Table of Contents

	

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

	

FORM 10-Q

	
 	
x QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
FOR THE QUARTERLY PERIOD ENDED June 30, 2013
OR
o TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from         to
Commission File Number: 000-51280

	

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

	
			
Illinois	 	36-3297908	
(State or Other Jurisdiction of	 	(I.R.S. Employer	
Incorporation or Organization)	 	Identification Number)	
 	 	 	
22 West Washington Street	 	 	
Chicago, Illinois	 	60602	
(Address of Principal Executive Offices)	 	(Zip Code)	
   (312) 696-6000
(Registrant’s Telephone Number, Including Area Code)
Indicate by check mark whether the Registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the Registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes x No o
Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files). Yes x No o
Indicate by check mark whether the Registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See the definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act.

				
Large accelerated filer    x	Accelerated filer   o	Non-accelerated filer    o	Smaller reporting company   o	
 	(Do not check if a smaller reporting company)	 	
Indicate by check mark whether the Registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes o No x
As of July 26, 2013, there were 46,111,853 shar es of the Company’s common stock, no par value, outstanding.

	

Table of Contents

MORNINGSTAR, INC. AND SUBSIDIARIES
INDEX

	
					
PART 1	FINANCIAL INFORMATION	3	
 	 	 	 	
 	Item 1.	Financial Statements	3	
 	 	 	 	
 	 	 	Unaudited Condensed Consolidated Statements of Income for the three and six months ended June 30, 2013 and 2012	4	
 	 	 	 	 	
 	 	 	Unaudited Condensed Consolidated Statements of Comprehensive Income for the three and six months ended June 30, 2013 and 2012	5	
 	 	 	 	 	
 	 	 	Unaudited Condensed Consolidated Balance Sheets as of June 30, 2013 and December 31, 2012	6	
 	 	 	 	 	
 	 	 	Unaudited Condensed Consolidated Statement of Equity for the six months ended June 30, 2013	7	
 	 	 	 	 	
 	 	 	Unaudited Condensed Consolidated Statements of Cash Flows for the six months ended June 30, 2013 and 2012	8	
 	 	 	 	 	
 	 	 	Notes to Unaudited Condensed Consolidated Financial Statements	10	
 	 	 	 	
 	Item 2.	Management’s Discussion and Analysis of Financial Condition and Results of Operations	30	
 	 	 	 	
 	Item 3.	Quantitative and Qualitative Disclosures about Market Risk	49	
 	 	 	 	
 	Item 4.	Controls and Procedures	49	

PART 2	OTHER INFORMATION	51	
 	 	 	 	
 	Item 1.	Legal Proceedings	51	
 	 	 	 	
 	Item 1A.	Risk Factors	51	
 	 	 	 	
 	Item 2.	Unregistered Sales of Equity Securities and Use of Proceeds	51	
 	 	 	 	
 	Item 6.	Exhibits	51	
 	 	 	 	
SIGNATURE	 	52	
 	 	 	 	 	
EXHIBIT INDEX	 	 	53	

2

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PART 1.	FINANCIAL INFORMATION	
		
Item 1.	Financial Statements	

3

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Morningstar, Inc. and Subsidiaries
Unaudited Condensed Consolidated Statements of Income

																	
 	 	Three months ended June 30	 	Six months ended June 30	
(in thousands except per share amounts)	 	2013		 	2012		 	2013		 	2012		
 	 	 	 	 	 	 	 	 	
Revenue	 	$	175,428		 	$	165,968		 	$	344,284		 	$	326,727		
 	 	 	 	 	 	 	 	 	
Operating expense (1):	 	 	 	 	 	 	 	 	
Cost of goods sold	 	50,273		 	49,452		 	98,283		 	99,768		
Development	 	14,154		 	12,442		 	27,794		 	25,807		
Sales and marketing	 	28,035		 	27,373		 	56,015		 	55,699		
General and administrative	 	28,120		 	24,946		 	55,447		 	53,124		
Depreciation and amortization	 	11,262		 	10,619		 	22,601		 	20,794		
Total operating expense	 	131,844		 	124,832		 	260,140		 	255,192		
 	 	 	 	 	 	 	 	 	
Operating income	 	43,584		 	41,136		 	84,144		 	71,535		
 	 	 	 	 	 	 	 	 	
Non-operating income (expense):	 	 		 	 		 	 	 	 	
Interest income, net	 	664		 	1,260		 	1,405		 	2,129		
Gain (loss) on sale of investments, reclassified from other comprehensive income	 	423		 	37		 	1,148		 	(49	)	
Holding gain upon acquisition of additional ownership of equity method investments	 	3,713		 	—		 	3,713		 	—		
Other expense, net	 	(1,689	)	 	(302	)	 	(2,210	)	 	(426	)	
Non-operating income, net	 	3,111		 	995		 	4,056		 	1,654		
 	 	 	 	 	 	 	 	 	
Income before income taxes and equity in net income of unconsolidated entities	 	46,695		 	42,131		 	88,200		 	73,189		
 	 	 	 	 	 	 	 	 	
Income tax expense	 	15,955		 	14,744		 	28,382		 	26,255		
 	 	 	 	 	 	 	 	 	
Equity in net income of unconsolidated entities	 	360		 	497		 	857		 	1,063		
 	 	 	 	 	 	 	 	 	
Consolidated net income	 	31,100		 	27,884		 	60,675		 	47,997		
 	 	 	 	 	 	 	 	 	
Net loss attributable to the noncontrolling interest	 	21		 	4		 	64		 	28		
 	 	 	 	 	 	 	 	 	
Net income attributable to Morningstar, Inc.	 	$	31,121		 	$	27,888		 	$	60,739		 	$	48,025		
 	 	 	 	 	 	 	 	 	
Net income per share attributable to Morningstar, Inc.:	 	 		 	 		 	 	 	 	
Basic	 	$	0.67		 	$	0.57		 	$	1.31		 	$	0.97		
Diluted	 	$	0.66		 	$	0.56		 	$	1.30		 	$	0.95		
 	 	 	 	 	 	 	 	 	
Dividends per common share:	 	 	 	 	 	 	 	 	
Dividends declared per common share	 	$	0.13		 	$	0.10		 	$	0.25		 	$	0.20		
Dividends paid per common share	 	$	0.13		 	$	0.10		 	$	0.13		 	$	0.20		
 	 	 	 	 	 	 	 	 	
Weighted average shares outstanding:	 	 	 	 	 	 	 	 	
Basic	 	46,400		 	49,195		 	46,403		 	49,566		
Diluted	 	46,853		 	49,856		 	46,756		 	50,296		

																	
 	 	 	 	 	 	 	 	 	
 	 	Three months ended June 30	 	Six months ended June 30	
 	 	2013		 	2012		 	2013		 	2012		
(1) Includes stock-based compensation expense of:	 	 		 	 		 	 	 	 	
Cost of goods sold	 	$	1,204		 	$	1,067		 	$	2,407		 	$	2,156		
Development	 	487		 	465		 	985		 	964		
Sales and marketing	 	522		 	461		 	1,034		 	940		
General and administrative	 	1,741		 	1,741		 	3,311		 	3,540		
Total stock-based compensation expense	 	$	3,954		 	$	3,734		 	$	7,737		 	$	7,600		

 See notes to unaudited condensed consolidated financial statements.

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Morningstar, Inc. and Subsidiaries
Unaudited Condensed Consolidated Statements of Comprehensive Income

	
																	
 	 	Three months ended June 30	 	Six months ended June 30	
(in thousands) 	 	2013		 	2012		 	2013		 	2012		
 	 	 	 	 	 	 	 	 	
Consolidated net income	 	$	31,100		 	$	27,884		 	$	60,675		 	$	47,997		
 	 	 	 	 	 	 	 	 	
Other comprehensive income (loss):	 	 	 	 	 	 	 	 	
Foreign currency translation adjustment	 	(7,128	)	 	(8,743	)	 	(16,199	)	 	(1,778	)	
Unrealized gains on securities, net of tax:	 	 	 	 	 	 	 	 	
  Unrealized holding gains arising during period	 	(166	)	 	(541	)	 	1,000		 	368		
  Reclassification of gains included in net income	 	(271	)	 	(22	)	 	(734	)	 	33		
Other comprehensive loss	 	(7,565	)	 	(9,306	)	 	(15,933	)	 	(1,377	)	
 	 	 	 	 	 	 	 	 	
Comprehensive income	 	23,535		 	18,578		 	44,742		 	46,620		
Comprehensive (income) loss attributable to noncontrolling interest	 	64		 	(46	)	 	206		 	61		
Comprehensive income attributable to Morningstar, Inc.	 	$	23,599		 	$	18,532		 	$	44,948		 	$	46,681		

See notes to unaudited condensed consolidated financial statements.

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Morningstar, Inc. and Subsidiaries
Unaudited Condensed Consolidated Balance Sheets

									
 	 	As of June 30	 	As of December 31	
(in thousands except share amounts)	 	2013		 	2012		
Assets	 	 		 	 		
Current assets:	 	 		 	 		
Cash and cash equivalents	 	$	169,810		 	$	163,889		
Investments	 	144,973		 	157,529		
Accounts receivable, less allowance of $784 and $569, respectively	 	110,646		 	114,361		
Deferred tax asset, net	 	3,590		 	3,741		
Income tax receivable, net	 	6,492		 	14,267		
Other	 	26,874		 	20,823		
Total current assets	 	462,385		 	474,610		
Property, equipment, and capitalized software, net	 	95,550		 	84,022		
Investments in unconsolidated entities	 	36,087		 	35,305		
Goodwill	 	321,425		 	320,845		
Intangible assets, net	 	112,073		 	116,732		
Other assets	 	11,537		 	10,438		
Total assets	 	$	1,039,057		 	$	1,041,952		
 	 	 	 	 	
Liabilities and equity	 	 		 	 		
Current liabilities:	 	 		 	 		
Accounts payable and accrued liabilities	 	$	47,639		 	$	43,777		
Accrued compensation	 	50,326		 	67,317		
Deferred revenue	 	155,059		 	146,015		
Other	 	272		 	256		
Total current liabilities	 	253,296		 	257,365		
Accrued compensation	 	8,144		 	8,281		
Deferred tax liability, net	 	24,072		 	21,583		
Deferred rent	 	14,457		 	15,368		
Other long-term liabilities	 	21,812		 	12,460		
Total liabilities	 	321,781		 	315,057		
 	 	 	 	 	
Equity:	 	 		 	 		
Morningstar, Inc. shareholders’ equity:	 	 		 	 		
Common stock, no par value, 200,000,000 shares authorized, of which 46,131,688 and 46,541,571 shares were outstanding as of June 30, 2013 and December 31, 2012, respectively	 	5		 	5		
Treasury stock at cost, 5,943,566   shares as of June 30, 2013 and 5,214,070 shares as of December 31, 2012	 	(352,503	)	 	(301,839	)	
Additional paid-in capital	 	529,334		 	521,285		
Retained earnings	 	545,347		 	496,354		
Accumulated other comprehensive income (loss):	 	 	 	 	
    Currency translation adjustment	 	(7,132	)	 	8,925		
    Unrealized gain on available-for-sale investments	 	1,053		 	787		
Total accumulated other comprehensive income	 	(6,079	)	 	9,712		
Total Morningstar, Inc. shareholders’ equity	 	716,104		 	725,517		
Noncontrolling interest	 	1,172		 	1,378		
Total equity	 	717,276		 	726,895		
Total liabilities and equity	 	$	1,039,057		 	$	1,041,952		
 See notes to unaudited condensed consolidated financial statements.

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Morningstar, Inc. and Subsidiaries
Unaudited Condensed Consolidated Statement of Equity
For the six months ended June 30, 2013

	
																																
 	 	Morningstar, Inc. Shareholders’ Equity	 	 	 	 	
 	 	 	 	 	 	 	 	 	 	Accumulated
Other
Comprehensive
Income
(Loss)		 	 	 	 	
 	 	Common Stock	 	 		 	Additional
Paid-in
Capital		 	 	 			 	Non
Controlling
Interests		 	 	
(in thousands, except share amounts)	 	Shares
Outstanding		 	Par
Value		 	Treasury
Stock		 			 	Retained
Earnings		 			 			 	Total
Equity		
 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	
Balance as of December 31, 2012	 	46,541,571		 	$	5		 	$	(301,839	)	 	$	521,285		 	$	496,354		 	$	9,712		 	$	1,378		 	$	726,895		
 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	
Net income (loss)	 	 	 	—		 	—		 	—		 	60,739		 	—		 	(64	)	 	60,675		
Other comprehensive income (loss):	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	
Unrealized gain on available-for-sale investments, net of income tax of $151	 	 	 	—		 	—		 	—		 	—		 	1,000		 	—		 	1,000		
Reclassification of adjustments for gains included in net income, net of income tax of $414	 	 	 	—		 	—		 	—		 	—		 	(734	)	 	—		 	(734	)	
Foreign currency translation adjustment, net	 	 	 	—		 	—		 	—		 	—		 	(16,057	)	 	(142	)	 	(16,199	)	
Other comprehensive loss, net	 	 	 	—		 	—		 	—		 	—		 	(15,791	)	 	(142	)	 	(15,933	)	
Issuance of common stock related to stock-option exercises and vesting of restricted stock units, net	 	337,886		 	—		 	1,286		 	(3,633	)	 	—		 	—		 	—		 	(2,347	)	
Stock-based compensation — restricted stock units	 	 	 	—		 	—		 	7,297		 	—		 	—		 	—		 	7,297		
Stock-based compensation — restricted stock	 	 	 	—		 	—		 	194		 	—		 	—		 	—		 	194		
Stock-based compensation — stock-options	 	 	 	—		 	—		 	246		 	—		 	—		 	—		 	246		
Excess tax benefit derived from stock-option exercises and vesting of restricted stock units	 	 	 	—		 	—		 	3,842		 	—		 	—		 	—		 	3,842		
Common shares repurchased	 	(747,769	)	 	—		 	(51,950	)	 	—		 	—		 	—		 	—		 	(51,950	)	
Dividends declared — common shares outstanding	 	 	 	—		 	—		 	—		 	(11,563	)	 	—		 	—		 	(11,563	)	
Dividends declared — restricted stock units	 	 	 	—		 	—		 	103		 	(183	)	 	—		 	—		 	(80	)	
 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	
Balance as of June 30, 2013	 	46,131,688		 	$	5		 	$	(352,503	)	 	$	529,334		 	$	545,347		 	$	(6,079	)	 	$	1,172		 	$	717,276		
 
See notes to unaudited condensed consolidated financial statements.

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Morningstar, Inc. and Subsidiaries
Unaudited Condensed Consolidated Statements of Cash Flows

									
 	 	Six months ended June 30	
(in thousands)	 	2013		 	2012		
 	 	 	 	 	
Operating activities	 	 		 	 		
Consolidated net income	 	$	60,675		 	$	47,997		
Adjustments to reconcile consolidated net income to net cash flows from operating activities:	 	 	 	 	
Depreciation and amortization	 	22,601		 	20,794		
Deferred income taxes	 	(38	)	 	299		
Stock-based compensation expense	 	7,737		 	7,600		
Provision for bad debts	 	461		 	717		
Equity in net income of unconsolidated entities	 	(857	)	 	(1,063	)	
Excess tax benefits from stock-option exercises and vesting of restricted stock units	 	(3,842	)	 	(4,548	)	
Holding gain upon acquisition of additional ownership of equity method investments	 	(3,713	)	 	—		
Other, net	 	688		 	745		
Changes in operating assets and liabilities, net of effects of acquisitions:	 	 	 	 	
Accounts receivable	 	524		 	(4,394	)	
Other assets	 	(3,465	)	 	(3,640	)	
Accounts payable and accrued liabilities	 	638		 	652		
Accrued compensation	 	(19,581	)	 	(26,920	)	
Income taxes—current	 	13,693		 	4,525		
Deferred revenue	 	11,023		 	12,333		
Deferred rent	 	(872	)	 	468		
Other liabilities	 	(537	)	 	(776	)	
Cash provided by operating activities	 	85,135		 	54,789		
 	 	 	 	 	
Investing activities	 	 		 	 		
Purchases of investments	 	(82,299	)	 	(133,888	)	
Proceeds from maturities and sales of investments	 	96,128		 	161,523		
Capital expenditures	 	(18,881	)	 	(17,922	)	
Acquisitions, net of cash acquired	 	(11,125	)	 	—		
Proceeds from sale of a business	 	957		 	—		
Purchases of equity- and cost-method investments	 	(909	)	 	(6,750	)	
Other, net	 	436		 	—		
Cash provided by (used for) investing activities	 	(15,693	)	 	2,963		
 	 	 	 	 	
Financing activities	 	 		 	 		
Proceeds from stock-option exercises	 	2,810		 	4,474		
Employee taxes withheld for restricted stock units	 	(5,157	)	 	(3,693	)	
Excess tax benefits from stock-option exercises and vesting of restricted stock units	 	3,842		 	4,548		
Common shares repurchased	 	(53,937	)	 	(105,439	)	
Dividends paid	 	(5,889	)	 	(10,004	)	
Other, net	 	(50	)	 	(20	)	
Cash used for financing activities	 	(58,381	)	 	(110,134	)	
 	 	 	 	 	
Effect of exchange rate changes on cash and cash equivalents	 	(5,140	)	 	(556	)	
Net increase (decrease) in cash and cash equivalents	 	5,921		 	(52,938	)	
Cash and cash equivalents—beginning of period	 	163,889		 	200,437		
Cash and cash equivalents—end of period	 	$	169,810		 	$	147,499		
 	 	 	 	 	
Supplemental disclosure of cash flow information:	 	 		 	 		
Cash paid for income taxes	 	$	14,511		 	$	21,405		

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Supplemental information of non-cash investing and financing activities:	 	 	 	 	
Unrealized gain on available-for-sale investments	 	$	418		 	$	606		
Equipment obtained under long-term financing arrangement	 	$	4,860		 	$	—		
 
See notes to unaudited condensed consolidated financial statements.

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MORNINGSTAR, INC. AND SUBSIDIARIES
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
 
1 . Basis of Presentation of Interim Financial Information
 
The accompanying 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
 
2 . 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.

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3 . Acquisitions, Goodwill and Other Intangible Assets
 
Acquisitions

Increased Ownership Interest in Morningstar Sweden AB

In May 2013, we acquired an additional 76% interest in Morningstar Sweden AB (Morningstar Sweden), increasing our ownership to 100% from 24% . Morningstar’s main offerings in Sweden include Morningstar Direct, Morningstar Data, Integrated Web Tools, and Morningstar.se, an investment information website for individual investors that provides fund and ETF data, portfolio tools, and market analysis. We began consolidating the financial results of this acquisition in our Consolidated Financial Statements on May 2, 2013.

Morningstar Sweden's total preliminary estimated fair value of $18,783,000 includes $14,748,000 in cash paid to acquire the remaining 76% interest in Morningstar Sweden and $4,035,000 related to the 24% of Morningstar Sweden we previously held. We determined the preliminary fair value of the previously held 24% investment independent of the acquired controlling interest by applying a minority interest discount based on analysis of comparable transactions. Accordingly, we recorded a preliminary non-cash holding gain of $3,713,000 . The gain is included in non-operating income in our Unaudited Condensed Consolidated Statement of Income. The gain is preliminary pending receipt of the final valuation of our previously held investment.

The following table summarizes our preliminary allocation of the estimated fair values of the assets acquired and liabilities assumed at the date of acquisition, all of which are preliminary pending receipt of the final valuation:

					
 	 	($000)		
Cash and cash equivalents	 	$	3,472		
Accounts receivable and other current assets	 	519		
Other non-current assets	 	244		
Intangible assets	 	9,000		
Goodwill	 	9,940		
Deferred revenue	 	(1,191	)	
Deferred tax liability	 	(2,118	)	
Other current and non-current liabilities	 	(1,083	)	
Total fair value of Morningstar Sweden	 	$	18,783		

The preliminary allocation includes $9,000,000 of acquired intangible assets, as follows:

							
 	 	($000)		 	Weighted Average Useful Life (years)	
Customer-related assets	 	$	9,000		 	14	
Total intangible assets	 	$	9,000		 	14	

We recognized a preliminary deferred tax liability of $2,118,000 mainly because the amortization expense related to certain intangible assets is not deductible for income tax purposes. The fair value of the acquired intangible assets and the deferred tax liability are preliminary pending receipt of the final valuation for these intangible assets.

Preliminary goodwill of $9,940,000 represents the premium over the fair value of the net tangible and intangible assets acquired with this acquisition. We paid this premium for a number of reasons, including the opportunity to offer Morningstar's full suite of products and services to investors in Sweden and further leverage Morningstar's global reach, investment databases, and technology expertise.

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Goodwill
 
The following table shows the changes in our goodwill balances from December 31, 2012 to June 30, 2013 :

	
				
 	($000)		
Balance as of December 31, 2012	$	320,845		
Acquisition of remaining ownership in Morningstar Sweden	9,940		
Other, primarily foreign currency translation	(9,360	)	
Balance as of June 30, 2013	$	321,425		

We did not record any significant impairment losses in the first six 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 June 30, 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	 	$	29,577		 	$	(22,012	)	 	$	7,565		 	9	 	$	30,621		 	$	(21,527	)	 	$	9,094		 	9	
Customer-related assets	 	138,673		 	(67,508	)	 	71,165		 	12	 	132,798		 	(63,005	)	 	69,793		 	12	
Supplier relationships	 	240		 	(102	)	 	138		 	20	 	240		 	(96	)	 	144		 	20	
Technology-based assets	 	79,720		 	(46,618	)	 	33,102		 	9	 	81,333		 	(43,809	)	 	37,524		 	9	
Non-competition agreement	 	1,680		 	(1,577	)	 	103		 	4	 	1,765		 	(1,588	)	 	177		 	4	
Total intangible assets	 	$	249,890		 	$	(137,817	)	 	$	112,073		 	10	 	$	246,757		 	$	(130,025	)	 	$	116,732		 	10	
 
The following table summarizes our amortization expense related to intangible assets: 

																	
 	 	Three months ended June 30	 	Six months ended June 30	
($000)	 	2013		 	2012		 	2013		 	2012		
Amortization expense	 	$	5,337		 	$	5,976		 	$	10,962		 	$	12,031		
 
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	 	$	21,155		
2014	 	20,174		
2015	 	19,367		
2016	 	14,821		
2017	 	10,362		
2018	 	8,411		
 
Our estimates of future amortization expense for intangible assets may be affected by changes to the preliminary purchase price allocations, additional acquisitions, divestitures, changes in the estimated average useful life, and currency translations.

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4 . Income Per Share  

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

	
																		
 	 	 	Three months ended June 30	 	Six months ended June 30	
(in thousands, except per share amounts)	 	 	2013		 	2012		 	2013		 	2012		
 	 	 	 	 	 	 	 	 	 	
Basic net income per share attributable to Morningstar, Inc.:	 	 	 		 	 		 	 	 	 	
Net income attributable to Morningstar, Inc.:	 	 	$	31,121		 	$	27,888		 	$	60,739		 	$	48,025		
Less: Distributed earnings available to participating securities	 	 	(2	)	 	(12	)	 	(5	)	 	(27	)	
Less: Undistributed earnings available to participating securities	 	 	(9	)	 	(53	)	 	(18	)	 	(88	)	
Numerator for basic net income per share — undistributed and distributed earnings available to common shareholders	 	 	$	31,110		 	$	27,823		 	$	60,716		 	$	47,910		
 	 	 	 	 	 	 	 	 	 	
Weighted average common shares outstanding	 	 	46,400		 	49,195		 	46,403		 	49,566		
 	 	 	 	 	 	 	 	 	 	
Basic net income per share attributable to Morningstar, Inc.	 	 	$	0.67		 	$	0.57		 	$	1.31		 	$	0.97		
 	 	 	 	 	 	 	 	 	 	
Diluted net income per share attributable to Morningstar, Inc.:	 	 	 	 	 	 	 	 	 	
Numerator for basic net income per share — undistributed and distributed earnings available to common shareholders	 	 	$	31,110		 	$	27,823		 	$	60,716		 	$	47,910		
Add: Undistributed earnings allocated to participating securities	 	 	9		 	53		 	18		 	88		
Less: Undistributed earnings reallocated to participating securities	 	 	(9	)	 	(53	)	 	(17	)	 	(87	)	
Numerator for diluted net income per share — undistributed and distributed earnings available to common shareholders	 	 	$	31,110		 	$	27,823		 	$	60,717		 	$	47,911		
 	 	 			 			 			 			
Weighted average common shares outstanding	 	 	46,400		 	49,195		 	46,403		 	49,566		
Net effect of dilutive stock options and restricted stock units	 	 	453		 	661		 	353		 	730		
Weighted average common shares outstanding for computing diluted income per share	 	 	46,853		 	49,856		 	46,756		 	50,296		
 	 	 			 			 			 			
Diluted net income per share attributable to Morningstar, Inc.	 	 	$	0.66		 	$	0.56		 	$	1.30		 	$	0.95		

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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 June 30	 	Six months ended June 30	
(in thousands)	 	 	2013		 	2012		 	2013		 	2012		
Weighted average stock options	 	 	—		 	13		 	—		 	13		
Weighted average restricted stock units	 	 	2		 	—		 	22		 	—		
Weighted average restricted stock	 	 	—		 	—		 	—		 	—		
Total	 	 	2		 	13		 	22		 	13		

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

5 . Segment and Geographical Area Information
 
As of June 30, 2013, Morningstar had 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, Morningstar Equity Research, 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 Equity Research is sold to companies that purchase our research for their own use or provide our research to their affiliated advisors or individual investor clients. Morningstar Principia is our CD-ROM-based investment research and planning software for advisors.
 
The Investment Information segment also includes Morningstar Credit Ratings, LLC. 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.

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Our segment accounting policies are the same as those described in Note 2, except for the capitalization and amortization of internal product development costs, amortization of intangible assets, and costs related to corporate functions. We exclude these items from our operating segment results to provide our chief operating decision maker with a better indication of each segment’s ability to generate cash flow. This information is one of the criteria used by our chief operating decision maker in determining how to allocate resources to each segment. We include capitalization and amortization of internal product development costs, amortization of intangible assets, and costs related to corporate functions in the Corporate Items category. Our segment disclosures are consistent with the business segment information provided to our chief operating decision maker on a recurring basis; for that reason, we don’t present balance sheet information by segment. We disclose goodwill by segment in accordance with the requirements of FASB ASC 350-20-50,  Intangibles - Goodwill - Disclosure.

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The following tables present information about our operating segments and by geographical area:

	
																	
 	 	Three months ended June 30, 2013	
($000)	 	Investment
Information		 	Investment
Management		 	Corporate Items		 	Total		
External revenue	 	$	141,426		 	$	34,002		 	$	—		 	$	175,428		
Operating expense, excluding stock-based compensation expense, depreciation, and amortization	 	91,751		 	16,856		 	8,021		 	116,628		
Stock-based compensation expense	 	2,483		 	611		 	860		 	3,954		
Depreciation and amortization	 	2,343		 	19		 	8,900		 	11,262		
Operating income (loss)	 	$	44,849		 	$	16,516		 	$	(17,781	)	 	$	43,584		
 	 	 	 	 	 	 	 	 	
U.S. capital expenditures	 	 		 	 		 	 		 	$	8,241		
Non-U.S. capital expenditures	 	 		 	 		 	 		 	$	1,522		

 	 	Three months ended June 30, 2012	
($000)	 	Investment
Information		 	Investment
Management		 	Corporate Items		 	Total		
External revenue	 	$	134,749		 	$	31,219		 	$	—		 	$	165,968		
Operating expense, excluding stock-based compensation expense, depreciation, and amortization	 	86,915		 	17,179		 	6,385		 	110,479		
Stock-based compensation expense	 	2,531		 	529		 	674		 	3,734		
Depreciation and amortization	 	2,300		 	38		 	8,281		 	10,619		
Operating income (loss)	 	$	43,003		 	$	13,473		 	$	(15,340	)	 	$	41,136		
 	 	 	 	 	 	 	 	 	
U.S. capital expenditures	 	 		 	 		 	 		 	$	6,818		
Non-U.S. capital expenditures	 	 		 	 		 	 		 	$	2,110		

 	 	Six months ended June 30, 2013	
($000)	 	Investment
Information		 	Investment
Management		 	Corporate Items		 	Total		
External revenue	 	$	277,613		 	$	66,671		 	$	—		 	$	344,284		
Operating expense, excluding stock-based compensation expense, depreciation, and amortization	 	181,620		 	32,475		 	15,707		 	229,802		
Stock-based compensation expense	 	4,982		 	1,203		 	1,552		 	7,737		
Depreciation and amortization	 	4,695		 	43		 	17,863		 	22,601		
Operating income (loss)	 	$	86,316		 	$	32,950		 	$	(35,122	)	 	$	84,144		
 	 	 	 	 	 	 	 	 	
U.S. capital expenditures	 	 		 	 		 	 		 	$	16,250		
Non-U.S. capital expenditures	 	 		 	 		 	 		 	$	2,631		

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 	 	Six months ended June 30, 2012	
($000)	 	Investment
Information		 	Investment
Management		 	Corporate Items		 	Total		
External revenue	 	$	261,674		 	$	65,053		 	$	—		 	$	326,727		
Operating expense, excluding stock-based compensation expense, depreciation, and amortization	 	180,353		 	33,132		 	13,313		 	226,798		
Stock-based compensation expense	 	5,090		 	1,080		 	1,430		 	7,600		
Depreciation and amortization	 	4,544		 	77		 	16,173		 	20,794		
Operating income (loss)	 	$	71,687		 	$	30,764		 	$	(30,916	)	 	$	71,535		
 	 	 	 	 	 	 	 	 	
U.S. capital expenditures	 	 		 	 		 	 		 	$	14,215		
Non-U.S. capital expenditures	 	 		 	 		 	 		 	$	3,707		

	
																	
 	 	As of June 30, 2013	
($000)	 	Investment
Information		 	Investment
Management		 	Corporate Items		 	Total		
Goodwill	 	$	280,252		 	$	41,173		 	$	—		 	$	321,425		

	
																	
 	 	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 June 30	 	Six months ended June 30	
($000)	 	2013		 	2012		 	2013		 	2012		
United States	 	$	126,335		 	$	117,952		 	$	247,748		 	$	232,421		
 	 	 	 	 	 	 	 	 	
United Kingdom	 	14,015		 	14,714		 	27,168		 	28,450		
Europe, excluding the United Kingdom	 	13,993		 	12,281		 	27,160		 	24,336		
Australia	 	9,176		 	9,791		 	18,528		 	19,139		
Canada	 	7,812		 	7,397		 	15,548		 	14,747		
Asia, excluding Japan	 	2,661		 	2,366		 	5,256		 	4,735		
Japan	 	788		 	986		 	1,617		 	1,965		
Other	 	648		 	481		 	1,259		 	934		
Total Non-U.S.	 	49,093		 	48,016		 	96,536		 	94,306		
 	 	 	 	 	 	 	 	 	
Total	 	$	175,428		 	$	165,968		 	$	344,284		 	$	326,727		

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Long-lived assets by geographical area	 	 	 	 	
 	 	As of June 30	 	As of December 31	
($000)	 	2013		 	2012		
United States	 	$	74,154		 	$	60,371		
 	 	 	 	 	
United Kingdom	 	6,318		 	7,435		
Europe, excluding the United Kingdom	 	2,169		 	2,356		
Australia	 	1,114		 	1,402		
Canada	 	1,484		 	1,773		
Asia, excluding Japan	 	10,121		 	10,445		
Japan	 	51		 	84		
Other	 	139		 	156		
Total Non-U.S.	 	21,396		 	23,651		
 	 	 	 	 	
Total	 	$	95,550		 	$	84,022		

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

	
									
 	 	As of June 30	 	As of December 31	
($000)	 	2013		 	2012		
Available-for-sale	 	$	109,687		 	$	125,786		
Held-to-maturity	 	28,343		 	26,357		
Trading securities	 	6,943		 	5,386		
Total	 	$	144,973		 	$	157,529		

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The following table shows the cost, unrealized gains (losses), and fair values related to investments classified as available-for-sale and held-to-maturity:

	
																																	
 	 	As of June 30, 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	 	$	25,277		 	$	11		 	$	(61	)	 	$	25,227		 	$	40,669		 	$	29		 	$	(608	)	 	$	40,090		
Corporate bonds	 	54,189		 	8		 	(302	)	 	53,895		 	49,339		 	36		 	(292	)	 	49,083		
Foreign obligations	 	2,437		 	—		 	(41	)	 	2,396		 	2,437		 	1		 	(19	)	 	2,419		
Commercial paper	 	7,484		 	—		 	(2	)	 	7,482		 	2,000		 	—		 	—		 	2,000		
Equity securities and exchange-traded funds	 	8,038		 	515		 	(220	)	 	8,333		 	19,613		 	1,359		 	(323	)	 	20,649		
Mutual funds	 	10,615		 	1,838		 	(99	)	 	12,354		 	10,499		 	1,092		 	(46	)	 	11,545		
Total	 	$	108,040		 	$	2,372		 	$	(725	)	 	$	109,687		 	$	124,557		 	$	2,517		 	$	(1,288	)	 	$	125,786		
 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	
Held-to-maturity:	 	 		 	 		 	 		 	 		 	 		 	 		 	 		 	 		
Certificates of deposit	 	$	28,343		 	$	—		 	$	—		 	$	28,343		 	$	26,357		 	$	—		 	$	—		 	$	26,357		
 
As of June 30, 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 June 30, 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 June 30, 2013	 	As of December 31, 2012	
($000)	 	Cost		 	Fair Value		 	Cost		 	Fair Value		
Available-for-sale:	 	 		 	 		 	 		 	 		
Due in one year or less	 	$	49,646		 	$	49,421		 	$	87,599		 	$	86,784		
Due in one to two years	 	39,741		 	39,579		 	6,846		 	6,808		
Equity securities, exchange-traded funds, and mutual funds	 	18,653		 	20,687		 	30,112		 	32,194		
    Total	 	$	108,040		 	$	109,687		 	$	124,557		 	$	125,786		
 	 	 	 	 	 	 	 	 	
Held-to-maturity:	 	 		 	 		 	 		 	 		
Due in one year or less	 	$	28,339		 	$	28,339		 	$	26,352		 	$	26,352		
Due in one to three years	 	4		 	4		 	5		 	5		
Total	 	$	28,343		 	$	28,343		 	$	26,357		 	$	26,357		
 
As of June 30, 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.

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

									
 	 	Six months ended June 30	
($000)	 	2013		 	2012		
Realized gains	 	$	2,226		 	$	470		
Realized losses	 	(1,078	)	 	(519	)	
Realized gains (losses), net	 	$	1,148		 	$	(49	)	
 
We determine realized gains and losses using the specific identification method.

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

	
									
 	 	Six months ended June 30	
($000)	 	2013		 	2012		
Unrealized gains, net	 	$	273		 	$	156		

The fair value of our assets subject to fair value measurements and that are measured at fair value on a recurring basis using the fair value hierarchy and the necessary disclosures under FASB ASC 820, Fair Value Measurement , are as follows:

	
																	
 	 	Fair Value	 	Fair Value Measurements as of June 30, 2013	
 	 	as of	 	Using Fair Value Hierarchy	
($000)	 	June 30, 2013	 	Level 1		 	Level 2		 	Level 3		
Available-for-sale investments:	 	 		 	 		 	 		 	 		
Government obligations	 	$	25,227		 	$	—		 	$	25,227		 	$	—		
Corporate bonds	 	53,895		 	—		 	53,895		 	—		
Foreign obligations	 	2,396		 	—		 	2,396		 	—		
Equity securities and exchange-traded funds	 	8,333		 	8,333		 	—		 	—		
Mutual funds	 	12,354		 	12,354		 	—		 	—		
Trading securities	 	6,943		 	6,943		 	—		 	—		
Cash equivalents	 	9,489		 	9,489		 	—		 	—		
Total	 	$	118,637		 	$	37,119		 	$	81,518		 	$	—		

	
																	
 	 	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		 	$	—		

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

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

We measure the fair value of money market funds, mutual funds, equity securities, and exchange-traded funds based on quoted prices in active markets for identical assets or liabilities. All other financial instruments were valued either based on recent trades of securities in inactive markets or based on quoted market prices of similar instruments and other significant inputs derived from observable market data. We did not hold any securities categorized as Level 3 as of June 30, 2013 and December 31, 2012 .

7 . Investments in Unconsolidated Entities
 
Our investments in unconsolidated entities consist primarily of the following:

	
									
 	 	As of June 30			As of December 31		
($000)	 	2013			2012		
Investment in MJKK	 	$	20,900		 	$	20,540		
Other equity method investments	 	6,366		 	6,288		
Investments accounted for using the cost method	 	8,821		 	8,477		
Total investments in unconsolidated entities	 	$	36,087		 	$	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 Tokyo Stock Exchange under the ticker 47650. We account for our investment in MJKK using the equity method. The following table summarizes our ownership percentage in MJKK and the market value of this investment based on MJKK’s publicly quoted share price: 

									
 	 	As of June 30		 	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)	 	¥	9,218,664		 	¥	3,109,579		
Equivalent U.S. dollars ($000)	 	$	93,016		 	$	36,227		

Other Equity Method Investments . As of June 30, 2013 and December 31, 2012 , other equity method investments consist of our investment in YCharts, Inc. (YCharts), and Inquiry Financial Europe AB (Inquiry Financial). YCharts is a technology company that provides stock research and analysis. Our ownership interest in YCharts was approximately 22% as of June 30, 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 June 30, 2013 and December 31, 2012 .

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As of December 31, 2012, other equity-method investments also included our investment in Morningstar Sweden. Our ownership interest and profit-and-loss sharing interest in Morningstar Sweden was 24% at that date. In May 2013, we acquired an additional 76% ownership interest in Morningstar Sweden, increasing our ownership interest to 100% . Upon acquiring the majority ownership, we recorded a non-cash gain of $3,713,000 . This gain represents the difference between the estimated fair value and the book value of our investment in Morningstar Sweden at the date of acquisition. Because Morningstar Sweden is now a wholly owned subsidiary, we no longer account for our investment using the equity method. Beginning in May 2013, we consolidate the assets, liabilities, and results of operations of Morningstar Sweden in our Unaudited Condensed Consolidated Financial Statements. See Note 3 for additional information concerning our acquisition of Morningstar Sweden.

We did not record any impairment losses on our equity method investments in the first six months of 2013 or 2012 .
 
Cost Method Investments. As of June 30, 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 six months of 2013 or 2012 .

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

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

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

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

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

	
				
 	 	As of June 30		
(in thousands)	 	2013		
Shares available for future grants	 	4,521		

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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 six months ended June 30, 2013 and June 30, 2012 :

	
																	
 	 	Three months ended June 30	 	Six months ended June 30	
($000)	 	2013		 	2012		 	2013		 	2012		
Restricted stock units	 	$	3,734		 	$	3,270		 	$	7,297		 	$	6,548		
Restricted stock	 	97		 	444		 	194		 	888		
Stock options	 	123		 	20		 	246		 	164		
Total stock-based compensation expense	 	$	3,954		 	$	3,734		 	$	7,737		 	$	7,600		
 	 	 	 	 	 	 	 	 	
Income tax benefit related to the stock-based compensation expense	 	$	1,068		 	$	882		 	$	2,098		 	$	1,804		

The following table summarizes the amount of unrecognized stock-based compensation expense as of June 30, 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	 	$	38,079		 	36	
Restricted stock	 	711		 	22	
Stock options	 	831		 	22	
Total unrecognized stock-based compensation expense	 	$	39,621		 	35	

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.

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The following table summarizes restricted stock unit activity during the first six 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	 	244,364		 	—		 	244,364		 	69.99		
Dividend equivalents	 	1,357		 	36		 	1,393		 	54.85		
Vested	 	(251,514	)	 	—		 	(251,514	)	 	49.88		
Vested but deferred	 	—		 	—		 	—		 	—		
Issued	 	—		 	(2,257	)	 	(2,257	)	 	49.40		
Forfeited	 	(23,605	)	 	—		 	(23,605	)	 	55.01		
RSUs outstanding—June 30, 2013	 	697,747		 	16,561		 	714,308		 	60.29		
 
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.

The following tables summarize stock option activity in the first six 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	 	(250	)	 	21.04		
Exercised	 	(33,972	)	 	20.82		
Options outstanding—June 30, 2013	 	248,473		 	21.01		
 	 	 	 	 	
Options exercisable—June 30, 2013	 	248,473		 	$	21.01		

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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	 	(1,252	)	 	13.71		
Exercised	 	(125,159	)	 	15.89		
Options outstanding—June 30, 2013	 	265,373		 	35.69		
 	 	 	 	 	
Options exercisable—June 30, 2013	 	229,326		 	$	32.25		
 
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:

	
									
 	 	Six months ended June 30	
($000)	 	2013		 	2012		
Intrinsic value of options exercised	 	$	8,170		 	$	14,531		

The table below shows additional information for options outstanding and exercisable as of June 30, 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	 	735		 	0.78	 	$	10.95		 	$	49		 	735		 	0.78	 	$	10.95		 	$	49		
$20.96 - $47.86	 	441,436		 	1.65	 	23.93		 	23,683		 	441,436		 	1.65	 	23.93		 	23,683		
$57.28 - $59.35	 	71,675		 	8.03	 	57.46		 	1,442		 	35,628		 	8.01	 	57.37		 	692		
$8.57 - $59.35	 	513,846		 	2.54	 	28.59		 	$	25,174		 	477,799		 	2.12	 	26.40		 	$	24,424		
 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	
Vested or Expected to Vest	 	 	 	 	 	 	 	 	 	 	 	 	 	
$8.57 - $59.35	 	513,846		 	2.54	 	$	28.59		 	$	25,174		 	 	 	 	 	 	 	 	
 
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 June 30, 2013 . The intrinsic value is based on our closing stock price of $77.58 on that date.

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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 six months ended June 30, 2013 and June 30, 2012 :

																	
 	 	Three months ended June 30	 	Six months ended June 30	
($000)	 	2013		 	2012		 	2013		 	2012		
Excess tax benefits related to stock-based compensation	 	$	2,255		 	$	1,235		 	$	3,842		 	$	4,548		

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9 . Income Taxes
 
Effective Tax Rate

The following table shows our effective income tax rate for the three and six months ended June 30, 2013 and June 30, 2012 :

	
																	
 	 	Three months ended June 30	 	Six months ended June 30	
($000)	 	2013		 	2012		 	2013		 	2012		
Income before income taxes and equity in net income of unconsolidated entities	 	$	46,695		 	$	42,131		 	$	88,200		 	$	73,189		
Equity in net income of unconsolidated entities	 	360		 	497		 	857		 	1,063		
Net loss attributable to the noncontrolling interest	 	21		 	4		 	64		 	28		
Total	 	$	47,076		 	$	42,632		 	$	89,121		 	$	74,280		
Income tax expense	 	$	15,955		 	$	14,744		 	$	28,382		 	$	26,255		
Effective tax rate	 	33.9	%	 	34.6	%	 	31.8	%	 	35.3	%	
 
Our effective tax rate in the second quarter of 2013 was 33.9% , a decrease of 0.7 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 June 30, 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 June 30	 	As of December 31	
($000)	 	2013		 	2012		
Gross unrecognized tax benefits	 	$	14,332		 	$	12,699		
Gross unrecognized tax benefits that would affect income tax expense	 	$	14,332		 	$	12,699		
Decrease in income tax expense upon recognition of gross unrecognized tax benefits	 	$	11,877		 	$	10,446		

In the first six months of 2013, we recorded a net increase of $1,633,000 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 June 30	 	As of December 31	
Liabilities for Unrecognized Tax Benefits ($000)	 	2013		 	2012		
Current liability	 	$	6,604		 	$	6,568		
Non-current liability	 	7,367		 	5,659		
Total liability for unrecognized tax benefits	 	$	13,971		 	$	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.

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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.

10 . 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.
We have not provided an estimate of loss or range of loss in connection with this matter because no such estimate can reasonably be made.

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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, compensatory damages, punitive damages, attorneys' fees, and injunctive relief. Ibbotson and Morningstar answered the complaint, and Ibbotson asserted a counterclaim against Business Logic alleging trade secret misappropriation and breach of contract, also seeking damages and injunctive relief. Business Logic filed a motion for summary judgment on its breach of contract claim, which is pending but has not yet been decided by the Circuit Court.
As noted above, Business Logic's complaint seeks, among other things, compensatory damages, punitive damages, attorneys' fees, and injunctive relief. With regard to compensatory damages, based on the analysis of Ibbotson's retained damages expert (who has assumed, solely for purposes of his analysis, that Business Logic will prevail with regard to the issue of liability), and recognizing the uncertainty inherent in litigation and our intention to continue to vigorously defend the claims made by Business Logic, our best estimate of the range of possible loss is between $0 and $5.4 million , excluding punitive damages or attorneys' fees, both of which are recoverable in certain circumstances under the Illinois Trade Secrets Act. Business Logic's retained damages expert (who has also assumed for purposes of her estimate that Business Logic will prevail with regard to the issue of liability) has, however, estimated compensatory damages of $84 million , excluding punitive damages or attorneys' fees. We dispute the conclusions reached and the methods employed by Business Logic's expert.
With regard to Business Logic's claim for injunctive relief, no reasonable estimate of loss or range of loss is possible.
Morningstar and Ibbotson continue to vigorously contest all the claims against them in this matter. We cannot, however, predict the outcome of the proceeding.
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.
11 . 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 June 30, 2013 , we had repurchased a total of 5,804,364 shares for $352,886,000 under this authorization.

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Item 2.	Management’s Discussion and Analysis of Financial Condition and Results of Operations	
 
The discussion included in this section, as well as other sections of this Quarterly Report on Form 10-Q, contains forward-looking statements as that term is used in the Private Securities Litigation Reform Act of 1995. These statements are based on our current expectations about future events or future financial performance. Forward-looking statements by their nature address matters that are, to different degrees, uncertain, and often contain words such as “may,” “could,” “expect,” “intend,” “plan,” “seek,” “anticipate,” “believe,” “estimate,” “predict,” “potential,” or “continue.” These statements involve known and unknown risks and uncertainties that may cause the events we discuss not to occur or to differ significantly from what we expect. For us, these risks and uncertainties include, among others:
 
• general industry conditions and competition, including current global financial uncertainty;
• the impact of market volatility on revenue from asset-based fees;
• damage to our reputation resulting from claims made about possible conflicts of interest;
• liability for any losses that result from an actual or claimed breach of our fiduciary duties;
• financial services industry consolidation;
• liability related to the storage of personal information about our users;
• a prolonged outage of our database and network facilities;
• challenges faced by our non-U.S. operations;
• the availability of free or low-cost investment information; and
• liability and/or damage to our reputation as a result of some of our currently
pending litigation.
 
A more complete description of these risks and uncertainties can be found in our other filings with the Securities and Exchange Commission (SEC), including our Annual Report on Form 10-K for the year ended December 31, 2012. If any of these risks and uncertainties materialize, our actual future results may vary significantly from what we expect. We do not undertake to update our forward-looking statements as a result of new information or future events.
 
All dollar and percentage comparisons, which are often accompanied by words such as “increase,” “decrease,” “grew,” “declined,” “was up,” “was down,” “was flat,” or “was similar” refer to a comparison with the same period in the prior year unless otherwise stated.  

Understanding our Company
 
Our Business

Our mission is to create great products that help investors reach their financial goals. We offer an extensive line of data, software, and research products for individual investors, financial advisors, and institutional clients. We also offer investment management services for advisors, institutions, and retirement plan participants. Many of our products are sold through subscriptions or license agreements. As a result, we typically generate recurring revenue.
 
As of the second quarter of 2013, we currently have two operating segments: The Investment Information segment includes all of our data, software, and research products and services. These products and services are typically sold through subscriptions or license agreements. The Investment Management segment includes all of our asset management operations, which are registered investment advisors and earn more than half of their revenue from asset-based fees.

Beginning in the third quarter of 2013, we will begin reporting based on one operating segment to reflect our shift to a more centralized organizational structure. We will continue to report revenue for our two main product groups: Information Products and Investment Management.
 
Over our 29-year history, we have focused primarily on organic growth by introducing new products and services and expanding our existing products. From 2006 through 2010, we also completed 24 acquisitions to support our growth strategies. During the second quarter of 2013, we also acquired the remaining ownership interest in Morningstar Sweden AB to become the sole owner.

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Industry Overview

We monitor developments in the economic and financial information industry to help inform our company strategy, product development plans, and marketing initiatives.

Market volatility increased during the second quarter of 2013 as fears about central-bank actions across the globe made investors increasingly cautious. After strong gains in the first quarter, the Morningstar U.S. Market Index, a broad market benchmark, was up a more modest 2.7% in the second quarter of 2013. The Global Ex-U.S. Index was down 3.1%.

U.S. mutual fund assets stood at $13.9 trillion as of May 31, 2013, based on data from the Investment Company Institute (ICI), compared with $13.0 trillion as of December 31, 2012. Based on Morningstar's estimated asset flow data, investors withdrew $47 billion from long-term open-end funds in June 2013, driven entirely by heavy outflows from taxable and municipal bond funds. For the second quarter overall, investors added about $27 billion to long-term open-end funds, down from $184 billion in the first quarter.

Assets in exchange-traded funds (ETFs) rose to $1.5 trillion as of May 31, 2013, compared with $1.1 trillion as of May 31, 2012, based on data from the ICI.

For the first half of 2013, new issuance of commercial mortgage-backed securities (CMBS) totaled $50.6 billion, compared with $65.0 billion for full-year 2012. Morningstar Credit Ratings, a Nationally Recognized
Statistical Rating Organization and the structured credit research and ratings subsidiary of Morningstar, Inc. was
engaged to provide ratings on 20 new-issue rating deals for the year to date through June 30, 2013, with a rated
balance of $12.5 billion.

In July 2013, the United States Department of Labor (DOL) revised the definition of "Rating Agency" in its amended requirements for the Exemption From Certain Prohibited Transaction Restrictions of the Employee Retirement Income Security Act of 1974 (ERISA), commonly referred to as the “Underwriter Exemptions”, to eliminate any specific reference to a particular credit rating agency. The amended exemption increases the ability of employee benefit plans to invest in structured credit securities that carry ratings issued by Morningstar Credit Ratings.

While economic growth has generally improved in 2013, we believe the business environment for the financial services industry remains challenging. Firms continue to be cautious about spending against a backdrop of low interest rates, client risk aversion, and increased regulation. Further, the historically low interest-rate environment has put significant pressure on the margins of many firms, most notably those in the variable annuity space. As a result, we expect there will be further pressure on revenue from clients in this area.

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Three and Six Months Ended June 30, 2013 vs. Three and Six Months Ended June 30, 2012 
 
Consolidated Results

	
																								
 	 	Three months ended June 30	 	Six months ended June 30	 	
Key Metrics ($000)	 	2013		 	2012		 	Change		 	2013		 	2012		 	Change		 	
Revenue	 	$	175,428		 	$	165,968		 	5.7	 %	 	$	344,284		 	$	326,727		 	5.4	 %	 	
Operating income	 	$	43,584		 	$	41,136		 	6.0	 %	 	$	84,144		 	$	71,535		 	17.6	 %	 	
Operating margin	 	24.8	%	 	24.8	%	 	—		 	24.4	%	 	21.9	%	 	2.5		pp	
 	 	 	 	 	 	 	 	 	 	 	 	 	 	
Cash provided by (used for) investing activities	 	$	(64,925	)	 	$	24,943		 	NMF		 	$	(15,693	)	 	$	2,963		 	NMF		 	
Cash used for financing activities	 	$	(46,731	)	 	$	(89,291	)	 	(47.7	)%	 	$	(58,381	)	 	$	(110,134	)	 	(47.0	)%	 	
 	 	 	 	 	 	 	 	 	 	 	 	 	 	
Cash provided by operating activities	 	$	58,462		 	$	49,165		 	18.9	 %	 	$	85,135		 	$	54,789		 	55.4	 %	 	
Capital expenditures	 	(9,763	)	 	(8,928	)	 	9.4	 %	 	(18,881	)	 	(17,922	)	 	5.4	 %	 	
Free cash flow	 	$	48,699		 	$	40,237		 	21.0	 %	 	$	66,254		 	$	36,867		 	79.7	 %	 	
 
____________________________________________________________________________________________
pp — percentage points
NMF — Not meaningful
 
We define free cash flow as cash provided by or used for operating activities less capital expenditures. We present free cash flow solely as supplemental disclosure to help investors better understand how much cash is available after we spend money to operate our business. Our management team uses free cash flow to evaluate our business. Free cash flow is not equivalent to any measure required to be reported under U.S. generally accepted accounting principles (GAAP). Also, the free cash flow definition we use may not be comparable to similarly titled measures used by other companies.

Consolidated Revenue
 
In the second quarter of 2013 , our consolidated revenue increased 5.7% to $175.4 million , compared with $166.0 million in the second quarter of 2012 . Currency movements had a slightly negative effect in the quarter, lowering revenue by approximately $0.7 million . We had $0.9 million of revenue during 2013 from acquisitions. Our 2012 results included revenue of $1.5 million from businesses that we sold in 2012 and that did not recur in 2013.
 
Excluding acquisitions, divestitures, and the effect of foreign currency translations, our consolidated revenue rose $10.8 million , or 6.6% , in the second quarter of 2013 . Leading the growth were Morningstar Direct, Morningstar Managed Portfolios, Retirement Solutions, and Morningstar Data.

Revenue for the first half of the year increased 5.4% to $344.3 million . Currency movements had a slightly negative effect in the first half, lowering revenue by approximately $1.2 million . We had $0.9 million of revenue during the first half of 2013 from acquisitions. Our 2012 results included revenue of $2.7 million from businesses that we sold in 2012 and that did not recur in 2013.

Excluding acquisitions, divestitures, and the effect of foreign currency translations, our consolidated revenue rose $20.5 million , or 6.3% , in the first half of 2013. Leading the growth were Morningstar Direct, Morningstar Data, Morningstar Managed Portfolios, and Retirement Solutions.

The positive product trends mentioned above for both the second quarter and first half of 2013 helped offset the loss of business from our largest client in the Investment Management segment. As previously announced, a large Investment Advisory Services client moved to in-house management of several fund-of-funds portfolios in April 2012. We recognized about $0.6 million and $3.8 million in revenue in the second quarter and first half of 2012, respectively, associated with our work on these portfolios.

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To make it easier for investors to compare our results in different periods, we provide information on organic revenue, which reflects our underlying business excluding acquisitions, divestitures, and the effect of foreign currency translations, and revenue from divestitures and acquisitions. We had one acquisition during the six months ended June 30, 2013 . We had two divestitures in the fourth quarter of 2012. We include a divested operation as part of revenue from divestitures for 12 months after we complete the divestiture.

The table below reconciles consolidated revenue with organic revenue (revenue excluding acquisitions, divestitures, and the effect of foreign currency translations):

	
																							
 	 	Three months ended June 30	 	Six months ended June 30	
($000)	 	2013		 	2012		 	Change		 	2013		 	2012		 	Change		
Consolidated revenue	 	$	175,428		 	$	165,968		 	5.7	%	 	$	344,284		 	$	326,727		 	5.4	%	
Less: acquisitions	 	(867	)	 	—		 	NMF		 	(867	)	 	—		 	NMF		
Less: divestitures	 	—		 	(1,500	)	 	NMF		 	—		 	(2,663	)	 	NMF		
Unfavorable effect of foreign currency translations	 	749		 	—		 	NMF		 	1,189		 	—		 	NMF		
Organic revenue	 	$	175,310		 	$	164,468		 	6.6	%	 	$	344,606		 	$	324,064		 	6.3	%	
 ___________________________________________________________________________________________
NMF - not meaningful

Organic revenue (revenue excluding acquisitions, divestitures, and the effect of foreign currency translations) is considered a non-GAAP financial measure. The definition of organic revenue we use may not be the same as similarly titled measures used by other companies. Organic revenue should not be considered an alternative to any measure of performance as promulgated under GAAP.

International revenue made up about 28% of our consolidated revenue in the second quarter and first half of 2013 , compared with about 29% in the second quarter and first half of 2012. More than half of our international revenue is from Europe, with most of the remainder from Australia and Canada. Revenue from international operations was up $1.1 million , or 2.2% , to $49.1 million for the second quarter of 2013 compared to $48.0 in the second quarter of 2012. Revenue from international operations rose $2.2 million , or 2.4% , to $96.5 million in the first half of 2013 compared to $94.3 million in the first half of 2012.
 
Foreign currency translations had a slightly negative effect on our international revenue. We had $0.9 million in incremental revenue during the second quarter and first half of 2013 from acquisitions. Our second quarter and first six months of 2012 international results included revenue of $1.4 million and $2.5 million , respectively, from businesses that we sold in 2012 and that did not recur in 2013. Excluding acquisitions, divestitures, and the effect of foreign currency translations, international revenue rose 5.0% in the second quarter and 5.5% in the first half of 2013, reflecting stronger product sales in most regions.

International organic revenue (international revenue excluding acquisitions, divestitures, and the effect of foreign currency translations) is considered a non-GAAP financial measure. The definition of international organic revenue we use may not be the same as similarly titled measures used by other companies. International organic revenue should not be considered an alternative to any measure of performance as promulgated under GAAP.

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The tables below present a reconciliation from international revenue to international organic revenue (international revenue excluding acquisitions, divestitures, and the effect of foreign currency translations):

	
																							
 	 	Three months ended June 30	 	Six months ended June 30	
($000)	 	2013		 	2012		 	Change		 	2013		 	2012		 	Change		
International revenue	 	$	49,093		 	$	48,016		 	2.2	%	 	$	96,536		 	$	94,306		 	2.4	%	
Less: acquisitions	 	(867	)	 	—		 	NMF		 	(867	)	 	—		 	NMF		
Less: divestitures	 	—		 	(1,385	)	 	NMF		 	—		 	(2,461	)	 	NMF		
Unfavorable effect of foreign currency translations	 	749		 	—		 	NMF		 	1,189		 	—		 	NMF		
International organic revenue	 	$	48,975		 	$	46,631		 	5.0	%	 	$	96,858		 	$	91,845		 	5.5	%	

Consolidated Operating Expense

	
																								
 	 	Three months ended June 30	 	Six months ended June 30	 	
($000)	 	2013		 	2012		 	Change		 	2013		 	2012		 	Change		 	
Operating expense	 	$	131,844		 	$	124,832		 	5.6	%	 	$	260,140		 	$	255,192		 	1.9	%	 	
% of revenue	 	75.2	%	 	75.2	%	 	—		 	75.6	%	 	78.1	%	 	(2.5	)	pp	
 
In the second quarter of 2013 , our consolidated operating expense increased $7.0 million , or 5.6% . For the first six months of 2013 , operating expense increased $4.9 million , or 1.9% . Higher salary expense of $2.8 million and $2.3 million was the primary driver of the increase in total operating expense in the quarter and first half of 2013, respectively. Of the increase in salary expense, approximately $1.5 million resulted from moving up the timing of annual salary increases this year to April from July. Salary increases made in July 2012 also contributed to the higher salary expense. Higher bonus expense of $2.2 million and $1.4 million also contributed to the increase in both the second quarter and first half of 2013, respectively. The bonus expense increase mainly reflects the comparison from unusually low expense in the second quarter of 2012. We review and update our estimates and the bonus pool size quarterly, primarily based on our expectations for full-year revenue and operating income metrics relative to internal targets.
 
We had approximately 3,425 employees worldwide as of June 30, 2013 , compared with 3,495 as of December 31, 2012 and 3,490 as of June 30, 2012 .

Intangible amortization expense decreased $0.6 million in the quarter and $1.1 million in the first half of the year, primarily because certain intangible assets from some of our earlier acquisitions are now fully amortized. However, depreciation expense rose $1.3 million in the second quarter and $2.9 million in the first half of the year, primarily driven by amortization of software development costs and higher capital expenditures for computer software in the United States.

General and administrative (G&A) expense in the first half of 2012 included $1.6 million of combined expense for an impairment charge for one of our smaller products and a litigation settlement. These expenses did not recur in 2013.

Cost of Goods Sold

	
																								
 	 	Three months ended June 30	 	Six months ended June 30	 	
($000)	 	2013		 	2012		 	Change		 	2013		 	2012		 	Change		 	
Cost of goods sold	 	$	50,273		 	$	49,452		 	1.7	%	 	$	98,283		 	$	99,768		 	(1.5	)%	 	
% of revenue	 	28.7	%	 	29.8	%	 	(1.1	)	pp	28.5	%	 	30.5	%	 	(2.0	)	pp	
Gross profit	 	$	125,155		 	$	116,516		 	7.4	%	 	$	246,001		 	$	226,959		 	8.4	 %	 	
Gross margin	 	71.3	%	 	70.2	%	 	1.1		pp	71.5	%	 	69.5	%	 	2.0		pp	

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Cost of goods sold is our largest category of operating expense, representing more than one-third of our total operating expense. Our business relies heavily on human capital, and cost of goods sold includes the compensation expense for employees who produce our products and services. Compensation expense for approximately half of our employees is included in this category.
 
Cost of goods sold increased $0.8 million in the second quarter of 2013 and decreased $1.5 million in the first half of 2013. Higher salary expense was the primary contributor to the increase in the second quarter.

Our gross margin improved 1.1 percentage points in the second quarter and 2.0 percentage points in the first half of the year as revenue increased faster than our cost basis in this category.

Development Expense

	
																								
 	 	Three months ended June 30	 	Six months ended June 30	 	
($000)	 	2013		 	2012		 	Change		 	2013		 	2012		 	Change		 	
Development expense	 	$	14,154		 	$	12,442		 	13.8	%	 	$	27,794		 	$	25,807		 	7.7	%	 	
% of revenue	 	8.1	%	 	7.5	%	 	0.6		pp	8.1	%	 	7.9	%	 	0.2		pp	
 
Development expense increased $1.7 million in the second quarter of 2013 and $ 2.0 million in the first six months of 2013. We capitalized $2.2 million and $3.8 million of software development expense in the second quarter and first half of 2013 , respectively, reducing the expense that we would otherwise report in this category. In comparison, we capitalized $2.4 million and $4.1 million in the second quarter and first six months of 2012, respectively. Higher salary expense of $0.9 million in the second quarter of 2013 and $1.0 million in the first half of the year was the primary driver of the increase. Higher bonus expense also contributed to the increase, although to a lesser extent.

As a percentage of revenue, development expense was 0.6 percentage points higher in the second quarter of 2013 and 0.2 percentage points higher in the first half of 2013.

Sales and Marketing Expense

	
																								
 	 	Three months ended June 30	 	Six months ended June 30	 	
($000)	 	2013		 	2012		 	Change		 	2013		 	2012		 	Change		 	
Sales and marketing expense	 	$	28,035		 	$	27,373		 	2.4	%	 	$	56,015		 	$	55,699		 	0.6	%	 	
% of revenue	 	16.0	%	 	16.5	%	 	(0.5	)	pp	16.3	%	 	17.0	%	 	(0.7	)	pp	
 
Sales and marketing expense increased $0.7 million in the second quarter of 2013 and $0.3 million in the first half of 2013. Higher commissions of $1.0 million and $1.9 million in the second quarter and first half of 2013, respectively, contributed to the increase. Lower bonus expense, advertising and marketing expense, and travel expense partially offset the increase in operating expense in the first half of the year.

As a percentage of revenue, sales and marketing expense was down 0.5 percentage points in the second quarter and 0.7 percentage points for the first half of 2013, primarily reflecting lower bonus expense as a percentage of revenue.

General and Administrative Expense

	
																								
 	 	Three months ended June 30	 	Six months ended June 30	 	
($000)	 	2013		 	2012		 	Change		 	2013		 	2012		 	Change		 	
General and administrative expense	 	$	28,120		 	$	24,946		 	12.7	%	 	$	55,447		 	$	53,124		 	4.4	%	 	
% of revenue	 	16.0	%	 	15.0	%	 	1.0		pp	16.1	%	 	16.3	%	 	(0.2	)	pp	

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G&A expense increased $3.2 million in the second quarter of 2013 and $2.3 million in the first half of 2013. Higher professional fees, rent expense, bonus expense, and salary expense contributed to the increase in the second quarter and first half of 2013. G&A expense in the first half of 2012 included about $1.6 million of expense for an impairment charge for one of our smaller products and a litigation settlement. These expenses did not recur in 2013.
 
Bonus expense was up $0.9 million in the first half of 2013. However, in the first quarter of 2013, we paid a greater portion of the 2012 bonus to employees in this category compared with our initial estimate, contributing $0.5 million to the bonus expense recorded in the first half of 2013.

As a percentage of revenue, G&A expense increased 1.0 percentage points in the second quarter of 2013 . As a percentage of revenue, G&A expense declined 0.2 percentage points in the first half of 2013, primarily reflecting the unfavorable effect of the $1.6 million non-recurring expense on our 2012 results.

Depreciation and Amortization Expense

	
																								
 	 	Three months ended June 30	 	Six months ended June 30	 	
($000)	 	2013		 	2012		 	Change		 	2013		 	2012		 	Change		 	
Depreciation expense	 	$	5,925		 	$	4,643		 	27.6	 %	 	$	11,639		 	$	8,763		 	32.8	 %	 	
Amortization expense	 	5,337		 	5,976		 	(10.7	)%	 	10,962		 	12,031		 	(8.9	)%	 	
Total depreciation and amortization expense	 	$	11,262		 	$	10,619		 	6.1	 %	 	$	22,601		 	$	20,794		 	8.7	 %	 	
% of revenue	 	6.4	%	 	6.4	%	 	—		 	6.6	%	 	6.4	%	 	0.2		pp	

Depreciation expense rose $1.3 million in the second quarter of 2013 and $2.9 million in the first half of the year, primarily related to amortization of software development costs and increased capital expenditures for computer software for our operations in the United States. Amortization expense decreased $0.6 million in the second quarter of 2013 and $1.1 million in the first half of 2013, primarily because certain intangible assets from some of our earlier acquisitions are now fully amortized.
 
We expect that amortization of intangible assets will be an ongoing cost for the remaining lives of the assets. We estimate that aggregate amortization expense for intangible assets will be approximately $21.2 million in 2013 and $20.2 million in 2014 . Our estimates of future amortization expense for intangible assets may be affected by additional acquisitions, dispositions, changes in the estimated average useful lives, and currency translations.
 
As a percentage of revenue, depreciation and amortization expense was unchanged in the second quarter and up slightly in the first half of 2013 .

Stock-Based Compensation Expense

	
																								
 	 	Three months ended June 30	 	Six months ended June 30	 	
($000)	 	2013		 	2012		 	Change		 	2013		 	2012		 	Change		 	
Total stock-based compensation expense	 	$	3,954		 	$	3,734		 	5.9	%	 	$	7,737		 	$	7,600		 	1.8	%	 	
% of revenue	 	2.3	%	 	2.2	%	 	0.1		pp	2.2	%	 	2.3	%	 	(0.1	)	pp	

Our stock-based compensation expense relates to grants of restricted stock units (RSUs), restricted stock, and stock options. We include this cost in each of our operating expense categories. Stock-based compensation expense increased $0.1 million in the first six months of 2013 , and was down slightly as a percentage of revenue compared with the same period in 2012 .

We describe our stock-based compensation in more detail in Note 8 of the Notes to our Unaudited Condensed Consolidated Financial Statements.

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Based on grants of RSUs, stock options, and restricted stock made through June 30, 2013 , we anticipate that stock-based compensation expense will be approximately $16.0 million in 2013 . This amount is subject to change based on additional equity grants or changes in our estimated forfeiture rate related to these grants.
 
Bonus Expense
 
The amount of bonus expense is not a fixed cost. We review and update our estimates and the bonus pool size quarterly, primarily based on our expectations for full-year revenue and operating income metrics relative to internal targets. We record bonus expense throughout the year and pay annual bonuses to employees in the first quarter of the following year.

																								
 	 	Three months ended June 30	 	Six months ended June 30	 	
($000)	 	2013		 	2012		 	Change		 	2013		 	2012		 	Change		 	
Bonus expense	 	$	9,628		 	$	7,398		 	30.1	%	 	$	20,154		 	$	18,718		 	7.7	%	 	
% of revenue	 	5.5	%	 	4.5	%	 	1.0		pp	5.9	%	 	5.7	%	 	0.2		pp	
 
Bonus expense, which we include in each of our operating expense categories, increased $2.2 million in the second quarter of 2013 and $1.4 million in the first half of 2013. The increase mainly reflects the comparison from unusually low expense in the second quarter of 2012. Bonus expense as a percentage of revenue increased about 1.0 percentage points in the second quarter of 2013 and 0.2 percentage points in the first half of 2013.

Consolidated Operating Income

	
																								
 	 	Three months ended June 30	 	Six months ended June 30	 	
($000)	 	2013		 	2012		 	Change		 	2013		 	2012		 	Change		 	
Operating income	 	$	43,584		 	$	41,136		 	6.0	%	 	$	84,144		 	$	71,535		 	17.6	%	 	
% of revenue	 	24.8	%	 	24.8	%	 	—		 	24.4	%	 	21.9	%	 	2.5		pp	
 
Consolidated operating income increased $2.4 million in the second quarter of 2013 as our operating costs increased $7.0 million and revenue increased $9.5 million . Our operating margin was 24.8% , unchanged compared with the second quarter of 2012.

Consolidated operating income increased $12.6 million in the first six months of 2013 as our operating costs grew $4.9 million and revenue increased $17.6 million . Our operating margin was 24.4% , an increase of 2.5 percentage points compared with the first six months of 2012.

Lower salary expense as a percentage of revenue contributed approximately 1.2 percentage points to the margin improvement in the first half of 2013. In addition, the $1.6 million of expense recorded in the first quarter of 2012 related to an impairment charge for one of our smaller products and a litigation settlement lowered our 2012 margin by approximately 0.5 percentage points, favorably affecting the current-year comparison.

Consolidated Free Cash Flow
 
As described in more detail above, we define free cash flow as cash provided by or used for operating activities less capital expenditures.

	
																							
 	 	Three months ended June 30	 	Six months ended June 30	
($000)	 	2013		 	2012		 	Change		 	2013		 	2012		 	Change		
Cash provided by operating activities	 	$	58,462		 	$	49,165		 	18.9	%	 	$	85,135		 	$	54,789		 	55.4	%	
Capital expenditures	 	(9,763	)	 	(8,928	)	 	9.4	%	 	(18,881	)	 	(17,922	)	 	5.4	%	
Free cash flow	 	$	48,699		 	$	40,237		 	21.0	%	 	$	66,254		 	$	36,867		 	79.7	%	
 
We generated positive free cash flow of $48.7 million in the second quarter of 2013 , an increase of $8.5 million compared with free cash flow of $40.2 million in the second quarter of 2012. We generated positive free cash flow of $66.3 million in the first half of 2013 , an increase of $29.4 million compared with free cash flow of $36.9 million in the first half of 2012.

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To provide investors with additional insight into our financial results, we provide a comparison between the change in consolidated net income and the change in operating cash flow:

	
																									
 	 	Three months ended June 30	 	Six months ended June 30	
($000)	 	2013		 	2012		 	Change		 	2013		 	2012		 	Change		
Consolidated net income	 	$	31,100		 	$	27,884		 	$	3,216		 	$	60,675		 	$	47,997		 	$	12,678		
Adjustments to reconcile consolidated net income to net cash flows from operating activities:	 	 	 	 	 	 		 	 	 	 	 	 	
Excess tax benefits from stock-option exercises and vesting of restricted stock units	 	(2,255	)	 	(1,235	)	 	(1,020	)	 	(3,842	)	 	(4,548	)	 	706		
Depreciation and amortization expense	 	11,262		 	10,619		 	643		 	22,601		 	20,794		 	1,807		
Stock-based compensation expense	 	3,954		 	3,734		 	220		 	7,737		 	7,600		 	137		
Holding gain upon acquisition of additional ownership of equity method investment	 	(3,713	)	 	—		 	(3,713	)	 	(3,713	)	 	—		 	(3,713	)	
All other non-cash items included in net income	 	4,142		 	1,882		 	2,260		 	254		 	698		 	(444	)	
Changes in operating assets and liabilities, net of effects of acquisitions:	 	 	 	 	 	 		 	 	 	 	 	 	
Cash paid for bonuses	 	—		 	—		 	—		 	(36,568	)	 	(42,820	)	 	6,252		
Cash paid for income taxes	 	(13,867	)	 	(16,485	)	 	2,618		 	(14,511	)	 	(21,405	)	 	6,894		
Cash paid for separation agreements	 	—		 	—		 	—		 	—		 	(137	)	 	137		
Accounts receivable	 	6,430		 	3,045		 	3,385		 	524		 	(4,394	)	 	4,918		
Deferred revenue	 	(6,746	)	 	(1,832	)	 	(4,914	)	 	11,023		 	12,333		 	(1,310	)	
Income taxes — current	 	13,073		 	13,641		 	(568	)	 	28,204		 	25,930		 	2,274		
Accrued compensation	 	12,231		 	8,248		 	3,983		 	16,987		 	16,037		 	950		
Other assets	 	3,110		 	118		 	2,992		 	(3,465	)	 	(3,640	)	 	175		
Accounts payable and accrued liabilities	 	238		 	(51	)	 	289		 	638		 	652		 	(14	)	
All other	 	(497	)	 	(403	)	 	(94	)	 	(1,409	)	 	(308	)	 	(1,101	)	
Cash provided by operating activities	 	$	58,462		 	$	49,165		 	$	9,297		 	$	85,135		 	$	54,789		 	$	30,346		
 
In the second quarter of 2013 , cash provided by operations increased more than the increase in net income adjusted for non-cash items, primarily because of the positive cash flow effect of operating assets and liabilities and the timing of income tax payments.

In the first half of 2013 , cash provided by operations increased more than the increase in net income adjusted for non-cash items, primarily because of the lower cash paid for bonuses and the timing of income tax payments.

FASB ASC 718, Compensation—Stock Compensation , requires that we classify excess tax benefits as a financing activity, which contributes to the difference between net income and cash from operations. In the first six months of 2013 and 2012, we classified $3.8 million and $4.5 million , respectively, of excess tax benefits as financing activities. We describe these excess tax benefits in the Liquidity and Capital Resources section.
 
Capital expenditures: We spent $9.8 million for capital expenditures in the second quarter of 2013 and $18.9 million in the first six months of 2013 , primarily for computer hardware and software and internally developed capitalized software. In the first six months of 2013 , capital expenditures increased $1.0 million compared with the prior-year period.

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Segment Results

	
																								
 	 	Three months ended June 30	 	Six months ended June 30	 	
Key Metrics ($000)	 	2013		 	2012		 	Change		 	2013		 	2012		 	Change		 	
Revenue	 	 		 	 		 	 		 	 	 	 	 	 	 	
Investment Information	 	$	141,426		 	$	134,749		 	5.0	 %	 	$	277,613		 	$	261,674		 	6.1	%	 	
Investment Management	 	34,002		 	31,219		 	8.9	 %	 	66,671		 	65,053		 	2.5	%	 	
Consolidated revenue	 	$	175,428		 	$	165,968		 	5.7	 %	 	$	344,284		 	$	326,727		 	5.4	%	 	
 	 	 	 	 	 	 	 	 	 	 	 	 	 	
Operating income (loss)	 	 		 	 		 	 	 	 	 	 	 	 	 	
Investment Information	 	$	44,849		 	$	43,003		 	4.3	 %	 	$	86,316		 	$	71,687		 	20.4	%	 	
Investment Management	 	16,516		 	13,473		 	22.6	 %	 	32,950		 	30,764		 	7.1	%	 	
Intangible amortization and corporate depreciation expense	 	(8,900	)	 	(8,281	)	 	7.5	 %	 	(17,863	)	 	(16,173	)	 	10.4	%	 	
Corporate unallocated	 	(8,881	)	 	(7,059	)	 	25.8	 %	 	(17,259	)	 	(14,743	)	 	17.1	%	 	
Consolidated operating income	 	$	43,584		 	$	41,136		 	6.0	 %	 	$	84,144		 	$	71,535		 	17.6	%	 	
 	 	 	 	 	 	 	 	 	 	 	 	 	 	
Operating margin	 	 		 	 		 	 		 	 	 	 	 	 	 	
Investment Information	 	31.7	%	 	31.9	%	 	(0.2	)	pp	31.1	%	 	27.4	%	 	3.7		pp	
Investment Management	 	48.6	%	 	43.2	%	 	5.4		pp	49.4	%	 	47.3	%	 	2.1		pp	
Consolidated operating margin	 	24.8	%	 	24.8	%	 	—		 	24.4	%	 	21.9	%	 	2.5		pp	

Investment Information Segment
 
The Investment Information segment includes all of our data, software, and research products and services. These products are typically sold through subscriptions or license agreements.
 
The largest products in this segment based on revenue are Morningstar Data, Morningstar Advisor Workstation (including Morningstar Office), Morningstar Direct, Morningstar.com, Morningstar Integrated Web Tools, Morningstar Structured Credit Ratings, Morningstar Equity Research, 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 help institutional clients build customized websites or enhance their existing sites with our 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 Equity Research is sold to companies that purchase our research for their own use or provide our research to their affiliated advisors or individual investor clients. Morningstar Principia is our CD-ROM-based investment research and planning software for advisors.

The Investment Information segment also includes Morningstar Credit Ratings, LLC. 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.
 
In the first six months of 2013 and 2012 , this segment represented approximately 80% of our consolidated revenue.

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 	 	Three months ended June 30	 	Six months ended June 30	 	
Key Metrics ($000)	 	2013		 	2012		 	Change		 	2013		 	2012		 	Change		 	
Revenue	 	$	141,426		 	$	134,749		 	5.0	 %	 	$	277,613		 	$	261,674		 	6.1	%	 	
Operating income	 	$	44,849		 	$	43,003		 	4.3	 %	 	$	86,316		 	$	71,687		 	20.4	%	 	
Operating margin (%)	 	31.7	%	 	31.9	%	 	(0.2	)	pp	31.1	%	 	27.4	%	 	3.7		pp	

Revenue
 
In the second quarter of 2013 , Investment Information segment revenue increased $6.7 million , or 5.0% , to $141.4 million . Morningstar Direct was the main contributor to revenue growth in the second quarter. Morningstar Data, Advisor Workstation, and Morningstar.com also contributed to the revenue growth, although to a lesser extent.

In the first half of 2013, Investment Information segment revenue increased $15.9 million , or 6.1% , to $277.6 million . Morningstar Direct and Morningstar Data were the main contributors to revenue growth. Morningstar Advisor Workstation, Structured Credit Ratings, and Morningstar Integrated Web Tools also contributed to the revenue growth, although to a lesser extent.

Morningstar Direct contributed approximately 46% and 41% of the organic revenue growth for the segment in the second quarter of and first half of 2013, respectively. The number of licenses for Morningstar Direct increased to 8,055 worldwide as of June 30, 2013 , compared with 6,771 as of June 30, 2012 , with strong growth globally. The growth reflects additional licenses for both new and existing clients, and, to a lesser extent, client migrations from both Institutional Workstation and Morningstar EnCorr.

Morningstar Data was the second-largest contributor to the increase in segment revenue in the second quarter and first half of 2013. Morningstar Data's revenue growth reflects strong renewal rates for managed product data as well as new contracts signed in 2012. Morningstar Data gives institutions access to a full range of proprietary investment data spanning numerous investment databases, including real-time pricing data and commodity data. The data packages we offer include proprietary statistics, such as the Morningstar Style Box and Morningstar Rating, and a wide range of other information on investment performance, risk, portfolios, operations data, fees and expenses, cash flows, and ownership.

Higher revenue from Morningstar Advisor Workstation (mainly Morningstar Office) and Morningstar Integrated Web Tools also contributed to the revenue growth, although to a lesser extent. The number of U.S. licenses for Morningstar Advisor Workstation rose slightly to 164,923 as of June 30, 2013 compared with 162,904 as of December 31, 2012 and 160,145 as of June 30, 2012 . Lower revenue for Principia partially offset the higher revenue from these two products. Principia subscriptions totaled 22,464 as of June 30, 2013 , down from 26,807 as of December 31, 2012 and 28,599 as of June 30, 2012 . During the first quarter of 2013, we announced that we are no longer selling new subscriptions to Principia, and we’ve begun migrating Principia clients to Morningstar Advisor Workstation and other Morningstar products that meet their needs. We expect to continue supporting clients on Principia until the end of 2014.

Revenue for Morningstar.com was up in both periods of 2013 because of higher advertising sales during the second quarter of 2013, mainly in the United States. Premium subscriptions for the U.S. version of Morningstar.com declined to 123,881 as of June 30, 2013 , compared with 126,410 as of June 30, 2012 , and 123,899 as of December 31, 2012. Consistent with the trend over the past few years, we moderately increased subscription prices for U.S. Premium Membership in both January  2013 and 2012 , which offset the revenue decline associated with the lower subscription levels.

Higher revenue for Morningstar Structured Credit Ratings also contributed to the growth in revenue in the first half of the year, primarily because of a significant increase in new-issue ratings compared with the prior-year period. We completed 20 new-issue CMBS ratings in the first six months of 2013, compared with eight in the first six months of 2012.

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Operating Income
 
In the second quarter of 2013 , operating income for the Investment Information segment increased $1.8 million , or 4.3% . Operating expense was up $4.8 million in the second quarter of 2013 , mainly because of higher bonus and salary expense.

In the first half of 2013, operating income for the Investment Information segment increased $14.6 million , or 20.4% . Operating expense was up $1.3 million , or 0.7% in the first half of 2013.

The Investment Information segment's operating margin decreased 0.2 percentage points in the second quarter and increased 3.7 percentage points in the first half of the year. The margin improvement in the first half of the year reflects the higher revenue base as well as lower salary expense as a percentage of revenue. Lower salary expense contributed approximately 2.1 percentage points to the margin improvement in the first half of the year.

Investment Management Segment
 
The Investment Management segment includes all of our asset management operations, which earn more than half 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, ETF, and stock portfolios tailored to meet a range of investment time horizons, risk levels, and investment strategies that financial advisors can use for their clients’ taxable and tax-deferred accounts.
 
Our Investment Advisory Services business has multiple fee structures, which vary by client. In general, we seek to receive asset-based fees for any work we perform that involves managing investments or acting as a subadvisor to investment portfolios. For any individual contract, we may receive flat fees, variable asset-based fees, or a combination of the two. Some of our contracts include minimum fee levels that provide us with a flat payment up to a specified asset level, above which we also receive variable asset-based fees. In the majority of our contracts that include variable asset-based fees, we bill clients quarterly in arrears based on average assets for the quarter. The method of calculation varies by client; some contracts include provisions for calculating average assets based on daily data, while others use weekly or monthly data. Other contracts may include provisions for monthly billing or billing based on assets as of the last day of the billing period rather than on average assets.
 
In our Retirement Solutions business, our contracts may include one-time setup fees, technology licensing fees, asset-based fees for managed retirement accounts, fixed and variable fees for advice and guidance, or a combination of these fee structures. Our Retirement Solutions business also includes plan sponsor and custom target-date consulting arrangements. Fees for these services may be based on the level of assets under advisement in these arrangements.
 
We do not disclose a fee range for our Investment Advisory Services and Retirement Solutions businesses because our fee structures vary by client. In addition, we believe disclosing a fee range would be detrimental from a competitive standpoint. We disclose changes in the nature of the underlying services we provide or their associated fee structures (for example, a change from flat fees to asset-based fees) in our periodic filings to the extent that they are material to our financial results.
 
For Morningstar Managed Portfolios, we charge asset-based fees, that are based on a tiered schedule that depends on the client’s account balance. Fees for our mutual fund and ETF portfolios generally range from 30 to 40 basis points. We charge fees of 55 basis points for our customized stock portfolios.

In addition, we offer Managed Portfolios through our subsidiary Ibbotson Associates Australia Limited (Ibbotson Australia), which provides asset management services primarily to institutional clients and individual investors.

In the first six months of 2013 and 2012 , this segment represented approximately 20% of our consolidated revenue.

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 	 	Three months ended June 30	 	Six months ended June 30	 	
Key Metrics ($000)	 	2013		 	2012		 	Change		 	2013		 	2012		 	Change		 	
Revenue	 	$	34,002		 	$	31,219		 	8.9	%	 	$	66,671		 	$	65,053		 	2.5	%	 	
Operating income	 	$	16,516		 	$	13,473		 	22.6	%	 	$	32,950		 	$	30,764		 	7.1	%	 	
Operating margin (%)	 	48.6	%	 	43.2	%	 	5.4		pp	49.4	%	 	47.3	%	 	2.1		pp	

Revenue
 
Investment Management segment revenue increased $2.8 million , or 8.9% , in the second quarter of 2013 and $1.6 million , or 2.5% , in the first half of 2013, driven by higher revenue for Managed Portfolios and Retirement Solutions.

These positive product trends were partially offset by lower revenue for Investment Advisory Services, which was driven by the loss of business from our largest client in the Investment Management segment. As previously announced, a large Investment Advisory Services client moved to in-house management of several fund-of-funds portfolios in April 2012. We recognized about $0.6 million and $3.8 million in associated revenue in the second quarter and first half of 2012, respectively.

The variable annuity industry, which accounted for approximately 10% of Investment Management segment revenue in the first half of 2013 and 15% of 2012 full-year revenue, continues to face challenges. Accordingly, we expect that there will be further pressure on revenue from clients in the variable annuity industry.
 
We had approximately $22.8 million in revenue from asset-based fees in the second quarter of 2013, an increase of $4.3 million compared with $18.5 million in the second quarter of 2012. Within the Investment Management segment, revenue from asset-based fees made up about 67% and 59% of segment revenue in the second quarter of 2013 and 2012 , respectively.

Total assets under advisement and management were $166.1 billion as of June 30, 2013 , a decrease of $20.6 billion from $186.7 billion as of June 30, 2012 . A change in the scope of services we provide to an existing client during the fourth quarter of 2012 lowered our assets by about $45.9 billion.

The asset totals as of the end of each period don't fully reflect the change in average asset levels during the quarter. The asset-based fees we earn are primarily based on average asset levels during each quarter. Average assets under advisement and management (calculated based on available quarterly data) were approximately $161.6 billion in the second quarter of 2013 , down 14.9% from approximately $189.9 billion in the second quarter of 2012 .

Assets under Advisement and Management for Investment Advisory Services

	
									
 	 	As of June 30	
($ billions)	 	2013		 	2012		
Assets under advisement – U.S.	 	$	95.6		 	$	133.8		
Assets under advisement – International	 	5.8		 	4.3		
Total	 	$	101.4		 	$	138.1		
 
We provided Investment Advisory Services on approximately $101.4 billion in assets as of June 30, 2013 compared with approximately $94.3 billion as of December 31, 2012 and approximately $138.1 billion as of June 30, 2012 .

These assets include relationships for which we receive basis-point fees, including consulting arrangements and other agreements where we act as a portfolio construction manager for a mutual fund or variable annuity. We also provide Investment Advisory Services for some assets for which we receive a flat fee; we do not include these assets in the total reported above. Excluding changes related to new contracts and cancellations, changes in the value of assets under advisement can come from two primary sources: gains or losses related to overall trends in market performance, and net inflows or outflows caused when investors add to or redeem shares from these portfolios.

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Assets under advisement and management decreased about $36.7 billion , or 26.6% , compared with June 30, 2012 . A change in the scope of services we provide to an existing client during the fourth quarter of 2012 lowered our assets by about $45.9 billion. This portfolio represented 33.2% of our Investment Advisory Services assets under advisement and management as of June 30, 2012.

We cannot quantify cash inflows and outflows for these portfolios because we do not have custody of the assets in the majority of our investment management businesses. The information we receive from many of our clients does not separately identify the effect of cash inflows and outflows on asset balances for each period. We also cannot precisely quantify the effect of market appreciation or depreciation because the majority of our clients have discretionary authority to implement their own portfolio allocations.
 
Assets under Advisement and Management for Retirement Solutions

	
									
 	 	As of June 30	
($ billions)	 	2013		 	2012		
Assets under management	 	$	27.9		 	$	22.4		
Assets under advisement	 	28.0		 	19.3		
Total	 	$	55.9		 	$	41.7		
 
Assets under management for managed retirement accounts increased to $27.9 billion as of June 30, 2013 , compared with $25.1 billion as of December 31, 2012 and $22.4 billion as of June 30, 2012 . Assets under advisement for plan sponsor and custom target-date arrangements increased to $28.0 billion as of June 30, 2013 , compared with $22.1 billion as of December 31, 2012 and $19.3 billion as of June 30, 2012 .
 
We cannot quantify all of the factors affecting assets under management for our managed retirement accounts. These factors primarily consist of employer and employee contributions, plan administrative fees, market movements, and participant loans and hardship withdrawals. We cannot quantify the impact of these other factors because the information we receive from the plan providers does not separately identify these transactions or the changes in balances caused by market movement.

Morningstar Managed Portfolios
 
Revenue for Morningstar Managed Portfolios increased $1.8 million in the second quarter of 2013 and $3.2 million in the first half of the year. This growth mainly reflects higher average asset levels during the first six months of 2013 compared with the same period in 2012 . Assets under management and advisement for Morningstar Managed Portfolios rose to $5.9 billion as of June 30, 2013 , up from $4.7 billion as of December 31, 2012 and $3.9 billion as of June 30, 2012 , reflecting strong net inflows and positive market performance.

Ibbotson Australia Managed Portfolios

Revenue for Ibbotson Australia Managed Portfolios increased about $0.8 million in the first six months of 2013 . Assets under management for Ibbotson Australia totaled $2.9 billion as of June 30, 2013 , down slightly from $3.3 billion as of December 31, 2012 and $3.0 billion as of June 30, 2012 . The decline is due to a weaker Australian dollar vs. the U.S. dollar.

Operating Income
 
Operating income for the Investment Management segment increased $3.0 million , or 22.6% , in the second quarter of 2013 from higher revenue of $2.8 million and slightly lower operating expense of $0.2 million. Operating income for the Investment Management segment increased $2.2 million in the first half of 2013. Operating expense in the segment rose $0.6 million , or 1.7% , in the first half of 2013.

Operating margin increased 5.4 percentage points and 2.1 percentage points in the second quarter and first six months of 2013 , as the revenue increase exceeded the decline in operating expense. Lower expense for operations outside the United States as a percentage of revenue contributed to the margin increase in both periods.

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Corporate Items
 
We do not allocate corporate costs to our business segments. The corporate items category includes capitalization and amortization of internal product development costs and amortization expense related to intangible assets recorded for acquisitions. The table below shows the components of corporate items that affected our consolidated operating income:

	
																							
 	 	Three months ended June 30	 	Six months ended June 30	
($000)	 	2013		 	2012		 	Change		 	2013		 	2012		 	Change		
Amortization expense	 	$	5,337		 	$	5,976		 	(10.7	)%	 	$	10,962		 	$	12,031		 	(8.9	)%	
Depreciation expense	 	3,563		 	2,305		 	54.6	 %	 	6,901		 	4,142		 	66.6	 %	
Corporate unallocated	 	8,881		 	7,059		 	25.8	 %	 	17,259		 	14,743		 	17.1	 %	
Corporate items	 	$	17,781		 	$	15,340		 	15.9	 %	 	$	35,122		 	$	30,916		 	13.6	 %	
 
Amortization of intangible assets decreased $0.6 million in the second quarter of 2013 and $1.1 million in the first half of 2013, primarily because certain intangible assets from some of our earlier acquisitions are now fully amortized. As of June 30, 2013 , we had $112.1 million of net intangible assets. We amortize these assets over their estimated lives, ranging from one to 25 years. We estimate that aggregate amortization expense for intangible assets will be approximately $21.2 million in 2013 .

Depreciation expense for corporate items increased $1.3 million in the second quarter of 2013 and $2.8 million in the first half of 2013, primarily related to higher capital expenditures for our operations in the United States.
 
Corporate unallocated expense increased $1.8 million in the second quarter of 2013 and $2.5 million in the first half of the year, mainly reflecting higher professional fees and salary expense. In addition, corporate unallocated in the first quarter of 2012 included about $1.6 million of expense for a litigation settlement and an impairment charge for one of our smaller products. These expenses did not recur in 2013.

We capitalized $2.2 million and $3.8 million of software development expense in the second quarter and first half of 2013 , respectively, reducing the expense that we would otherwise report in this category. In comparison, we capitalized $2.4 million and $4.1 million in the second quarter and first six months of 2012, respectively.

Equity in Net Income of Unconsolidated Entities, Non-Operating Income (Expense), and Income Tax Expense
 
Equity in Net Income of Unconsolidated Entities

	
																	
 	 	Three months ended June 30	 	Six months ended June 30	
($000)	 	2013		 	2012		 	2013		 	2012		
Equity in net income of unconsolidated entities	 	$	360		 	$	497		 	$	857		 	$	1,063		
 
Equity in net income of unconsolidated entities includes our portion of the net income (loss) of Morningstar Japan K.K. (MJKK), Morningstar Sweden AB, YCharts, Inc., and beginning in the fourth quarter of 2012, Inquiry Financial Europe AB. Equity in net income of unconsolidated entities is primarily from our position in MJKK.

In May 2013, we acquired an additional 76% ownership interest in Morningstar Sweden, increasing our ownership interest to 100% . Because Morningstar Sweden is now a wholly owned subsidiary, we no longer account for our investment using the equity method. Beginning in May 2013, we consolidate the assets, liabilities, and results of operations of Morningstar Sweden in our Unaudited Condensed Consolidated Financial Statements. See Note 3 of the Notes to our Unaudited Condensed Consolidated Financial Statements for additional information concerning our acquisition of Morningstar Sweden.

We describe our investments in unconsolidated entities in more detail in Note 7 of the Notes to our Unaudited Condensed Consolidated Financial Statements.

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Non-Operating Income (Expense)
 
The following table presents the components of net non-operating income (expense):

	
																	
 	 	Three months ended June 30	 	Six months ended June 30	
($000)	 	2013		 	2012		 	2013		 	2012		
Interest income	 	$	664		 	$	1,260		 	$	1,405		 	$	2,129		
Gain (loss) on sale of investments, reclassified from other comprehensive income	 	423		 	37		 	1,148		 	(49	)	
Holding gain upon acquisition of additional ownership of equity method investments	 	3,713		 	—		 	3,713		 	—		
Other expense, net	 	(1,689	)	 	(302	)	 	(2,210	)	 	(426	)	
Non-operating income, net	 	$	3,111		 	$	995		 	$	4,056		 	$	1,654		
 
Interest income mainly reflects interest from our investment portfolio.

In the first half of 2013, non-operating income includes a preliminary non-cash gain of $3.7 million . This gain represents the difference between the estimated preliminary fair value and the book value of our investment in Morningstar Sweden at the date of acquisition.

Other income (expense), net also includes foreign currency exchange gains and losses arising from the ordinary course of business related to our U.S. and non-U.S. operations, realized gains and losses from our investment portfolio, gains and losses on sale of fixed assets, and royalty income from MJKK.

Income Tax Expense
 
The following table shows our effective tax rate:

	
																	
 	 	Three months ended June 30	 	Six months ended June 30	
($000)	 	2013		 	2012		 	2013		 	2012		
Income before income taxes and equity in net income of unconsolidated entities	 	$	46,695		 	$	42,131		 	$	88,200		 	$	73,189		
Equity in net income of unconsolidated entities	 	360		 	497		 	857		 	1,063		
Net loss attributable to the noncontrolling interest	 	21		 	4		 	64		 	28		
Total	 	$	47,076		 	$	42,632		 	$	89,121		 	$	74,280		
Income tax expense	 	$	15,955		 	$	14,744		 	$	28,382		 	$	26,255		
Effective tax rate	 	33.9	%	 	34.6	%	 	31.8	%	 	35.3	%	
 
Our effective tax rate in the second quarter of 2013 was 33.9% , a decrease of 0.7 percentage points compared with 34.6% in the prior-year period. Year to date, our effective tax rate was 31.8% , compared with 35.3% in the first half of 2012. The decreases primarily reflect reductions in valuation allowances, and for the year-to-date period, adjustments to certain deferred income tax benefits.

As of June 30, 2013 , we had $14.3 million of gross unrecognized tax benefits which, if recognized, would reduce our effective income tax rate and decrease our income tax expense by $11.9 million . As of December 31, 2012, we had $12.7 million of gross unrecognized tax benefits which, if recognized, would reduce our effective income tax rate and decrease our income tax expense by $10.4 million .

As of June 30, 2013 , our Unaudited Condensed Consolidated Balance Sheet included a current liability of approximately $6.6 million and a non-current liability of $7.4 million for unrecognized tax benefits. As of December 31, 2012 , our Condensed Consolidated Balance Sheet included a current liability of $6.6 million and a non-current liability of $5.7 million for unrecognized tax benefits. These amounts include interest and penalties, less any associated tax benefits.

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We have not provided federal and state income taxes on accumulated undistributed earnings of certain foreign subsidiaries because these earnings have been permanently reinvested. Approximately 44% of our cash, cash equivalents, and investments as of June 30, 2013 were held by our operations outside of the United States. As such, we believe that our cash balances and investments in the United States, along with cash generated from our U.S. operations, will be sufficient to meet our U.S. operating and cash needs for the foreseeable future, without requiring us to repatriate earnings from these foreign subsidiaries. It is not possible to determine the amount of the unrecognized deferred tax liability related to the undistributed earnings.

We are currently under audit by 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.

Liquidity and Capital Resources
 
We believe our available cash balances and investments, along with cash generated from operations, will be sufficient to meet our operating and cash needs for at least the next 12 months. We invest our cash reserves in cash equivalents and investments, consisting primarily of fixed-income securities. We maintain a conservative investment policy for our investments and invest a portion of these assets in government obligations and corporate bonds with high-quality stand-alone credit ratings. Investments in our portfolio have a maximum maturity of two years; the weighted average maturity is approximately one year. We also invest a portion of our investments balance (approximately 19% as of June 30, 2013 ) in proprietary Morningstar portfolios, exchange-traded funds that seek to track the performance of certain Morningstar proprietary indexes, and various mutual funds. The proprietary Morningstar portfolios may consist of stocks, bonds, options, mutual funds, or exchange-traded funds. Approximately 56% of our cash, cash equivalents, and investments was held by our operations in the United States as of June 30, 2013 , compared with 58% as of December 31, 2012 .
 
We intend to use our cash, cash equivalents, and investments for general corporate purposes, including working capital, funding future growth, repurchasing shares under our share repurchase program, and paying quarterly dividends. To date, we have not needed to access any significant commercial credit and have not attempted to borrow or establish any lines of credit.

In December 2012, the board approved an increase to our $300 million share repurchase program. The board approval authorized us to repurchase up to an additional $200 million in shares of our outstanding common stock, bringing the total amount authorized under the program to $500 million. We may repurchase shares from time to time at prevailing market prices on the open market or in private transactions in amounts that we deem appropriate.
In the first six months of 2013 , we repurchased a total of 747,769 shares for approximately $51.9 million , of which $2.7 million was settled and paid early in the third quarter of 2013. As of June 30, 2013 , we have repurchased a total of 5,804,364 shares for $352.9 million since we announced the share repurchase program in 2010.

We expect to make a recurring quarterly dividend payment of 12.5 cents per share in 2013. We paid dividends of $5.9 million in the first six months of 2013 . In May 2013, our board of directors approved a payment of a regular quarterly dividend of 12.5 cents per share payable on July 31, 2013 to shareholders of record as of July 12, 2013 . As of June 30, 2013 , we recorded a liability for dividends payable of $5.8 million .

Cash, Cash Equivalents, and Investments
 
As of June 30, 2013 , we had cash, cash equivalents, and investments of $314.8 million, a decrease of $6.6 million compared with $321.4 million as of December 31, 2012 . The decrease reflects $53.9 million used to repurchase common stock through our share repurchase program, bonus payments of $36.6 million made during the first quarter of 2013 related to the 2012 bonus, and $18.9 million of capital expenditures. In addition, we used cash of approximately $11.1 million to acquire the additional 76% of Morningstar Sweden to become the sole owner. These items, which decreased our cash, cash equivalents, and investments balance, were partially offset by net income, adjusted for non-cash items, and the positive effect of changes in our operating assets and liabilities.

Cash Provided by Operating Activities
 
Our main source of capital is cash generated from operating activities.

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In the first six months of 2013 , cash provided by operating activities was $85.1 million, driven by $83.7 million of net income, adjusted for non-cash items and $1.4 million in changes from our net operating assets and liabilities. Changes in our operating assets and liabilities mainly benefited from an increase in income taxes and deferred revenue. A decrease in accrued compensation partially offset these benefits. The decline in accrued compensation primarily reflects the bonus payments made in the first quarter of 2013 of approximately $36.6 million, partially offset by the current-year bonus liability for the first six months of 2013.The cash flow benefit of income taxes was partially offset by tax payments of $14.5 million made during the first six months of the year.

Cash provided by operating activities increased $30.3 million compared with the same period in 2012 . The increase primarily reflects the higher net income, adjusted for non-cash items, a $6.9 million decrease in income tax payments, and a $6.3 million decrease in cash paid for bonus. We paid $36.6 million in annual bonuses in the first quarter of 2013 , compared with $42.8 million in the prior-year period.

Cash Provided by (Used for) Investing Activities
 
Cash provided by (used for) investing activities consists primarily of purchases of investments less proceeds from the maturity or sale of investments, cash used for capital expenditures, purchases of equity and cost method investments, cash used for acquisitions, and proceeds from the sale of businesses. The level of investing activities varies from period to period depending on activity in these categories. In the first six months of 2013 , cash used for investing activities was $15.7 million, compared with cash provided by investing activities of $3.0 million in the same period of 2012 .

In the first six months of 2013 , proceeds from the maturity and sale of investments exceeded purchases of investments by $13.8 million compared with $27.6 million in the first six months of 2012 . We have used a portion of these proceeds to fund our share repurchase program. As of June 30, 2013 and December 31, 2012 , we had investments, consisting primarily of fixed-income securities, of $145.0 million and $157.5 million, respectively. As of June 30, 2013 , our investments represented approximately 46% of our total cash, cash equivalents, and investments balance, compared with 49% as of December 31, 2012 .
 
Capital expenditures were $18.9 million in the first six months of 2013 , a slight increase of $1.0 million compared with the first six months of 2012 . Capital expenditures in the first six months of 2013 reflect spending primarily for computer software and hardware and capitalized software. The capital expenditures in the first six months of 2012 were primarily for computer hardware and software, capitalized software, and an expansion of our office space in Chicago. We expect to make total capital expenditures of approximately $42 million to $47 million in 2013 , primarily for computer hardware and software, leasehold improvements for new and existing office locations, and capitalized software. In addition, we expect to make further investments in network and systems security in an amount that may be material.

Cash used for acquisitions, net of cash acquired, was $11.1 million in the first half of 2013 for the Sweden share acquisition. We did not complete any acquisitions in the first six months of 2012 . We also used cash of $0.9 million for additional funding in our investment in YCharts, Inc. In the first six months of 2012, we used approximately $6.8 million in cash to acquire a minority equity stake in HelloWallet LLC.

Cash Provided by (Used for) Financing Activities
 
Cash provided by (used for) financing activities consists primarily of cash used to repurchase common stock through our share repurchase program, dividend payments, and net proceeds from stock-option exercises and excess tax benefits related to stock-option exercises and vesting of restricted stock units.

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Excess tax benefits occur at the time a stock option is exercised when the intrinsic value of the option (the difference between the fair value of our stock on the date of exercise and the exercise price of the option) is greater than the fair value of the option at the time of grant. Similarly, the vesting of restricted stock units generates excess tax benefits when the market value of our common stock on the vesting date exceeds the grant price of the restricted stock units. These excess tax benefits reduce the cash we pay for income taxes in the year we recognize them. It is not possible to predict the timing of stock-option exercises or the intrinsic value that will be achieved at the time options are exercised or upon vesting of restricted stock units. As a result, we expect cash flow from financing activities to vary over time. Note 8 in the Notes to our Unaudited Condensed Consolidated Financial Statements includes additional information concerning stock options and restricted stock units outstanding as of June 30, 2013 .
 
Cash used for financing activities was $58.4 million in the first six months of 2013 . We used cash of approximately $53.9 million under our share repurchase program in the first six months of 2013 . In addition, we made dividend payments of $5.9 million and had a net cash inflow of $2.8 million from the proceeds from stock-option exercises. Taxes withheld for restricted stock units represented an outflow of $5.2 million. Additionally, excess tax benefits related to stock-option exercises and vesting of restricted stock units represented an outflow of $3.8 million.

Cash used for financing activities was $110.1 million in the first six months of 2012 . We made purchases of $105.4 million under our share repurchase program in the first six months of 2012. We also paid dividends of $10.0 million . Taxes withheld for restricted stock units represented an outflow of $3.7 million. Partially offsetting these cash outflows were proceeds from stock-option exercises of $4.5 million , as well as excess tax benefits related to stock-option exercises and vesting of restricted stock units totaling $4.5 million .

Employees exercised approximately 0.2 million and 0.3 million stock options in the first six months of 2013 and 2012 , respectively. The total intrinsic value (the difference between the market value of our stock on the date of exercise and the exercise price of the option) of options exercised during the first six months of 2013 and 2012 was $8.2 million and $14.5 million, respectively.

Application of Critical Accounting Policies and Estimates
 
We discuss our critical accounting policies and estimates in Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations, included in our Annual Report on Form 10-K for the year ended December 31, 2012 , as filed with the SEC on February 28, 2013 . We also discuss our significant accounting policies in Note 3 of our Consolidated Financial Statements included in our Annual Report.

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Rule 10b5-1 Sales Plans
 
Our directors and executive officers may exercise stock options or purchase or sell shares of our common stock in the market from time to time. We encourage them to make these transactions through plans that comply with Exchange Act Rule 10b5-1(c). Morningstar will not receive any proceeds, other than proceeds from the exercise of stock options, related to these transactions. The following table, which we are providing on a voluntary basis, shows the Rule 10b5-1 sales plans entered into by our directors and executive officers that were in effect as of July 15, 2013:

																
Name and Position	 	Date of
Plan	 	Plan Termination Date	 	Number of
Shares
to be
Sold under
the Plan		 	Timing of Sales under the Plan	 	Number of Shares Sold under the Plan through July 15, 2013		 	Projected
Beneficial
Ownership (1)		
Cheryl Francis
Director
 	 	5/21/2013	 	5/31/2014	 	2,800		 	Shares to be sold under the plan if the stock reaches specified prices
	 	—		 	20,952		
Steve Kaplan
Director
 	 	3/4/2013	 	12/31/2013	 	6,000		 	Shares to be sold under the plan on specified dates	 	—		 	51,055		
Jack Noonan
Director
 	 	11/15/2012	 	5/2/2015	 	24,000		 	Shares to be sold under the plan if the stock reaches specified prices	 	6,000		 	63,232		

During the second quarter of 2013, the previously disclosed Rule 10b5-1 sales plans for Chris Boruff and David Williams completed in accordance with their terms.
_______________________________
(1)   This column reflects an estimate of the number of shares each identified director and executive officer will beneficially own following the sale of all shares under the Rule 10b5-1 sales plans identified above. This information reflects the beneficial ownership of our common stock on June 30, 2013 , and includes shares of our common stock subject to options that were then exercisable or that will have become exercisable by August 29, 2013 and restricted stock units that will vest by August 29, 2013. The estimates do not reflect any changes to beneficial ownership that may have occurred since June 30, 2013 . Each director and executive officer identified in the table may amend or terminate his or her Rule 10b5-1 sales plan and may adopt additional Rule 10b5-1 plans in the future.

Item 3.	Quantitative and Qualitative Disclosures about Market Risk	
 
Our investment portfolio is actively managed and may suffer losses from fluctuating interest rates, market prices, or adverse security selection. We invest our investment portfolio mainly in high-quality fixed-income securities. As of June 30, 2013 , our cash, cash equivalents, and investments balance was $314.8 million. Based on our estimates, a 100 basis-point change in interest rates would change the fair value of our investment portfolio by approximately $0.9 million.

As our non-U.S. revenue increases as a percentage of our consolidated revenue, fluctuations in foreign currencies present a greater potential risk. Our European operations are subject to currency risk related to the euro. To date, we have not engaged in currency hedging, and we do not currently have any positions in derivative instruments to hedge our currency risk. Our results could suffer if certain foreign currencies decline relative to the U.S. dollar. In addition, because we use the local currency of our subsidiaries as the functional currency, we are affected by the translation of foreign currencies into U.S. dollars.

Item 4.	Controls and Procedures	

(a)	Evaluation and Disclosure Controls and Procedures	
 
Disclosure controls and procedures are designed to reasonably assure that information required to be disclosed in the reports filed or submitted under the Exchange Act is recorded, processed, summarized, and reported within the time periods specified in the SEC’s rules and forms. Disclosure controls and procedures include, without limitation, controls and procedures designed to reasonably assure that information required to be disclosed in the reports filed under the Exchange Act is accumulated and communicated to management, including the chief executive officer and chief financial officer, as appropriate, to allow timely decisions regarding required disclosure.

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We carried out an evaluation, under the supervision and with the participation of our management, including our chief executive officer and chief financial officer, of the effectiveness of the design and operation of our disclosure controls and procedures, as defined in Rules 13a-15(e) and 15d-15(e) of the Securities Exchange Act of 1934, as of June 30, 2013 . Based on that evaluation, our chief executive officer and chief financial officer concluded that our disclosure controls and procedures are effective to provide reasonable assurance that information required to be disclosed in the reports we file or submit under the Exchange Act is recorded, processed, summarized, and reported as and when required and is accumulated and communicated to management, including the chief executive officer and chief financial officer, as appropriate, to allow timely decisions regarding required disclosure.

(b)	Changes in Internal Control Over Financial Reporting	
 
There were no changes in our internal control over financial reporting during the quarter ended June 30, 2013 that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.

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PART 2.	OTHER INFORMATION	

Item 1.	Legal Proceedings	
 
We incorporate by reference the information regarding legal proceedings set forth in Note 10 , Contingencies, of the Notes to our Unaudited Condensed Consolidated Financial Statements contained in Part 1, Item 1 of this Quarterly Report on Form 10-Q.

Item 1A.	Risk Factors	
 
There have been no material changes to the risk factors disclosed in Item 1A—Risk Factors in our Annual Report on Form 10-K for the year ended December 31, 2012 .

Item 2.	Unregistered Sales of Equity Securities and Use of Proceeds	
 
Issuer Purchases of Equity Securities*
 
The following table presents information related to repurchases of common stock we made during the three months ended June 30, 2013 :

	
															
Period:	 	Total number
of shares
purchased		 	Average
price paid
per share		 	Total number
of shares
purchased as
part of publicly
announced
programs (1)		 	Approximate
dollar value of
shares that
may yet be
purchased
under the
programs (1)		
Cumulative through March 31, 2013	 	5,222,136		 	$	59.63		 	5,222,136		 	$	188,490,274		
April 1, 2013 – April 30, 2013	 	10,218		 	66.06		 	10,218		 	$	187,815,036		
May 1, 2013 – May 31, 2013	 	250,333		 	68.75		 	250,333		 	$	170,600,168		
June 1, 2013 – June 30, 2013	 	321,677		 	72.99		 	321,677		 	$	147,113,706		
Total	 	5,804,364		 	$	60.78		 	5,804,364		 			

  _________________________________________________
* Subject to applicable law, we may repurchase shares at prevailing market prices directly on the open market or in privately negotiated transactions in amounts that we deem appropriate.

(1)	In September 2010, our board of directors approved a share repurchase program that authorized the purchase of up to $100 million of the outstanding common stock with an expiration date of December 31, 2012. In December 2011, the board approved an increase to this program. 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 approved another increase to this program. The board approval authorized the company to repurchase up to an additional $200 million in shares of our outstanding common stock with a revised expiration date of December 31, 2014.	

		
Item 6.	Exhibits	
 
Incorporated by reference to Exhibit Index included herewith.

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SIGNATURE
 
Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.

	
				
 	 	MORNINGSTAR, INC.	
 	 	 	
Date: July 31, 2013	By:	/s/ Scott Cooley	
 	 	Scott Cooley	
 	 	Chief Financial Officer	

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EXHIBIT INDEX

	
			
Exhibit No	 	Description of Exhibit	
10.1	 	Form of Morningstar 2011 Stock Incentive Plan Restricted Stock Unit Award Agreement for awards made on and after May 15, 2013	
 	 	 	
10.2	 	Form of Morningstar 2011 Stock Incentive Plan Director Restricted Stock Unit Award Agreement for awards made on and after May 15, 2013	
 	 	 	
31.1	 	Certification of Chief Executive Officer pursuant to Rule 13a-14(a) and 15d-14(a) of the Securities Exchange Act of 1934, as amended	
 	 	 	
31.2	 	Certification of Chief Financial Officer pursuant to Rule 13a-14(a) and 15d-14(a) of the Securities Exchange Act of 1934, as amended	
 	 	 	
32.1	 	Certification of Chief Executive Officer Pursuant to 18 U.S.C. 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002	
 	 	 	
32.2	 	Certification of Chief Financial Officer Pursuant to 18 U.S.C. 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002	
 	 	 	
101	 	The following financial information from Morningstar Inc.’s Quarterly Report on Form 10-Q for the quarter ended June 30, 2013, filed with the SEC on July 31, 2013 formatted in XBRL: (i) Condensed Consolidated Statements of Income, (ii) Condensed Consolidated Statements of Comprehensive Income (iii) Condensed Consolidated Balance Sheets, (iv) Condensed Consolidated Statement of Equity, (v) Condensed Consolidated Statements of Cash Flows and (vi) the Notes to Unaudited Condensed Consolidated Financial Statement	
  ______________________________________

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Exhibit 10.1

MORNINGSTAR, INC.
2011 STOCK INCENTIVE PLAN
RESTRICTED STOCK UNIT AWARD AGREEMENT

THIS RESTRICTED STOCK UNIT AWARD AGREEMENT , which includes the Online Grant Acceptance form (the “Grant Notice”) provided to the Participant named therein (together, the “Award Agreement”), is made under the Morningstar, Inc. 2011 Stock Incentive Plan (the “Plan”) as of the Grant Date specified in the Grant Notice. Any term capitalized but not defined in this Award Agreement will have the meaning set forth in the Plan.
BETWEEN:

(1)	MORNINGSTAR, INC., an Illinois corporation (the “Company”); and	

(2)	The Participant identified in the Grant Notice.	
1     GRANT OF RESTRICTED STOCK UNITS

1.1	In accordance with the terms of the Plan and subject to the terms and conditions of this Award Agreement, the Company hereby grants to the Participant the number of Restricted Stock Units specified in the Grant Notice.	

1.2	Each Restricted Stock Unit is a notional amount that represents one unvested share of common stock, no par value, of the Company (a “Share”). Each Restricted Stock Unit constitutes the right, subject to the terms and conditions of the Plan and this Award Agreement, to distribution of a Share if and when the Restricted Stock Unit vests.	

1.3	This Award Agreement is subject to the provisions of the Plan and shall be interpreted in accordance therewith. The Participant hereby agrees to be bound by the terms of this Award Agreement and the Plan.	

1.4	Subject to, and except as otherwise provided by, this Award Agreement, including Section 3.2 hereof, the Restricted Stock Units subject to this Award Agreement shall vest in installments, with each installment becoming vested on the “Vesting Date” shown below, if the Participant has remained in continuous Service (as defined in Section 3.3 hereof) until that Vesting Date. Notwithstanding the foregoing, the Board or the Committee may cause the Restricted Stock Units granted hereby to vest at an earlier date pursuant to its authority under the Plan.	

		

Percentage of Restricted Stock Units	
Vesting Date	
25%	First anniversary of Grant Date	
25%	Second Anniversary of Grant Date	
25%	Third Anniversary of Grant Date	
25%	Fourth Anniversary of Grant Date	

1.5	Further details of the Restricted Stock Units granted to the Participant under the terms of this Award Agreement are set forth in the Grant Notice.	

2	RIGHTS AS A SHAREHOLDER	

2.1	Unless and until a Restricted Stock Unit has vested and the Share underlying it has been distributed to the Participant, the Participant will not be entitled to vote that Share or have any right to dividends, dividend equivalents or other distributions with respect to that Share; provided that the number and class of securities subject to this Award Agreement shall be subject to adjustment in accordance with Section 5.7 of the Plan.	

3	TERMINATION OF SERVICE AND OTHER CHANGES IN SERVICE STATUS	

3.1	If the Participant’s Service (as defined in Section 3.3) terminates for any reason other than Disability or death, the Participant will forfeit the right to receive Shares underlying any Restricted Stock Units that have not vested at that time. Notwithstanding anything in the Plan to the contrary, for purposes of this Award Agreement, “Disability” shall mean the condition of being “disabled” as provided in Code Section 409A(a)(2)(C).	

3.2	If the Participant’s Service terminates on account of the Disability or death of the Participant, the Shares underlying all of the Restricted Stock Units awarded hereunder shall become immediately vested and be distributed to the Participant or the Participant’s beneficiary under the Plan as soon as practicable in accordance with Section 4.1 of this Award Agreement.	

3.3	For purposes of this Award Agreement “Service” means the provision of services to the Company or its Affiliates in the capacity of an employee or a member of the Board but not as a consultant to the Company or an Affiliate. For purposes of this Award Agreement, the transfer of an employee from the Company to an Affiliate, from an Affiliate to the Company or from an Affiliate to another Affiliate shall not be a termination of Service. However, if the Affiliate for which an employee is providing services ceases to be an Affiliate of the Company due to a sale, transfer or other reason, and the employee ceases to perform services for the Company or any Affiliate, the employee shall incur a termination of Service. For purposes of this Award Agreement, "Affiliate” means an entity that is (directly or indirectly) controlled by, or controls, the Company.	

4	TIMING AND FORM OF PAYMENT	

4.1	Once a Restricted Stock Unit vests, the Participant will be entitled to receive a Share in its place. Delivery of the Share will be made as soon as administratively feasible after its associated Restricted Stock Unit vests, but no later than 2½ months from the end of the calendar year in which such vesting occurs.	

5	WITHHOLDING OBLIGATIONS	

5.1	Without limiting the Company’s power or rights pursuant to Section 5.5 of the Plan, amounts required by tax law or regulation to be withheld by the Company with respect to any taxable event arising under this Award Agreement will be satisfied by having Shares withheld in accordance with Section 5.5 of the Plan. In addition, the Participant may elect to deliver to the Company the necessary funds to satisfy the withholding obligation, in which case there will be no reduction in the Shares otherwise distributable to the Participant.	

6	NOTICES	

6.1	Any notice or other communication required or permitted under this Award Agreement must be in writing and must be delivered personally, sent by certified, registered or express mail, or sent by overnight courier, at the sender's expense. Notice will be deemed given when delivered personally or, if mailed, three days after the date of deposit or, if sent by overnight courier, on the regular business day following the date sent. Notice to the Company should be sent to Morningstar, Inc., 22 West Washington Street, Chicago, Illinois, 60602, Attention: General Counsel. Notice to the Participant should be sent to the address of the Participant contained in the Company’s records. Either party may change the person and/or address to whom the other party must give notice by giving such other party written notice of such change, in accordance with the procedures described above.	

7	CONSTRUCTION	

7.1	The Restricted Stock Units granted hereunder are subject to any rules and regulations promulgated by the Committee pursuant to the Plan, now or hereafter in effect.	

7.2	The Company and the Participant may amend this Award Agreement only by a written instrument signed by both parties, provided, that the Company may amend this Award Agreement without further action by the Participant if (i) such amendment is deemed by the Company to be advisable or necessary to comply with applicable law, rule, or, regulation, including Section 409A of the Code, or (ii) if such amendment is not to the detriment of the Participant.	

7.3	The Participant shall agree to the terms of this Award Agreement by accepting the Grant Notice at the time and in the manner specified by the Company.	

Exhibit 10.2

MORNINGSTAR, INC.
2011 STOCK INCENTIVE PLAN
DIRECTOR RESTRICTED STOCK UNIT AWARD AGREEMENT

THIS DIRECTOR RESTRICTED STOCK UNIT AWARD AGREEMENT , which includes the Online Grant Acceptance form (the “Grant Notice”) provided to the Participant named therein (together, the “Award Agreement”), is made under the Morningstar, Inc. 2011 Stock Incentive Plan (the “Plan”) as of the Grant Date specified in the Grant Notice. Any term capitalized but not defined in this Award Agreement will have the meaning set forth in the Plan.
BETWEEN:

(1)	MORNINGSTAR, INC., an Illinois corporation (the “Company”); and	

(2)	The Participant identified in the Grant Notice.	
1     GRANT OF RESTRICTED STOCK UNITS

1.1	In accordance with the terms of the Plan and subject to the terms and conditions of this Award Agreement, the Company hereby grants to the Participant the number of Restricted Stock Units specified in the Grant Notice.	

1.2	Each Restricted Stock Unit is a notional amount that represents one unvested share of common stock, no par value, of the Company (a “Share”). Each Restricted Stock Unit constitutes the right, subject to the terms and conditions of the Plan and this Award Agreement, to distribution of a Share if and when the Restricted Stock Unit vests.	

1.3	This Award Agreement is subject to the provisions of the Plan and shall be interpreted in accordance therewith. The Participant hereby agrees to be bound by the terms of this Award Agreement and the Plan.	

1.4	Subject to, and except as otherwise provided by, this Award Agreement, including Section 3.2 hereof, the Restricted Stock Units subject to this Award Agreement shall vest in installments, with each installment becoming vested on the “Vesting Date” shown below, if the Participant has remained in continuous Service (as defined in Section 3.3 hereof) until that Vesting Date. Notwithstanding the foregoing, the Board or the Committee may cause the Restricted Stock Units granted hereby to vest at an earlier date pursuant to its authority under the Plan.	

		

Percentage of Restricted Stock Units	
Vesting Date	
33.3%	First anniversary of Grant Date	
33.3%	Second Anniversary of Grant Date	
33.3%	Third Anniversary of Grant Date	

1.5	Further details of the Restricted Stock Units granted to the Participant under the terms of this Award Agreement are set forth in the Grant Notice.	

2	RIGHTS AS A SHAREHOLDER	

2.1	Unless and until a Restricted Stock Unit has vested and the Share underlying it has been distributed to the Participant, the Participant will not be entitled to vote that Share or have any right to dividends, dividend equivalents or other distributions with respect to that Share; provided that the number and class of securities subject to this Award Agreement shall be subject to adjustment in accordance with Section 5.7 of the Plan.	

3	TERMINATION OF SERVICE AND OTHER CHANGES IN SERVICE STATUS	

3.1	If the Participant’s Service (as defined in Section 3.3) terminates for any reason other than Disability, death, or by virtue of the Company’s 12 year term limit for non-employee directors, the Participant will forfeit the right to receive Shares underlying any Restricted Stock Units that have not vested at that time. Notwithstanding anything in the Plan to the contrary, for purposes of this Award Agreement, “Disability” shall mean the condition of being “disabled” as provided in Code Section 409A(a)(2)(C).	

3.2	If the Participant’s Service terminates on account of the Disability or death of the Participant or by virtue of the Company’s 12 year term limit for non-employee directors, the Shares underlying all of the Restricted Stock Units awarded hereunder shall become immediately vested and be distributed to the Participant or the Participant’s beneficiary under the Plan as soon as practicable in accordance with Section 4.1 of this Award Agreement.	

3.3	For purposes of this Award Agreement “Service” means the provision of services to the Company or its Affiliates in the capacity of an employee or a member of the Board but not as a consultant to the Company or an Affiliate. For purposes of this Award Agreement, "Affiliate” means an entity that is (directly or indirectly) controlled by, or controls, the Company.	

4	TIMING AND FORM OF PAYMENT	

4.1	Once a Restricted Stock Unit vests, the Participant will be entitled to receive a Share in its place. Delivery of the Share will be made as soon as administratively feasible after its associated Restricted Stock Unit vests, but no later than 2½ months from the end of the calendar year in which such vesting occurs.	

5	WITHHOLDING OBLIGATIONS	

5.1	Without limiting the Company’s power or rights pursuant to Section 5.5 of the Plan with respect to a member of the Board who also serves as an employee of the Company, amounts required by tax law or regulation to be withheld by the Company with respect to any taxable event arising under this Award Agreement will be satisfied by having Shares withheld in accordance with Section 5.5 of the Plan. In addition, a Participant subject to withholding obligations may elect to deliver to the Company the necessary funds to satisfy the withholding obligation, in which case there will be no reduction in the Shares otherwise distributable to the Participant.	

6	NOTICES	

6.1	Any notice or other communication required or permitted under this Award Agreement must be in writing and must be delivered personally, sent by certified, registered or express mail, or sent by overnight courier, at the sender's expense. Notice will be deemed given when delivered personally or, if mailed, three days after the date of deposit or, if sent by overnight courier, on the regular business day following the date sent. Notice to the Company should be sent to Morningstar, Inc., 22 West Washington Street, Chicago, Illinois, 60602, Attention: General Counsel. Notice to the Participant should be sent to the address of the Participant contained in the Company’s records. Either party may change the person and/or address to whom the other party must give notice by giving such other party written notice of such change, in accordance with the procedures described above.	

7	CONSTRUCTION	

7.1	The Restricted Stock Units granted hereunder are subject to any rules and regulations promulgated by the Committee pursuant to the Plan, now or hereafter in effect.	

7.2	The Company and the Participant may amend this Award Agreement only by a written instrument signed by both parties, provided, that the Company may amend this Award Agreement without further action by the Participant if (i) such amendment is deemed by the Company to be advisable or necessary to comply with applicable law, rule, or, regulation, including Section 409A of the Code, or (ii) if such amendment is not to the detriment of the Participant.	

7.3	The Participant shall agree to the terms of this Award Agreement by accepting the Grant Notice at the time and in the manner specified by the Company.	

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

	
				
Date: July 31, 2013	 	/s/ Joe Mansueto	
 	 	Joe Mansueto	
 	 	Chairman of the Board and Chief Executive Officer	

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

	
				
Date: July 31, 2013	 	/s/ Scott Cooley	
 	 	Scott Cooley	
 	 	Chief Financial Officer	

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

1.	the Company's Quarterly Report on Form 10-Q for the quarterly period ended June 30, 2013 as filed with the Securities and Exchange Commission on the date hereof (the Report) fully complies with the requirements of Section 13(a) or 15(d) of the Securities Exchange Act of 1934 (15 U.S.C. 78m); and	

2.	the information contained in the Report fairly presents, in all material respects, the financial condition and results of operations of the Company.	

	
				
/s/ Joe Mansueto	
Joe Mansueto	 	
Chairman of the Board and Chief Executive Officer	
 	
Date: July 31, 2013	 	

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

1.	the Company's Quarterly Report on Form 10-Q for the quarterly period ended June 30, 2013 as filed with the Securities and Exchange Commission on the date hereof (the Report) fully complies with the requirements of Section 13(a) or 15(d) of the Securities Exchange Act of 1934 (15 U.S.C. 78m); and	

2.	the information contained in the Report fairly presents, in all material respects, the financial condition and results of operations of the Company.	

	
				
/s/ Scott Cooley	 	
Scott Cooley	 	
Chief Financial Officer	 	
 	 	
Date: July 31, 2013