MORNINGSTAR, INC., 10-Q filed on 10/30/2012
Quarterly Report
Document and Entity Information
9 Months Ended
Sep. 30, 2012
Oct. 26, 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
Sep. 30, 2012 
 
Document Fiscal Year Focus
2012 
 
Document Fiscal Period Focus
Q3 
 
Amendment Flag
false 
 
Entity Common Stock, Shares Outstanding
 
47,131,295 
Condensed Consolidated Statements of Income (USD $)
In Thousands, except Per Share data, unless otherwise specified
3 Months Ended 9 Months Ended
Sep. 30, 2012
Sep. 30, 2011
Sep. 30, 2012
Sep. 30, 2011
Revenue
$ 160,952 
$ 160,051 
$ 487,679 
$ 472,829 
Operating expense (1):
 
 
 
 
Cost of goods sold
47,711 1
48,074 1
147,479 
133,929 
Development
12,857 1
13,482 1
38,664 
39,151 
Sales and marketing
25,732 1
27,253 1
81,431 
80,502 
General and administrative
23,966 1
26,431 1
77,090 
83,255 
Depreciation and amortization
10,822 1
10,947 1
31,616 
31,712 
Total operating expense
121,088 1
126,187 1
376,280 
368,549 
Operating income (loss)
39,864 
33,864 
111,399 
104,280 
Non-operating income (expense):
 
 
 
 
Interest income (expense), net
1,719 
797 
3,848 
1,142 
Other income (expense), net
161 
(1,376)
(314)
(938)
Non-operating income (expense), net
1,880 
(579)
3,534 
204 
Income before income taxes and equity in net income of unconsolidated entities
41,744 
33,285 
114,933 
104,484 
Income tax expense
15,186 
12,343 
41,441 
35,585 
Equity in net income of unconsolidated entities
478 
428 
1,541 
1,397 
Consolidated net income
27,036 
21,370 
75,033 
70,296 
Net (income) loss attributable to the noncontrolling interest
34 
10 
62 
106 
Net income attributable to Morningstar, Inc.
$ 27,070 
$ 21,380 
$ 75,095 
$ 70,402 
Net income per share attributable to:
 
 
 
 
Basic (in dollars per share)
$ 0.56 
$ 0.42 
$ 1.53 
$ 1.40 
Diluted (in dollars per share)
$ 0.56 
$ 0.42 
$ 1.51 
$ 1.37 
Dividends declared per common share
$ 0.10 
$ 0.05 
$ 0.30 
$ 0.15 
Dividends paid per common share
$ 0.10 
$ 0.05 
$ 0.30 
$ 0.15 
Weighted average shares outstanding:
 
 
 
 
Basic (in shares)
47,975 
50,278 
49,028 
50,082 
Diluted (in shares)
48,481 
51,123 
49,664 
51,071 
Condensed Consolidated Statements of Income (Parenthetical) (USD $)
In Thousands, unless otherwise specified
3 Months Ended 9 Months Ended
Sep. 30, 2012
Sep. 30, 2011
Sep. 30, 2012
Sep. 30, 2011
(1) Includes stock-based compensation expense of:
 
 
 
 
Allocated Share-based Compensation Expense
$ 3,994 
$ 3,951 
$ 11,594 
$ 11,443 
Cost of Sales
 
 
 
 
(1) Includes stock-based compensation expense of:
 
 
 
 
Allocated Share-based Compensation Expense
1,148 
1,117 
3,304 
3,068 
Development
 
 
 
 
(1) Includes stock-based compensation expense of:
 
 
 
 
Allocated Share-based Compensation Expense
471 
545 
1,435 
1,588 
Sales and Marketing
 
 
 
 
(1) Includes stock-based compensation expense of:
 
 
 
 
Allocated Share-based Compensation Expense
493 
489 
1,433 
1,392 
General and Administrative
 
 
 
 
(1) Includes stock-based compensation expense of:
 
 
 
 
Allocated Share-based Compensation Expense
$ 1,882 
$ 1,800 
$ 5,422 
$ 5,395 
Condensed Consolidated Statements of Comprehensive Income Consolidated Statements of Comprehensive Income (USD $)
In Thousands, unless otherwise specified
3 Months Ended 9 Months Ended
Sep. 30, 2012
Sep. 30, 2011
Sep. 30, 2012
Sep. 30, 2011
Consolidated net income
$ 27,036 
$ 21,370 
$ 75,033 
$ 70,296 
Other comprehensive income (loss), net of tax:
 
 
 
 
Foreign currency translation adjustment
7,375 
(12,570)
5,597 
(6)
Unrealized gains (losses) on securities:
 
 
 
 
Unrealized holding gains (losses) arising during period
1,026 
(1,871)
1,394 
(1,472)
Reclassification of adjustments for (gains) losses included in net income
0 
81 
33 
(171)
Other comprehensive income (loss), net
8,401 
(14,360)
7,024 
(1,649)
Other comprehensive income (loss), net
35,437 
7,010 
82,057 
68,647 
Comprehensive (income) loss attributable to noncontrolling interest
16 
(47)
77 
52 
Comprehensive income attributable to Morningstar, Inc.
$ 35,453 
$ 6,963 
$ 82,134 
$ 68,699 
Condensed Consolidated Balance Sheets (USD $)
In Thousands, unless otherwise specified
Sep. 30, 2012
Dec. 31, 2011
Current assets:
 
 
Cash and cash equivalents
$ 152,181 
$ 200,437 
Investments
190,899 
269,755 
Accounts receivable, less allowance of $723 and $835, respectively
119,877 
113,312 
Deferred tax asset, net
2,156 
5,104 
Income tax receivable, net
5,277 
7,445 
Other
22,546 
15,980 
Total current assets
492,936 
612,033 
Property, equipment, and capitalized software, net
77,873 
68,196 
Investments in unconsolidated entities
38,278 
27,642 
Goodwill
321,134 
318,492 
Intangible assets, net
122,832 
139,809 
Other assets
8,330 
5,912 
Total assets
1,061,383 
1,172,084 
Current liabilities:
 
 
Accounts payable and accrued liabilities
40,356 
41,403 
Accrued compensation
55,131 
73,124 
Deferred revenue
164,360 
155,494 
Other
319 
612 
Total current liabilities
260,166 
270,633 
Accrued compensation
6,802 
5,724 
Deferred tax liability, net
14,262 
15,940 
Deferred rent
15,160 
14,604 
Other long-term liabilities
8,262 
8,167 
Total liabilities
304,652 
315,068 
Morningstar, Inc. shareholders' equity:
 
 
Common stock, no par value, 200,000,000 shares authorized, of which 47,479,142 and 50,083,940 shares were outstanding as of September 30, 2012 and December 31, 2011, respectively
5 
5 
Treasury stock at cost, 4,125,568 shares as of September 30, 2012 and 980,177 shares as of December 31, 2011
(232,685)
(46,701)
Additional paid-in capital
509,896 
491,432 
Retained earnings
469,295 
409,022 
Accumulated other comprehensive income:
 
 
Currency translation adjustment
7,548 
1,936 
Unrealized gain on available-for-sale securities
1,103 
(324)
Total accumulated other comprehensive income
8,651 
1,612 
Total Morningstar, Inc. shareholders' equity
755,162 
855,370 
Noncontrolling interest
1,569 
1,646 
Total equity
756,731 
857,016 
Total liabilities and equity
$ 1,061,383 
$ 1,172,084 
Condensed Consolidated Balance Sheets (Parenthetical) (USD $)
In Thousands, except Share data, unless otherwise specified
Sep. 30, 2012
Dec. 31, 2011
Statement of Financial Position [Abstract]
 
 
Allowance for Doubtful Accounts Receivable, Current
$ 723 
$ 835 
Common Stock, No Par Value
$ 0 
$ 0 
Common Stock, Shares Authorized
200,000,000 
200,000,000 
Common Stock, Shares, Outstanding
47,479,142 
50,083,940 
Treasury Stock, Shares
4,125,568 
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)
75,033 
 
 
 
75,095 
 
(62)
Other Comprehensive Income (loss)
 
 
 
 
 
 
 
Unrealized gains (losses) on available-for-sale investments, net of income tax of $189
1,394 
   
   
   
   
1,394 
0 
Reclassification of adjustments for losses (gains) included in net income, net of income tax of $16
33 
   
   
   
   
33 
0 
Foreign currency translation adjustment, net
5,597 
   
   
   
   
5,612 
(15)
Other comprehensive income (loss), net
7,024 
   
   
   
   
7,039 
(15)
Issuance of common stock related to stock-option exercises and vesting of restricted stock units, net
2,760 
0 
1,114 
1,646 
   
   
   
Issuance of common stock related to stock-option exercises and vesting of restricted stock units, net (in shares)
 
561,276 
 
 
 
 
 
Adjustments to Additional Paid in Capital, Share-based Compensation, Requisite Service Period Recognition
 
 
 
 
 
 
 
Stock-based compensation - restricted stock units
9,944 
   
   
9,944 
   
   
   
Stock-based compensation - restricted stock
1,332 
   
   
1,332 
   
   
   
Stock-based compensation - stock options
318 
   
   
318 
   
   
   
Excess tax benefit derived from stock-option exercises and vesting of restricted stock units
5,007 
   
   
5,007 
   
   
   
Common share repurchased
(187,098)
   
(187,098)
   
   
   
   
Common share repurchased (in shares)
 
(3,166,074)
 
 
 
 
 
Dividends declared - common shares outstanding
(14,587)
   
   
   
(14,587)
   
   
Dividends declared - restricted stock units
(18)
   
   
217 
(235)
   
   
Balance at Sep. 30, 2012
$ 756,731 
$ 5 
$ (232,685)
$ 509,896 
$ 469,295 
$ 8,651 
$ 1,569 
Balance (in shares) at Sep. 30, 2012
47,479,142 
47,479,142 
 
 
 
 
 
Condensed Consolidated Statement of Equity (Parenthetical) (USD $)
In Thousands, unless otherwise specified
9 Months Ended
Sep. 30, 2012
Statement of Stockholders' Equity [Abstract]
 
Other Comprehensive Income (Loss), Unrealized Holding Gain (Loss) on Securities Arising During Period, Tax
$ 794 
Other Comprehensive Income (Loss), Reclassification Adjustment for Sale of Securities Included in Net Income, Tax
$ 19 
Condensed Consolidated Statements of Cash Flows (USD $)
In Thousands, unless otherwise specified
9 Months Ended
Sep. 30, 2012
Sep. 30, 2011
Operating activities
 
 
Consolidated net income
$ 75,033 
$ 70,296 
Adjustments to reconcile consolidated net income to net cash flows from operating activities:
 
 
Depreciation and amortization
31,616 
31,712 
Deferred income taxes
492 
(1,559)
Stock-based compensation expense
11,594 
11,443 
Provision for bad debt
990 
1,076 
Equity in net income of unconsolidated entities
(1,541)
(1,397)
Excess tax benefits from stock-option exercises and vesting of restricted stock units
(5,007)
(7,621)
Other, net
342 
1,607 
Changes in operating assets and liabilities, net of effects of acquisitions:
 
 
Accounts receivable
(6,569)
(403)
Other assets
(3,551)
1,996 
Accounts payable and accrued liabilities
(4,316)
(5,275)
Accrued compensation
(20,851)
(3,242)
Income taxes- current
7,220 
9,442 
Deferred revenue
7,684 
618 
Deferred rent
291 
(984)
Other liabilities
(1,111)
(1,393)
Cash provided by operating activities
92,316 
106,316 
Investing activities
 
 
Purchases of investments
(134,929)
(298,876)
Proceeds from maturities and sales of investments
216,350 
222,599 
Capital expenditures
(22,876)
(14,689)
Acquisitions, net of cash acquired
0 
300 
Purchases of equity and cost method investments
10,304 
0 
Other, net
(4)
875 
Cash used for investing activities
48,237 
(89,791)
Financing activities
 
 
Proceeds from stock-option exercises, net
2,760 
6,630 
Excess tax benefits from stock-option exercises and vesting of restricted stock units
5,007 
7,621 
Common shares repurchased
(183,698)
(28,526)
Dividends paid
(14,867)
(7,539)
Other, net
(18)
(363)
Cash provided by (used for) financing activities
(190,816)
(22,177)
Effect of exchange rate changes on cash and cash equivalents
2,007 
(254)
Net increase (decrease) in cash and cash equivalents
(48,256)
(5,906)
Cash and cash equivalents-beginning of period
200,437 
180,176 
Cash and cash equivalents-end of period
152,181 
174,270 
Supplemental disclosure of cash flow information:
 
 
Cash paid for income taxes
33,163 
28,437 
Supplemental information of non-cash investing and financing activities:
 
 
Unrealized Gain (Loss) on Available For Sale Investments
$ 2,221 
$ (2,598)
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
 
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 nine months ended September 30, 2011 that had not been previously detected. We did not properly disclose the correct amount 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, but did not exist in the cumulative statement as of and for the six months ended June 30, 2012.

The following tables shows our previously reported amounts, the correction, and our as corrected amounts:
 
 
Nine months ended September 30, 2011
($000)
 
Previously Reported

 
Correction

 
As Corrected

Investing Activities
 
 
 
 
 
 
Purchases of investments
 
$
(281,698
)
 
$
(17,178
)
 
$
(298,876
)
Proceeds from maturities and sales of investments
 
$
205,421

 
$
17,178

 
$
222,599

Cash used for investing activities
 
$
(89,791
)
 
$
—

 
$
(89,791
)
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 September 30, 2012:
 
 
($000)

Balance as of December 31, 2011
$
318,492

Net change, primarily currency translation
2,642

Balance as of September 30, 2012
$
321,134



We did not record any significant impairment losses in the first nine months 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 September 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
 
$
32,343

 
$
(22,488
)
 
$
9,855

 
9

 
$
32,293

 
$
(20,455
)
 
$
11,838

 
9

Customer-related assets
 
135,772

 
(62,763
)
 
73,009

 
12

 
134,396

 
(52,611
)
 
81,785

 
12

Supplier relationships
 
240

 
(93
)
 
147

 
20

 
240

 
(84
)
 
156

 
20

Technology-based assets
 
81,308

 
(41,735
)
 
39,573

 
9

 
80,694

 
(35,130
)
 
45,564

 
9

Non-competition agreement
 
1,766

 
(1,518
)
 
248

 
4

 
1,751

 
(1,285
)
 
466

 
4

Total intangible assets
 
$
251,429

 
$
(128,597
)
 
$
122,832

 
10

 
$
249,374

 
$
(109,565
)
 
$
139,809

 
10

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

 
2011

 
2012

 
2011

Amortization expense
 
$
5,941

 
$
6,894

 
$
17,972

 
$
20,039


 
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
 
$
24,048

2013
 
21,317

2014
 
20,058

2015
 
19,186

2016
 
14,564

2017
 
9,954


 
Our estimates of future amortization expense for intangible assets may be affected by acquisitions, dispositions, 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 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.
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 September 30
 
Nine months ended September 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.:
 
$
27,070

 
$
21,380

 
$
75,095

 
$
70,402

Less: Distributed earnings available to participating securities
 
(12
)
 
(8
)
 
(39
)
 
(25
)
Less: Undistributed earnings available to participating securities
 
(53
)
 
(57
)
 
(144
)
 
(189
)
Numerator for basic net income per share — undistributed and distributed earnings available to common shareholders
 
$
27,005

 
$
21,315

 
$
74,912

 
$
70,188

 
 
 
 
 
 
 
 
 
Weighted average common shares outstanding
 
47,975

 
50,278

 
49,028

 
50,082

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

 
$
0.42

 
$
1.53

 
$
1.40

 
 
 
 
 
 
 
 
 
Diluted net income per share attributable to Morningstar, Inc.:
 
 
 
 
 
 
 
 
Numerator for basic net income per share — undistributed and distributed earnings available to common shareholders
 
$
27,005

 
$
21,315

 
$
74,912

 
$
70,188

Add: Undistributed earnings allocated to participating securities
 
53

 
57

 
144

 
189

Less: Undistributed earnings reallocated to participating securities
 
(53
)
 
(56
)
 
(142
)
 
(186
)
Numerator for diluted net income per share — undistributed and distributed earnings available to common shareholders
 
$
27,005

 
$
21,316

 
$
74,914

 
$
70,191

 
 


 


 


 


Weighted average common shares outstanding
 
47,975

 
50,278

 
49,028

 
50,082

Net effect of dilutive stock options and restricted stock units
 
506

 
845

 
636

 
989

Weighted average common shares outstanding for computing diluted income per share
 
48,481

 
51,123

 
49,664

 
51,071

 
 


 


 


 


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

 
$
0.42

 
$
1.51

 
$
1.37


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. The latter 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 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 September 30, 2012
($000)
 
Investment
Information

 
Investment
Management

 
Corporate Items

 
Total

External revenue
 
$
129,357

 
$
31,595

 
$
—

 
$
160,952

Operating expense, excluding stock-based compensation expense, depreciation, and amortization
 
85,366

 
16,145

 
4,761

 
106,272

Stock-based compensation expense
 
2,738

 
577

 
679

 
3,994

Depreciation and amortization
 
2,296

 
31

 
8,495

 
10,822

Operating income (loss)
 
$
38,957

 
$
14,842

 
$
(13,935
)
 
$
39,864

 
 
 
 
 
 
 
 
 
U.S. capital expenditures
 
 

 
 

 
 

 
$
3,066

Non-U.S. capital expenditures
 
 

 
 

 
 

 
$
1,888

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

 
Investment
Management

 
Corporate Items

 
Total

External revenue
 
$
125,804

 
$
34,247

 
$
—

 
$
160,051

Operating expense, excluding stock-based compensation expense, depreciation, and amortization
 
89,652

 
15,587

 
6,050

 
111,289

Stock-based compensation expense
 
2,609

 
556

 
786

 
3,951

Depreciation and amortization
 
2,117

 
42

 
8,788

 
10,947

Operating income (loss)
 
$
31,426

 
$
18,062

 
$
(15,624
)
 
$
33,864

 
 
 
 
 
 
 
 
 
U.S. capital expenditures
 
 

 
 

 
 

 
$
4,560

Non-U.S. capital expenditures
 
 

 
 

 
 

 
$
1,711

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Nine months ended September 30, 2012
($000)
 
Investment
Information

 
Investment
Management

 
Corporate Items

 
Total

External revenue
 
$
391,031

 
$
96,648

 
$
—

 
$
487,679

Operating expense, excluding stock-based compensation expense, depreciation, and amortization
 
265,719

 
49,277

 
18,074

 
333,070

Stock-based compensation expense
 
7,828

 
1,657

 
2,109

 
11,594

Depreciation and amortization
 
6,840

 
108

 
24,668

 
31,616

Operating income (loss)
 
$
110,644

 
$
45,606

 
$
(44,851
)
 
$
111,399

 
 
 
 
 
 
 
 
 
U.S. capital expenditures
 
 

 
 

 
 

 
$
17,280

Non-U.S. capital expenditures
 
 

 
 

 
 

 
$
5,596

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Nine months ended September 30, 2011
($000)
 
Investment
Information

 
Investment
Management

 
Corporate Items

 
Total

External revenue
 
$
374,319

 
$
98,510

 
$
—

 
$
472,829

Operating expense, excluding stock-based compensation expense, depreciation, and amortization
 
259,899

 
43,258

 
22,237

 
325,394

Stock-based compensation expense
 
7,567

 
1,529

 
2,347

 
11,443

Depreciation and amortization
 
6,023

 
124

 
25,565

 
31,712

Operating income (loss)
 
$
100,830

 
$
53,599

 
$
(50,149
)
 
$
104,280

 
 
 
 
 
 
 
 
 
U.S. capital expenditures
 
 

 
 

 
 

 
$
8,084

Non-U.S. capital expenditures
 
 

 
 

 
 

 
$
6,605

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

 
Investment
Management

 
Corporate Items

 
Total

Goodwill
 
$
279,451

 
$
41,683

 
$
—

 
$
321,134

 
 
 
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 September 30
 
Nine months ended September 30
($000)
 
2012

 
2011

 
2012

 
2011

United States
 
$
114,021

 
$
112,790

 
$
346,442

 
$
334,395

United Kingdom
 
13,711

 
13,588

 
42,160

 
40,382

Europe, excluding the United Kingdom
 
11,643

 
12,609

 
35,980

 
36,750

Australia
 
10,090

 
10,614

 
29,230

 
30,600

Canada
 
7,605

 
6,723

 
22,351

 
20,124

Asia, excluding Japan
 
2,420

 
2,358

 
7,156

 
6,760

Japan
 
924

 
1,032

 
2,889

 
2,922

Other
 
538

 
337

 
1,471

 
896

Total Non-U.S.
 
46,931

 
47,261

 
141,237

 
138,434

 
 
 
 
 
 
 
 
 
Total
 
$
160,952

 
$
160,051

 
$
487,679

 
$
472,829



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

 
2011

United States
 
$
54,060

 
$
44,572

United Kingdom
 
7,611

 
7,512

Europe, excluding the United Kingdom
 
2,429

 
2,629

Australia
 
1,519

 
1,415

Canada
 
1,853

 
2,076

Asia, excluding Japan
 
10,033

 
9,656

Japan
 
207

 
282

Other
 
161

 
54

Total Non-U.S.
 
23,813

 
23,624

 
 
 
 
 
Total
 
$
77,873

 
$
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 September 30
 
As of December 31
($000)
 
2012

 
2011

Available-for-sale
 
$
165,517

 
$
247,917

Held-to-maturity
 
19,948

 
16,347

Trading securities
 
5,434

 
5,491

Total
 
$
190,899

 
$
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 September 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
 
$
55,300

 
$
47

 
$
(622
)
 
$
54,725

 
$
139,099

 
$
72

 
$
(402
)
 
$
138,769

Corporate bonds
 
63,810

 
78

 
(431
)
 
63,457

 
61,589

 
14

 
(280
)
 
61,323

Commercial paper
 
4,995

 
2

 
—

 
4,997

 
29,964

 
2

 
(7
)
 
29,959

Equity securities and exchange-traded funds
 
29,325

 
1,962

 
(346
)
 
30,941

 
8,461

 
368

 
(558
)
 
8,271

Mutual funds
 
10,360

 
1,076

 
(39
)
 
11,397

 
9,298

 
363

 
(66
)
 
9,595

Total
 
$
163,790

 
$
3,165

 
$
(1,438
)
 
$
165,517

 
$
248,411

 
$
819

 
$
(1,313
)
 
$
247,917

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Held-to-maturity:
 
 

 
 

 
 

 
 

 
 

 
 

 
 

 
 

Certificates of deposit
 
$
19,948

 
$
—

 
$
—

 
$
19,948

 
$
16,347

 
$
—

 
$
—

 
$
16,347


 
As of September 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 September 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 September 30, 2012
 
As of December 31, 2011
($000)
 
Cost

 
Fair Value

 
Cost

 
Fair Value

Available-for-sale:
 
 

 
 

 
 

 
 

Due in one year or less
 
$
107,770

 
$
106,979

 
$
155,651

 
$
155,247

Due in one to two years
 
16,061

 
15,938

 
75,001

 
74,804

Due in more than two years
 
274

 
262

 
—

 
—

Equity securities, exchange-traded funds, and mutual funds
 
39,685

 
42,338

 
17,759

 
17,866

Total
 
$
163,790

 
$
165,517

 
$
248,411

 
$
247,917

 
 
 
 
 
 
 
 
 
Held-to-maturity:
 
 

 
 

 
 

 
 

Due in one year or less
 
$
19,942

 
$
19,942

 
$
16,342

 
$
16,342

Due in one to three years
 
6

 
6

 
5

 
5

Total
 
$
19,948

 
$
19,948

 
$
16,347

 
$
16,347


 
As of September 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 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: 
 
 
Nine months ended September 30
($000)
 
2012

 
2011

Realized gains
 
$
689

 
$
270

Realized losses
 
(741
)
 
—

Realized gains (losses), net
 
$
(52
)
 
$
270


 
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:
 
 
 
Nine months ended September 30
($000)
 
2012

 
2011

Unrealized gains (losses), net
 
$
337

 
$
(810
)


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 September 30, 2012
 
 
as of
 
Using Fair Value Hierarchy
($000)
 
September 30, 2012
 
Level 1

 
Level 2

 
Level 3

Available-for-sale investments:
 
 

 
 

 
 

 
 

Government obligations
 
$
54,725

 
$
—

 
$
54,725

 
$
—

Corporate bonds
 
63,457

 
—

 
63,457

 
—

Commercial paper
 
4,997

 
—

 
4,997

 
—

Equity securities and exchange-traded funds
 
30,941

 
30,941

 
—

 
—

Mutual funds
 
11,397

 
11,397

 
—

 
—

Trading securities
 
5,434

 
5,434

 
—

 
—

Cash equivalents
 
20,468

 
20,468

 
—

 
—

Total
 
$
191,419

 
$
68,240

 
$
123,179

 
$
—

 
 
 
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 September 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 September 30


As of December 31

($000)
 
2012


2011

Investment in MJKK
 
$
20,085

 
$
19,662

Other equity method investments
 
6,185

 
2,807

Investments accounted for using the cost method
 
12,008

 
5,173

Total investments in unconsolidated entities
 
$
38,278

 
$
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 September 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)
 
¥
2,843,568

 
¥
2,797,704

Equivalent U.S. dollars ($000)
 
$
36,369

 
$
36,146



Other Equity Method Investments. As of September 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 investors in Sweden. Our ownership interest in Morningstar Sweden was approximately 24% as of September 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 September 30, 2012 and December 31, 2011. As of September 30, 2012, other equity method investments also includes our investment in Inquiry Financial Europe AB (Inquiry Financial). In September 2012, we acquired a minority equity stake in Inquiry Financial for $3,554,000. Inquiry Financial is a provider of sell-side consensus estimate data. Our ownership interest in Inquiry Financial was approximately 34% as of September 30, 2012.

We did not record any impairment losses on our equity method investments in the first nine months of 2012 or 2011.
 
Cost Method Investments. As of September 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 September 30, 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 nine 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 September 30, 2012:

Liability for vacant office space
 
($000)

Balance as of December 31, 2011
 
$
919

Reduction of liability for lease and other related payments
 
(768
)
Balance as of September 30, 2012
 
$
151



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 September 30

(000)
 
2012

Shares available for future grants
 
4,760


 

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 nine months ended September 30, 2012 and September 30, 2011:
 
 
 
Three months ended September 30
 
Nine months ended September 30
($000)
 
2012

 
2011

 
2012

 
2011

Restricted stock units
 
$
3,396

 
$
3,372

 
$
9,944

 
$
9,489

Restricted stock
 
444

 
444

 
1,332

 
1,752

Stock options
 
154

 
135

 
318

 
202

Total stock-based compensation expense
 
$
3,994

 
$
3,951

 
$
11,594

 
$
11,443

 
 
 
 
 
 
 
 
 
Income tax benefit related to the stock-based compensation expense
 
$
931

 
$
967

 
$
2,735

 
$
2,636


 
The following table summarizes the amount of unrecognized stock-based compensation expense as of September 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
 
$
30,356

 
33

Restricted stock
 
4,587

 
31

Stock options
 
1,201

 
30

Total unrecognized stock-based compensation expense
 
$
36,144

 
33



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 nine mo