MORNINGSTAR, INC., 10-Q filed on 5/1/2013
Quarterly Report
Document and Entity Information
3 Months Ended
Mar. 31, 2013
Apr. 26, 2013
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
Mar. 31, 2013 
 
Document Fiscal Year Focus
2013 
 
Document Fiscal Period Focus
Q1 
 
Amendment Flag
false 
 
Entity Common Stock, Shares Outstanding
 
46,499,799 
Condensed Consolidated Statements of Income (USD $)
In Thousands, except Per Share data, unless otherwise specified
3 Months Ended
Mar. 31, 2013
Mar. 31, 2012
Revenue
$ 168,856 
$ 160,759 
Operating expense (1):
 
 
Cost of goods sold
48,010 
50,316 
Development
13,640 
13,365 
Sales and marketing
27,980 
28,326 
General and administrative
27,327 
28,178 
Depreciation and amortization
11,339 
10,175 
Total operating expense
128,296 
130,360 
Operating income (loss)
40,560 
30,399 
Non-operating income (expense):
 
 
Interest income (expense), net
741 
869 
Gain (loss) on sale of investments reclassified from other comprehensive income
725 
(86)
Other income (expense), net
(521)
(124)
Non-operating income (expense), net
945 
659 
Income before income taxes and equity in net income of unconsolidated entities
41,505 
31,058 
Income tax expense
12,427 
11,511 
Equity in net income of unconsolidated entities
497 
566 
Consolidated net income
29,575 
20,113 
Net (income) loss attributable to the noncontrolling interest
43 
24 
Net income attributable to Morningstar, Inc.
$ 29,618 
$ 20,137 
Net income per share attributable to:
 
 
Basic (in dollars per share)
$ 0.64 
$ 0.40 
Diluted (in dollars per share)
$ 0.63 
$ 0.40 
Dividends declared per common share
$ 0.13 
$ 0.10 
Dividends paid per common share
$ 0.00 
$ 0.10 
Weighted average shares outstanding:
 
 
Basic (in shares)
46,406 
49,938 
Diluted (in shares)
46,814 
50,758 
Condensed Consolidated Statements of Income (Parenthetical) (USD $)
In Thousands, unless otherwise specified
3 Months Ended
Mar. 31, 2013
Mar. 31, 2012
(1) Includes stock-based compensation expense of:
 
 
Allocated Share-based Compensation Expense
$ 3,783 
$ 3,866 
Cost of Sales
 
 
(1) Includes stock-based compensation expense of:
 
 
Allocated Share-based Compensation Expense
1,203 
1,089 
Development
 
 
(1) Includes stock-based compensation expense of:
 
 
Allocated Share-based Compensation Expense
498 
499 
Sales and Marketing
 
 
(1) Includes stock-based compensation expense of:
 
 
Allocated Share-based Compensation Expense
512 
479 
General and Administrative
 
 
(1) Includes stock-based compensation expense of:
 
 
Allocated Share-based Compensation Expense
$ 1,570 
$ 1,799 
Condensed Consolidated Statements of Comprehensive Income Consolidated Statements of Comprehensive Income (USD $)
In Thousands, unless otherwise specified
3 Months Ended
Mar. 31, 2013
Mar. 31, 2012
Consolidated net income
$ 29,575 
$ 20,113 
Other comprehensive income (loss), net of tax:
 
 
Foreign currency translation adjustment
(9,071)
6,965 
Unrealized gains (losses) on securities:
 
 
Unrealized holding gains (losses) arising during period
1,166 
909 
Reclassification of adjustments for (gains) losses included in net income
(463)
55 
Other comprehensive income (loss), net
(8,368)
7,929 
Other comprehensive income (loss), net
21,207 
28,042 
Comprehensive (income) loss attributable to noncontrolling interest
142 
107 
Comprehensive income attributable to Morningstar, Inc.
$ 21,349 
$ 28,149 
Condensed Consolidated Balance Sheets (USD $)
In Thousands, unless otherwise specified
Mar. 31, 2013
Dec. 31, 2012
Current assets:
 
 
Cash and cash equivalents
$ 224,892 
$ 163,889 
Investments
103,436 
157,529 
Accounts receivable, less allowance of $676 and $569, respectively
117,744 
114,361 
Deferred tax asset, net
3,343 
3,741 
Income tax receivable, net
2,672 
14,267 
Other
28,091 
20,823 
Total current assets
480,178 
474,610 
Property, equipment, and capitalized software, net
91,815 
84,022 
Investments in unconsolidated entities
35,635 
35,305 
Goodwill
315,784 
320,845 
Intangible assets, net
109,717 
116,732 
Other assets
12,420 
10,438 
Total assets
1,045,549 
1,041,952 
Current liabilities:
 
 
Accounts payable and accrued liabilities
44,777 
43,777 
Accrued compensation
36,139 
67,317 
Deferred revenue
162,074 
146,015 
Other
242 
256 
Total current liabilities
243,232 
257,365 
Accrued compensation
8,569 
8,281 
Deferred tax liability, net
18,332 
21,583 
Deferred rent
15,046 
15,368 
Other long-term liabilities
21,248 
12,460 
Total liabilities
306,427 
315,057 
Morningstar, Inc. shareholders' equity:
 
 
Common stock, no par value, 200,000,000 shares authorized, of which 46,487,512 and 46,541,571 shares were outstanding as of March 31, 2013 and December 31, 2012, respectively
Treasury stock at cost, 5,379,583 shares as of March 31, 2013 and 5,214,070 shares as of December 31, 2012
(312,412)
(301,839)
Additional paid-in capital
528,754 
521,285 
Retained earnings
520,096 
496,354 
Accumulated other comprehensive income:
 
 
Currency translation adjustment
(47)
8,925 
Unrealized gain on available-for-sale securities
1,490 
787 
Total accumulated other comprehensive income
1,443 
9,712 
Total Morningstar, Inc. shareholders' equity
737,886 
725,517 
Noncontrolling interest
1,236 
1,378 
Total equity
739,122 
726,895 
Total liabilities and equity
$ 1,045,549 
$ 1,041,952 
Condensed Consolidated Balance Sheets (Parenthetical) (USD $)
In Thousands, except Share data, unless otherwise specified
Mar. 31, 2013
Dec. 31, 2012
Statement of Financial Position [Abstract]
 
 
Allowance for Doubtful Accounts Receivable, Current
$ 676 
$ 569 
Common Stock, No Par Value
$ 0 
$ 0 
Common Stock, Shares Authorized
200,000,000 
200,000,000 
Common Stock, Shares, Outstanding
46,487,512 
46,541,571 
Treasury Stock, Shares
5,379,583 
5,214,070 
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, 2012
$ 726,895 
$ 5 
$ (301,839)
$ 521,285 
$ 496,354 
$ 9,712 
$ 1,378 
Balance (in shares) at Dec. 31, 2012
46,541,571 
46,541,571 
 
 
 
 
 
Increase (Decrease) in Stockholders' Equity
 
 
 
 
 
 
 
Net Income (Loss)
29,575 
 
 
 
29,618 
 
(43)
Other Comprehensive Income (loss)
 
 
 
 
 
 
 
Unrealized gains (losses) on available-for-sale investments, net of income tax of $398
1,166 
   
   
   
   
1,166 
Reclassification of adjustments for losses (gains) included in net income, net of income tax of $262
(463)
   
   
   
   
(463)
Foreign currency translation adjustment, net
(9,071)
   
   
   
   
(8,972)
(99)
Other comprehensive income (loss), net
(8,368)
   
   
   
   
(8,269)
(99)
Issuance of common stock related to stock-option exercises and vesting of restricted stock units, net
2,006 
2,006 
   
   
   
Issuance of common stock related to stock-option exercises and vesting of restricted stock units, net (in shares)
 
111,482 
 
 
 
 
 
Adjustments to Additional Paid in Capital, Share-based Compensation, Requisite Service Period Recognition
 
 
 
 
 
 
 
Stock-based compensation - restricted stock units
3,563 
   
   
3,563 
   
   
   
Stock-based compensation - restricted stock
97 
   
   
97 
   
   
   
Stock-based compensation - stock options
123 
   
   
123 
   
   
   
Excess tax benefit derived from stock-option exercises and vesting of restricted stock units
1,587 
   
   
1,587 
   
   
   
Common share repurchased
(10,573)
   
(10,573)
   
   
   
   
Common share repurchased (in shares)
 
(165,541)
 
 
 
 
 
Dividends declared - common shares outstanding
(5,784)
   
   
   
(5,784)
   
   
Dividends declared - restricted stock units
   
   
93 
(92)
   
   
Balance at Mar. 31, 2013
$ 739,122 
$ 5 
$ (312,412)
$ 528,754 
$ 520,096 
$ 1,443 
$ 1,236 
Balance (in shares) at Mar. 31, 2013
46,487,512 
46,487,512 
 
 
 
 
 
Condensed Consolidated Statement of Equity (Parenthetical) (USD $)
In Thousands, unless otherwise specified
3 Months Ended
Mar. 31, 2013
Statement of Stockholders' Equity [Abstract]
 
Other Comprehensive Income (Loss), Unrealized Holding Gain (Loss) on Securities Arising During Period, Tax
$ 398 
Other Comprehensive Income (Loss), Reclassification Adjustment for Sale of Securities Included in Net Income, Tax
$ 262 
Condensed Consolidated Statements of Cash Flows (USD $)
In Thousands, unless otherwise specified
3 Months Ended
Mar. 31, 2013
Mar. 31, 2012
Operating activities
 
 
Consolidated net income
$ 29,575 
$ 20,113 
Adjustments to reconcile consolidated net income to net cash flows from operating activities:
 
 
Depreciation and amortization
11,339 
10,175 
Deferred income taxes
(2,934)
(1,453)
Stock-based compensation expense
3,783 
3,866 
Provision for bad debt
175 
525 
Equity in net income of unconsolidated entities
(497)
(566)
Excess tax benefits from stock-option exercises and vesting of restricted stock units
(1,587)
(3,313)
Other, net
(632)
310 
Changes in operating assets and liabilities, net of effects of acquisitions:
 
 
Accounts receivable
(5,906)
(7,439)
Other assets
(6,575)
(3,758)
Accounts payable and accrued liabilities
400 
703 
Accrued compensation
(31,812)
(35,168)
Income taxes- current
14,487 
7,369 
Deferred revenue
17,769 
14,165 
Deferred rent
(461)
716 
Other liabilities
(451)
(621)
Cash provided by operating activities
26,673 
5,624 
Investing activities
 
 
Purchases of investments
(3,694)
(86,796)
Proceeds from maturities and sales of investments
61,152 
80,551 
Capital expenditures
(9,118)
(8,994)
Purchases of equity and cost method investments
6,750 
Other, net
892 
Cash used for investing activities
49,232 
(21,980)
Financing activities
 
 
Proceeds from stock-option exercises, net
2,006 
3,906 
Excess tax benefits from stock-option exercises and vesting of restricted stock units
1,587 
3,313 
Common shares repurchased
(15,240)
(23,033)
Dividends paid
(5,012)
Other, net
(3)
(17)
Cash provided by (used for) financing activities
(11,650)
(20,843)
Effect of exchange rate changes on cash and cash equivalents
(3,252)
2,110 
Net increase (decrease) in cash and cash equivalents
61,003 
(35,089)
Cash and cash equivalents-beginning of period
163,889 
200,437 
Cash and cash equivalents-end of period
224,892 
165,348 
Supplemental disclosure of cash flow information:
 
 
Cash paid for income taxes
627 
5,553 
Supplemental information of non-cash investing and financing activities:
 
 
Unrealized Gain (Loss) on Available For Sale Investments
1,102 
1,498 
NonCashFinancingArrangement
$ 4,860 
$ 0 
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, 2012, filed with the SEC on February 28, 2013.
 
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
 
Correction
Correction
Correction

In 2012, we identified errors related to purchases of investments and proceeds from maturities and sales of investments included on our Consolidated Statement of Cash Flows for the three months ended March 31, 2012 that had not been previously detected. We did not properly disclose the correct amounts for both categories by equal, but offsetting, amounts. The financial statements have been corrected to increase the purchases of investments and proceeds from maturities and sales of investments as shown in the table below. The error existed in the first quarter of 2012.

The following table shows our previously reported amounts, the correction, and our as corrected amounts:
 
 
Three months ended March 31, 2012
($000)
 
Previously Reported

 
Correction

 
As Corrected

Investing Activities
 
 
 
 
 
 
Purchases of investments
 
$
(344,391
)
 
$
257,595

 
$
(86,796
)
Proceeds from maturities and sales of investments
 
$
338,146

 
$
(257,595
)
 
$
80,551

Cash used for investing activities
 
$
(21,980
)
 
$

 
$
(21,980
)
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, 2012 to March 31, 2013:
 
 
($000)

Balance as of December 31, 2012
$
320,845

Net change, currency translation
(5,061
)
Balance as of March 31, 2013
$
315,784



We did not record any significant impairment losses in the first three months of 2013 or 2012. We perform our annual impairment reviews in the fourth quarter.

Intangible Assets

The following table summarizes our intangible assets: 
 
 
As of March 31, 2013
 
As of December 31, 2012
($000)
 
Gross

 
Accumulated
Amortization

 
Net

 
Weighted
Average
Useful  Life
(years)
 
Gross

 
Accumulated
Amortization

 
Net

 
Weighted
Average
Useful  Life
(years)
Intellectual property
 
$
30,572

 
$
(22,132
)
 
$
8,440

 
9
 
$
30,621

 
$
(21,527
)
 
$
9,094

 
9
Customer-related assets
 
130,833

 
(65,110
)
 
65,723

 
12
 
132,798

 
(63,005
)
 
69,793

 
12
Supplier relationships
 
240

 
(99
)
 
141

 
20
 
240

 
(96
)
 
144

 
20
Technology-based assets
 
80,644

 
(45,341
)
 
35,303

 
9
 
81,333

 
(43,809
)
 
37,524

 
9
Non-competition agreement
 
1,768

 
(1,658
)
 
110

 
4
 
1,765

 
(1,588
)
 
177

 
4
Total intangible assets
 
$
244,057

 
$
(134,340
)
 
$
109,717

 
10
 
$
246,757

 
$
(130,025
)
 
$
116,732

 
10
 
The following table summarizes our amortization expense related to intangible assets:
 
 
Three months ended March 31
($000)
 
2013

 
2012

Amortization expense
 
$
5,625

 
$
6,055


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

We expect intangible amortization expense for 2013 and subsequent years as follows:
 
 
($000)

2013
 
$
20,977

2014
 
19,759

2015
 
18,951

2016
 
14,360

2017
 
9,828

2018
 
7,875


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

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

We discuss our significant accounting policies in Note 3 of our Consolidated Financial Statements included in our Annual Report on Form 10-K for the year ended December 31, 2012, filed with the SEC on February 28, 2013.

In addition, effective January 1, 2013, we adopted FASB ASU No. 2013-2, Comprehensive Income (Topic 220). The amended guidance requires us to 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 where net income is presented. The adoption of ASU No. 2013-2 did not have a material effect on our consolidated financial statements.
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 March 31
(in thousands, except per share amounts)
 
2013

 
2012

 
 
 
 
 
Basic net income per share attributable to Morningstar, Inc.:
 
 
 
 
Net income attributable to Morningstar, Inc.:
 
$
29,618

 
$
20,137

Less: Distributed earnings available to participating securities
 
(15
)
 
(16
)
Less: Undistributed earnings available to participating securities
 
(13
)
 
(46
)
Numerator for basic net income per share — undistributed and distributed earnings available to common shareholders
 
$
29,590

 
$
20,075

 
 
 
 
 
Weighted average common shares outstanding
 
46,406

 
49,938

 
 
 
 
 
Basic net income per share attributable to Morningstar, Inc.
 
$
0.64

 
$
0.40

 
 
 
 
 
Diluted net income per share attributable to Morningstar, Inc.:
 
 
 
 
Numerator for basic net income per share — undistributed and distributed earnings available to common shareholders
 
$
29,590

 
$
20,075

Add: Undistributed earnings allocated to participating securities
 
13

 
46

Less: Undistributed earnings reallocated to participating securities
 
(13
)
 
(45
)
Numerator for diluted net income per share — undistributed and distributed earnings available to common shareholders
 
$
29,590

 
$
20,076

 
 


 


Weighted average common shares outstanding
 
46,406

 
49,938

Net effect of dilutive stock options and restricted stock units
 
408

 
820

Weighted average common shares outstanding for computing diluted income per share
 
46,814

 
50,758

 
 


 


Diluted net income per share attributable to Morningstar, Inc.
 
$
0.63

 
$
0.40


The following table shows the number of weighted average stock options, restricted stock units, and restricted stock excluded from our calculation of diluted earnings per share because their inclusion would have been anti-dilutive:
 
 
Three months ended March 31
(in thousands)
 
2013

 
2012

Weighted average stock options
 

 
14

Weighted average restricted stock units
 
9

 

Weighted average restricted stock
 

 

Total
 
9

 
14


These stock options and restricted stock units could be included in the calculation in the future.

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, Morningstar Advisor Workstation (including Morningstar Office), Morningstar Direct, Morningstar.com, Morningstar Integrated Web Tools, Morningstar Structured Credit Ratings, 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 that 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. Morningstar Structured Credit Ratings is provided by Morningstar Credit Ratings, LLC, a Nationally Recognized Statistical Rating Organization specializing in structured finance. Morningstar Principia is our CD-ROM-based investment research and planning software for advisors.
 
The Investment Information segment also includes Morningstar Equity Research and Morningstar Credit Ratings, LLC. 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. Morningstar Credit Ratings, LLC offers Structured Credit Ratings as well as research, surveillance services, and data to help institutional investors identify risk in commercial mortgage-backed securities (CMBS).

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, 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 Associates Australia Limited which provides asset management services primarily to institutional clients and individual investors.
 
Our segment accounting policies are the same as those described in Note 3, 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 March 31, 2013
($000)
 
Investment
Information

 
Investment
Management

 
Corporate Items

 
Total

External revenue
 
$
136,187

 
$
32,669

 
$

 
$
168,856

Operating expense, excluding stock-based compensation expense, depreciation, and amortization
 
89,869

 
15,619

 
7,686

 
113,174

Stock-based compensation expense
 
2,499

 
592

 
692

 
3,783

Depreciation and amortization
 
2,352

 
24

 
8,963

 
11,339

Operating income (loss)
 
$
41,467

 
$
16,434

 
$
(17,341
)
 
$
40,560

 
 
 
 
 
 
 
 
 
U.S. capital expenditures
 
 

 
 

 
 

 
$
8,009

Non-U.S. capital expenditures
 
 

 
 

 
 

 
$
1,109

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Three months ended March 31, 2012
($000)
 
Investment
Information

 
Investment
Management

 
Corporate Items

 
Total

External revenue
 
$
126,925

 
$
33,834

 
$

 
$
160,759

Operating expense, excluding stock-based compensation expense, depreciation, and amortization
 
93,438

 
15,953

 
6,928

 
116,319

Stock-based compensation expense
 
2,559

 
551

 
756

 
3,866

Depreciation and amortization
 
2,244

 
39

 
7,892

 
10,175

Operating income (loss)
 
$
28,684

 
$
17,291

 
$
(15,576
)
 
$
30,399

 
 
 
 
 
 
 
 
 
U.S. capital expenditures
 
 

 
 

 
 

 
$
7,397

Non-U.S. capital expenditures
 
 

 
 

 
 

 
$
1,597

 
 
 
 
 
 
 
 
 
 
 
 
As of March 31, 2013
($000)
 
Investment
Information

 
Investment
Management

 
Corporate Items

 
Total

Goodwill
 
$
274,631

 
$
41,153

 
$

 
$
315,784

 
 
 
As of December 31, 2012
($000)
 
Investment
Information

 
Investment
Management

 
Corporate Items

 
Total

Goodwill
 
$
279,164

 
$
41,681

 
$

 
$
320,845

 
External revenue by geographical area
 
 
 
 
 
 
Three months ended March 31
($000)
 
2013

 
2012

United States
 
$
121,413

 
$
114,469

 
 
 
 
 
United Kingdom
 
13,153

 
13,736

Europe, excluding the United Kingdom
 
13,167

 
12,055

Australia
 
9,352

 
9,348

Canada
 
7,736

 
7,350

Asia, excluding Japan
 
2,595

 
2,369

Japan
 
829

 
979

Other
 
611

 
453

Total Non-U.S.
 
47,443

 
46,290

 
 
 
 
 
Total
 
$
168,856

 
$
160,759




Long-lived assets by geographical area
 
 
 
 
 
 
As of March 31
 
As of December 31
($000)
 
2013

 
2012

United States
 
$
69,664

 
$
60,371

 
 
 
 
 
United Kingdom
 
6,517

 
7,435

Europe, excluding the United Kingdom
 
2,116

 
2,356

Australia
 
1,374

 
1,402

Canada
 
1,641

 
1,773

Asia, excluding Japan
 
10,291

 
10,445

Japan
 
58

 
84

Other
 
154

 
156

Total Non-U.S.
 
22,151

 
23,651

 
 
 
 
 
Total
 
$
91,815

 
$
84,022

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 March 31
 
As of December 31
($000)
 
2013

 
2012

Available-for-sale
 
$
70,193

 
$
125,786

Held-to-maturity
 
26,408

 
26,357

Trading securities
 
6,835

 
5,386

Total
 
$
103,436

 
$
157,529




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 March 31, 2013
 
As of December 31, 2012
($000)
 
Cost

 
Unrealized
Gain

 
Unrealized
Loss

 
Fair
Value

 
Cost

 
Unrealized
Gain

 
Unrealized
Loss

 
Fair
Value

Available-for-sale:
 
 

 
 

 
 

 
 

 
 

 
 

 
 

 
 

Government obligations
 
$
17,384

 
$
27

 
$
(108
)
 
$
17,303

 
$
40,669

 
$
29

 
$
(608
)
 
$
40,090

Corporate bonds
 
30,171

 
18

 
(186
)
 
30,003

 
49,339

 
36

 
(292
)
 
49,083

Foreign obligations
 
2,433

 
1

 
(30
)
 
2,404

 
2,437

 
1

 
(19
)
 
2,419

Commercial paper
 

 

 

 

 
2,000

 

 

 
2,000

Equity securities and exchange-traded funds
 
7,351

 
943

 
(164
)
 
8,130

 
19,613

 
1,359

 
(323
)
 
20,649

Mutual funds
 
10,523

 
1,956

 
(126
)
 
12,353

 
10,499

 
1,092

 
(46
)
 
11,545

Total
 
$
67,862

 
$
2,945

 
$
(614
)
 
$
70,193

 
$
124,557

 
$
2,517

 
$
(1,288
)
 
$
125,786

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Held-to-maturity:
 
 

 
 

 
 

 
 

 
 

 
 

 
 

 
 

Certificates of deposit
 
$
26,408

 
$

 
$

 
$
26,408

 
$
26,357

 
$

 
$

 
$
26,357


 
As of March 31, 2013 and December 31, 2012, 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 March 31, 2013 and December 31, 2012. 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 March 31, 2013
 
As of December 31, 2012
($000)
 
Cost

 
Fair Value

 
Cost

 
Fair Value

Available-for-sale:
 
 

 
 

 
 

 
 

Due in one year or less
 
$
49,988

 
$
49,710

 
$
87,599

 
$
86,784

Due in one to two years
 

 

 
6,846

 
6,808

Equity securities, exchange-traded funds, and mutual funds
 
17,874

 
20,483

 
30,112

 
32,194

    Total
 
$
67,862

 
$
70,193

 
$
124,557

 
$
125,786

 
 
 
 
 
 
 
 
 
Held-to-maturity:
 
 

 
 

 
 

 
 

Due in one year or less
 
$
26,403

 
$
26,403

 
$
26,352

 
$
26,352

Due in one to three years
 
5

 
5

 
5

 
5

Total
 
$
26,408

 
$
26,408

 
$
26,357

 
$
26,357


 
As of March 31, 2013 and December 31, 2012, held-to-maturity investments included a $1,500,000 certificate of deposit held primarily 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 Condensed Consolidated Statements of Income: 
 
 
Three months ended March 31
($000)
 
2013

 
2012

Realized gains
 
$
1,564

 
$
212

Realized losses
 
(839
)
 
(298
)
Realized gains (losses), net
 
$
725

 
$
(86
)

 
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:
 
 
 
Three months ended March 31
($000)
 
2013

 
2012

Unrealized gains, net
 
$
318

 
$
428



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 March 31, 2013
 
 
as of
 
Using Fair Value Hierarchy
($000)
 
March 31, 2013
 
Level 1

 
Level 2

 
Level 3

Available-for-sale investments:
 
 

 
 

 
 

 
 

Government obligations
 
$
17,303

 
$

 
$
17,303

 
$

Corporate bonds
 
30,003

 

 
30,003

 

Foreign obligations
 
2,404

 

 
2,404

 

Equity securities and exchange-traded funds
 
8,130

 
8,130

 

 

Mutual funds
 
12,353

 
12,353

 

 

Trading securities
 
6,835

 
6,835

 

 

Cash equivalents
 
9,285

 
9,285

 

 

Total
 
$
86,313

 
$
36,603

 
$
49,710

 
$

 
 
 
Fair Value
 
Fair Value Measurements as of December 31, 2012
 
 
as of
 
Using Fair Value Hierarchy
($000)
 
December 31, 2012
 
Level 1

 
Level 2

 
Level 3

Available-for-sale investments:
 
 

 
 

 
 

 
 

Government obligations
 
$
40,090

 
$

 
$
40,090

 
$

Corporate bonds
 
49,083

 

 
49,083

 

Foreign obligations
 
2,419

 

 
2,419

 

Commercial paper
 
2,000

 

 
2,000

 

Equity securities and exchange-traded funds
 
20,649

 
20,649

 

 

Mutual funds
 
11,545

 
11,545

 

 

Trading securities
 
5,386

 
5,386

 

 

Cash equivalents
 
398

 
398

 

 

Total
 
$
131,570

 
$
37,978

 
$
93,592

 
$


 
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 March 31, 2013 and December 31, 2012.
Investments in Unconsolidated Entities
Investments in Unconsolidated Entities
Investments in Unconsolidated Entities
 
Our investments in unconsolidated entities consist primarily of the following:
 
 
 
As of March 31


As of December 31

($000)
 
2013


2012

Investment in MJKK
 
$
21,152

 
$
20,540

Other equity method investments
 
6,019

 
6,288

Investments accounted for using the cost method
 
8,464

 
8,477

Total investments in unconsolidated entities
 
$
35,635

 
$
35,305


 
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” under 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 March 31

 
As of December 31

 
 
2013

 
2012

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

 
 

Japanese yen (¥000)
 
¥
5,054,213

 
¥
3,109,579

Equivalent U.S. dollars ($000)
 
$
53,676

 
$
36,227



Other Equity Method Investments. As of March 31, 2013 and December 31, 2012, other equity method investments consist of our investment in Morningstar Sweden AB (Morningstar Sweden), YCharts, Inc. (YCharts), and Inquiry Financial Europe AB (Inquiry Financial). Morningstar Sweden develops and markets products and services customized for investors in Sweden. Our ownership interest in Morningstar Sweden was approximately 24% as of March 31, 2013 and December 31, 2012. YCharts is a technology company that provides stock research and analysis. Our ownership interest in YCharts was approximately 22% as of March 31, 2013 and December 31, 2012. Inquiry Financial is a provider of sell-side consensus estimate data. Our ownership interest in Inquiry Financial was approximately 34% as of March 31, 2013 and December 31, 2012.

We did not record any impairment losses on our equity method investments in the first three months of 2013 or 2012.
 
Cost Method Investments. As of March 31, 2013 and December 31, 2012, our cost method investments consist of minority investments in Pitchbook Data, Inc. (Pitchbook) and HelloWallet LLC (HelloWallet). Pitchbook offers detailed data and information about private equity transactions, investors, companies, limited partners, and service providers. HelloWallet is a provider of personalized financial guidance to employees of Fortune 1000 companies.

We did not record any impairment losses on our cost method investments in the first three months of 2013 or 2012.
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 March 31

(000)
 
2013

Shares available for future grants
 
4,741


 
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 months ended March 31, 2013 and March 31, 2012:
 
 
 
Three months ended March 31
($000)
 
2013

 
2012

Restricted stock units
 
$
3,563

 
$
3,278

Restricted stock
 
97

 
444

Stock options
 
123

 
144

Total stock-based compensation expense
 
$
3,783

 
$
3,866

 
 
 
 
 
Income tax benefit related to the stock-based compensation expense
 
$
1,030

 
$
930


 

The following table summarizes the amount of unrecognized stock-based compensation expense as of March 31, 2013 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
 
$
26,014

 
31
Restricted stock
 
808

 
25
Stock options
 
955

 
25
Total unrecognized stock-based compensation expense
 
$
27,777

 
30


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 during 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 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 three months of 2013:
Restricted Stock Units (RSUs)
 
Unvested

 
Vested but
Deferred

 
Total

 
Weighted
Average
Grant Date Value
per RSU

RSUs outstanding—December 31, 2012
 
727,145

 
18,782

 
745,927

 
$
53.37

Granted
 

 

 

 

Dividend equivalents
 

 

 

 

Vested
 
(2,586
)
 

 
(2,586
)
 
35.83

Vested but deferred
 

 

 

 

Issued
 

 

 

 

Forfeited
 
(9,500
)
 

 
(9,500
)
 
53.25

RSUs outstanding—March 31, 2013
 
715,059

 
18,782

 
733,841

 
53.87


 
Restricted Stock
 
In conjunction with our acquisition of Realpoint in May 2010, we issued 199,174 shares of restricted stock to the selling employee-shareholders under the 2004 Stock Incentive Plan. The restricted stock vests ratably over a five-year period from the acquisition date and may be subject to forfeiture if the holder terminates his or her employment during the vesting period.

Because of the terms of the restricted stock agreements prepared in conjunction with the Realpoint acquisition, we account for the grant of restricted stock as stock-based compensation expense and not as part of the acquisition consideration.

We measured the fair value of the restricted stock on the date of grant based on the closing market price of our common stock on the day prior to the grant. We amortize the fair value of $9,363,000 to stock-based compensation expense over the vesting period. We have assumed that all of the remaining restricted stock will ultimately vest, and therefore have not incorporated a forfeiture rate for purposes of determining the stock-based compensation expense.
 
Stock Options

Stock options granted to employees vest ratably over a four-year period. Grants to our non-employee directors vest ratably over a three-year period. All grants expire 10 years after the date of grant. Almost all of the options granted under the 2004 Stock Incentive Plan have a premium feature in which the exercise price increases over the term of the option at a rate equal to the 10-year Treasury bond yield as of the date of grant. Options granted under the 2011 Plan have an exercise price equal to the fair market value on the grant date.

In May 2011, we granted 86,106 stock options under the 2004 Stock Incentive Plan. In November 2011, we granted 6,095 stock options under the 2011 Plan. We estimated the fair value of the options on the date of grant using a Black-Scholes option-pricing model. The weighted average fair value of options granted during 2011 was $23.81 per share, based on the following assumptions:

Assumptions for Black-Scholes Option Pricing Model
 
 
Expected life (years):
 
7.4

Volatility factor:
 
35.10
%
Dividend yield:
 
0.35
%
Interest rate:
 
2.87
%


The following tables summarize stock option activity in the first three months of 2013 for our various stock option grants. The first table includes activity for options granted at an exercise price below the fair value per share of our common stock on the grant date; the second table includes activity for all other option grants. 
Options Granted At an Exercise Price Below the Fair Value Per Share on the Grant Date
 
Underlying
Shares

 
Weighted
Average
Exercise
Price

Options outstanding—December 31, 2012
 
282,695

 
$
20.55

Granted
 

 

Canceled
 

 

Exercised
 
(21,410
)
 
20.74

Options outstanding—March 31, 2013
 
261,285

 
20.78

 
 
 
 
 
Options exercisable—March 31, 2013
 
261,285

 
$
20.78


 
All Other Option Grants, Excluding Activity Shown Above
 
Underlying
Shares

 
Weighted
Average
Exercise
Price

Options outstanding—December 31, 2012
 
391,784

 
$
28.98

Granted
 

 

Canceled
 
(525
)
 
17.73

Exercised
 
(88,672
)
 
17.11

Options outstanding—March 31, 2013
 
302,587

 
32.69

 
 
 
 
 
Options exercisable—March 31, 2013
 
248,487

 
$
27.29

 
The following table summarizes the total intrinsic value (difference between the market value of our stock on the date of exercise and the exercise price of the option) of options exercised:
 
 
 
Three months ended March 31
($000)
 
2013

 
2012

Intrinsic value of options exercised
 
$
5,588

 
$
10,905


 

The table below shows additional information for options outstanding and exercisable as of March 31, 2013:
 
 
 
Options Outstanding
 
Options Exercisable
Range of Exercise Prices
 
Number of  Options

 
Weighted
Average
Remaining
Contractual
Life (years)
 
Weighted
Average
Exercise
Price

 
Aggregate
Intrinsic
Value
($000)

 
Exercisable Shares

 
Weighted Average Remaining Contractual Life (years)
 
Weighted Average Exercise Price

 
Aggregate Intrinsic Value ($000)

$8.57 - $14.70
 
29,582

 
0.11
 
$
8.63

 
$
1,813

 
29,582

 
0.11
 
$
8.63

 
$
1,813

$20.74- $47.32
 
462,615

 
1.90
 
23.66

 
21,400

 
462,615

 
1.90
 
23.66

 
21,400

$57.28 - $59.35
 
71,675

 
8.29
 
57.46

 
893

 
17,575

 
8.29
 
57.46

 
203

$8.57 - $59.35
 
563,872

 
4.29
 
27.17

 
$
24,106

 
509,772

 
2.02
 
23.95

 
$
23,416

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Vested or Expected to Vest
 
 
 
 
 
 
 
 
 
 
 
 
 
$8.57 - $59.35
 
563,872

 
2.62
 
$
27.17

 
$
24,106

 
 
 
 
 
 
 
 

 
The aggregate intrinsic value in the table above represents the total pretax intrinsic value all option holders would have received if they had exercised all outstanding options on March 31, 2013. The intrinsic value is based on our closing stock price of $69.92 on that date.

Excess Tax Benefits Related to Stock-Based Compensation
 
FASB ASC 718, Compensation—Stock Compensation, requires that we classify the cash flows that result from excess tax benefits as financing cash flows. Excess tax benefits correspond to the portion of the tax deduction taken on our income tax return that exceeds the amount of tax benefit related to the compensation cost recognized in our Statement of Income. The following table summarizes our excess tax benefits for the three months ended March 31, 2013 and March 31, 2012:
 
 
Three months ended March 31
($000)
 
2013

 
2012

Excess tax benefits related to stock-based compensation
 
$
1,587

 
$
3,313

Income Taxes
Income Taxes
Income Taxes
 
Effective Tax Rate

The following table shows our effective income tax rate for the three months ended March 31, 2013 and March 31, 2012:
 
 
 
Three months ended March 31
($000)
 
2013

 
2012

Income before income taxes and equity in net income of unconsolidated entities
 
$
41,505

 
$
31,058

Equity in net income of unconsolidated entities
 
497

 
566

Net loss attributable to the noncontrolling interest
 
43

 
24

Total
 
$
42,045

 
$
31,648

Income tax expense
 
$
12,427

 
$
11,511

Effective tax rate
 
29.6
%
 
36.4
%

 
Our effective tax rate in the first quarter of 2013 was 29.6%, a decrease of 6.8 percentage points compared with the prior-year period. The effective tax rate decrease primarily reflects adjustments to certain deferred income tax benefits and reductions in valuation allowances.

Unrecognized Tax Benefits

The table below provides information concerning our gross unrecognized tax benefits as of March 31, 2013 and December 31, 2012. The table also provides the effect these gross unrecognized tax benefits would have on our income tax expense, if they were recognized.
 
 
As of March 31
 
As of December 31
($000)
 
2013

 
2012

Gross unrecognized tax benefits
 
$
13,746

 
$
12,699

Gross unrecognized tax benefits that would affect income tax expense
 
$
13,746

 
$
12,699

Decrease in income tax expense upon recognition of gross unrecognized tax benefits
 
$
11,389

 
$
10,446



In the first quarter of 2013, we recorded a net increase of $1,047,000 of gross tax benefits.

Our Condensed Consolidated Balance Sheets include the following liabilities for unrecognized tax benefits. These amounts include interest and penalties, less any associated tax benefits.

 
 
As of March 31
 
As of December 31
Liabilities for Unrecognized Tax Benefits ($000)
 
2013

 
2012

Current liability
 
$
6,576

 
$
6,568

Non-current liability
 
6,799

 
5,659

Total liability for unrecognized tax benefits
 
$
13,375

 
$
12,227



We conduct business globally and as a result, we file income tax returns in U.S. federal, state, local, and foreign jurisdictions. In the normal course of business, we are subject to examination by tax authorities throughout the world. The open tax years for our U.S. federal tax returns and most state tax returns include the years 2008 to the present. In non-U.S. jurisdictions, the statute of limitations generally extends to years prior to 2005.

We are currently under audit by the U.S. federal and various state and local tax authorities in the United States, as well as tax authorities in certain non-U.S. jurisdictions. It is possible, though not likely, that the examination phase of some of these audits will conclude in 2013. It is not possible to estimate the effect of current audits on previously recorded unrecognized tax benefits.
 
Our effective tax rate reflects the fact that we are not recording an income tax benefit related to losses recorded by certain of our non-U.S. operations. The net operating losses (NOLs) may become deductible in certain non-U.S. tax jurisdictions to the extent these non-U.S. operations become profitable. In the year certain non-U.S. entities record a loss, we do not record a corresponding tax benefit, thus increasing our effective tax rate. For each of our operations, we evaluate whether it is more likely than not that the tax benefits related to NOLs will be realized. As part of this evaluation, we consider evidence such as tax planning strategies, historical operating results, forecasted taxable income, and recent financial performance. Upon determining that it is more likely than not that the NOLs will be realized, we reduce the tax valuation allowances related to these NOLs, which results in a reduction to our income tax expense and our effective tax rate in the period.

Contingencies
Contingencies
Contingencies

Life's Good S.T.A.B.L. Hedge Fund

In September 2011, three individual investors in Life's Good S.T.A.B.L. Mortgage hedge fund (LG), Marta Klass, Gregory Martin, and Richard Roellig, filed a complaint in the United States District Court for the Eastern District of Pennsylvania against LG, its principal Robert Stinson, and several other parties, including Morningstar, Inc. (the Klass Matter). The plaintiffs claim that Morningstar committed fraud and aided and abetted the other defendants' breach of fiduciary duty through the 5-star rating LG obtained from Morningstar. The plaintiffs seek unspecified damages. Hedge fund managers self-report their performance data to Morningstar.

More than a year before the Klass Matter, in June 2010, the SEC filed suit against LG and other entities claiming they were part of a Ponzi scheme operated by Stinson. As a result, LG and the other entities were placed in court-appointed receivership. Morningstar was not part of the SEC suit or receivership. Since that time, the Receiver, as part of his duties, has been investigating whether to assert claims against third parties. Morningstar is aware of 14 lawsuits filed by the Receiver seeking to recover money for the fund.

In November 2011, Morningstar filed a motion to dismiss the Klass Matter. On behalf of the entities in receivership, the Receiver filed a motion to stay the proceedings because the Receivership Order does not permit suits against the entities in receivership without court permission. The court granted the Receiver's motion and stayed the Klass Matter. In April 2012, the Receiver filed a complaint against Morningstar, in which the Receiver claims that Morningstar is liable for contribution and aiding and abetting Stinson's breach of fiduciary duty and fraud through the 5-star rating LG obtained from Morningstar. The Receiver seeks unspecified damages. The same day the Receiver filed his complaint, Morningstar sought leave from the court to file a counter suit against Stinson and two of his entities-Keystone State Capital Corporation and LG-for, among other things, fraud, misrepresentation, and breach of user agreements. In June 2012, the court denied Morningstar's motion for leave to file suit. The court took no position on the merits of Morningstar's claims, and did not preclude us from renewing our motion to file a complaint at a later time, but deferred to the Receiver's request not to subject the receivership estate to additional litigation at this early point in the receivership. In August 2012, the court denied Morningstar's motion to dismiss the Receiver's complaint.

We believe the allegations against Morningstar by the Klass plaintiffs and the Receiver have no legal or factual basis and we plan to vigorously contest the claims. We also intend to refile our affirmative claims against Stinson, Keystone, and LG at a later time consistent with the court's order. We cannot predict the outcome of the proceedings.

Business Logic Holding Corporation

In November 2009, Business Logic Holding Corporation filed a complaint in the Circuit Court of Cook County, Illinois against Ibbotson Associates, Inc. and Morningstar, Inc. relating to Ibbotson's prior commercial relationship with Business Logic. Business Logic is alleging breach of contract and trade secret misappropriation in connection with Ibbotson's development of a proprietary web-service software and user interface that connects plan participant data with the Ibbotson Wealth Forecasting Engine. Business Logic seeks, among other things, injunctive relief and unspecified damages. Ibbotson and Morningstar answered the complaint, and Ibbotson asserted a counterclaim against Business Logic alleging trade secret misappropriation and breach of contract, seeking damages and injunctive relief. While Morningstar and Ibbotson are vigorously contesting the claims against them, we cannot predict the outcome of the proceeding.

We have not provided an estimate of loss or range of loss in connection with the matters described above because no such estimate can reasonably be made.

In addition to these proceedings, we are involved in legal proceedings and litigation that have arisen in the normal course of our business. Although the outcome of a particular proceeding can never be predicted, we do not believe that the result of any of these other matters will have a material adverse effect on our business, operating results, or financial position.
Share Repurchase Program
Share Repurchase Program Disclosure [Text Block]
Share Repurchase Program
 
In September 2010, the board of directors approved a share repurchase program that authorizes the repurchase of up to $100 million in shares of our outstanding common stock. In December 2011, the board approved an increase to the $100 million share repurchase program it announced in 2010. The board approval authorized the company to repurchase up to an additional $200 million in shares of our outstanding common stock. In December 2012, the board authorized the company to repurchase an additional $200 million in shares of our outstanding common stock, increasing the repurchase program from $300 million to $500 million with a revised expiration date of December 31, 2014. We may repurchase shares from time to time at prevailing market prices on the open market or in private transactions at our discretion. As of March 31, 2013, we had repurchased a total of 5,222,136 shares for $311,510,000 under this authorization.
Summary of Significant Accounting Policies (Policies)

In addition, effective January 1, 2013, we adopted FASB ASU No. 2013-2, Comprehensive Income (Topic 220). The amended guidance requires us to 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 where net income is presented. The adoption of ASU No. 2013-2 did not have a material effect on our consolidated financial statements.
 
Our segment accounting policies are the same as those described in Note 3, 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 - Disclosur
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:
Investments and Fair value Measurements (Policies)
Investment, Policy [Policy Text Block]
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:
Correction (Tables)
Schedule of Error Corrections and Prior Period Adjustments
The following table shows our previously reported amounts, the correction, and our as corrected amounts:
 
 
Three months ended March 31, 2012
($000)
 
Previously Reported

 
Correction

 
As Corrected