with Exchange Act Rule 10b5-1(c). Morningstar will not receive any proceeds, other than proceeds from the exercise of stock options, related to these transactions. The following table, which we are providing on a voluntary basis, shows the Rule 10b5-1 sales plans entered into by our directors and executive officers that were in effect as of May 1, 2009:

Name and Position	 	Date of
Plan	 	Plan
Termination
Date	 	Number of
Shares
to be
Sold under
the Plan	 	Timing of Sales under the Plan	 	Number of
Shares
Sold under
the Plan through
May 1,
2009	 	Projected
Beneficial
Ownership (1)	 	
Joe Mansueto
Chairman and
Chief Executive
Officer	 	08/13/08	 	12/31/09	 	1,075,000	 	Shares to be sold ratably over the course of the plan	 	325,016	 	25,851,246	 	
Chris Boruff
President,
Advisor Software	 	05/12/08	 	11/15/09	 	80,000	 	Shares to be sold under the plan if the stock reaches specified prices	 	12,000	 	91,180	 	
Tao Huang
Chief Operating
Officer	 	02/24/09	 	05/31/10	 	470,000	 	Shares to be sold under the plan if the stock reaches specified prices beginning May 5, 2009	 	—	 	497,179	 	
Elizabeth
Kirscher
President, Data
Services	 	05/22/08	 	06/30/09	 	100,000	 	Shares to be sold under the plan if the stock reaches specified prices	 	—	 	90,564	 	
Catherine Odelbo
President, Equity
Research	 	08/13/08	 	12/31/09	 	28,165	 	Weekly increments of up to 3,500 shares	 	—	 	148,000	 	
Don Phillips
President, Fund
Research and
Managing
Director	 	05/09/06	 	12/01/09	 	1,506,097	 	Weekly increments of up to 17,500 shares	 	1,297,251	 	439,506	 	
Patrick
Reinkemeyer
President,
Morningstar
Associates, LLC	 	09/10/08	 	10/31/09	 	15,000	 	Weekly increments of up to 1,000 shares	 	—	 	318,495	 	
Richard Robbins
General Counsel
and Corporate
Secretary	 	08/15/08	 	06/30/09	 	7,061	 	Biweekly increments of up to 500 shares	 	2,061	 	17,435	 	
David Williams
Managing
Director,
Design	 	09/10/08	 	09/30/09	 	10,000	 	Weekly increments of up to 2,500 shares	 	—	 	100,362	 	
 
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(1)   This column reflects an estimate of the number of shares each identified director and executive officer will beneficially own following the sale of all shares under the Rule 10b5-1 sales plans identified above. This information reflects the beneficial ownership of our common stock on March 31, 2009, and includes shares of our common stock subject to options that were then exercisable or that will have become exercisable by May 30, 2009 and restricted stock units that will vest by May 30, 2009. The estimates do not reflect any changes to beneficial ownership that may have occurred since March 31, 2009. Each director and executive officer identified in the table may amend or terminate his or her Rule 10b5-1 sales plan and may adopt additional Rule 10b5-1 plans in the future.
 
Item 3. Quantitative and Qualitative Disclosures about Market Risk 
 
Our investment portfolio is actively managed and may suffer losses from fluctuating interest rates, market prices, or adverse security selection. Our investment portfolio is mainly invested in high-quality fixed-income securities. We do not have any direct exposure to sub-prime mortgages. As of March 31, 2009, our cash, cash equivalents, and investments balance was $286.0 million. Based on our estimates, a 100 basis-point change in interest rates would impact the fair value of our investment portfolio by approximately $0.9 million.
 
As our non-U.S. revenue increases as a percentage of our consolidated revenue, fluctuations in foreign currencies present a greater potential risk. To date, we have not engaged in currency hedging, and we do not currently have any positions in derivative instruments to hedge our currency risk. Our results could suffer if certain foreign currencies decline relative to the U.S. dollar. In addition, because we use the local currency of our subsidiaries as the functional currency, we are affected by the translation of foreign currencies into U.S. dollars.
 
Item 4. Controls and Procedures 
 
(a) Evaluation and Disclosure Controls and Procedures
 
Disclosure controls and procedures are designed to reasonably assure that information required to be disclosed in the reports filed or submitted under the Exchange Act is recorded, processed, summarized, and reported within the time periods specified in the SEC’s rules and forms. Disclosure controls and procedures include, without limitation, controls and procedures designed to reasonably assure that information required to be disclosed in the reports filed under the Exchange Act is accumulated and communicated to management, including the chief executive officer and chief financial officer, as appropriate, to allow timely decisions regarding required disclosure.
 
We carried out an evaluation, under the supervision and with the participation of our management, including our chief executive officer and chief financial officer, of the effectiveness of the design and operation of our disclosure controls and procedures, as defined in Rules 12a-15(e) and 15d-15(e) of the Securities Exchange Act of 1934, as of March 31, 2009. Based on that evaluation, our chief executive officer and chief financial officer concluded that our disclosure controls and procedures are effective to provide reasonable assurance that information required to be disclosed in the reports we file or submit under the Exchange Act is recorded, processed, summarized, and reported as and when required and is accumulated and communicated to management, including the chief executive officer and chief financial officer, as appropriate, to allow timely decisions regarding required disclosure.
 
(b) Changes in Internal Controls Over Financial Reporting
 
There were no changes in our internal controls over financial reporting during the quarter ended March 31, 2009 that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.
 
PART 2            OTHER INFORMATION 
 
Item 1.  Legal Proceedings 
 
We incorporate by reference the information regarding legal proceedings set forth in Note 12, “Contingencies,” of the Notes to our Unaudited Condensed Consolidated Financial Statements contained in Part 1, Item 1 of this Quarterly Report on Form 10-Q.
 
Item 1A.  Risk Factors 
 
There have been no material changes to the risk factors disclosed in Item 1A — Risk Factors in our Annual Report on Form 10-K for the year ended December 31, 2008.
 
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Item 6. Exhibits 
 
(a) Exhibits

Exhibit No	 	Description of Exhibit	
 	 	 	
31.1	 	Certification of Chief Executive Officer pursuant to Rule 13a-14(a) and 15d-14(a) of the Securities Exchange Act of 1934, as amended	
 	 	 	
31.2	 	Certification of Chief Financial Officer pursuant to Rule 13a-14(a) and 15d-14(a) of the Securities Exchange Act of 1934, as amended	
 	 	 	
32.1	 	Certification of Chief Executive Officer Pursuant to 18 U.S.C. 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002	
 	 	 	
32.2	 	Certification of Chief Financial Officer Pursuant to 18 U.S.C. 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002	
 
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SIGNATURE 
 
Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.

 	 	 	 	    MORNINGSTAR, INC.	
 	 	 	 	 	
Date: May 6, 2009	 	 	By:	/s/ Scott Cooley	
 	 	 	 	    Scott Cooley	
 	 	 	 	    Chief Financial Officer	
 
35

EXHIBIT 31.1
 
CERTIFICATION OF CHIEF EXECUTIVE OFFICER
 
I, Joe Mansueto, certify that:
 
1.             I have reviewed this Quarterly Report on Form 10-Q of Morningstar, Inc.;
 
2.             Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report;
 
3.             Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report;
 
4.             The registrant’s other certifying officer and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for the registrant and have:
 
a.             designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared;
 
b.             designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles;
 
c.             evaluated the effectiveness of the registrant’s disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and
 
d.             disclosed in this report any change in the registrant’s internal control over financial reporting that occurred during the registrant’s most recent fiscal quarter that has materially affected, or is reasonably likely to materially affect, the registrant’s internal control over financial reporting; and
 
5.             The registrant’s other certifying officer and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant’s auditors and the audit committee of the registrant’s board of directors (or persons performing the equivalent functions):
 
a.             all significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant’s ability to record, process, summarize and report financial information; and
 
b.             any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant’s internal control over financial reporting.

Date: May 6, 2009	 	/s/ Joe Mansueto	 	
 	 	Joe Mansueto	
 	 	Chairman of the Board and Chief Executive Officer	
 
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EXHIBIT 31.2
 
CERTIFICATION OF CHIEF FINANCIAL OFFICER
 
I, Scott Cooley, certify that:
 
1.              I have reviewed this Quarterly Report on Form 10-Q of Morningstar, Inc.;
 
2.              Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report;
 
3.              Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report;
 
4.              The registrant’s other certifying officer and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for the registrant and have:
 
a.              designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared;
 
b.              designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles;
 
c.              evaluated the effectiveness of the registrant’s disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and
 
d.              disclosed in this report any change in the registrant’s internal control over financial reporting that occurred during the registrant’s most recent fiscal quarter that has materially affected, or is reasonably likely to materially affect, the registrant’s internal control over financial reporting; and
 
5.              The registrant’s other certifying officer and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant’s auditors and the audit committee of the registrant’s board of directors (or persons performing the equivalent functions):
 
a.              all significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant’s ability to record, process, summarize and report financial information; and
 
b.              any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant’s internal control over financial reporting.

Date: May 6, 2009	 	/s/ Scott Cooley	 	
 	 	Scott Cooley	
 	 	Chief Financial Officer	
 
37

EXHIBIT 32.1
 
CERTIFICATION PURSUANT TO 18 U.S.C. SECTION 1350,
AS ADOPTED PURSUANT TO SECTION 906 OF
THE SARBANES-OXLEY ACT OF 2002
 
Joe Mansueto, as Chairman of the Board and Chief Executive Officer of Morningstar, Inc. (the Company), certifies, pursuant to 18 U.S.C. 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, that:

 	1.	the Company’s Quarterly Report on Form 10-Q for the quarterly period ended March 31, 2009 as filed with the Securities and Exchange Commission on the date hereof (the Report) fully complies with the requirements of Section 13(a) or 15(d) of the Securities Exchange Act of 1934 (15 U.S.C. 78m); and	
 	 	 	
 	2.	the information contained in the Report fairly presents, in all material respects, the financial condition and results of operations of the Company.	
 	 	 	
 	/s/ Joe Mansueto	 	
 	Joe Mansueto	 	
 	Chairman of the Board and Chief Executive Officer	
 	 	
 	May 6, 2009	 	

38

EXHIBIT 32.2
 
CERTIFICATION PURSUANT TO 18 U.S.C. SECTION 1350,
AS ADOPTED PURSUANT TO SECTION 906 OF
THE SARBANES-OXLEY ACT OF 2002
 
Scott Cooley, as Chief Financial Officer of Morningstar, Inc. (the Company), certifies, pursuant to 18 U.S.C. 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, that:

 	1.	the Company’s Quarterly Report on Form 10-Q for the quarterly period ended March 31, 2009 as filed with the Securities and Exchange Commission on the date hereof (the Report) fully complies with the requirements of Section 13(a) or 15(d) of the Securities Exchange Act of 1934 (15 U.S.C. 78m); and	
 	 	 	
 	2.	the information contained in the Report fairly presents, in all material respects, the financial condition and results of operations of the Company.	
 	 	 	
 	/s/ Scott Cooley	 	 	
 	Scott Cooley	 	
 	Chief Financial Officer	 	
 	 	 	
 	May 6, 2009	 	

39