MORNINGSTAR, INC., 10-Q filed on 7/31/2012
Quarterly Report
Document and Entity Information
6 Months Ended
Jun. 30, 2012
Jul. 27, 2012
Document and Entity Information Abstract
 
 
Entity Registrant Name
MORNINGSTAR, INC. 
 
Entity Central Index Key
0001289419 
 
Current Fiscal Year End Date
--12-31 
 
Entity Filer Category
Large Accelerated Filer 
 
Document Type
10-Q 
 
Document Period End Date
Jun. 30, 2012 
 
Document Fiscal Year Focus
2012 
 
Document Fiscal Period Focus
Q2 
 
Amendment Flag
false 
 
Entity Common Stock, Shares Outstanding
 
48,394,821 
Condensed Consolidated Statements of Income (USD $)
In Thousands, except Per Share data, unless otherwise specified
3 Months Ended 6 Months Ended
Jun. 30, 2012
Jun. 30, 2011
Jun. 30, 2012
Jun. 30, 2011
Revenue
$ 165,968 
$ 161,011 
$ 326,727 
$ 312,778 
Operating expense (1):
 
 
 
 
Cost of goods sold
49,452 1
45,186 1
99,768 
85,855 
Development
12,442 1
13,681 1
25,807 
25,669 
Sales and marketing
27,373 1
26,767 1
55,699 
53,249 
General and administrative
24,946 1
26,207 1
53,124 
56,824 
Depreciation and amortization
10,619 1
10,563 1
20,794 
20,765 
Total operating expense
124,832 1
122,404 1
255,192 
242,362 
Operating income (loss)
41,136 
38,607 
71,535 
70,416 
Non-operating income (expense):
 
 
 
 
Interest income (expense), net
1,260 
(179)
2,129 
345 
Other income (expense), net
(265)
188 
(475)
438 
Non-operating income (expense), net
995 
1,654 
783 
Income before income taxes and equity in net income of unconsolidated entities
42,131 
38,616 
73,189 
71,199 
Income tax expense
14,744 
12,724 
26,255 
23,242 
Equity in net income of unconsolidated entities
497 
595 
1,063 
969 
Consolidated net income
27,884 
26,487 
47,997 
48,926 
Net (income) loss attributable to the noncontrolling interest
(2)
28 
96 
Net income attributable to Morningstar, Inc.
$ 27,888 
$ 26,485 
$ 48,025 
$ 49,022 
Net income per share attributable to:
 
 
 
 
Basic (in dollars per share)
$ 0.57 
$ 0.53 
$ 0.97 
$ 0.98 
Diluted (in dollars per share)
$ 0.56 
$ 0.52 
$ 0.95 
$ 0.96 
Dividends declared per common share
$ 0.10 
$ 0.05 
$ 0.20 
$ 0.10 
Dividends paid per common share
$ 0.10 
$ 0.05 
$ 0.20 
$ 0.10 
Weighted average shares outstanding:
 
 
 
 
Basic (in shares)
49,195 
50,165 
49,566 
49,983 
Diluted (in shares)
49,856 
51,142 
50,296 
51,041 
Condensed Consolidated Statements of Income (Parenthetical) (USD $)
In Thousands, unless otherwise specified
3 Months Ended 6 Months Ended
Jun. 30, 2012
Jun. 30, 2011
Jun. 30, 2012
Jun. 30, 2011
(1) Includes stock-based compensation expense of:
 
 
 
 
Allocated Share-based Compensation Expense
$ 3,734 
$ 3,843 
$ 7,600 
$ 7,492 
Cost of Sales
 
 
 
 
(1) Includes stock-based compensation expense of:
 
 
 
 
Allocated Share-based Compensation Expense
1,067 
1,072 
2,156 
1,951 
Development
 
 
 
 
(1) Includes stock-based compensation expense of:
 
 
 
 
Allocated Share-based Compensation Expense
465 
572 
964 
1,043 
Sales and Marketing
 
 
 
 
(1) Includes stock-based compensation expense of:
 
 
 
 
Allocated Share-based Compensation Expense
461 
481 
940 
903 
General and Administrative
 
 
 
 
(1) Includes stock-based compensation expense of:
 
 
 
 
Allocated Share-based Compensation Expense
$ 1,741 
$ 1,718 
$ 3,540 
$ 3,595 
Condensed Consolidated Statements of Comprehensive Income Consolidated Statements of Comprehensive Income (USD $)
In Thousands, unless otherwise specified
3 Months Ended 6 Months Ended
Jun. 30, 2012
Jun. 30, 2011
Jun. 30, 2012
Jun. 30, 2011
Consolidated net income
$ 27,884 
$ 26,487 
$ 47,997 
$ 48,926 
Other comprehensive income (loss), net of tax:
 
 
 
 
Foreign currency translation adjustment
(8,743)
3,262 
(1,778)
12,564 
Unrealized gains (losses) on securities:
 
 
 
 
Unrealized holding gains (losses) arising during period
(541)
(39)
368 
399 
Reclassification of adjustments for (gains) losses included in net income
(22)
(211)
33 
(252)
Other comprehensive income (loss), net
(9,306)
3,012 
(1,377)
12,711 
Other comprehensive income (loss), net
18,578 
29,499 
46,620 
61,637 
Comprehensive (income) loss attributable to noncontrolling interest
(46)
(13)
61 
99 
Comprehensive income attributable to Morningstar, Inc.
$ 18,532 
$ 29,486 
$ 46,681 
$ 61,736 
Condensed Consolidated Balance Sheets (USD $)
In Thousands, unless otherwise specified
Jun. 30, 2012
Dec. 31, 2011
Current assets:
 
 
Cash and cash equivalents
$ 147,499 
$ 200,437 
Investments
242,379 
269,755 
Accounts receivable, less allowance of $1,017 and $835, respectively
117,016 
113,312 
Deferred tax asset, net
4,898 
5,104 
Income tax receivable, net
7,911 
7,445 
Other
22,288 
15,980 
Total current assets
541,991 
612,033 
Property, equipment, and capitalized software, net
77,376 
68,196 
Investments in unconsolidated entities
34,271 
27,642 
Goodwill
316,963 
318,492 
Intangible assets, net
127,377 
139,809 
Other assets
7,801 
5,912 
Total assets
1,105,779 
1,172,084 
Current liabilities:
 
 
Accounts payable and accrued liabilities
45,858 
41,403 
Accrued compensation
48,383 
73,124 
Deferred revenue
167,531 
155,494 
Other
367 
612 
Total current liabilities
262,139 
270,633 
Accrued compensation
6,483 
5,724 
Deferred tax liability, net
16,183 
15,940 
Deferred rent
15,199 
14,604 
Other long-term liabilities
8,550 
8,167 
Total liabilities
308,554 
315,068 
Morningstar, Inc. shareholders' equity:
 
 
Common stock, no par value, 200,000,000 shares authorized, of which 498,741,627 and 50,083,940 shares were outstanding as of June 30, 2012 and December 31, 2011, respectively
Treasury stock at cost, 2,857,205 shares as of June 30, 2012 and 980,177 shares as of December 31, 2011
(155,139)
(46,701)
Additional paid-in capital
503,480 
491,432 
Retained earnings
447,026 
409,022 
Accumulated other comprehensive income:
 
 
Currency translation adjustment
191 
1,936 
Unrealized gain on available-for-sale securities
77 
(324)
Total accumulated other comprehensive income
268 
1,612 
Total Morningstar, Inc. shareholders' equity
795,640 
855,370 
Noncontrolling interest
1,585 
1,646 
Total equity
797,225 
857,016 
Total liabilities and equity
$ 1,105,779 
$ 1,172,084 
Condensed Consolidated Balance Sheets (Parenthetical) (USD $)
In Thousands, except Share data, unless otherwise specified
Jun. 30, 2012
Dec. 31, 2011
Statement of Financial Position [Abstract]
 
 
Allowance for Doubtful Accounts Receivable, Current
$ 1,017 
$ 835 
Common Stock, No Par Value
$ 0 
$ 0 
Common Stock, Shares Authorized
200,000,000 
200,000,000 
Common Stock, Shares, Outstanding
48,741,627 
50,083,940 
Treasury Stock, Shares
2,857,205 
980,177 
Condensed Consolidated Statement of Equity (USD $)
In Thousands, except Share data, unless otherwise specified
Total
Common Stock
Treasury Stock
Additional Paid-In Capital
Retained Earnings
Accumulated Other Comprehensive Income (Loss)
Non Controlling Interests
Balance at Dec. 31, 2011
$ 857,016 
$ 5 
$ (46,701)
$ 491,432 
$ 409,022 
$ 1,612 
$ 1,646 
Balance (in shares) at Dec. 31, 2011
50,083,940 
50,083,940 
 
 
 
 
 
Increase (Decrease) in Stockholders' Equity
 
 
 
 
 
 
 
Net Income (Loss)
47,997 
 
 
 
48,025 
 
(28)
Other Comprehensive Income (loss)
 
 
 
 
 
 
 
Unrealized gains (losses) on available-for-sale investments, net of income tax of $189
368 
   
   
   
   
368 
Reclassification of adjustments for losses (gains) included in net income, net of income tax of $16
33 
   
   
   
   
33 
Foreign currency translation adjustment, net
(1,778)
   
   
   
   
(1,745)
(33)
Other comprehensive income (loss), net
(1,377)
   
   
   
   
(1,344)
(33)
Issuance of common stock related to stock-option exercises and vesting of restricted stock units, net
781 
1,026 
(245)
   
   
   
Issuance of common stock related to stock-option exercises and vesting of restricted stock units, net (in shares)
 
519,907 
 
 
 
 
 
Adjustments to Additional Paid in Capital, Share-based Compensation, Requisite Service Period Recognition
 
 
 
 
 
 
 
Stock-based compensation - restricted stock units
6,548 
   
   
6,548 
   
   
   
Stock-based compensation - restricted stock
888 
   
   
888 
   
   
   
Stock-based compensation - stock options
164 
   
   
164 
   
   
   
Excess tax benefit derived from stock-option exercises and vesting of restricted stock units
4,548 
   
   
4,548 
   
   
   
Common share repurchased
(109,464)
   
(109,464)
   
   
   
   
Common share repurchased (in shares)
 
(1,862,220)
 
 
 
 
 
Dividends declared - common shares outstanding
(9,861)
   
   
   
(9,861)
   
   
Dividends declared - restricted stock units
(15)
   
   
145 
(160)
   
   
Balance at Jun. 30, 2012
$ 797,225 
$ 5 
$ (155,139)
$ 503,480 
$ 447,026 
$ 268 
$ 1,585 
Balance (in shares) at Jun. 30, 2012
48,741,627 
48,741,627 
 
 
 
 
 
Condensed Consolidated Statement of Equity (Parenthetical) (USD $)
In Thousands, unless otherwise specified
6 Months Ended
Jun. 30, 2012
Statement of Stockholders' Equity [Abstract]
 
Other Comprehensive Income (Loss), Unrealized Holding Gain (Loss) on Securities Arising During Period, Tax
$ 189 
Other Comprehensive Income (Loss), Reclassification Adjustment for Sale of Securities Included in Net Income, Tax
$ 16 
Condensed Consolidated Statements of Cash Flows (USD $)
In Thousands, unless otherwise specified
6 Months Ended
Jun. 30, 2012
Jun. 30, 2011
Operating activities
 
 
Consolidated net income
$ 47,997 
$ 48,926 
Adjustments to reconcile consolidated net income to net cash flows from operating activities:
 
 
Depreciation and amortization
20,794 
20,765 
Deferred income taxes
299 
454 
Stock-based compensation expense
7,600 
7,492 
Provision for bad debt
717 
530 
Equity in net income of unconsolidated entities
(1,063)
(969)
Excess tax benefits from stock-option exercises and vesting of restricted stock units
(4,548)
(6,171)
Other, net
745 
(547)
Changes in operating assets and liabilities, net of effects of acquisitions:
 
 
Accounts receivable
(4,394)
617 
Other assets
(3,640)
608 
Accounts payable and accrued liabilities
652 
(5,260)
Accrued compensation
(26,920)
(14,528)
Income taxes- current
4,525 
2,742 
Deferred revenue
12,333 
8,197 
Deferred rent
468 
(657)
Other liabilities
(776)
(1,043)
Cash provided by operating activities
54,789 
61,156 
Investing activities
 
 
Purchases of investments
(133,888)
(198,647)
Proceeds from maturities and sales of investments
161,523 
150,360 
Capital expenditures
(17,922)
(8,418)
Acquisitions, net of cash acquired
569 
Purchases of cost method investments
(6,750)
Other, net
785 
Cash used for investing activities
2,963 
(55,351)
Financing activities
 
 
Proceeds from stock-option exercises, net
781 
4,652 
Excess tax benefits from stock-option exercises and vesting of restricted stock units
4,548 
6,171 
Common shares repurchased
(105,439)
(109)
Dividends paid
(10,004)
(5,011)
Other, net
(20)
(214)
Cash provided by (used for) financing activities
(110,134)
5,489 
Effect of exchange rate changes on cash and cash equivalents
(556)
3,553 
Net increase (decrease) in cash and cash equivalents
(52,938)
14,847 
Cash and cash equivalents-beginning of period
200,437 
180,176 
Cash and cash equivalents-end of period
147,499 
195,023 
Supplemental disclosure of cash flow information:
 
 
Cash paid for income taxes
21,405 
21,104 
Supplemental information of non-cash investing and financing activities:
 
 
Unrealized Gain (Loss) on Available For Sale Investments
$ 606 
$ 220 
Basis of Presentation of Interim Financial Information
Basis of Presentation of Interim Financial Information
Basis of Presentation of Interim Financial Information
 
The accompanying condensed consolidated financial statements of Morningstar, Inc. and subsidiaries (Morningstar, we, our, the Company) have been prepared to conform to the rules and regulations of the Securities and Exchange Commission (SEC). The preparation of financial statements in conformity with accounting principles generally accepted in the United States requires management to make estimates and assumptions that affect the reported amount of assets, liabilities, revenue, and expenses. Actual results could differ from those estimates. In the opinion of management, the statements reflect all adjustments, which are of a normal recurring nature, necessary to present fairly our financial position, results of operations, equity, and cash flows. These financial statements and notes should be read in conjunction with our Consolidated Financial Statements and Notes thereto included in our Annual Report on Form 10-K for the year ended December 31, 2011, filed with the SEC on February 24, 2012.
 
The acronyms that appear in the Notes to our Unaudited Condensed Consolidated Financial Statements refer to the following:
 
ASC: Accounting Standards Codification
ASU: Accounting Standards Update
FASB: Financial Accounting Standards Board
SEC: Securities and Exchange Commission
 
Summary of Significant Accounting Policies
Summary of Significant Accounting Policies
Summary of Significant Accounting Policies

We discuss our significant accounting policies in Note 2 of our Consolidated Financial Statements included in our Annual Report on Form 10-K for the year ended December 31, 2011, filed with the SEC on February 24, 2012.

In addition, effective January 1, 2012, we adopted FASB ASU No. 2011-04, Fair Value Measurement (Topic 820): Amendments to Achieve Common Fair Value Measurement and Disclosure Requirements in U.S. GAAP and IFRSs. ASU No. 2011-04 clarifies existing fair value measurement and disclosure requirements, amends certain fair value measurement principles, and requires additional disclosures about fair value measurements. The adoption of ASU No. 2011-04 did not have a material impact on our Consolidated Financial Statements.
Goodwill and Other Intangible Assets
Goodwill and Other Intangible Assets
Goodwill and Other Intangible Assets
 
Goodwill
 
The following table shows the changes in our goodwill balances from December 31, 2011 to June 30, 2012:
 
 
($000)

Balance as of December 31, 2011
$
318,492

Net change, primarily currency translation
(1,529
)
Balance as of June 30, 2012
$
316,963



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

Intangible Assets

The following table summarizes our intangible assets: 
 
 
As of June 30, 2012
 
As of December 31, 2011
($000)
 
Gross

 
Accumulated
Amortization

 
Net

 
Weighted
Average
Useful  Life
(years)

 
Gross

 
Accumulated
Amortization

 
Net

 
Weighted
Average
Useful  Life
(years)

Intellectual property
 
$
32,073

 
$
(21,671
)
 
$
10,402

 
9

 
$
32,293

 
$
(20,455
)
 
$
11,838

 
9

Customer-related assets
 
134,059

 
(58,926
)
 
75,133

 
12

 
134,396

 
(52,611
)
 
81,785

 
12

Supplier relationships
 
240

 
(90
)
 
150

 
20

 
240

 
(84
)
 
156

 
20

Technology-based assets
 
80,723

 
(39,345
)
 
41,378

 
9

 
80,694

 
(35,130
)
 
45,564

 
9

Non-competition agreement
 
1,750

 
(1,436
)
 
314

 
4

 
1,751

 
(1,285
)
 
466

 
4

Total intangible assets
 
$
248,845

 
$
(121,468
)
 
$
127,377

 
10

 
$
249,374

 
$
(109,565
)
 
$
139,809

 
10

 
The following table summarizes our amortization expense related to intangible assets:
 
 
Three months ended June 30
 
Six months ended June 30
($000)
 
2012

 
2011

 
2012

 
2011

Amortization expense
 
$
5,976

 
$
6,632

 
$
12,031

 
$
13,145


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

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

2012
 
$
23,766

2013
 
21,086

2014
 
19,859

2015
 
18,998

2016
 
14,393

2017
 
9,839


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

Income Per Share
Income Per Share
Income Per Share 

The following table shows how we reconcile our net income and the number of shares used in computing basic and diluted income per share:

 
 
Three months ended June 30
 
Six months ended June 30
(in thousands, except per share amounts)
 
2012

 
2011

 
2012

 
2011

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

 
 

 
 
 
 
Net income attributable to Morningstar, Inc.:
 
$
27,888

 
$
26,485

 
$
48,025

 
$
49,022

Less: Distributed earnings available to participating securities
 
(12
)
 
(8
)
 
(27
)
 
(17
)
Less: Undistributed earnings available to participating securities
 
(53
)
 
(72
)
 
(88
)
 
(131
)
Numerator for basic net income per share — undistributed and distributed earnings available to common shareholders
 
$
27,823

 
$
26,405

 
$
47,910

 
$
48,874

 
 
 
 
 
 
 
 
 
Weighted average common shares outstanding
 
49,195

 
50,165

 
49,566

 
49,983

 
 
 
 
 
 
 
 
 
Basic net income per share attributable to Morningstar, Inc.
 
$
0.57

 
$
0.53

 
$
0.97

 
$
0.98

 
 
 
 
 
 
 
 
 
Diluted net income per share attributable to Morningstar, Inc.:
 
 
 
 
 
 
 
 
Numerator for basic net income per share — undistributed and distributed earnings available to common shareholders
 
$
27,823

 
$
26,405

 
$
47,910

 
$
48,874

Add: Undistributed earnings allocated to participating securities
 
53

 
72

 
88

 
131

Less: Undistributed earnings reallocated to participating securities
 
(53
)
 
(70
)
 
(87
)
 
(129
)
Numerator for diluted net income per share — undistributed and distributed earnings available to common shareholders
 
$
27,823

 
$
26,407

 
$
47,911

 
$
48,876

 
 


 


 


 


Weighted average common shares outstanding
 
49,195

 
50,165

 
49,566

 
49,983

Net effect of dilutive stock options and restricted stock units
 
661

 
977

 
730

 
1,058

Weighted average common shares outstanding for computing diluted income per share
 
49,856

 
51,142

 
50,296

 
51,041

 
 


 


 


 


Diluted net income per share attributable to Morningstar, Inc.
 
$
0.56

 
$
0.52

 
$
0.95

 
$
0.96


Segment and Geographical Area Information
Segment and Geographical Area Information
Segment and Geographical Area Information
 
Morningstar has two operating segments:
 
Investment Information. The Investment Information segment includes all of our data, software, and research products and services. These products are typically sold through subscriptions or license agreements.
 
The largest products in this segment based on revenue are Morningstar Data (formerly Licensed Data), Morningstar Advisor Workstation (including Morningstar Office), Morningstar Direct, Morningstar.com, Morningstar Integrated Web Tools, and Morningstar Principia. Morningstar Data is a set of investment data spanning all of our investment databases, including real-time pricing and commodity data, and is available through electronic data feeds. Advisor Workstation is a web-based investment planning system for advisors. Advisor Workstation is available in two editions: Morningstar Office for independent financial advisors and an enterprise edition for financial advisors affiliated with larger firms. Morningstar Direct is a web-based institutional research platform. Morningstar.com includes both Premium Memberships and Internet advertising sales. Morningstar Integrated Web Tools is a set of services that helps institutional clients build customized websites or enhance their existing sites with Morningstar’s online tools and components. Principia is our CD-ROM-based investment research and planning software for advisors.
 
The Investment Information segment also includes Morningstar Equity Research, which we distribute through several channels. We sell Morningstar Equity Research to companies that purchase our research for their own use or provide our research to their affiliated advisors or individual investor clients.

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

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

Investment Management. The Investment Management segment includes all of our asset management operations, which earn the majority of their revenue from asset-based fees.
 
The key products and services in this segment based on revenue are Investment Advisory Services (formerly Investment Consulting), which focuses on investment monitoring and asset allocation for funds of funds, including mutual funds and variable annuities; Retirement Solutions, including the Morningstar Retirement Manager and Advice by Ibbotson platforms; and Morningstar Managed Portfolios, a fee-based discretionary asset management service that includes a series of mutual fund, exchange-traded fund, and stock portfolios tailored to meet a range of investment time horizons and risk levels that financial advisors can use for their clients' taxable and tax-deferred accounts. In addition, we offer Managed Portfolios through our subsidiary Ibbotson Australia which provides asset management services primarily to institutional clients and individual investors.
 
Our segment accounting policies are the same as those described in Note 2, except for the capitalization and amortization of internal product development costs, amortization of intangible assets, and costs related to corporate functions. We exclude these items from our operating segment results to provide our chief operating decision maker with a better indication of each segment’s ability to generate cash flow. This information is one of the criteria used by our chief operating decision maker in determining how to allocate resources to each segment. We include capitalization and amortization of internal product development costs, amortization of intangible assets, and costs related to corporate functions in the Corporate Items category. Our segment disclosures are consistent with the business segment information provided to our chief operating decision maker on a recurring basis; for that reason, we don’t present balance sheet information by segment. We disclose goodwill by segment in accordance with the requirements of FASB ASC 350-20-50, Intangibles - Goodwill - Disclosure.
 
The following tables present information about our operating segments and by geographical area:
 
 
 
Three months ended June 30, 2012
($000)
 
Investment
Information

 
Investment
Management

 
Corporate Items

 
Total

External revenue
 
$
134,749

 
$
31,219

 
$

 
$
165,968

Operating expense, excluding stock-based compensation expense, depreciation, and amortization
 
86,915

 
17,179

 
6,385

 
110,479

Stock-based compensation expense
 
2,531

 
529

 
674

 
3,734

Depreciation and amortization
 
2,300

 
38

 
8,281

 
10,619

Operating income (loss)
 
$
43,003

 
$
13,473

 
$
(15,340
)
 
$
41,136

 
 
 
 
 
 
 
 
 
U.S. capital expenditures
 
 

 
 

 
 

 
$
6,818

Non-U.S. capital expenditures
 
 

 
 

 
 

 
$
2,110

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Three months ended June 30, 2011
($000)
 
Investment
Information

 
Investment
Management

 
Corporate Items

 
Total

External revenue
 
$
128,116

 
$
32,895

 
$

 
$
161,011

Operating expense, excluding stock-based compensation expense, depreciation, and amortization
 
86,484

 
13,833

 
7,681

 
107,998

Stock-based compensation expense
 
2,488

 
531

 
824

 
3,843

Depreciation and amortization
 
2,047

 
40

 
8,476

 
10,563

Operating income (loss)
 
$
37,097

 
$
18,491

 
$
(16,981
)
 
$
38,607

 
 
 
 
 
 
 
 
 
U.S. capital expenditures
 
 

 
 

 
 

 
$
1,593

Non-U.S. capital expenditures
 
 

 
 

 
 

 
$
1,788

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Six months ended June 30, 2012
($000)
 
Investment
Information

 
Investment
Management

 
Corporate Items

 
Total

External revenue
 
$
261,674

 
$
65,053

 
$

 
$
326,727

Operating expense, excluding stock-based compensation expense, depreciation, and amortization
 
180,353

 
33,132

 
13,313

 
226,798

Stock-based compensation expense
 
5,090

 
1,080

 
1,430

 
7,600

Depreciation and amortization
 
4,544

 
77

 
16,173

 
20,794

Operating income (loss)
 
$
71,687

 
$
30,764

 
$
(30,916
)
 
$
71,535

 
 
 
 
 
 
 
 
 
U.S. capital expenditures
 
 

 
 

 
 

 
$
14,215

Non-U.S. capital expenditures
 
 

 
 

 
 

 
$
3,707

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Six months ended June 30, 2011
($000)
 
Investment
Information

 
Investment
Management

 
Corporate Items

 
Total

External revenue
 
$
248,515

 
$
64,263

 
$

 
$
312,778

Operating expense, excluding stock-based compensation expense, depreciation, and amortization
 
170,247

 
27,671

 
16,187

 
214,105

Stock-based compensation expense
 
4,958

 
973

 
1,561

 
7,492

Depreciation and amortization
 
3,906

 
82

 
16,777

 
20,765

Operating income (loss)
 
$
69,404

 
$
35,537

 
$
(34,525
)
 
$
70,416

 
 
 
 
 
 
 
 
 
U.S. capital expenditures
 
 

 
 

 
 

 
$
3,523

Non-U.S. capital expenditures
 
 

 
 

 
 

 
$
4,895

 
 
 
 
 
 
 
 
 
 
 
 
As of June 30, 2012
($000)
 
Investment
Information

 
Investment
Management

 
Corporate Items

 
Total

Goodwill
 
$
275,568

 
$
41,395

 
$

 
$
316,963

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

 
Investment
Management

 
Corporate Items

 
Total

Goodwill
 
$
277,059

 
$
41,433

 
$

 
$
318,492

 
External revenue by geographical area
 
 
 
 
 
 
 
 
 
 
Three months ended June 30
 
Six months ended June 30
($000)
 
2012

 
2011

 
2012

 
2011

United States
 
$
117,952

 
$
113,424

 
$
232,421

 
$
221,605

United Kingdom
 
14,714

 
13,947

 
28,450

 
26,794

Europe, excluding the United Kingdom
 
12,281

 
12,561

 
24,336

 
24,141

Australia
 
9,791

 
10,693

 
19,139

 
19,986

Canada
 
7,397

 
6,784

 
14,747

 
13,401

Asia, excluding Japan
 
2,366

 
2,338

 
4,735

 
4,402

Japan
 
986

 
959

 
1,965

 
1,890

Other
 
481

 
305

 
934

 
559

Total Non-U.S.
 
48,016

 
47,587

 
94,306

 
91,173

 
 
 
 
 
 
 
 
 
Total
 
$
165,968

 
$
161,011

 
$
326,727

 
$
312,778




Long-lived assets by geographical area
 
 
 
 
 
 
As of June 30
 
As of December 31
($000)
 
2012

 
2011

United States
 
$
53,941

 
$
44,572

United Kingdom
 
7,422

 
7,512

Europe, excluding the United Kingdom
 
2,543

 
2,629

Australia
 
1,550

 
1,415

Canada
 
1,914

 
2,076

Asia, excluding Japan
 
9,757

 
9,656

Japan
 
216

 
282

Other
 
33

 
54

Total Non-U.S.
 
23,435

 
23,624

 
 
 
 
 
Total
 
$
77,376

 
$
68,196

Investments and Fair Value Measurements
Investments and Fair Value Measurements
Investments and Fair Value Measurements
 
We account for our investments in accordance with FASB ASC 320, Investments—Debt and Equity Securities. We classify our investments in three categories: available-for-sale, held-to-maturity, and trading. We monitor the concentration, diversification, maturity, and liquidity of our investment portfolio, which is primarily invested in fixed-income securities, and classify our investment portfolio as shown below:
 
 
 
As of June 30
 
As of December 31
($000)
 
2012

 
2011

Available-for-sale
 
$
217,478

 
$
247,917

Held-to-maturity
 
19,717

 
16,347

Trading securities
 
5,184

 
5,491

Total
 
$
242,379

 
$
269,755




The following table shows the cost, unrealized gains (losses), and fair values related to investments classified as available-for-sale and held-to-maturity:
 
 
 
As of June 30, 2012
 
As of December 31, 2011
($000)
 
Cost

 
Unrealized
Gain

 
Unrealized
Loss

 
Fair
Value

 
Cost

 
Unrealized
Gain

 
Unrealized
Loss

 
Fair
Value

Available-for-sale:
 
 

 
 

 
 

 
 

 
 

 
 

 
 

 
 

Government obligations
 
$
82,317

 
$
53

 
$
(571
)
 
$
81,799

 
$
139,099

 
$
72

 
$
(402
)
 
$
138,769

Corporate bonds
 
78,476

 
38

 
(351
)
 
78,163

 
61,589

 
14

 
(280
)
 
61,323

Commercial paper
 
17,138

 
1

 
(3
)
 
17,136

 
29,964

 
2

 
(7
)
 
29,959

Equity securities and exchange-traded funds
 
29,080

 
827

 
(421
)
 
29,486

 
8,461

 
368

 
(558
)
 
8,271

Mutual funds
 
10,355

 
623

 
(84
)
 
10,894

 
9,298

 
363

 
(66
)
 
9,595

Total
 
$
217,366

 
$
1,542

 
$
(1,430
)
 
$
217,478

 
$
248,411

 
$
819

 
$
(1,313
)
 
$
247,917

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Held-to-maturity:
 
 

 
 

 
 

 
 

 
 

 
 

 
 

 
 

Certificates of deposit
 
$
19,717

 
$

 
$

 
$
19,717

 
$
16,347

 
$

 
$

 
$
16,347


 
As of June 30, 2012 and December 31, 2011, investments with unrealized losses for greater than a 12-month period were not material to the Condensed Consolidated Balance Sheets and were not deemed to have other than temporary declines in value.

The table below shows the cost and fair value of investments classified as available-for-sale and held-to-maturity based on their contractual maturities as of June 30, 2012 and December 31, 2011. The expected maturities of certain fixed-income securities may differ from their contractual maturities because some of these holdings have call features that allow the issuers the right to prepay obligations without penalties.
 
 
 
As of June 30, 2012
 
As of December 31, 2011
($000)
 
Cost

 
Fair Value

 
Cost

 
Fair Value

Available-for-sale:
 
 

 
 

 
 

 
 

Due in one year or less
 
$
141,562

 
$
140,928

 
$
155,651

 
$
155,247

Due in one to two years
 
36,369

 
36,170

 
75,001

 
74,804

Equity securities, exchange-traded funds, and mutual funds
 
39,435

 
40,380

 
17,759

 
17,866

Total
 
$
217,366

 
$
217,478

 
$
248,411

 
$
247,917

 
 
 
 
 
 
 
 
 
Held-to-maturity:
 
 

 
 

 
 

 
 

Due in one year or less
 
$
19,712

 
$
19,712

 
$
16,342

 
$
16,342

Due in one to three years
 
5

 
5

 
5

 
5

Total
 
$
19,717

 
$
19,717

 
$
16,347

 
$
16,347


 
As of June 30, 2012 and December 31, 2011, held-to-maturity investments included a $1,500,000 and a $1,600,000 certificate of deposit, respectively, held primarily as collateral against a bank guarantee for our office lease in Australia.

The following table shows the realized gains and losses arising from sales of our investments classified as available-for-sale recorded in our Condensed Consolidated Statements of Income: 
 
 
Six months ended June 30
($000)
 
2012

 
2011

Realized gains
 
$
470

 
$
397

Realized losses
 
(519
)
 

Realized gains (losses), net
 
$
(49
)
 
$
397


 
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 Condensed Consolidated Statements of Income:
 
 
 
Six months ended June 30
($000)
 
2012

 
2011

Unrealized gains (losses), net
 
$
156

 
$
(9
)


The fair value of our assets subject to fair value measurements and that are measured at fair value on a recurring basis using the fair value hierarchy and the necessary disclosures under FASB ASC 820, Fair Value Measurement, are as follows:
 
 
 
Fair Value
 
Fair Value Measurements as of June 30, 2012
 
 
as of
 
Using Fair Value Hierarchy
($000)
 
June 30, 2012
 
Level 1

 
Level 2

 
Level 3

Available-for-sale investments:
 
 

 
 

 
 

 
 

Government obligations
 
$
81,799

 
$

 
$
81,799

 
$

Corporate bonds
 
78,163

 

 
78,163

 

Commercial paper
 
17,136

 

 
17,136

 

Equity securities and exchange-traded funds
 
29,486

 
29,486

 

 

Mutual funds
 
10,894

 
10,894

 

 

Trading securities
 
5,184

 
5,184

 

 

Cash equivalents
 
9,485

 
9,485

 

 

Total
 
$
232,147

 
$
55,049

 
$
177,098

 
$

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

 
Level 2

 
Level 3

Available-for-sale investments:
 
 

 
 

 
 

 
 

Government obligations
 
$
138,769

 
$

 
$
138,769

 
$

Corporate bonds
 
61,323

 

 
61,323

 

Commercial paper
 
29,959

 

 
29,959

 

Equity securities and exchange-traded funds
 
8,271

 
8,271

 

 

Mutual funds
 
9,595

 
9,595

 

 

Trading securities
 
5,491

 
5,491

 

 

Cash equivalents
 
30,818

 
30,818

 

 

Total
 
$
284,226

 
$
54,175

 
$
230,051

 
$


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

Based on our analysis of the nature and risks of our investments in equity securities and mutual funds, we have determined that presenting 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. All other financial instruments were valued either based on recent trades of securities in inactive markets or based on quoted market prices of similar instruments and other significant inputs derived from observable market data. We did not hold any securities categorized as Level 3 as of June 30, 2012 and December 31, 2011.
Investments in Unconsolidated Entities
Investments in Unconsolidated Entities
Investments in Unconsolidated Entities
 
Our investments in unconsolidated entities consist primarily of the following:
 
 
 
As of June 30


As of December 31

($000)
 
2012


2011

Investment in MJKK
 
$
19,618

 
$
19,662

Other equity method investments
 
2,645

 
2,807

Investments accounted for using the cost method
 
12,008

 
5,173

Total investments in unconsolidated entities
 
$
34,271

 
$
27,642


 
Morningstar Japan K.K. Morningstar Japan K.K. (MJKK) develops and markets products and services customized for the Japanese market. MJKK’s shares are traded on the Osaka Stock Exchange, “Hercules Market,” using the ticker 4765. We account for our investment in MJKK using the equity method. The following table summarizes our ownership percentage in MJKK and the market value of this investment based on MJKK’s publicly quoted share price: 
 
 
As of June 30

 
As of December 31

 
 
2012

 
2011

Morningstar’s approximate ownership of MJKK
 
34
%
 
33
%
 
 
 
 
 
Approximate market value of Morningstar’s ownership in MJKK:
 
 

 
 

Japanese yen (¥000)
 
¥
3,293,035

 
¥
2,797,704

Equivalent U.S. dollars ($000)
 
$
41,426

 
$
36,146



Other Equity Method Investments. As of June 30, 2012 and December 31, 2011, other equity method investments consist of our investment in Morningstar Sweden AB (Morningstar Sweden) and YCharts, Inc. (YCharts). Morningstar Sweden develops and markets products and services customized for its respective market. Our ownership interest in Morningstar Sweden was approximately 24% as of June 30, 2012 and December 31, 2011. YCharts is a technology company that provides stock research and analysis. Our ownership interest in YCharts was approximately 20% as of June 30, 2012 and December 31, 2011.

We did not record any impairment losses on our equity method investments in the first six months of 2012 or 2011.
 
Cost Method Investments. As of June 30, 2012 and December 31, 2011, our cost method investments consist of minority investments in Pitchbook Data, Inc. (Pitchbook) and Bundle Corporation (Bundle). As of March 31, 2012, our cost method investments also include HelloWallet LLC (HelloWallet). Pitchbook offers detailed data and information about private equity transactions, investors, companies, limited partners, and service providers. Bundle is a social media company dedicated to helping people make smarter spending and saving choices. HelloWallet is a provider of personalized financial guidance to employees of Fortune 1000 companies. We paid approximately $6,750,000 for the minority equity stake in HelloWallet in the first quarter of 2012. We did not record any impairment losses on our cost method investments in the first six months of 2012 or 2011.
Liability for Vacant Office Space
Liability for Vacant Office Space
Liability for Vacant Office Space
 
We include our liability for vacant office space in "Accounts payable and accrued liabilities" and "Other long-term liabilities," as appropriate, on our Condensed Consolidated Balance Sheets. The following table shows the change in our liability for vacant office space from December 31, 2011 to June 30, 2012:

Liability for vacant office space
 
($000)

Balance as of December 31, 2011
 
$
919

Reduction of liability for lease and other related payments
 
(654
)
Balance as of June 30, 2012
 
$
265



Stock-Based Compensation
Stock-Based Compensation
Stock-Based Compensation
 
Stock-Based Compensation Plans
 
Our shareholders approved the Morningstar 2011 Stock Incentive Plan (the 2011 Plan) on May 17, 2011. As of that date, we stopped granting awards under the Morningstar 2004 Stock Incentive Plan (the 2004 Plan). The 2004 Plan amended and restated the Morningstar 1993 Stock Option Plan, the Morningstar 2000 Stock Option Plan, and the Morningstar 2001 Stock Option Plan.

The 2011 Plan provides for a variety of stock-based awards, including, among other things, stock options, restricted stock units, and restricted stock. We granted stock options, restricted stock units and restricted stock under the 2004 Plan.

All of our employees and our non-employee directors are eligible for awards under the 2011 Plan.

Grants awarded under the 2011 Plan or the 2004 Plan that are forfeited, canceled, settled, or otherwise terminated without a distribution of shares, or shares withheld by us in connection with the exercise of options, will be available for awards under the 2011 Plan. Any shares subject to awards under the 2011 Plan, but not under the 2004 Plan, that are withheld by us in connection with the payment of any required income tax withholding will be available for awards under the 2011 Plan.

The following table summarizes the number of shares available for future grants under our 2011 Plan:
 
 
 
As of June 30

(000)
 
2012

Shares available for future grants
 
4,740


 

Accounting for Stock-Based Compensation Awards
 
The following table summarizes our stock-based compensation expense and the related income tax benefit we recorded in the three and six months ended June 30, 2012 and June 30, 2011:
 
 
 
Three months ended June 30
 
Six months ended June 30
($000)
 
2012

 
2011

 
2012

 
2011

Restricted stock units
 
$
3,270

 
$
3,332

 
$
6,548

 
$
6,117

Restricted stock
 
444

 
444

 
888

 
1,308

Stock options
 
20

 
67

 
164

 
67

Total stock-based compensation expense
 
$
3,734

 
$
3,843

 
$
7,600

 
$
7,492

 
 
 
 
 
 
 
 
 
Income tax benefit related to the stock-based compensation expense
 
$
882

 
$
944

 
$
1,804

 
$
1,669


 
The following table summarizes the amount of unrecognized stock-based compensation expense as of June 30, 2012 and the expected number of months over which the expense will be recognized:
 
 
Unrecognized stock-based compensation expense ($000)

 
Expected amortization period (months)

Restricted stock units
 
$
33,988

 
36

Restricted stock
 
5,031

 
34

Stock options
 
1,355

 
33

Total unrecognized stock-based compensation expense
 
$
40,374

 
36



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

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

The following table summarizes restricted stock unit activity during the first six months of 2012:
Restricted Stock Units (RSUs)
 
Unvested

 
Vested but
Deferred

 
Total

 
Weighted
Average
Grant Date Value
per RSU

RSUs outstanding—December 31, 2011
 
741,043

 
20,076

 
761,119

 
$
50.66

Granted
 
293,609

 

 
293,609

 
55.40

Dividend equivalents
 
2,553

 
(3
)
 
2,550

 
50.69

Vested
 
(245,251
)
 

 
(245,251
)
 
50.74

Vested but deferred
 
1,424

 
(1,424
)
 

 

Issued