MORNINGSTAR, INC., 10-K/A filed on 3/1/2016
Amended Annual Report
Document and Entity Information Document (USD $)
In Billions, except Share data, unless otherwise specified
12 Months Ended
Dec. 31, 2015
Feb. 19, 2016
Jun. 30, 2015
Document and Entity Information Abstract
 
 
 
Entity Registrant Name
MORNINGSTAR, INC. 
 
 
Entity Central Index Key
0001289419 
 
 
Current Fiscal Year End Date
--12-31 
 
 
Entity Filer Category
Large Accelerated Filer 
 
 
Document Type
10-K 
 
 
Document Period End Date
Dec. 31, 2015 
 
 
Document Fiscal Year Focus
2015 
 
 
Document Fiscal Period Focus
FY 
 
 
Amendment Flag
false 
 
 
Entity Common Stock, Shares Outstanding
 
42,911,386 
 
Entity Well-known Seasoned Issuer
Yes 
 
 
Entity Voluntary Filers
No 
 
 
Entity Current Reporting Status
Yes 
 
 
Entity Public Float
 
 
$ 1.5 
Condensed Consolidated Statements of Income (USD $)
In Millions, except Per Share data, unless otherwise specified
12 Months Ended
Dec. 31, 2015
Dec. 31, 2014
Dec. 31, 2013
Revenue
$ 788.8 
$ 760.1 
$ 698.3 
Operating expense:
 
 
 
Cost of revenue
330.1 
318.6 
271.4 
Sales and marketing
96.6 
111.1 
103.6 
General and administrative
107.1 
108.9 
106.9 
Depreciation and amortization
64.4 
54.9 
45.7 
Gain (Loss) Related to Litigation Settlement
61.0 
Total operating expense
598.2 
654.5 
527.6 
Operating income
190.6 
105.6 
170.7 
Non-operating income:
 
 
 
Interest income, net
1.3 
2.1 
2.7 
Gain on sale of investments, reclassified from other comprehensive income
0.6 
1.0 
4.2 
Equity Method Investments Holding Gain
5.2 
3.6 
Other income (expense), net
1.2 
0.1 
(3.2)
Non-operating income, net
3.1 
8.4 
7.3 
Income before income taxes and equity in net income of unconsolidated entities
193.7 
114.0 
178.0 
Income tax expense
62.7 
35.7 
56.0 
Equity in net income of unconsolidated entities
1.8 
1.4 
Consolidated net income
132.8 
78.3 
123.4 
Net (income) loss attributable to the noncontrolling interest
(0.2)
0.1 
Net income attributable to Morningstar, Inc.
$ 132.6 
$ 78.3 
$ 123.5 
Net income per share attributable to Morningstar, Inc.:
 
 
 
Basic net income per share attributable to Morningstar, Inc. (in dollars per share)
$ 3.00 
$ 1.75 
$ 2.68 
Diluted net income per share attributable to Morningstar, Inc. (in dollars per share)
$ 3.00 
$ 1.74 
$ 2.66 
Dividends per common share:
 
 
 
Dividends declared per common share
$ 0.79 
$ 0.70 
$ 0.545 
Dividends paid per common share
$ 0.76 
$ 0.68 
$ 0.375 
Weighted average shares outstanding:
 
 
 
Basic (in shares)
44.2 
44.7 
46.2 
Diluted (in shares)
44.3 
44.9 
46.5 
Consolidated Consolidated Statements of Comprehensive Income (USD $)
In Millions, unless otherwise specified
12 Months Ended
Dec. 31, 2015
Dec. 31, 2014
Dec. 31, 2013
Consolidated net income
$ 132.8 
$ 78.3 
$ 123.4 
Other comprehensive income (loss), net of tax:
 
 
 
Foreign currency translation adjustment
(28.2)
(29.8)
(4.5)
Unrealized gains (losses) on securities:
 
 
 
Unrealized holding gains (losses) arising during period
(1.0)
0.4 
2.4 
Reclassification of gains included in net income
(0.4)
(0.6)
(2.6)
Other comprehensive income (loss)
(29.6)
(30.0)
(4.7)
Comprehensive income
103.2 
48.3 
118.7 
Comprehensive (income) loss attributable to noncontrolling interest
(0.4)
0.1 
0.3 
Comprehensive income attributable to Morningstar, Inc.
$ 102.8 
$ 48.4 
$ 119.0 
Condensed Consolidated Balance Sheets (USD $)
In Millions, unless otherwise specified
Dec. 31, 2015
Dec. 31, 2014
Current assets:
 
 
Cash and cash equivalents
$ 207.1 
$ 185.2 
Investments
41.5 
39.4 
Accounts receivable, less allowance of $1.8 and $1.5, respectively
139.3 
136.7 
Deferred tax asset, net
Other
22.0 
29.5 
Total current assets
409.9 
390.8 
Property, equipment, and capitalized software, net
134.5 
117.6 
Investments in unconsolidated entities
35.6 
28.8 
Goodwill
364.2 
370.1 
Intangible assets, net
74.2 
95.9 
Other assets
10.6 
7.1 
Total assets
1,029.0 
1,010.3 
Current liabilities:
 
 
Accounts payable and accrued liabilities
39.2 
34.3 
Accrued compensation
80.9 
80.5 
Deferred revenue
140.7 
146.0 
Short-term Debt
35.0 
30.0 
Other
8.6 
3.0 
Total current liabilities
304.4 
293.8 
Accrued compensation
8.9 
7.9 
Deferred tax liability, net
19.8 
17.0 
Deferred rent
25.4 
26.4 
Other long-term liabilities
29.9 
10.8 
Total liabilities
388.4 
355.9 
Morningstar, Inc. shareholders' equity:
 
 
Common stock, no par value, 200,000,000 shares authorized, of which 43,403,076 and 44,345,763 shares were outstanding as of December 31, 2015 and December 31, 2014, respectively
Treasury stock at cost, 9,478,449 shares and 8,257,214 shares as of December 31, 2015 and December 31, 2014, respectively
(619.8)
(524.3)
Additional paid-in capital
575.5 
561.1 
Retained earnings
739.2 
641.5 
Accumulated other comprehensive loss:
 
 
Currency translation adjustment
(53.5)
(25.1)
Unrealized gain (loss) on available-for-sale investments
(1.1)
0.3 
Total accumulated other comprehensive loss
(54.6)
(24.8)
Total Morningstar, Inc. shareholders' equity
640.3 
653.5 
Noncontrolling interest
0.3 
0.9 
Total equity
640.6 
654.4 
Total liabilities and equity
$ 1,029.0 
$ 1,010.3 
Consolidated Balance Sheets (Parenthetical) (USD $)
In Millions, except Share data, unless otherwise specified
Dec. 31, 2015
Dec. 31, 2014
Statement of Financial Position [Abstract]
 
 
Allowance for Doubtful Accounts Receivable, Current
$ 1.8 
$ 1.5 
Common Stock, No Par Value
$ 0 
$ 0 
Common Stock, Shares Authorized
200,000,000 
200,000,000 
Common Stock, Shares, Outstanding
43,403,076 
44,345,763 
Treasury Stock, Shares
9,478,449 
8,257,214 
Condensed Consolidated Statement of Equity (USD $)
In Millions, except Share data, unless otherwise specified
Total
Common Stock
Treasury Stock
Additional Paid-In Capital
Retained Earnings
Accumulated Other Comprehensive Income (Loss)
Non Controlling Interests
Balance at Dec. 31, 2012
$ 726.9 
 
$ (301.8)
$ 521.4 
$ 496.4 
$ 9.6 
$ 1.3 
Balance (in shares) at Dec. 31, 2012
 
46,541,571 
 
 
 
 
 
Increase (Decrease) in Stockholders' Equity
 
 
 
 
 
 
 
Net income (loss)
123.4 
 
 
 
123.5 
 
(0.1)
Other Comprehensive Income (loss)
 
 
 
 
 
 
 
Unrealized gain on available-for-sale investments, net of income tax
2.4 
 
 
 
 
2.4 
 
Reclassification of adjustments for gains included in net income, net of income tax
(2.6)
 
 
 
 
(2.6)
 
Foreign currency translation adjustment, net
(4.5)
 
 
 
 
(4.3)
(0.2)
Other comprehensive income (loss)
(4.7)
 
 
 
 
(4.5)
(0.2)
Issuance of common stock related to stock-option exercises and vesting of restricted stock units, net
(1.3)
 
1.6 
(2.9)
 
 
 
Issuance of common stock related to stock-option exercises and vesting of restricted stock units, net (in shares)
 
437,263 
 
 
 
 
 
Adjustments to Additional Paid in Capital, Share-based Compensation, Requisite Service Period Recognition [Abstract]
 
 
 
 
 
 
 
Stock-based compensation - restricted stock units
14.1 
 
 
14.1 
 
 
 
Stock-based compensation - restricted stock
0.4 
 
 
0.4 
 
 
 
Stock-based compensation - stock options
0.5 
 
 
0.5 
 
 
 
Excess tax benefit derived from stock-option exercises and vesting of restricted stock units
5.9 
 
 
5.9 
 
 
 
Dividends declared - common shares outstanding
(25.0)
 
 
 
(25.0)
 
 
Dividends declared - restricted stock units
(0.1)
 
 
0.2 
(0.3)
 
 
Common share repurchased
(148.8)
 
(148.8)
 
 
 
 
Common share repurchased (in shares)
 
(2,011,411)
 
 
 
 
 
Balance at Dec. 31, 2013
691.3 
 
(449.0)
539.6 
594.6 
5.1 
1.0 
Balance (in shares) at Dec. 31, 2013
 
44,967,423 
 
 
 
 
 
Increase (Decrease) in Stockholders' Equity
 
 
 
 
 
 
 
Net income (loss)
78.3 
 
 
 
78.3 
 
 
Other Comprehensive Income (loss)
 
 
 
 
 
 
 
Unrealized gain on available-for-sale investments, net of income tax
0.4 
 
 
 
 
0.4 
 
Reclassification of adjustments for gains included in net income, net of income tax
(0.6)
 
 
 
 
(0.6)
 
Foreign currency translation adjustment, net
(29.8)
 
 
 
 
(29.7)
(0.1)
Other comprehensive income (loss)
(30.0)
 
 
 
 
(29.9)
(0.1)
Issuance of common stock related to stock-option exercises and vesting of restricted stock units, net
0.8 
 
1.4 
(0.6)
 
 
 
Issuance of common stock related to stock-option exercises and vesting of restricted stock units, net (in shares)
 
452,344 
 
 
 
 
 
Adjustments to Additional Paid in Capital, Share-based Compensation, Requisite Service Period Recognition [Abstract]
 
 
 
 
 
 
 
Stock-based compensation - restricted stock units
16.3 
 
 
16.3 
 
 
 
Stock-based compensation - restricted stock
0.4 
 
 
0.4 
 
 
 
Adjustments to Additional Paid in Capital, Share-based Compensation, Other Long-term Incentive Plans, Requisite Service Period Recognition
0.5 
 
 
0.5 
 
 
 
Stock-based compensation - stock options
0.4 
 
 
0.4 
 
 
 
Excess tax benefit derived from stock-option exercises and vesting of restricted stock units
4.4 
 
 
4.4 
 
 
 
Dividends declared - common shares outstanding
(31.2)
 
 
 
(31.2)
 
 
Dividends declared - restricted stock units
(0.1)
 
 
0.1 
(0.2)
 
 
Common share repurchased
(76.7)
 
(76.7)
 
 
 
 
Common share repurchased (in shares)
 
(1,074,004)
 
 
 
 
 
Balance at Dec. 31, 2014
654.4 
(524.3)
561.1 
641.5 
(24.8)
0.9 
Balance (in shares) at Dec. 31, 2014
44,345,763 
44,345,763 
 
 
 
 
 
Increase (Decrease) in Stockholders' Equity
 
 
 
 
 
 
 
Net income (loss)
132.8 
 
 
 
132.6 
 
0.2 
Other Comprehensive Income (loss)
 
 
 
 
 
 
 
Unrealized gain on available-for-sale investments, net of income tax
(1.0)
 
 
 
 
(1.0)
 
Reclassification of adjustments for gains included in net income, net of income tax
(0.4)
 
 
 
 
(0.4)
 
Foreign currency translation adjustment, net
(28.2)
 
 
 
 
(28.4)
0.2 
Other comprehensive income (loss)
(29.6)
 
 
 
 
(29.8)
0.2 
Issuance of common stock related to stock-option exercises and vesting of restricted stock units, net
(1.7)
 
1.5 
(3.2)
 
 
 
Issuance of common stock related to stock-option exercises and vesting of restricted stock units, net (in shares)
 
298,435 
 
 
 
 
 
Adjustments to Additional Paid in Capital, Share-based Compensation, Requisite Service Period Recognition [Abstract]
 
 
 
 
 
 
 
Stock-based compensation - restricted stock units
16.1 
 
 
16.1 
 
 
 
Stock-based compensation - restricted stock
0.1 
 
 
0.1 
 
 
 
Adjustments to Additional Paid in Capital, Share-based Compensation, Other Long-term Incentive Plans, Requisite Service Period Recognition
1.0 
 
 
1.0 
 
 
 
Stock-based compensation - stock options
0.2 
 
 
0.2 
 
 
 
Excess tax benefit derived from stock-option exercises and vesting of restricted stock units
2.6 
 
 
2.6 
 
 
 
Dividends declared - common shares outstanding
(34.8)
 
 
 
(34.8)
 
 
Dividends declared - restricted stock units
(0.1)
 
 
 
(0.1)
 
 
Purchase of remaining interest in majority-owned investment
(3.4)
 
 
(2.4)
 
 
(1.0)
Common share repurchased
(97.0)
 
(97.0)
 
 
 
 
Common share repurchased (in shares)
 
(1,241,122)
 
 
 
 
 
Balance at Dec. 31, 2015
$ 640.6 
$ 0 
$ (619.8)
$ 575.5 
$ 739.2 
$ (54.6)
$ 0.3 
Balance (in shares) at Dec. 31, 2015
43,403,076 
43,403,076 
 
 
 
 
 
Condensed Consolidated Statement of Equity (Parenthetical) (USD $)
In Millions, unless otherwise specified
12 Months Ended
Dec. 31, 2015
Dec. 31, 2014
Dec. 31, 2013
Statement of Stockholders' Equity [Abstract]
 
 
 
Other Comprehensive Income (Loss), Unrealized Holding Gain (Loss) on Securities Arising During Period, Tax
$ 0.4 
$ 0.2 
$ 1.5 
Other Comprehensive Income (Loss), Reclassification Adjustment for Sale of Securities Included in Net Income, Tax
$ 0.1 
$ 0.4 
$ 1.6 
Condensed Consolidated Statements of Cash Flows (USD $)
In Millions, unless otherwise specified
12 Months Ended
Dec. 31, 2015
Dec. 31, 2014
Dec. 31, 2013
Operating activities
 
 
 
Consolidated net income
$ 132.8 
$ 78.3 
$ 123.4 
Adjustments to reconcile consolidated net income to net cash flows from operating activities:
 
 
 
Depreciation and amortization
64.4 
54.9 
45.7 
Deferred income taxes
2.9 
3.0 
(1.1)
Stock-based compensation expense
17.4 
17.6 
15.0 
Provision for bad debt
0.5 
0.5 
0.8 
Equity in net income of unconsolidated entities
(1.8)
(1.4)
Excess tax benefits from stock-option exercises and vesting of restricted stock units
(2.6)
(4.4)
(5.9)
Gain on sale of cost-method investment
(0.4)
Holding gain upon acquisition of additional ownership of equity method investment
(5.2)
(3.6)
Other, net
(1.1)
(0.7)
(1.8)
Changes in operating assets and liabilities, net of effects of acquisitions:
 
 
 
Accounts receivable
(6.9)
(25.9)
(1.6)
Other assets
0.7 
(5.3)
(2.3)
Accounts payable and accrued liabilities
4.7 
(2.0)
(1.2)
Accrued compensation
7.0 
19.5 
3.2 
Income taxes—current
10.1 
2.3 
16.8 
Deferred revenue
10.6 
(1.7)
3.7 
Deferred rent
(0.3)
3.0 
(1.5)
Other liabilities
0.5 
(1.3)
(1.5)
Cash provided by operating activities
238.9 
132.2 
186.7 
Investing activities
 
 
 
Purchases of investments
(34.7)
(20.4)
(140.1)
Proceeds from maturities and sales of investments
30.0 
111.6 
171.2 
Capital expenditures
(57.3)
(58.3)
(33.6)
Acquisitions, net of cash acquired
(11.1)
(64.4)
(11.1)
Proceeds from sale of a business, net
1.0 
Purchases of cost and equity method investments
(6.2)
(2.8)
Other, net
(0.2)
0.3 
0.5 
Cash used for investing activities
(79.5)
(31.2)
(14.9)
Financing activities
 
 
 
Common shares repurchased
(97.0)
(76.7)
(153.5)
Dividends paid
(33.7)
(30.5)
(17.4)
Proceeds from short-term debt
50.0 
30.0 
Repayments of short-term debt
(45.0)
Proceeds from stock-option exercises, net
3.9 
6.6 
4.5 
Taxes Withheld For Restricted Stock Units
(5.6)
(5.8)
(5.8)
Excess tax benefits from stock-option exercises and vesting of restricted stock units
2.6 
4.4 
5.9 
Other, net
(0.1)
0.3 
(0.1)
Cash provided by (used for) financing activities
(124.9)
(71.7)
(166.4)
Effect of exchange rate changes on cash and cash equivalents
(12.6)
(12.3)
(1.1)
Net increase in cash and cash equivalents
21.9 
17.0 
4.3 
Cash and cash equivalents - beginning of period
185.2 
168.2 
163.9 
Cash and cash equivalents - end of period
207.1 
185.2 
168.2 
Supplemental disclosure of cash flow information:
 
 
 
Cash paid for income taxes
50.1 
30.4 
40.4 
Cash paid for interest
0.4 
0.3 
Supplemental information of non-cash investing and financing activities:
 
 
 
Unrealized gain (loss) on available-for-sale investments
2.0 
(0.4)
(0.3)
Equipment obtained under long-term financing arrangement
$ 5.3 
$ 0 
$ 4.9 
Description of Business
Description of Business
Description of Business
 
Morningstar, Inc. and its subsidiaries (Morningstar, we, our), provides independent investment research for investors around the world. We offer an extensive line of products and services for financial advisors, asset managers, retirement plan providers and sponsors, and individual investors. We have operations in 27 countries.
Summary of Significant Accounting Policies
Summary of Significant Accounting Policies
Summary of Significant Accounting Policies

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

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

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

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

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

Comprehensive Income. In accordance with ASU No. 2011-05, Presentation of Comprehensive Income, we present the total of comprehensive income, the components of net income, and the components of other comprehensive income (OCI) in two separate but consecutive statements, our Consolidated Statements of Income and separately, our Consolidated Statements of Comprehensive Income. In addition, effective January 1, 2013, we adopted FASB ASU No. 2013-02, Comprehensive Income (Topic 220). We show the effects of items reclassified out of each component of accumulated other comprehensive income to net income on the face of the financial statement along with net income.

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

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

Separately, as a result of our move to a more centralized structure in 2013 (including new positions created, changes in focus for some existing roles, and the refinement of employee cost categorizations as we moved to a more centralized structure), approximately 180 net positions shifted from the general and administrative and sales and marketing categories to cost of revenue. These changes added approximately $14 million of compensation expense to cost of revenue in 2014 versus 2013, and reduced the compensation expense included in the sales and marketing and general and administrative categories by approximately $8 million and $6 million, respectively, in the same period. These changes did not affect total operating expense or operating income for any of the periods presented.

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

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

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

Trading: We classify certain other investments, primarily equity securities, as trading securities, primarily to satisfy the requirements of one of our wholly owned subsidiaries, which is a registered broker-dealer. We include realized and unrealized gains and losses associated with these investments as a component of our operating income in our Consolidated Statements of Income. We record these securities at their fair value in our Consolidated Balance Sheets.

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

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

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

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

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

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

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

Concentration of Credit Risk. No single customer is large enough to pose a significant credit risk to our operations or financial condition. For the years ended December 31, 2015, 2014, and 2013, no single customer represented 5% or more of our consolidated revenue. If receivables from our customers become delinquent, we begin a collections process. We maintain an allowance for doubtful accounts based on our estimate of the probable losses of accounts receivable.

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

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

The table below summarizes our capitalized software development costs for the past three years:
(in millions)
 
2015

 
2014

 
2013

Capitalized software development costs
 
$
21.8

 
$
18.8

 
$
8.1



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

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

Goodwill. Changes in the carrying amount of our recorded goodwill are mainly the result of business acquisitions, divestitures, and the effect of foreign currency translations. In accordance with FASB ASC 350, Intangibles—Goodwill and Other, we do not amortize goodwill; instead, goodwill is subject to an impairment test annually, or whenever indicators of impairment exist. An impairment would occur if the carrying amount of a reporting unit exceeded the fair value of that reporting unit. We performed annual impairment reviews in the fourth quarter of 2015, 2014, and 2013. We did not record any impairment losses in 2015, 2014, or 2013.

Intangible Assets. We amortize intangible assets using the straight-line method over their estimated useful lives, which range from one to 25 years. We have no intangible assets with indefinite useful lives. In accordance with FASB ASC 360-10-35, Subsequent Measurement—Impairment or Disposal of Long Lived Assets, we review intangible assets for impairment whenever events or changes in circumstances indicate that the carrying value may not be recoverable. If the value of future undiscounted cash flows is less than the carrying amount of an asset group, we record an impairment loss based on the excess of the carrying amount over the fair value of the asset group. We did not record any impairment losses in 2015, 2014, or 2013.

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

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

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

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

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

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

Our Workplace Solutions offerings help retirement plan participants plan and invest for retirement. We offer these services both through retirement plan providers (typically third-party asset management companies that offer proprietary mutual funds) and directly to plan sponsors (employers that offer retirement plans to their employees). For our Workplace Solutions offerings, we provide both a hosted solution as well as proprietary installed software advice solution. Clients can integrate the installed customized software into their existing systems to help investors accumulate wealth, transition into retirement, and manage income during retirement. The revenue arrangements for Workplace Solutions generally extend over multiple years. Our contracts may include one-time setup fees, implementation fees, technology licensing and maintenance fees, asset-based fees for managed retirement accounts, fixed and variable fees for advice and guidance, or a combination of these fee structures. Upon customer acceptance, we recognize revenue ratably over the term of the agreement. We recognize asset-based fees and variable fees in excess of any minimum once the value is fixed and determinable.

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

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

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

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

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

 
2014

 
2013

Advertising expense
 
$
8.3

 
$
7.5

 
$
6.9



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

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

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

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

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

Income per Share. We compute and present income per share in accordance with FASB ASC 260, Earnings Per Share. The difference between weighted average shares outstanding and diluted shares outstanding mainly reflects the dilutive effect associated with our stock-based compensation plans. We further compute income per share in accordance with FASB ASC 260-10-45-59A, Participating Securities and the Two-Class Method. Under the two-class method, we allocate earnings between common stock and participating securities. The two-class method includes an earnings allocation formula that determines earnings per share for each class of common stock according to dividends declared and undistributed earnings for the period. For purposes of calculating earnings per share, we reduce our reported net earnings by the amount allocated to participating securities to arrive at the earnings allocated to common stock shareholders.

ASC 260-10-45-59A requires the dilutive effect of participating securities to be calculated using the more dilutive of the treasury stock or the two-class method. We have determined the two-class method to be the more dilutive. As such, we adjusted the earnings allocated to common stock shareholders in the basic earnings per share calculation for the reallocation of undistributed earnings to participating securities to calculate diluted earnings per share.

Foreign Currency. We translate the financial statements of non-U.S. subsidiaries to U.S. dollars using the period-end exchange rate for assets and liabilities and an average exchange rate for revenue and expense. We use the local currency as the functional currency for all of our non-U.S. subsidiaries. We record translation adjustments for non-U.S. subsidiaries as a component of “Other comprehensive income (loss)” in our Consolidated Statements of Comprehensive Income. We include exchange gains and losses arising from transactions denominated in currencies other than the functional currency in “Other income (expense), net” in our Consolidated Statements of Income.

Credit Arrangements
Credit Arrangements
Credit Arrangements

In July 2015, we renewed our $75.0 million, single-bank revolving credit facility. We drew on the credit facility during the fourth quarter of 2015 and had an outstanding principal balance of $35.0 million at an interest rate of LIBOR plus 100 basis points as of December 31, 2015, leaving borrowing availability of $40.0 million.
Income Per Share
Income Per Share
Income Per Share
 
The following table shows how we reconcile our net income and the number of shares used in computing basic and diluted income per share:

(in millions, except per share amounts)
 
2015

 
2014

 
2013

 
 
 
 
 
 
 
Basic net income per share attributable to Morningstar, Inc.:
 
 
 
 
 
 
Net income attributable to Morningstar, Inc.:
 
$
132.6

 
$
78.3

 
$
123.5

Less: Distributed earnings available to participating securities
 

 

 

Less: Undistributed earnings available to participating securities
 

 

 

Numerator for basic net income per share — undistributed and distributed earnings available to common shareholders
 
$
132.6

 
$
78.3

 
$
123.5

 
 
 
 
 
 
 
Weighted average common shares outstanding
 
44.2

 
44.7

 
46.2

 
 
 
 
 
 
 
Basic net income per share attributable to Morningstar, Inc.
 
$
3.00

 
$
1.75

 
$
2.68

 
 
 
 
 
 
 
Diluted net income per share attributable to Morningstar, Inc.:
 
 
 
 
 
 
Numerator for basic net income per share — undistributed and distributed earnings available to common shareholders
 
$
132.6

 
$
78.3

 
$
123.5

Add: Undistributed earnings allocated to participating securities
 

 

 

Less: Undistributed earnings reallocated to participating securities
 

 

 

Numerator for diluted net income per share — undistributed and distributed earnings available to common shareholders
 
$
132.6

 
$
78.3

 
$
123.5

 
 


 


 
 
Weighted average common shares outstanding
 
44.2

 
44.7

 
46.2

Net effect of dilutive stock options and restricted stock units
 
0.1

 
0.2

 
0.3

Weighted average common shares outstanding for computing diluted income per share
 
44.3

 
44.9

 
46.5

 
 


 


 
 
Diluted net income per share attributable to Morningstar, Inc.
 
$
3.00

 
$
1.74

 
$
2.66

 
 
 
 
 
 
 

The following table shows the number of weighted average restricted stock units and performance share awards excluded from our calculation of diluted earnings per share because their inclusion would have been anti-dilutive:
(in thousands)
 
2015

 
2014

 
2013

Weighted average restricted stock units
 
38

 
47

 
17

Weighted average performance share awards
 
4

 
6

 

Total
 
42

 
53

 
17


Stock options could be included in the calculation in the future.
Segment and Geographical Area Information
Segment and Geographical Area Information
Segment and Geographical Area Information

Segment Information

We report our results in a single reportable segment, which reflects how our chief operating decision maker allocates resources and evaluates our financial results.

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

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

Geographical Area Information

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

External revenue by geographical area
 
 
 
 
 
 
 
 
Year ended December 31
(in millions)
 
2015

 
2014

 
2013

United States
 
$
585.1

 
$
550.8

 
$
500.8

 
 
 
 
 
 
 
United Kingdom
 
64.2

 
61.8

 
56.2

Continental Europe
 
58.8

 
62.7

 
57.6

Australia
 
30.5

 
35.0

 
35.3

Canada
 
27.9

 
30.8

 
31.8

Asia
 
18.5

 
15.8

 
13.9

Other
 
3.8

 
3.2

 
2.7

Total International
 
203.7

 
209.3

 
197.5

 
 
 
 
 
 
 
Consolidated revenue
 
$
788.8

 
$
760.1

 
$
698.3


Long-lived assets by geographical area
 
 
 
 
 
 
As of December 31
(in millions)
 
2015

 
2014

United States
 
$
116.9

 
$
98.1

 
 
 
 
 
United Kingdom
 
8.6

 
8.1

Continental Europe
 
2.2

 
2.1

Australia
 
0.9

 
0.8

Canada
 
0.7

 
0.9

Asia
 
5.2

 
7.5

Other
 

 
0.1

Total International
 
17.6

 
19.5

 
 
 
 
 
Consolidated property, equipment, and capitalized software, net
 
$
134.5

 
$
117.6

Investments and Fair Value Measurements
Investments and Fair Value Measurements
Investments and Fair Value Measurements
 
We account for our investments in accordance with FASB ASC 320, Investments—Debt and Equity Securities. We classify our investments into three categories: available-for-sale, held-to-maturity, and trading. Our investment portfolio consists of stocks, bonds, options, mutual funds, money market funds, or exchange-traded products that replicate the model portfolios and strategies created by Morningstar. These investment accounts may also include exchange-traded products where Morningstar is an index provider. We classify our investment portfolio as shown below:
 
 
 
As of December 31
 
 
(in millions)
 
2015

 
2014

Available-for-sale
 
$
17.3

 
$
13.2

Held-to-maturity
 
15.3

 
17.9

Trading securities
 
8.9

 
8.3

Total
 
$
41.5

 
$
39.4


 
The following table shows the cost, unrealized gains (losses), and fair values related to investments classified as available-for-sale and held-to-maturity:
 
 
 
As of December 31, 2015
 
As of December 31, 2014
(in millions)
 
Cost

 
Unrealized
Gain

 
Unrealized
Loss

 
Fair
Value

 
Cost

 
Unrealized
Gain

 
Unrealized
Loss

 
Fair
Value

Available-for-sale:
 
 

 
 

 
 

 
 

 
 

 
 

 
 

 
 

Equity securities and exchange-traded funds
 
17.4

 
0.3

 
(1.6
)
 
16.1

 
11.4

 
0.8

 
(0.3
)
 
11.9

Mutual funds
 
1.3

 

 
(0.1
)
 
1.2

 
1.2

 
0.2

 
(0.1
)
 
1.3

Total
 
$
18.7

 
$
0.3

 
$
(1.7
)
 
$
17.3

 
$
12.6

 
$
1.0

 
$
(0.4
)
 
$
13.2

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Held-to-maturity:
 
 
 
 
 
 
 
 
 
 

 
 

 
 

 
 

Certificates of deposit
 
$
15.3

 
$

 
$

 
$
15.3

 
$
17.9

 
$

 
$

 
$
17.9


 
As of December 31, 2015 and December 31, 2014, investments with unrealized losses for greater than a 12-month period were not material to the Consolidated Balance Sheets and were not deemed to have other than temporary declines in value.

The table below shows the cost and fair value of investments classified as available-for-sale and held-to-maturity based on their contractual maturities as of December 31, 2015 and December 31, 2014. The expected maturities of certain fixed-income securities may differ from their contractual maturities because some of these holdings have call features that allow the issuers the right to prepay obligations without penalties.
 
 
 
As of December 31, 2015
 
As of December 31, 2014
(in millions)
 
Cost

 
Fair Value

 
Cost

 
Fair Value

Available-for-sale:
 
 

 
 

 
 

 
 

Equity securities, exchange-traded funds, and mutual funds
 
18.7

 
17.3

 
12.6

 
13.2

Total
 
$
18.7

 
$
17.3

 
$
12.6

 
$
13.2

 
 
 
 
 
 
 
 
 
Held-to-maturity:
 
 

 
 

 
 

 
 

Due in one year or less
 
$
15.3

 
$
15.3

 
$
17.9

 
$
17.9

Total
 
$
15.3

 
$
15.3

 
$
17.9

 
$
17.9


 
As of December 31, 2014, held-to-maturity investments included a $1.5 million certificate of deposit, held as collateral against bank guarantees for our office leases, primarily in Australia.

The following table shows the realized gains and losses arising from sales of our investments classified as available-for-sale recorded in our Consolidated Statements of Income: 
(in millions)
 
2015

 
2014

 
2013

Realized gains
 
$
1.3

 
$
1.5

 
$
5.5

Realized losses
 
(0.7
)
 
(0.5
)
 
(1.3
)
Realized gains, net
 
$
0.6

 
$
1.0

 
$
4.2


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

The following table shows the net unrealized gains (losses) on trading securities as recorded in our Consolidated Statements of Income:
 
(in millions)
 
2015

 
2014

 
2013

Unrealized gains (losses), net
 
$
(0.8
)
 
$
(0.2
)
 
$
0.8



The table below shows the fair value of our assets subject to fair value measurements that are measured at fair value on a recurring basis using the fair value hierarchy and the necessary disclosures under FASB ASC 820, Fair Value Measurement:
 
 
 
Fair Value
 
Fair Value Measurements as of December 31, 2015
 
 
as of
 
Using Fair Value Hierarchy
(in millions)
 
December 31, 2015
 
Level 1

 
Level 2

 
Level 3

Available-for-sale investments
 
 

 
 

 
 

 
 

Equity securities and exchange-traded funds
 
16.1

 
16.1

 

 

Mutual funds
 
1.2

 
1.2

 

 

Trading securities
 
8.9

 
8.9

 

 

Cash equivalents
 
0.2

 
0.2

 

 

Total
 
$
26.4

 
$
26.4

 
$

 
$

 
 
 
Fair Value
 
Fair Value Measurements as of December 31, 2014
 
 
as of
 
Using Fair Value Hierarchy
(in millions)
 
December 31, 2014
 
Level 1

 
Level 2

 
Level 3

Available-for-sale investments
 
 

 
 

 
 

 
 

Equity securities and exchange-traded funds
 
11.9

 
11.9

 

 

Mutual funds
 
1.3

 
1.3

 

 

Trading securities
 
8.3

 
8.3

 

 

Cash equivalents
 
0.5

 
0.5

 

 

Total
 
$
22.0

 
$
22.0

 
$

 
$


 

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

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

We measure the fair value of money market funds, mutual funds, equity securities, and exchange-traded funds based on quoted prices in active markets for identical assets or liabilities. We did not hold any securities categorized as Level 2 or Level 3 as of December 31, 2015 and December 31, 2014.
Acquisitions, Goodwill, and Other Intangible Assets
Acquisitions, Goodwill, and Other Intangible Assets
Acquisitions, Goodwill, and Other Intangible Assets
 
2015 Acquisitions

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

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

Total Rebalance Expert (tRx)

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

2014 Acquisitions

Increased Ownership Interest in HelloWallet Holdings, Inc.

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

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

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

Cash and cash equivalents
 
$
3.7

Accounts receivable and other current assets
 
0.2

Other current and non-current assets
 
0.3

Deferred tax asset
 
8.6

Intangible assets
 
9.5

Goodwill
 
39.2

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



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

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

 
5
Intellectual property (trademarks and trade names)
 
0.2

 
3
Non-competition agreement
 
2.6

 
5
Total intangible assets
 
$
9.5

 
5


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

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

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

ByAllAccounts, Inc.

In April 2014, we acquired ByAllAccounts, Inc. (ByAllAccounts), a provider of innovative data aggregation technology for financial applications for $27.9 million in cash. ByAllAccounts uses a knowledge-based process, including patented artificial intelligence technology, to collect, consolidate, and enrich financial account data and deliver it to virtually any platform. We began including the financial results of this acquisition in our Consolidated Financial Statements on April 1, 2014.

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

Cash and cash equivalents
 
$
0.3

Accounts receivable and other current assets
 
0.1

Deferred tax asset
 
4.0

Other current and non-current assets
 
0.3

Intangible assets
 
8.7

Goodwill
 
18.5

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



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

 
 
(in millions)

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

 
24
Technology-based assets
 
3.0

 
4.5
Intellectual property (trademarks and trade names)
 
0.1

 
1
Non-competition agreement
 
0.1

 
3
Total intangible assets
 
$
8.7

 
19


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

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

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

2013 Acquisitions

Increased Ownership Interest in Morningstar Sweden AB

In May 2013, we acquired an additional 76% interest in Morningstar Sweden AB (Morningstar Sweden), increasing our ownership to 100% from 24%. Morningstar’s main offerings in Sweden include Morningstar Direct, Morningstar Data, Morningstar Enterprise Components (formerly Integrated Web Tools), and Morningstar.se, a website for individual investors. We began consolidating the financial results of this acquisition in our Consolidated Financial Statements on May 2, 2013.

Morningstar Sweden's total estimated fair value of $18.5 million included $14.5 million in cash paid to acquire the remaining 76% interest in Morningstar Sweden and $4.0 million related to the 24% of Morningstar Sweden we previously held. We determined the fair value of the previously held 24% investment independent of the acquired controlling interest by applying a minority interest discount based on analysis of comparable transactions. Accordingly, we recorded a non-cash holding gain of $3.6 million, which is classified as "Holding gain upon acquisition of additional ownership of equity-method investments" in our Consolidated Statement of Income for the year ended December 31, 2013.

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

Cash and cash equivalents
 
$
3.5

Accounts receivable and other current assets
 
0.5

Other non-current assets
 
0.2

Intangible assets
 
9.7

Goodwill
 
8.9

Deferred revenue
 
(1.2
)
Deferred tax liability
 
(2.3
)
Other current and non-current liabilities
 
(0.8
)
Total fair value of Morningstar Sweden
 
$
18.5



The allocation included acquired intangible assets, as follows:
 
 
(in millions)

 
Weighted Average Useful Life (years)
Customer-related assets
 
$
9.7

 
14
Total intangible assets
 
$
9.7

 
14


We recognized a deferred tax liability of $2.3 million mainly because the amortization expense related to certain intangible assets is not deductible for income tax purposes.

Goodwill of $8.9 million represents the premium over the fair value of the net tangible and intangible assets acquired with this acquisition. We paid this premium for a number of reasons, including the opportunity to offer Morningstar's full suite of products and services to investors in Sweden and further leverage Morningstar's global reach, investment databases, and technology expertise.

Goodwill
 
The following table shows the changes in our goodwill balances from January 1, 2014 to December 31, 2015:
 
 
 
(in millions)

Balance as of January 1, 2014
 
$
326.5

Acquisition of HelloWallet and ByAllAccounts
 
57.6

Other, primarily foreign currency translation
 
(14.0
)
Balance as of December 31, 2014
 
$
370.1

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



We did not record any impairment losses in 2015, 2014, or 2013, as the estimated fair values of our reporting unit exceeded its carrying value. We perform our annual impairment testing during the fourth quarter of each year.

Intangible Assets

The following table summarizes our intangible assets: 
 
 
As of December 31, 2015
 
As of December 31, 2014
(in millions)
 
Gross

 
Accumulated
Amortization

 
Net

 
Weighted
Average
Useful  Life
(years)
 
Gross

 
Accumulated
Amortization

 
Net

 
Weighted
Average
Useful  Life
(years)
Intellectual property
 
$
28.3

 
$
(26.7
)
 
$
1.6

 
9
 
$
29.0

 
$
(25.0
)
 
$
4.0

 
9
Customer-related assets
 
137.5

 
(92.3
)
 
45.2

 
12
 
141.5

 
(83.6
)
 
57.9

 
12
Supplier relationships
 
0.2

 
(0.1
)
 
0.1

 
20
 
0.2

 
(0.1
)
 
0.1

 
20
Technology-based assets
 
89.5

 
(64.4
)
 
25.1

 
8
 
88.8

 
(57.4
)
 
31.4

 
8
Non-competition agreement
 
4.6

 
(2.4
)
 
2.2

 
5
 
4.4

 
(1.9
)
 
2.5

 
5
Total intangible assets
 
$
260.1

 
$
(185.9
)
 
$
74.2

 
10
 
$
263.9

 
$
(168.0
)
 
$
95.9

 
10

 
The following table summarizes our amortization expense related to intangible assets:
(in millions)
 
2015

 
2014

 
2013

Amortization expense
 
$
22.0

 
$
22.3

 
$
21.5


 
We did not record any impairment losses involving intangible assets in 2015, 2014, or 2013.

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

Based on acquisitions and divestitures completed through December 31, 2015, we expect intangible amortization expense for 2016 and subsequent years to be as follows:
 
 
(in millions)

2016
 
$
17.7

2017
 
12.8

2018
 
10.7

2019
 
8.2

2020
 
4.7

Thereafter
 
20.1


 
Our estimates of future amortization expense for intangible assets may be affected by additional acquisitions, divestitures, changes in the estimated average useful life, and currency translations.
Investments in Unconsolidated Entities
Investments in Unconsolidated Entities
Investments in Unconsolidated Entities
 
Our investments in unconsolidated entities consist primarily of the following:
 
 
 
As of December 31
 
 
(in millions)
 
2015

 
2014

Investment in MJKK
 
$
24.3

 
$
23.0

Other equity method investments
 
3.7

 
3.5

Investments accounted for using the cost method
 
7.6

 
2.3

Total investments in unconsolidated entities
 
$
35.6

 
$
28.8


 
Morningstar Japan K.K. Morningstar Japan K.K. (MJKK) develops and markets products and services customized for the Japanese market. MJKK’s shares are traded on the Tokyo Stock Exchange under the ticker 47650. We account for our investment in MJKK using the equity method. The following table summarizes our ownership percentage in MJKK and the market value of this investment based on MJKK’s publicly quoted share price: 
 
 
As of December 31
 
 
 
 
2015

 
2014

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

 
 

Japanese yen (¥ in millions)
 
¥
8,200.5

 
¥
7,347.4

Equivalent U.S. dollars ($ in millions)
 
$
68.1

 
$
61.3



Other Equity Method Investments. As of December 31, 2015 and 2014, other equity method investments consist of our investment in Inquiry Financial Europe AB (Inquiry Financial) and YCharts, Inc. (YCharts). Inquiry Financial is a provider of sell-side consensus estimate data. Our ownership interest in Inquiry Financial was approximately 34% as of December 31, 2015 and 2014. YCharts is a technology company that provides stock research and analysis. Our ownership interest in YCharts was approximately 22% as of December 31, 2015 and 2014.

During 2014, we recorded an impairment loss of $1.7 million on our investment in an unconsolidated entity. We did not record any impairment losses on these investments in 2015 or 2013.
 
Property, Equipment, and Capitalized Software
Property, Equipment, and Capitalized Software
Property, Equipment, and Capitalized Software

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

 
 
As of December 31
 
 
(in millions)
 
2015

 
2014

Computer equipment
 
$
60.3

 
$
53.4

Capitalized software
 
144.0

 
87.8

Furniture and fixtures
 
24.3

 
23.2

Leasehold improvements
 
61.9

 
54.3

Telephone equipment
 
2.1

 
1.9

Construction in progress
 
11.7

 
29.9

Property, equipment, and capitalized software, at cost
 
304.3

 
250.5

Less accumulated depreciation
 
(169.8
)
 
(132.9
)
Property, equipment, and capitalized software, net
 
$
134.5

 
$
117.6


The following table shows the amount of capitalized software development costs included in construction in progress:
 
 
As of December 31
 
 
(in millions)
 
2015

 
2014

Capitalized software development costs not yet placed into service
 
$

 
$
18.1



The following table summarizes our depreciation expense:
(in millions)
 
2015

 
2014

 
2013

Depreciation expense
 
$
42.4

 
$
32.6

 
$
24.2

Operating Leases
Operating Leases
Operating Leases

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

2016
 
$
20.9

2017
 
20.3

2018
 
18.1

2019
 
13.5

2020
 
13.1

Thereafter
 
35.7

Total
 
$
121.6


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

(in millions)
 
2015

 
2014

 
2013

Rent expense
 
$
27.1

 
$
24.5

 
$
22.2



Deferred rent includes build-out and rent abatement allowances received, which are amortized over the remaining portion of the original term of the lease as a reduction in office lease expense. We include deferred rent, as appropriate, in “Accounts payable and accrued liabilities” and “Deferred rent, noncurrent” on our Consolidated Balance Sheets.
 
 
As of December 31
 
 
(in millions)
 
2015

 
2014

Deferred rent
 
$
28.5

 
$
29.1



Stock-Based Compensation
Stock-Based Compensation
Stock-Based Compensation

Stock-Based Compensation Plans
 
Our shareholders approved the Morningstar 2011 Stock Incentive Plan (the 2011 Plan) on May 17, 2011. As of that date, we stopped granting awards under the Morningstar 2004 Stock Incentive Plan (the 2004 Plan). The 2004 Plan amended and restated the Morningstar 1993 Stock Option Plan, the Morningstar 2000 Stock Option Plan, and the Morningstar 2001 Stock Option Plan.
The 2011 Plan provides for a variety of stock-based awards, including, among other things, restricted stock units, restricted stock, performance share awards, and stock options. We granted restricted stock units, restricted stock, and stock options under the 2004 Plan.
All of our employees and our non-employee directors are eligible for awards under the 2011 Plan.
Grants awarded under the 2011 Plan or the 2004 Plan that are forfeited, canceled, settled, or otherwise terminated without a distribution of shares, or shares withheld by us in connection with the exercise of options, will be available for awards under the 2011 Plan. Any shares subject to awards under the 2011 Plan, but not under the 2004 Plan, that are withheld by us in connection with the payment of any required income tax withholding will be available for awards under the 2011 Plan.
The following table summarizes the number of shares available for future grants under our 2011 Plan:
 
 
As of December 31
(in millions)
 
2015

Shares available for future grants
 
4.0


 
Accounting for Stock-Based Compensation Awards
 
The following table summarizes our stock-based compensation expense and the related income tax benefit we recorded in the past three years:
 
 
Year ended December 31
(in millions)
 
2015

 
2014

 
2013

Restricted stock units
 
$
16.1

 
$
16.3

 
$
14.1

Restricted stock
 
0.1

 
0.4

 
0.4

Performance share awards
 
1.0

 
0.5

 

Stock options
 
0.2

 
0.4

 
0.5

Total stock-based compensation expense
 
$
17.4

 
$
17.6

 
$
15.0

 
 
 
 
 
 
 
Income tax benefit related to the stock-based compensation expense
 
$
5.0

 
$
5.1

 
$
4.0



The following table summarizes the stock-based compensation expense included in each of our operating expense categories for the past three years:
 
 
Year ended December 31
(in millions)
 
2015

 
2014

 
2013

Cost of revenue
 
$
8.1

 
$
7.8

 
$
6.8

Sales and marketing
 
2.2

 
2.1

 
2.0

General and administrative
 
7.1

 
7.7

 
6.2

Total stock-based compensation expense
 
$
17.4

 
$
17.6

 
$
15.0



The following table summarizes the amount of unrecognized stock-based compensation expense as of December 31, 2015 and the expected number of months over which the expense will be recognized:
 
 
Unrecognized stock-based compensation expense (in millions)

 
Weighted average expected amortization period (months)
Restricted stock units
 
$
31.4

 
31
Performance share awards
 
1.2

 
24
Total unrecognized stock-based compensation expense
 
$
32.6

 
31


In accordance with FASB ASC 718, Compensation—Stock Compensation, we estimate forfeitures of employee stock-based awards and recognize compensation cost only for those awards expected to vest. Our largest annual equity grants typically have vesting dates in the second quarter. We adjust the stock-based compensation expense annually in the third quarter to reflect those awards that ultimately vested and update our estimate of the forfeiture rate that will be applied to awards not yet vested.
 
Restricted Stock Units
 
Restricted stock units represent the right to receive a share of Morningstar common stock when that unit vests. Restricted stock units granted to employees vest ratably over a four-year period. Restricted stock units granted to non-employee directors vest ratably over a three-year period. For restricted stock units granted through December 31, 2008, employees could elect to defer receipt of the Morningstar common stock issued upon vesting of the restricted stock unit.

We measure the fair value of our restricted stock units on the date of grant based on the closing market price of the underlying common stock on the day prior to grant. We amortize that value to stock-based compensation expense, net of estimated forfeitures, ratably over the vesting period.

The following table summarizes restricted stock unit activity during the past three years:
Restricted Stock Units (RSUs)
 
Unvested

 
Vested but